Court Opinion

ID: 9469861
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:50:57.918458+00
Date Added: 2024-06-11T17:41:36.262092
License: Public Domain

HATCHETT, Circuit Judge,
dissenting:
I dissent because I do not believe: “The Code looks simply to whether [the taxpayer] received or did not receive compensation for his loss.” Without precedent from any circuit, without consideration of tax policy and the practicalities of real life, and in total disregard of the applicable treasury regulation, the majority reaches the conclusion *1007that “if he didn’t receive it — -he didn’t receive it.” The fact that the taxpayer did not seek reimbursement from a willing source is irrelevant in the majority’s analysis.
The regulation, section 1.165-1 (26 C.F.R.) provides:
§ 1.165-1 Losses.
(d) Year of deduction.
(2) (i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution of a release.
(3) Any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss (see § 1.165-8, relating to theft losses). However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.
The regulation, which must be given credence by this court, points out that no loss is sustained, for purposes of section 165(a), if there exists a “claim for reimbursement with respect to which there is a reasonable prospect of recovery.” Since the taxpayers here had a ripe and good claim for reimbursement, no deduction should have been allowed because no loss was sustained. A theft or casualty simply does not become a loss until all reasonable prospects for recovery have been exhausted. The distinction between an event and a loss has been amply explained in Alison v. United States, 344 U.S. 167, 73 S.Ct. 191, 97 L.Ed. 186 (1952). In making the distinction between an embezzlement and a loss, the Supreme Court stated:
Furthermore, the terms embezzlement and loss are not synonymous. The theft occurs, but whether there is a loss may remain uncertain. One whose funds have been embezzled may pursue the wrongdoer and recover his property in whole or in part.... Events in the Alison case show the practical value of this recovery. A substantial proportion of the embezzled funds was recovered in 1941, ten years after the first embezzlement occurred. This recovery is ample refutation of the view that a loss is inevitably “sustained” at the very time an embezzlement is committed.
Whether and when a deductible loss results from an embezzlement is a factual question, a practical one to be decided according to surrounding circumstances. See Boehm v. Commissioner, 326 U.S. 287 [66 S.Ct. 120, 90 L.Ed. 78].
344 U.S. at 170, 73 S.Ct. at 192. The taxpayers in this case are poorer, not as a result of the theft, but as a result of their decision, made with full knowledge, not to seek reimbursement from the insurance company. The taxpayers suffered no damages. They, in effect, paid damages to their insurance company and thereby caused other taxpayers to finance their “loophole.”
*1008There is, however, a more serious reason that I dissent than that stated above. The majority opinion now creates inconsistency within section 165 between corporations, individuals in a “trade or business,” or a “profit” making venture, and non-business individuals. The commissioner’s position in this case as expressed through the regulation, provides that all taxpayers must pursue readily available remedies. The majority’s position, in not requiring taxpayers to pursue remedies, results in giving corporations and individuals in a “trade or business,” or a “profit” making venture, a double bite under the tax laws. The business entity deducts the insurance premium and the theft. A non-business individual may only deduct the theft.
While this may be a desirable result as to an individual non-business taxpayer, it should not be a desirable result where the taxpayer is a corporation or an individual engaged in a “trade or business” or a “profit” making venture. In this sense, the majority fails to consider the practical and economic consequences of its decision.
The basis for all decisions regarding the interpretation of section 165(a) is, as mentioned in the majority opinion, Kentucky Utilities v. Glenn, 394 F.2d 631 (6th Cir. 1968). Since Kentucky Utilities, two cases have followed its lead. Axelrod v. Internal Revenue Service, 56 T.C. 248, 260 (Quealy, J. concurring), Bartlett v. United States, 397 F.Supp. 216 (Md.1975). Based on these decisions, the Internal Revenue Service promulgated Revenue Ruling 78-141, 1978-1 C.B. 58 and Letter Ruling 8102010, all holding that where a right to an insurance claim is not exercised, the deduction under section 165(a) may be denied. The Commissioner advances the same position here. Because of the great precedential importance placed on Kentucky Utilities, it deserves close scrutiny, notwithstanding its age.
Kentucky Utilities must be considered in light of two crucial points: (1) Kentucky Utilities was decided under the 1939 Code; and (2) the insured in that case was a corporation. The Kentucky Utilities case was governed by section 23(f) of the Internal Revenue Code of 1939. The pertinent part read:
(f) Losses by corporations.
“In the case of á corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.”
26 U.S.C.A. § 23(f) (1952) (Internal Revenue Code of 1939). Under § 23(f), only corporations were allowed to participate in the benefits of this section. Whereas, under § 165(a) and (c)(3), three classes of taxpayers are allowed the benefits accorded by this section: (1) the corporate taxpayer; (2) the individual taxpayer who is engaged in a “trade or business” or a “profit” making venture; and (3) the non-business taxpayer. These distinctions are important because each taxpayer requires different treatment consistent with economic and tax policy considerations of the Code. Given this perspective, a different, or at least a more restrictive holding as applying only to non-business individuals would have been better than that rendered by the majority. Such a holding would accomplish two objectives: (1) it would remain consistent with Kentucky Utilities, and (2) it would remain consistent with the economic realities of the Code.
THE ECONOMIC REALITIES
Under the present Code, as under the 1939 Code, corporations and individuals engaged in a “trade or business” or a “profit” making venture, are allowed deductions for payment of insurance premiums as an ordinary and necessary business expense. See I.R.C. § 162 (1954) and I.R.C. § 23(a) (1939); United States v. Weber Paper Co., 320 F.2d 199 (8th Cir. 1963); Bennett v. Commissioner of Internal Revenue, 139 F.2d 961 (8th Cir. 1944); see generally, Carnation Co. v. Commissioner of Internal Revenue, 640 F.2d 1010, 1012 (9th Cir. 1981) (stating that “[ijnsurance premiums are deductible as ‘ordinary and necessary business expenses.’ ”). No such deductions were allowed under the 1939 Code, as under the present 1954 Code, for insurance premiums paid by the non-business individual. See *10091. R.C. § 262 (1954) and I.R.C. § 24(a)(1) (1939); Revenue Ruling 70-394, C.B. 1970-2, p. 34. The importance of this point becomes readily apparent when the taxpayer, motivated by business or financial reasons, assumes the deductible loss out of fear of a policy cancellation or a premium increase. In such instances, the economic threat posed by the insurance company’s premium increase or policy cancellation upon the corporation or the business individual is not as harsh as it is upon the non-business individual. The corporation and business taxpayer will inevitably pass the increased cost on to its customers. The individual, on the other hand, is faced with a possible economic hardship if the insurance company either cancels or increases premiums.
Moreover, the government, not the business individual nor the corporation, actually pays the insurance premiums through deductions, a form of tax expenditure. See Surrey & McDaniel, The Tax Expenditure Concept and the Budget Reform Act of 1974, 17 B.C.Com. & Indus.L.Rev. 679, 683 (1976). Because of this subsidization and the cost transfer, the burden on these taxpayers is obviously less than the burden borne by the non-business individual.
In Kentucky Utilities, the holding, from this perspective, was correct on the facts of that case because had the court allowed the loss deduction to the corporation, it would have effectively left the government (other taxpayers) to pay the bill twice, once for the premium deduction, and again for the loss deduction. This is the situation that the majority advances with its holding in this case. This was not Congress’s intent, nor is it consistent with the nation’s tax policy. The problem with such a restrictive interpretation, however, is reconciling such a holding with the words of section 165. Thus, in the interest of statutory consistency, accepting the commissioner’s result would not only be consistent with a reasonable interpretation of the Code, but also with this nation’s tax policy.
Our job in interpreting statutes is to effectuate the intent of Congress. This requires us to give a practical interpretation which would not produce an absurd result. State of Alabama ex rel. Graddick v. Tennessee Valley Auth., 636 F.2d 1061 (5th Cir. 1981); United States v. Mikelberg, 517 F.2d 246 (5th Cir.), cert. denied, 424 U.S. 909, 96 S.Ct. 1104, 47 L.Ed.2d 313 (1975). Our objective is to produce an interpretation harmonious with the purpose of the statute. Gonzalez v. Young, 441 U.S. 600, 99 S.Ct. 1905, 60 L.Ed.2d 508 (1979); United States v. Article of Drug * * * Bacto-Unidisk, 394 U.S. 784, 89 S.Ct. 1410, 22 L.Ed.2d 726 (1969), reh’g denied, 395 U.S. 954, 89 S.Ct. 2013, 23 L.Ed.2d 473 (1969). When interpreting tax statutes, we must exercise great care in not according to some taxpayers “double-dips” and “windfalls.”
I would hold, in the interest of statutory consistency, that a taxpayer suffers a deductible casualty or theft loss only after exhaustion of all reasonable prospects of reimbursement.