Abdalla v. C. I. R.
| Decision Date | 12 June 1981 |
| Docket Number | No. 78-3039,78-3039 |
| Citation | 647 F.2d 487 |
| Parties | 81-2 USTC P 9491 Jacob ABDALLA and Mary T. Abdalla, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. . Unit A |
| Court | U.S. Court of Appeals — Fifth Circuit |
Band & Hopkins, H. Book Hopkins, Gretna, La., for petitioners-appellants.
M. Carr Ferguson, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Gilbert E. Andrews, Act. Chief, Appellate Sec., Stuart E. Seigel, Chief Counsel, Internal Revenue Service, Crombie J. D. Garrett, Murray S. Horwitz, Jonathan Cohen, Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.
Appeal from a Decision of the United States Tax Court.
Before THORNBERRY, RANDALL and TATE, Circuit Judges.
This case presents the question whether the availability or amount of a deduction claimed by a taxpayer under I.R.C. § 1374 of the net operating loss of a Subchapter S corporation in which the taxpayer is a holder of capital stock and debt is affected by the fact that on a date (October 26, 1966) during both the taxpayer's taxable year (ended December 31, 1966) and the corporation's taxable year (ended January 31, 1967), the corporation was adjudicated bankrupt and the capital stock and debt in the corporation owned by the taxpayer became worthless. The taxpayer claimed a deduction under § 1374 for the full net operating loss for the corporation's taxable year on his tax return for his taxable year (ended December 31, 1967) during which the corporation's taxable year ended. The Internal Revenue Service disallowed the deduction of the net operating loss in full for the reason that the taxpayer had incurred losses under I.R.C. §§ 165(g) and 166(d) for worthless stock and debt during his preceding taxable year (ended December 31, 1966), which had the effect under I.R.C. § 1016(a)(1) of reducing his bases in his stock and debt to zero during 1966, thereby rendering the net operating loss for the corporation's taxable year (January 31, 1967) nondeductible to the taxpayer under § 1374(c)(2).
The Tax Court, in resolving the interrelationship of a § 1374 net operating loss deduction and the deductions allowed for worthless stock (§ 165(g)) and worthless nonbusiness debt (§ 166(d)) in a situation where the taxpayer and his Subchapter S corporation have different taxable years, held that the worthlessness occasioned by the bankruptcy constituted a disposition of such stock and debt and that the taxpayer could, therefore, deduct under § 1374(c) the fraction of the net operating loss of the corporation allocable to the period from the beginning of the corporation's taxable year to the date of worthlessness. Abdalla v. Commissioner, 69 T.C. 697 (1978). On appeal, the taxpayer urges that he is entitled to claim the entire net operating loss of the corporation for its full taxable year, rather than for the period of the year ended on the date of worthlessness. The Service, having abandoned its position before the Tax Court, has not cross-appealed the Tax Court's holding that the worthlessness constituted a disposition for purposes of § 1374(c) and, indeed, urges that the Tax Court's judgment be affirmed.
Because the Service has not cross-appealed the judgment of the Tax Court, we affirm that judgment. However, we reject the Tax Court's rationale that worthlessness should be treated as a disposition under § 1374(c) because that theory presents more problems than it solves. For the reasons set forth below, we are of the opinion that the revision of the provisions of the Internal Revenue Code involved in this case should be left to Congress and that, unless and until Congress acts, these provisions should be applied as they are now written.
The taxpayer 1 was the owner of 100% of the outstanding capital stock of Abdalla's Furniture Inc. ("Furniture"), a Louisiana corporation. As of October 25, 1966, the basis of his capital stock and the basis of his indebtedness in Furniture were $100,000 and $141,500, respectively. In addition, the taxpayer owned 1,255 of the 1,275 shares of capital stock of Abdalla's Downtown Furniture, Inc. ("Downtown Furniture"), a Louisiana corporation. As of October 25, 1966, the basis of his capital stock in Downtown Furniture was $125,500. Both Furniture and Downtown Furniture used a fiscal year which ended January 31 for purposes of calculating their federal income tax liabilities. Furniture and Downtown Furniture filed properly executed elections in accordance with the provisions of I.R.C. §§ 1371 and 1372 to be taxed as Subchapter S corporations.
The taxpayer was also the president, principal stockholder and chief executive officer of three other corporations, Park Development Corporation ("Park"), Vista Development Corporation ("Vista") and Park Vista Homeowners Corporation, all Louisiana corporations.
Furniture and Downtown Furniture were adjudicated bankrupt on October 26, 1966. The taxpayer and the Internal Revenue Service stipulated that the taxpayer's stock and debt in Furniture and his stock in Downtown Furniture became completely worthless on that date.
For the fiscal year ended January 31, 1967, Furniture and Downtown Furniture had net operating losses of $255,825 and $208,170, respectively.
Prior to the adjudication of bankruptcy, the taxpayer had endorsed two notes of Furniture in solido. During his taxable year ended December 31, 1968, the taxpayer paid interest on such notes totaling $10,650.36, and he deducted that amount on his tax return for 1968. One of these notes was also endorsed by Vista and Park. Each of Vista and Park secured its endorsement of Furniture's liability by a promissory note payable to "bearer." Each such promissory note was, in turn, secured by an attached collateral mortgage executed by the maker of the note.
The taxpayer included a deduction for the net operating losses of Furniture and Downtown Furniture in his individual tax return filed for his taxable year ended December 31, 1967. In his individual tax return filed for his taxable year ended December 31, 1968, he included a deduction for his personal net operating losses resulting from the flow through of these corporate losses carried forward to 1968.
The Service disallowed the net operating losses for the reason that, since the taxpayer's stock and debt in Furniture and his stock in Downtown Furniture had become worthless during the taxpayer's taxable year ended December 31, 1966, the taxpayer incurred losses during 1966 for worthless stock and debt under §§ 165(g) 2 and 166(d), 3 respectively. Accordingly, the taxpayer was required by § 1016(a)(1) 4 to adjust the bases of his stock and debt to zero in 1966. Having zero bases in the stock and debt at January 31, 1967, he was not entitled to claim any net operating loss, for § 1374(c)(2) limits such deductions to the taxpayer's adjusted bases in his stock and indebtedness. 5 Also, the Service disallowed the deduction for the interest paid by the taxpayer on Furniture's notes.
The Tax Court, in a decision which was described by one dissenting judge as "Solomonic," held that the onset of worthlessness not only constituted the event which established the worthlessness of the taxpayer's investments for purposes of §§ 165(g) and 166(d), but also could fairly be treated as amounting to a sale or exchange of the stock and debt for purposes of § 1374(c). 6 Having adopted the position that the worthlessness of the taxpayer's stock and debt occasioned by the bankruptcy constituted a disposition of the stock and debt for purposes of § 1374(c), the Tax Court held that the taxpayer was entitled to deduct the net operating losses of Furniture and Downtown Furniture as if he had disposed of his stock in those corporations on the date of the bankruptcy. In so holding, the Tax Court specifically overruled dictum to the contrary in Levy v. Commissioner, 46 T.C. 531 (1966). The Tax Court further held that under § 1374(c)(2) 7 the limit on the amount of net operating loss of each corporation which the taxpayer was entitled to deduct was his adjusted bases in the stock and debt of such corporation as of October 25, 1966.
The Tax Court computed the taxpayer's portion of the net operating losses of Furniture and Downtown Furniture as follows:
Furniture
------------------------------------
Net operating loss for the
year ended 1/31/67 $225.825.00
Net operating loss per day
($255,825 - 365) = $700.89
Net operating loss for 267
days of year ended 1/31/67 = $187,137.73
Downtown furniture
------------------------------------
Net operating loss for the
year ended 1/31/67 = $208,170.00
Net operating loss per
day ($208,170 - 365)= $570.33
Net operating loss of 267
days of year ended 1/31/67 = $152,278.11
Taxpayer's share (.9843) of net
operating loss for 267 days = $149,887.34
Section 1374(c)(2) limits the deduction available to the taxpayer as follows
Furniture
-------------------
Basis in stock $100,000
Basis in debt 141,500
--------
$241,500
Downtown Furniture:
-------------------
Basis in stock $125,500
Basis in debt 0
--------
$125,500
Since the taxpayer's pro rata share of the net operating loss of Furniture ($187,173.73) was less than the sum of his bases in the stock and debt of Furniture ($241,500), he was entitled to deduct the full loss. In the case of Downtown Furniture, on the other hand, since the taxpayer's pro rata share of the net operating loss ($149,887.34) exceeded his basis in the stock ($125,500), he was entitled to deduct only $125,500 of that loss.
Having held that the taxpayer was entitled to deduct the net operating losses of Furniture through October 25, 1966, in the amount of $187,137.73 pursuant to § 1374, the Tax Court then held that, by...
To continue reading
Request your trial
-
Byram v. United States
...of the property entitled to interest deductions under the regulation. We considered and rejected this argument in Abdalla v. Commissioner, 647 F.2d 487, 503-04 (5th Cir.1981). It long has been settled in our circuit that a taxpayer is entitled to deduct interest payments only on his own ind......
-
Sachs v. Comm'r of Internal Revenue (In re Estate of Sachs)
...461 U.S. 574, 586 (1983); see Church of the Holy Trinity v. United States, 143 U.S. 457, 459 (1892); Abdalla v. Commissioner; 647 F.2d 487, 496 (5th Cir. 1981) and cases cited therein. Because ‘words do not have an immutable meaning,‘ we have interpreted the Code in a manner contrary to its......
-
Exxon Corp. v. Comm'r of Internal Revenue
...the intent of the legislative scheme clearly indicates a result contrary to that dictated by” the literal language. Abdalla v. Commissioner, 647 F.2d 487, 496 (5th Cir.1981), affg. 69 T.C. 697 (1978). “It is a familiar rule, that a thing may be within the letter of the statute and yet not w......
-
Boecking v. Commissioner, Docket No. 5897-90.
...liquidation as reported in prior years. See Abdalla v. Commissioner [Dec. 34,967], 69 T.C. 697 (1978), affd. [81-2 USTC ¶ 9491] 647 F.2d 487 (5th Cir. 1981); Schneider v. Commissioner [Dec. 33,456], 65 T.C. 18 (1975); James Armour, Inc. v. Commissioner [Dec. 27,071], 43 T.C. 295 (1964); Hei......