Opinion ID: 3012672
Heading Depth: 2
Heading Rank: 2

Heading: Furnaces B and C

Text: Inductotherm sold Furnaces B and C in 1997. However, it sought to deduct production costs of those furnaces in its 1991 and 1992 tax years. In the District Court, Inductotherm claimed that the Executive Order was in effect a confiscation that deprived it of its property rights in those two furnaces and thus, under § 165(a) of the Internal Revenue Code,5 it was entitled to deduct the costs of the furnaces when the Executive Order went into effect. 26 C.F.R. § 1.165-1 sets out a two-prong test for determining whether a taxpayer may recognize a loss under § 165(a) in a given year. There must be: (1) a closed and completed transaction fixed by identifiable events and (2) no reasonable prospect of recovery. Inductotherm contends that the promulgation of the Executive Order was a closed and completed transaction with respect to Furnaces B and C, and in 1991 and 1992 there was no reasonable prospect that it would recover the furnaces. This argument fails. First, other courts have held, as a matter of law, that a blocking order is not a closed and completed transaction because it is merely a temporary restriction on the use of property. See, e.g., Tran qui Than v. Regan, 658 F.2d 1296, 1301 (9th Cir. 1981) (“The 5. 26 U.S.C. § 165(a) provides that “[t]here shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.” 9 blocking of the assets . . . does not affect the interest, right or title to them which [the taxpayer] may possess. The blocking action merely suspends indefinitely the right to transfer those funds.”) (internal citation omitted); Nielsen v. Sec’y of the Treas., 424 F.2d 833, 843-44 (D.C. Cir. 1970) (“The blocking of accounts is generally recognized as different from taking, though raising a problem of taking ‘if continued indefinitely.’ ”). Moreover, we note that a taxpayer may not recognize a loss unless it has exhausted its remedies to reduce its loss. Investors Diversified Servs., Inc. v. Commissioner, 325 F.2d 341, 350 (8th Cir. 1963). In this case, Inductotherm could have sought a license from OFAC to unblock Furnaces B and C. See 31 C.F.R. §§ 575.202(c), 575.203(c). Yet it did not do so. On appeal, Inductotherm sets out what it acknowledges is a new theory for deducting the costs of Furnaces B and C in 1991 and 1992. It argues that, because electron-beam furnaces such as Furnaces B and C used a disfavored technology, the Executive Order’s promulgation deprived it of the only available market for the furnaces — Iraq, leaving the furnaces with little or no resale value. In this context, Inductotherm contends that it was entitled to recognize a loss under 26 C.F.R. § 1.471-2, which directs companies to value their inventory at the lower of cost or market value and allows write-downs based on declines in inventory value (e.g., for obsolescence).6 Ironically, Inductotherm expressly disclaimed reliance on this theory before the District Court. In response to an interrogatory from the Government, Inductotherm stated, “Plaintiff claims the deductions taken in fiscal years 1991 and 1992 because of the lack of control over the assets as a result of the freeze on the assets as issued by President Bush, not because there was an actual loss of value to the actual assets.” The response went on explicitly to state, “Plaintiffs do not assert that the deductions were taken pursuant to Section 471.” In light of Inductotherm’s express disclaimer in the District Court, we decline to entertain this new argument 6. Regulation § 1.471-2 complements § 471 of the IRC, which sets out the general rule for valuing inventories. 10 on appeal.7 Moreover, considering this argument would require calculating the decline in market values of Furnaces B and C that the Executive Order caused. Yet Inductotherm has failed to enter into the record any data that would enable us (or the District Court on remand) to perform this inquiry.8 Having failed to meet its burden, we decline to give Inductotherm a second turn at bat.9