Court Opinion

ID: 9429114
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:25:41.604739+00
Date Added: 2024-06-11T17:23:17.190694
License: Public Domain

Justice Blackmun,
dissenting.
These consolidated cases present issues concerning the so-called “tax benefit rule” that has been developed in federal income tax law. In No. 81-485, the Court concludes that the rule has no application to the situation presented. In No. 81-930, it concludes that the rule operates to the detriment of the taxpayer with respect to its later tax year. I disagree with both conclusions.
I
In No. 81-485, the Court interprets § 164(e) of the Internal Revenue Code of 1954, 26 U. S. C. § 164(e). See ante, at 392-395. It seems to me that the propriety of a 1972 deduction by the Bank under § 164(e) depended upon the payment by the Bank of a state tax on its shares. This Court’s decision in Lehnhausen v. Lake Shore Auto Parts Co., 410 U. S. 356 (1973), rendered any such tax nonexistent and any deduction therefore unavailable. I sense no “focus of Congress ... on the act of payment rather than on the ultimate use of the funds by the State.” Ante, at 394. The focus, instead, is on the payment of a tax. Events proved that there was no tax. The situation, thus, is one for the application, not the nonapplication, of some tax benefit rule.
I therefore turn to the question of the application of a proper rule in each of these cases.
*423The usual rule, as applied to a deduction, appears to be this: Whenever a deduction is claimed, with tax benefit, in a taxpayer’s federal return for a particular tax year, but factual developments in a later tax year prove the deduction to have been asserted mistakenly in whole or in part, the deduction, or that part of it which the emerging facts demonstrate as excessive, is to be regarded as income to the taxpayer in the later tax year. With that general concept (despite occasionally expressed theoretical differences between “transactional parity” or “transactional inconsistency,” on the one hand, and, on the other, a need for a “recovery”) I have no basic disagreement.
Regardless of the presence of § 111 in the Internal Revenue Code of 1954, 26 U. S. C. § 111 (1976 ed. and Supp. V), it is acknowledged that the tax benefit rule is judge-made. See, e. g., 1 J. Mertens, Law of Federal Income Taxation §7.34, p. 114 (J. Doheny rev. ed. 1981); Bittker & Kanner, The Tax Benefit Rule, 26 UCLA L. Rev. 265, 266 (1978). It came into being, apparently, because of two concerns: (1) a natural reaction against an undeserved and otherwise unrecoverable (by the Government) tax benefit, and (2) a perceived need, because income taxes are payable at regular intervals, to promote the integrity of the annual tax return. Under this approach, if a deduction is claimed, with some justification, in an earlier tax year, it is to be allowed in that year, even though developments in a later year show that the deduction in the earlier year was undeserved in whole or in part. This impropriety is then counterbalanced (concededly in an imprecise manner, see ante, at 378, n. 10, and 380-381, n. 12) by the inclusion of a reparative item in gross income in the later year. See Burnet v. Sanford & Brooks Co., 282 U. S. 359 (1931); Healy v. Commissioner, 345 U. S. 278 (1953).* In *424Nash v. United States, 398 U. S. 1, 3 (1970), the Court succinctly phrased it this way: “[A] recovery of an item that has produced an income tax benefit in a prior year is to be added to income in the year of recovery.”
I have no problem with the rule with respect to its first underlying concern (the rectification of an undeserved tax benefit). When a taxpayer has received an income tax benefit by claiming a deduction that later proves to be incorrect or, in other words, when the premise for the deduction is destroyed, it is only right that the situation be corrected so far as is reasonably possible, and that the taxpayer not profit by the improper deduction. I am troubled, however, by the tendency to carry out the second concern (the integrity of the annual return) to unnecessary and undesirable limits. The rule is not that sacrosanct.
In No. 81-485, Hillsboro National Bank, in its 1972 return, took as a deduction the amount of assessed state property taxes the Bank paid that year on its stock held by its shareholders; this deduction, were there such a tax, was authorized by the unusual, but nevertheless specific, provisions of § 164(e) of the Code, 26 U. S. C. § 164(e). The Bank received a benefit by the deduction, for its net income and federal income tax were reduced accordingly. Similarly, in No. 81-930, Bliss Dairy, Inc., which kept its books and filed its returns on the cash receipts and disbursements method, took a deduction in its return for its fiscal year ended June 30, 1973, for cattle feed it had purchased that year. That deduction was claimed as a business expense under § 162(a) of the Code, 26 U. S. C. § 162(a). The Dairy received a tax benefit, for its net income and federal income tax for fiscal 1973 were reduced by the deduction. Thus far, everything is clear and there is no problem.
In the Bank’s case, however, a subsequent development, namely, the final determination by this Court in 1973 in *425Lehnhausen, supra, that the 1970 amendment of the Illinois Constitution, prohibiting the imposition of the state property taxes in question, was valid, eliminated any factual justification for the 1972 deduction. And, in the Dairy’s case, a postfiscal year 1973 development, namely, the liquidation of the corporation and the distribution of such feed as was unconsumed on June 30, 1973, to its shareholders, with their consequent ability to deduct, when the feed thereafter was consumed, the amount of their adjusted basis in that feed, similarly demonstrated the impropriety of the Dairy’s full-cost deduction in fiscal 1973.
I have no difficulty in favoring some kind of “tax benefit” adjustment in favor of the Government for each of these situations. An adjustment should be made, for in each case the beneficial deduction turned out to be improper and undeserved because its factual premise proved to be incorrect. Each taxpayer thus was not entitled to the claimed deduction, or a portion of it, and this nonentitlement should be reflected among its tax obligations.
This takes me, however, to the difficulty I encounter with the second concern, that is, the unraveling or rectification of the situation. The Commissioner and the United States in these respective cases insist that the Bank and the Dairy should be regarded as receiving income in the very next tax year when the factual premise for the prior year’s deduction proved to be incorrect. I could understand that position, if, in the interim, the bar of a statute of limitations had become effective or if there were some other valid reason why the preceding year’s return could not be corrected and additional tax collected. But it seems to me that the better resolution of these two particular cases and others like them — and a resolution that should produce little complaint from the taxpayer — is to make the necessary adjustment, whenever it can be made, in the tax year for which the deduction was originally claimed. This makes the correction where the correction is due and it makes the amount of net income for each year a true amount and one that accords with the facts, not *426one that is structured, imprecise, and fictional. This normally would be accomplished either by the taxpayer’s filing an amended return for the earlier year, with payment of the resulting additional tax, or by the Commissioner’s assertion of a deficiency followed by collection. This actually is the kind of thing that is done all the time, for when a taxpayer’s return is audited and a deficiency is asserted due to an overstated deduction, the process equates with the filing of an amended return.
The Dairy’s case is particularly acute. On July 2, 1973, on the second day after the end of its fiscal year, the Dairy adopted a plan of liquidation pursuant to § 333 of the Code, 26 U. S. C. § 333. That section requires the adoption of a plan of liquidation; the making and filing, within 30 days, of written elections by the qualified electing shareholders; and the effectuation of the distribution in liquidation within a calendar month. §§ 333(a), (c), and (d). It seems obvious that the Dairy, its management, and its shareholders, by the end of the Dairy’s 1973 fiscal year on June 30, and certainly well before the filing of its tax return for that fiscal year, all had conceived and developed the July 2, 1973, plan of liquidation and were resolved to carry out that plan with the benefits that they felt would be afforded by it. Under these circumstances, we carry the tax benefit rule too far and apply it too strictly when we utilize the unconsumed feed to create income for the Dairy for fiscal 1974 (the month of July 1973), instead of decreasing the deduction for the same feed in fiscal 1973. Any concern for the integrity of annual tax reporting should not demand that much. I thus would have the Dairy’s returns adjusted in a realistic and factually true manner, rather than in accord with an inflexibly administered tax benefit rule.
Much the same is to be said about the Bank’s case. The decisive event, this Court’s decision in Lehnhausen, occurred on February 22, 1973, within the second month of the Bank’s 1973 tax year. Indeed, it took place before the Bank’s calendar year 1972 return would be overdue. Here again, an ac*427curate return for 1972 should be preferred over inaccurate returns for both 1972 and 1973.
This, in my view, is the way these two particular tax controversies should be resolved. I see no need for anything more complex in their resolution than what I have outlined. Of course, if a statute of limitations problem existed, or if the facts in some other way prevented reparation to the Government, the cases and their resolution might well be different.
I realize that my position is simplistic, but I doubt if the judge-made tax benefit rule really was intended, at its origin, to be regarded as applicable in simple situations of the kind presented in these successive-tax-year cases. So often a judge-made rule, understandably conceived, ultimately is used to carry us further than it should.
I would vacate the judgment in each of these cases and remand each case for further proceedings consistent with this analysis.

In Sanford & Brooks, the earlier tax years were 1913-1916 and the later year was 1920. In Healy, the earlier year was 1945 and the later *424years were 1947 and 1948. In Healy, the Court specifically noted the probable complicating factor of a statute of limitations barrier. 345 U. S., at 284.