Court Opinion

ID: 4486032
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:08.364274+00
Date Added: 2024-06-11T07:58:28.313905
License: Public Domain

NIMS, J., dissenting: I respectfully dissent. By its action in this case the majority reopens a loophole which the Supreme Court thought it had closed in Hillsboro National Bank v. Commissioner and United States v. Bliss Dairy, Inc., 460 U.S. 370 (1983). This arises through the combination of allowance of corporate deductions under section 162 for the cost of materials and supplies, plus the step-up in basis of the corporate assets distributed in liquidation by virtue of former section 337 which are thereafter sold by the shareholders at little or no gain. This résult is not only inconsistent with Bliss Dairy; it also conflicts directly with our recent holding in Byrd, Transferee v. Commissioner, 87 T.C. 830 (1986), affd. without published opinion 829 F.2d 1119 (4th Cir. 1987). In Byrd, the Commissioner asserted that expenses incurred by nurserymen in growing plants are normally deductible because the plants will be sold to customers in the ordinary course of business. However, since the plants in Byrd were distributed to shareholders in a corporate liquidation, this treatment was fundamentally inconsistent with the purpose behind the section 162 deduction. 87 T.C. at 836. Agreeing with the Commissioner, we held that since the corporate taxpayers distributed the plants to their shareholders in liquidation, the tax-benefit rule requires that they include in income the amount of their “unwarranted deduction.” 87 T.C. at 838. Stare decisis mandates that this holding be applied to the facts now before us. By reading the facts of Byrd selectively, it might be suggested that only the cost of the young plants distributed in liquidation, but not the cost of materials and supplies used to nurture them, were required to be recaptured. This is the only conceivable basis on which Byrd could be distinguished from this case. But to apply this bizarre distinction consistently, the majority should, at a minimum, disallow the cost of seeds. Even the majority must admit that seeds are but the precursors of young plants. The majority places more weight on the Supreme Court’s use of the words “consumption of the asset” in Bliss Dairy (460 U.S. at 395) than those words should be required to bear alone. The regulation from which the Supreme Court derived the concept of consumption is section 1.162-3, Income Tax Regs., which is quoted in relevant part in Bliss Dairy as follows: “Taxpayers * * * should include in expenses the charges for materials and supplies only in the amount that they are actually consumed and used in operation in the taxable year” (emphasis by the Supreme Court). 460 U.S. at 395. The phrase “actually consumed and used in operation in the taxable year” includes both consumption and sale in the ordinary course of the taxpayer’s business in the taxable year. Since the expensed items in the present case were consumed but not used in operation, and since the crops which they produced were distributed to the shareholders, the tax-benefit rule must be invoked. Our holding in Mars, Inc., and Uncle Ben’s, Inc. v. Commissioner, 88 T.C. 428 (1987), is not inconsistent with Bliss Dairy or with Byrd. Mars and Uncle Ben’s involved the incorporation of a foreign loss branch by the taxpayer. We held that the incorporation of a foreign loss branch is not a fundamentally inconsistent event as that term is defined in Bliss Dairy and that to hold otherwise would suggest taxability under Bliss Dairy on incorporation of any partnership that had incurred losses. Unlike the situation in Bliss Dairy, Byrd and, I submit, the case before us, the taxpayers in Mars and Uncle Ben’s did not convert expensed assets to some other, nonbusiness use which was inconsistent with earlier deductions. See Bliss Dairy, 460 U.S. at 395. For the foregoing reasons, I would hold for respondent. Chabot, Parker, Shields, Hamblen, Jacobs, Parr, and RUWE, JJ., agree with this dissent.