Court Opinion

ID: 9467484
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:50:13.234542+00
Date Added: 2024-06-11T17:40:22.544718
License: Public Domain

EN BANC OPINION ON REHEARING
Before FAIRCHILD, Chief Judge, and SWYGERT, CUMMINGS, PELL, SPRECHER, BAUER, WOOD and CUD-AHY, Circuit Judges.*
PER CURIAM.
The sole issue before the full Court is whether a majority of the panel properly *350held that the tax benefit rule1 may not be invoked unless the items sought to be excluded from taxation are asserted to be taxable only by means of the exclusionary aspect of the tax benefit rule. For the reasons given in the majority panel opinion, we hold the tax benefit rule requires use of the inclusionary aspect of the rule before a taxpayer can employ the exclusionary aspect. Supra at pp. 343-346.
At the en banc oral argument, in a colloquy between bench and bar, counsel suggested that Sections 832(b)(5) and 821(e) of the Internal Revenue Code as interpreted and applied in this case, while ostensibly taxing income, in fact operate to impose a direct tax on property that is not apportioned according to population, in violation of Article I, Section 2, Clause 3 and Section 9, Clause 4 of the Constitution.2 A tax on income, of course, need not be apportioned in view of the Sixteenth Amendment.3 This argument appears to be founded on a confusion of “taxable income” with “income.” As then Judge Tone’s majority opinion stated in its discussion of the tax benefit rule, this is not a case in which the Commissioner has added a “recovery” or recaptured loss to taxpayer’s gross income. The bottom line effect of the relevant provisions here has been to reduce the amount of the “losses incurred” deduction allowable to taxpayer in 1966 and 1971, thereby increasing the amount of its taxable income for those years. Supra at p. 346.
Taxable income is simply that portion of taxpayer’s gross income that Congress has chosen to tax. The term “taxable” in no way connotes a constitutional limitation on the extent to which or the manner in which gross income may be taxed. To the contrary, it is well settled that Congress has the power to impose without apportionment an income or excise tax measured by gross income or gross receipts, even where an individual taxpayer *351has no net income after expenses, Penn Mutual Indemnity Co. v. Commissioner of Internal Revenue, 277 F.2d 16, 20 (3d Cir. 1960), and that deductions are generally a matter of legislative grace. Idem. Indeed, mutual insurance companies like taxpayer here were, as has already been noted in the panel majority opinion, prior to 1963 taxed on the basis of gross income, and that very tax was upheld in Penn Mutual Indemnity Co., supra, against constitutional attack similar to the one raised here. Congress has now chosen to use a different measure of taxation, one which allows a deduction for “losses incurred,” but “losses incurred” only as defined and computed under the Code. This choice was a matter of legislative discretion and is not rendered constitutionally infirm for lack of apportionment because the resulting tax is not confined to or measured by taxpayer’s actual net income.
The Tax Court’s resolution of the unpaid losses dispute is reversed, with costs to the Commissioner.

. In Putoma Corp. v. Commissioner, 66 T.C. 652, 664 n. 10, affirmed, 601 F.2d 734 (5th Cir. 1979), the Tax Court described the tax benefit rule as follows:
“both a rule of inclusion and exclusion; recovery of an item previously deducted must be included in income; that portion of the recovery not resulting in a prior tax benefit is excluded.”
As explained in the panel majority opinion in the present case, the tax benefit rule is not limited to the recoveries of deductions but also includes recoveries of items that had earlier resulted in tax credits and of funds, such as embezzled monies, that were never included in gross income. Supra at p. 343 n. 26.

. Section 2, Clause 3 provides in pertinent part:
“Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers * *
Section 9, Clause 4 provides:
“No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”

. The Sixteenth Amendment provides:
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
This amendment was added to the Constitution in response to the Supreme Court’s invalidation of the Income Tax Act of 1894 in Pollock v. Farmer’s Loan & Trust Co., 157 U.S. 429, 601, 15 S.Ct. 673, 39 L.Ed. 759 (initial decision), 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed. 1108 (decision on rehearing), on the ground that a tax on income derived from property was the equivalent of a direct tax on the income-producing property itself and therefore must be apportioned in accordance with the above-quoted provisions of Article I. Prior to the decision in Pollock, it had been the general consensus that the term “direct taxes” as used in the Constitution referred only to taxes on real estate and poll or capitation taxes. See, e. g., Hylton v. United States, 3 U.S. (3 Dall.) 171, 177, 1 L.Ed. 556; Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533, 544, 19 L.Ed. 482; Springer v. United States, 102 U.S. 586, 602, 26 L.Ed. 253. In 1937, the Supreme Court effectively overruled Pollock, see New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466, thereby making the Sixteenth Amendment superfluous, Congress’ power to lay and collect income taxes does not, of course, derive from the Sixteenth Amendment, but from Article I, Section 8, Clause 1 of the Constitution, which provides in pertinent part:
“The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and General Welfare of the United States * *