Court Opinion

ID: 9426605
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:18:25.612492+00
Date Added: 2024-06-11T17:23:01.885725
License: Public Domain

Mr. Justice Blackmun,
with whom The Chief Justice, Mr. Justice Brennan, and Mr. Justice Powell join,
dissenting.
What is at issue here is whether a corporate taxpayer’s fiscal 1966 net operating loss deduction, carried back from 1968, as provided for by § 172 (a) of the Internal Revenue Code of 1954, 26 U. S. C. § 172 (a), was, to use the Government’s and the Court’s term, “absorbed” by the taxpayer’s capital gain1 for 1966, despite the taxpayer’s inability to offset the deduction against capital gain.2
The Government’s position is that the 1968 loss was “com*50pletely absorbed” 3 in 1966 and is unavailable for any other “carry” year (here, fiscal 1967) of the taxpayer; the Government thus would deny the taxpayer any tax benefit whatsoever for the excess of its 1968 loss over its 1966 net operating income.4 The Court today agrees. Because I feel the Court’s conclusion is at odds with obvious congressional policies, defeats the purposes of both the capital gain and the “carry” provisions, and is the product of a wooden and unimaginative reading of the pertinent Code sections, I dissent. Congress, accordingly, if its policies are to be effectuated, must try once again.
1. There are two separate policies at work here. Each favors the taxpayer; neither favors the Government. The first is the policy behind Congress’ separating capital gain from ordinary income and providing the alternative method of tax computation by § 1201 of the Code,, 26 U. S. C. § 1201. By placing a ceiling on the tax rate for capital gain, Congress encourages both the investment and the formation of capital that has proved so essential for the Nation’s economic development and strength. Chief Judge Mehaffy, in his opinion for the Court of Appeals in the present case, put it this way:
“The purpose behind the alternative tax in section 1201 is to alter the tax rate to reflect the traditionally unique character of income arising out of the sale of capital assets.” 500 F. 2d 1230,1232 (CA8 1974).
The second policy is that behind the carryback and carryover provisions: to afford the taxpayer relief from the peaks and valleys occasioned by our system of reporting and paying income taxes annually, and to encourage venture capital.
“Those provisions were enacted to ameliorate the unduly drastic consequences of taxing income strictly on an *51annual basis. They were designed to permit a taxpayer to set off its lean years against its lush years, and to strike something like an average taxable income computed over a period longer than one year.” Libson Shops, Inc. v. Koehler, 353 U. S. 382, 386 (1957).5
See also Bulova Watch Co. v. United States, 365 U. S. 753, 759 (1961); S. Rep. No. 665, 72d Cong., 1st Sess., 11 (1932); H. R. Rep. No. 855, 76th Cong., 1st Sess., 9 (1939); H. R. Rep. No. 2319, 81st Cong., 2d Sess., 59 (1950).
The Government’s — and the Court’s — position, however, sets these policies at cross purposes. The alternative method, required under § 1201 when capital gain is sufficient to make it beneficial for the current year, may become a fatal trap if net operating loss happens to be sustained in a subsequent year. This is so because the Government, as it has here, then confronts the taxpayer with the proposition that the carry-back loss excess has been “absorbed” even though no ordinary income, or income of any kind, has in fact absorbed it. Use of the alternative method thus has the wholly unintended— and undesirable — result of undercutting the ameliorative purpose of the “carry” provisions, and they become meaningless in specific application. What supposedly was given by each provision is now, and to a largely unpredictable extent, taken away. I regret this disregard for avowed congressional policies and for the statutory provisions that effectuated those policies.
2. There is a mathematical and tax illogic and unfairness in the Government’s — and the Court’s — analysis. Assuming, *52as we must, that inequality is not unknown in income taxation, that an adverse event of year A does not ordinarily soften the tax impact upon a prior or subsequent and more prosperous year B, that this is a consequence of the fact that income and the taxes thereon are computed on an annual basis, see Burnet v. Sanford & Brooks Co., 282 U. S. 359, 363 (1931); Woolford Realty Co. v. Rose, 286 U. S. 319, 326 (1932), and that “ ‘general equitable considerations’ do not control the question of what deductions are permissible,” United States v. Olympic Radio & Television, 349 U. S. 232, 236 (1955); Lewyt Corp. v. Commissioner, 349 U. S. 237, 240 (1955), the fact remains that the carryback and carryover provisions, as noted above, were designed to provide a leveling influence on the peaks and valleys and to have the taxpayer’s burden be one that is more realistic and in tune with actual economic gain. Thus, “where the benefit claimed by the taxpayer is fairly within the statutory language and the construction sought is in harmony with the statute as an organic whole, the benefits will not be withheld from the taxpayer.” Ibid. This is accomplished, it seems to me, by deeming a net operating loss as “carried” to taxable income only to the extent there is an actual setoff. Despite the Court’s intimation to the contrary, ante, at 43-44, this effectuates only fairness, not perfection. No one expects perfection in income taxation.
3. As the Government applies its theory to this taxpayer, the results are startling. Had the capital gain of fiscal 1966 been realized in its entirety in fiscal 1967, the taxpayer’s net operating loss excess (remaining after washing out the small net operating income of fiscal 1966) would be applied in its entirety against the larger net operating income of 1967. The result is that the taxpayer’s total income taxed for 1966-1968 would then be its actual net economic gain for that period. The same would be true if the taxpayer’s fiscal 1967 net operating income had been realized in fiscal *531966. But under the Government’s — and the Court’s — analysis, solely because the taxpayer realized capital gain in fiscal 1966, the net operating loss of 1968 is said to be totally “absorbed” in 1966 even though the “absorption” is imaginary and little less than mystical.
The Government’s “absorption” serves to make the “income” taxed for the aggregate period exceed the taxpayer’s actual economic gain by the amount of the so-called “absorption.” The result thus depends on happenstance, that is, on whether the capital gain comes earlier or later. This totally defeats the ameliorative purpose of the carryback and carryover legislation and, it seems to me, is punitive in application.6 On this approach, the taxpayer, to the extent business exigencies permit, is forced to time capital gain in accord with its estimate of unknown and unforeseeable net operating income or loss in future tax years. And it is hardly an answer to claim, as the Government does, that the “absorption” of the excess in fiscal 1966 really did *54not serve to increase the amount taxed for the aggregate period. No taxpayer, struggling with the realities of the business and tax worlds, will ever be convinced that the allowance of a deduction by words when coupled with its dis-allowance by administrative fiat, does not result in the taxpayer’s being taxed on more economic gain than it has realized. In contrast, the application of consistent prior judicial decisions, see paragraph 4, infra, would better accord with economic reality, and would treat corporate taxpayers with stable income and those with fluctuating income over the “carry” period more nearly the same.
4. Decisions in favor of the taxpayer’s position provided an unbroken line of authority in the Tax Court,7 in the District Courts,8 and in the Courts of Appeals,9 until the Fourth Circuit, under the Government’s persistence and by a divided vote, concluded otherwise.10 Mutual Assurance *55Soc. v. Commissioner, 505 F. 2d 128 (1974).11 Where, as here, we are concerned with technical and what the Government calls “the highly detailed provisions of Section 172,” Brief for United States 6, the Tax Court’s expertise is at its most valuable level and should be sought out and accorded deference. See the comment of Mr. Justice Jackson, dissenting, in Arrowsmith v. Commissioner, 344 U. S. 6, 12 (1952), concerning the Tax Court’s competence and “steady influence” in “a field beset with invisible boomerangs.”12 But the Court accords no deference to the Tax Court’s consistent position on the technical problem before us.
The reasoning in Chartier Real Estate Co. v. Commissioner, 52 T. C. 346 (1960), aff’d, 428 F. 2d 474 (CAI 1070), and the several cases that followed it, accommodates the respective congressional purposes behind the capital gain and the “carry” provisions. In Chartier the Government’s dual position — seeking to prevent the application of the loss carryback to the earlier year’s capital gain, and also claiming that the carryback nevertheless was absorbed by the capital gain — sought the best of two worlds. Its first proposition *56was upheld. Its second proposition was rejected, and properly so, because the acceptance of the former precluded acceptance of the latter if congressional policy were to be recognized.
No effort was made in Congress to change the statutes in order to overcome the judicial interpretation that was uniform until 1974. That, for me, as Judge Russell pertinently observed in dissent in Mutual Assurance, 505 F. 2d, at 138, “is a persuasive testimonial that those decisions set forth the proper construction of the statutes.” And the Government acknowledged at oral argument that the Internal Revenue Service sought no clarifying legislation in the Congress. Tr. of Oral Rearg. 18-20.
5. The legislative history reflects a proper concern for achieving a tax structure that operates fairly on income that fluctuates. Amelioration provisions are not new and, in fact, appeared in the income tax law as early as the Revenue Act of 1918. § 204 (b) of that Act, 40 Stat. 1061. Since 1939 the periods for carrybacks and carryovers have been expanded13 from the two-year carryover of 1939 until, in 1958 and lasting until 1976, a structure of a three-year carry-back and a five-year carryover was erected.14 It was said later that for “most companies” this period “is long enough to absorb all of their losses against income.” S. Rep. No. 1881, 87th Cong., 2d Sess., 129 (1962).
6. The Court today accepts the Government's contention *57that the meaning of the critical § 172 (b) (2) 15 is clearly and unambiguously against the taxpayer. It is said that the phrase “to which such loss may be carried” obviously modifies “each of the prior taxable years,” rather than “taxable income.” 16 That the language of the statute is not clearly in favor of the Government is demonstrated, if by no other means, by the existing conflict among the Circuits and by the decisions of the Districts Courts and of the Tax Court, cited above in nn. 7, 8, and 9, that have run so uniformly against the Government. If the language were as clear and unambiguous in the Government's favor as is contended, it hardly could have been read otherwise by so many capable and experienced judges. And the clear meaning which the Court now perceives does not, and cannot, *58comport with the underlying purpose of the carryback and carryover provisions.
7.-The definition of § 172 (c),17 to the effect that a taxable year does not result in a net operating loss when capital gain of that year exceeds any deficit in ordinary income, does not defeat the taxpayer. Congress was definite and specific in its definition of “net operating loss” for “carry” purposes in a tax year of that kind. But we are not concerned here with such a year and such a definition. We are concerned, instead, with 1968 where this taxpayer had a “net operating loss” and no capital gain or loss. That net operating loss is established and is available for “carry.” The definitional restriction of § 172 (c) obviously has no application to 1968 for this taxpayer.
Nor is § 172 (d) (2) (B) contrary to the taxpayer’s position. Section 172 (d) (2) is restricted in its application to “a taxpayer other than a corporation.” Corporate and individual taxpayers frequently are treated differently in our income tax structure, and I find little of assistance, even by way of inference, in § 172 (d) (2) (B) for resolving the issue before us in connection with a corporate taxpayer.
8. “Taxation is a practical matter.” Harrison v. Schaffner, 312 U. S. 579, 582 (1941). To do what the Court does today is to ignore that wise precept. What the Government urges— and the Court does — promotes inequality of treatment between taxpayers experiencing like economic gains over the “carry” period, whenever a capital gain happens to be present in one taxpayer’s taxable year but happens to be absent in *59the same year for another taxpayer. A provision intended to equalize to a great extent the tax burdens as between corporations with fluctuating income and those with stable income should not be used to render that goal unattainable or to introduce irrationalities.
I would affirm the judgment of the Court of Appeals.

 I use the term “capital gain” to mean the excess of net long-term capital gain over net short-term capital loss.

 See Weil v. Commissioner, 23 T. C. 424 (1954), aff’d, 229 F. 2d 593 (CA6 1956); Chartier Real Estate Co. v. Commissioner, 52 T. C. 346, 350-356 (1969), aff’d, 428 F. 2d 474 (CA1 1970).

 Tr. of Oral Rearg. 8.

 The parties agree that the carryback served to erase the taxpayer’s small net operating income for fiscal 1966.

 The Court of Appeals, in the present case, also aptly described this policy:
“The basic purpose behind the net operating loss carry back provisions of section 172 is to ameliorate the harsh tax consequences that can result from the necessity of accounting for certain exceptional economic events within the confines of an arbitrary annual accounting period.” 500 F. 2d, at 1232.

 Judge Raum, in my view, stated it correctly:
“The computation under the ‘regular’ method was merely tentative, to determine whether the ‘regular’ method would produce a smaller tax. Since it did not produce a smaller tax, it was in effect not employed at all as a measure of petitioner’s 1962 tax, and under the actual computation used (the ‘alternative’ method) only $1,115.57 of the net operating loss was absorbed, leaving the remaining $10,342.64 to be carried forward to 1965. This result is required by a proper interpretation of the provisions dealing with carrybacks and carryovers.
“We think it is to exalt form over substance to contend that, since a ‘regular’ computation was made in order to determine whether the amount of tax resulting therefrom was greater than that produced by the ‘alternative’ method of computation, and since the net operating loss was deducted in full in the ‘regular’ method, the entire loss was therefore taken into account in the tax computation, even though the ‘alternative’ method, to which only $1,115.57 was applied, ultimately produced petitioner’s actual tax liability.” Chartier Real Estate Co. v. Commissioner, 52 T. C., at 357, 358.

 Chartier Real Estate Co. v. Commissioner, 52 T. C., at 356-358 (Judge Raum); Mutual Assurance Soc. v. Commissioner, 32 TCM 839, ¶ 73,177 P-H Memo TC (1973) (Judge Quealy); Axelrod v. Commissioner, 32 TCM 885, ¶ 73,190 P-H Memo TC (1973) (Judge Featherston); Continental Equities, Inc. v. Commissioner, 33 TCM 812, ¶ 74,189 P-H Memo TC (1974) (Judge Tannenwald). See Lone Manor Farms, Inc. v. Commissioner, 61 T. C. 436 (1974), aff’d, 510 F. 2d 970 (CA3 1975).

 Olympic Foundry Co. v. United States, 72-1 USTC ¶ 9299 (WD Wash. 1972); Naegele v. United States, 73-2 USTC ¶ 9696 (Minn. 1973), appeal docketed, No. 73-1921 (CA8); Data Products Corp. v. United States, 74-2 USTC ¶ 9759 (CD Cal. 1974).

 Chartier Real Estate Co. v. Commissioner, 428 F. 2d 474 (CA1 1970); Olympic Foundry Co. v. United States, 493 F. 2d 1247 (CA9 1974); Foster Lumber Co. v. United States, 500 F. 2d 1230 (CA 1974) (case below); Data Products Corp. v. United States, No. 74-3341 (CA9, Dec. 27, 1974), cert. pending, No. 74-996.

 Scholarly commentary, however, has not been uniform. See Hawkins, Mechanics of Carrying Losses to Other Years, 14 W. Res. L. Rev. 241, 250-251 (1963), and D. Herwitz, Business Planning 844 (1966), both pre-Chartier. Compare Note, 8 San Diego L. Rev. 442 (1971), Note, 55 B. U. L. Rev. 134 (1975), and May, Net Operating Losses and Capital Gains — a Deceptive Combination, 29 Tax Lawyer 121 (1975), with *55Branda, Net Operating Losses and Capital Gains — Some Bizarre Consequences of the Alternative Tax Computation, 28 Tax Lawyer 455 (1975). In the last article the author concludes:
“Chartier and its progeny . . . despite strained reliance on the language of section 172(b)(2) ... are more soundly based on the policy underlying the favorable treatment of capital gains. . . .
“The reversals of the Tax Court by the Fourth and Sixth Circuits . . . are unconvincing.” Id., at 470.
See also Pratt & Scolnick, The Net Operating Loss Deduction: Disagreement Among Circuit Courts Creates Confusion, 53 Taxes 274 (1975); Nagel, Planning to Avoid Wastage of NOL Carryovers: A Lesson from Chartier Realty, 42 J. Taxation 26 (1975).

 Subsequently, the Sixth Circuit, in a case concerning individual taxpayers, agreed with the Fourth Circuit. Axelrod v. Commissioner, 507 F. 2d 884 (1974).

 See also Remarks of Mr. Justice Stewart at the Dedication of the New Courthouse of the United States Tax Court, 28 Tax Lawyer 451, 453 (1975).

 Revenue Act of 1939, § 211 (b) (adding § 122 to the Internal Revenue Code of 1939), 53 Stat. 867; Revenue Act of 1942, §153 (a), 56 Stat. 847; Revenue Act of 1950, §215 (a), 64 Stat. 937; Internal Revenue Code of 1954, § 172 (b), 68A Stat. 63; Technical Amendments Act of 1958, § 203 (a), 72 Stat. 1678.

 The Tax Reform Act of 1976, §806 (a), 90 Stat. 1598, adds to § 172 (b) (1) (B) of the Code, as amended, a sentence providing that for any taxable year ending after December 31, 1975, a net operating loss may be carried over for seven years following the loss. This thus increases the carryover period from five to seven years.

 Until the Tax Reform Act of 1976, § 172 (b) (2) read:
“Except as provided in subsections (i) and (j) [not pertinent here], the entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the ‘loss year’) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. . . .”
Section 1901 (a) (29) (C) (iv) of the 1976 Act, 90 Stat. 1769, replaced the phrase “subsections (i) and (j)” with “subsection (g).”
The words “to which such loss may be carried” first appeared in the 1954 Code. 68A Stat. 63. Apparently there is no committee or other legislative commentary on the addition of these words to § 172 (b) (2).

 The Government’s — and now the Court’s — argument that the phrase "to which such loss may be carried” must modify “each of the prior taxable years,” and is confined in its modification to that phrase, is surely wrong as a matter of routine statutory construction. This is so because that analysis renders the modifying phrase useless and redundant. The preceding §§ 172 (a) and (b) (1) already have directed that the loss be carried, and in the prescribed order, to specified taxable years. There is no additional need for § 172 (b) (2) to recite a limitation of the years to which the loss may be carried.

 Until the Tax Reform Act of 1976, § 172 (c) read:
“For purposes of this section, the term 'net operating loss' means (for any taxable year ending after December 31, 1953) the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).”
The parenthetical expression was eliminated by § 1901 (a) (29) (B) of the 1976 Act, 90 Stat. 1769.