Pilgrim's Pride Corp. v. Comm'r

• Decision Date: 11 December 2013
• Docket Number: No. 12089–10.,12089–10.
• Parties: PILGRIM'S PRIDE CORPORATION Successor in Interest to Pilgrim's Pride Corporation of Georgia f.k.a. Gold Kist, Inc. Successor in Interest to Gold Kist Inc. and Subsidiaries, Petitioner v. COMMISSIONER of INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

141 T.C. No. 17

141 T.C. 533

PILGRIM'S PRIDE CORPORATION Successor in Interest to Pilgrim's Pride Corporation of Georgia f.k.a. Gold Kist, Inc. Successor in Interest to Gold Kist Inc. and Subsidiaries, Petitioner

v.COMMISSIONER of INTERNAL REVENUE, Respondent.

No. 12089–10.

United States Tax Court.

Dec. 11, 2013

Decision for IRS.

P is the successor in interest to G. G was contractually obligated to purchase, and in 1999 did purchase, securities from S and T for $98.6 million. The securities were capital assets of G. In 2004 S offered to redeem the securities for $20 million. G's board of directors decided to abandon the securities for no consideration because a $98.6 million ordinary loss would produce tax savings greater than the $20 million offered by S. On June 24, 2004, G voluntarily surrendered the securities to S and T for no consideration. On its Federal income tax return for the tax year ending June 30, 2004, G reported a $98.6 million ordinary abandonment loss deduction under I.R.C. sec. 165(a) pursuant to sec. 1.165–2(a), Income Tax Regs.

An abandonment loss cannot be claimed on a sale or exchange of property. Sec. 1.165–2(b), Income Tax Regs. Pursuant to I.R.C. sec. 165(f) losses from sales or exchanges of capital assets are subject to the limitations on capital losses under I.R.C. secs. 1211 and 1212. I.R.C. sec. 1234A requires gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right with respect to property that is (or on acquisition would be) a capital asset in the hands of a taxpayer to be treated as gain or loss from the sale of a capital asset.

Held: the securities are intangible property comprising rights that G had in the management, profits, and assets of S and T. Those rights were terminated when G surrendered the securities.

Held, further, the $98.6 million loss on the surrender of the securities is attributable to the termination of G's rights with respect to the securities, which are capital assets, and pursuant to I.R.C. sec. 1234A the loss is treated as a loss from the sale or exchange of capital assets.

Held, further, G is not entitled to an ordinary loss deduction for abandonment, because the loss is treated as a loss from the sale or exchange of capital assets pursuant to I.R.C. sec. 1234A. See sec. 1.165–2(b), Income Tax Regs.

Held, further, pursuant to I.R.C. sec. 165(f), P's losses from the surrender of the securities, deemed to be a sale or exchange under I.R.C. sec. 1234A, are subject to the limitations on capital losses under I.R.C. secs. 1211 and 1212.

Robert H. Albaral and Todd A. Schroeder, for petitioner.

John Wayne Duncan and J. Greg Marble, for respondent.

OPINION

DAWSON, Judge:

Petitioner petitioned the Court pursuant to section 6213(a) and (f)(1) ¹ for redetermination of a $29,682,682 deficiency in Federal income tax and a $5,936,536 accuracy-related penalty under section 6662(a) that respondent determined against petitioner as successor in interest to Gold Kist Inc. (GK Co-op), a Georgia cooperative marketing association, for its tax year ending June 30, 2004. After a concession by respondent,² the only issue remaining for decision is whether a $98.6 million loss resulting from GK Co-op's abandonment of certain securities in 2004 is ordinary or capital.

Background

This case was submitted fully stipulated pursuant to Rule 122.³ The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. At the time petitioner filed its petition its principal place of business was in Pittsburg, Texas.

Petitioner is a corporation organized under the laws of the State of Delaware. It is the successor in interest to Pilgrim's Pride Corp. of Georgia f.k.a. Gold Kist, Inc., a Delaware corporation (GK Inc.), which was the successor in interest to Gold Kist Inc., a Georgia cooperative marketing association (GK Coop). GK Co-op was organized as a cooperative association in 1936 under the Georgia Cooperative Marketing Act. Beginning in 1978, GK Co-op was taxed as a nonexempt cooperative under subchapter T of the Code and was required to file an annual Form 990–C, Farmers' Cooperative Association Income Tax Return.

In 1999 GK Co-op was contractually required to purchase certain securities for an aggregate total of $98.6 million from Southern States Cooperative, Inc. (Southern States), and Southern States Capital Trust I (Trust), a Delaware statutory trust established by Southern States.⁴ Consequently, on October 5, 1999, GK Co-op purchased 40,000 shares of Step–Up Rate Series B Cumulative Redeemable Preferred Stock (series B preferred stock) ⁵ of Southern States for $39.2 million and 60,000 shares of Step–Up Rate Capital Securities, Series A (series A securities) ⁶ issued by the Trust for $59.4 million. The series B preferred stock and the series A securities, collectively referred to herein as the Securities, are securities as defined in section 165(g)(2).

The Securities generally provided for quarterly dividend payments that under certain circumstances could be unilaterally deferred by Southern States. Southern States ceased paying and began to defer the quarterly dividends payable on the series B preferred stock beginning with the April 2002 quarterly dividend. In October 2002 Southern States notified GK Co-op that the quarterly dividends on the series A securities for that quarter and subsequent quarters were deferred and would not be paid by Southern States.

In early 2004 Southern States offered to redeem the Securities from GK Coop for less than GK Co-op had paid for them.⁷ At that time GK Co-op was planning to merge with and into its wholly owned subsidiary GK Inc., a for-profit business corporation taxable under subchapter C of the Code, and to take the company public shortly after the end of its 2004 tax year. GK Co-op made a counteroffer of $31.5 million in May 2004 because it wanted to dispose of the Securities and remove them from its balance sheet before making the public offering. Southern States rejected GK Co-op's counteroffer and instead proposed to redeem the Securities for $20 million.

At a meeting held on May 24, 2004, GK Co-op's board of directors decided to abandon the Securities for no consideration because a $98 million ordinary loss would produce tax savings greater than the $20 million offered by Southern States. As a result, GK Co-op rejected the $20 million offer and ceased all negotiations with Southern States. At the time, GK Co-op valued the Securities at $38.8 million on its Generally Accepted Accounting Principles (GAAP) financial statements.

On June 24, 2004, GK Co-op voluntarily and irrevocably surrendered the Securities to Southern States and the Trust for no consideration ⁸ and recorded a $38.8 million loss on its GAAP financial statements for the tax year ended June 30, 2004. After surrendering the Securities, GK Co-op had no further ownership interest in Southern States or the Trust. The parties have stipulated that immediately before GK Co-op surrendered the Securities they were worth at least the $20 million Southern States offered to pay for them.

On its timely filed Form 990–C for the tax year ending June 30, 2004, GK Co-op reported a $98.6 million ordinary loss deduction under section 165(a) and pursuant to section 1.165–2(a), Income Tax Regs.⁹ In October 2004 GK Co-op converted from a cooperative association to a for-profit corporation and merged into GK Inc., and GK Inc. completed an initial public offering of its common stock.

In 2007 petitioner completed its acquisition of all the stock of GK Inc., and GK Inc. merged with and into petitioner. On December 1, 2008, petitioner and certain of its subsidiaries commenced a voluntary case under chapter 11 of title 11 of the United States Code (Bankruptcy Code) in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division. See In re Pilgrim's Pride Corp., No. 08–45664 (Bankr.N.D. Tex. filed Dec. 1, 2008).

On December 21, 2009, respondent issued the statutory notice of deficiency to petitioner as successor in interest to GK Co-op with respect to GK Co-op's tax year ending June 30, 2004. The notice of deficiency determined, inter alia, that GK Co-op's loss on the abandonment of the Securities was a capital loss rather than an ordinary loss as claimed by GK Co-op on its tax return. ¹⁰

When the notice of deficiency was issued, petitioner was prohibited by section 362(a)(8) of the Bankruptcy Code from filing a petition in the Tax Court to challenge the determined deficiency. On December 28, 2009, the debtors' amended joint plan of reorganization under chapter 11 of the Bankruptcy Code, as modified, became effective, and petitioner was no longer prohibited from filing a petition in the Tax Court.¹¹ On May 26, 2010, petitioner timely filed a petition in this Court, challenging respondent's determination that GK Co-op's loss on the abandonment of the Securities was a capital loss rather than an ordinary loss as claimed by GK Co-op on its tax return and the accuracy-related penalty. Respondent now concedes the penalty. See supra note 2.

Discussion

A. Section 165(a)

Generally, section 165(a) allows as a deduction any loss sustained during the taxable year that is not compensated for by insurance or otherwise. A loss from the sale or exchange of a capital asset is subject to the limitations on capital losses under sections 1211 and 1212. ¹² Sec. 165(f). In the case of a corporation, capital losses from sales or exchanges of capital assets are allowed only to the extent of capital gains from sales or exchanges of capital assets. Sec. 1211(a). Although by its terms section 1211 does not apply to gain or loss resulting from a disposition that is not a “sale or exchange”, see, e.g., Helvering v. William Flaccus Oak Leather Co., 313 U.S. 247, 61 S.Ct. 878, 85 L.Ed. 1310 (1941) (demonstrating that the term “sale or exchange” is narrower than the term “sale or other disposition”), Co...