Hills v. C. I. R.
| Decision Date | 15 November 1982 |
| Docket Number | No. 81-7668,81-7668 |
| Citation | 691 F.2d 997 |
| Parties | 82-2 USTC P 9669 Henry L. and Frances O. HILLS, Respondents, v. COMMISSIONER OF INTERNAL REVENUE, Petitioner. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Robert T. Duffy, William P. Wang, Attys., Appellate Section, U.S. Dept. of Justice, Washington, D.C., for petitioner.
Hicks, Maloof & Campbell, Bruce M. Edenfield, Atlanta, Ga., for respondents.
Appeal from the Decision of the United States Tax Court.
Before HILL and HATCHETT, Circuit Judges, and GOLDBERG *, Senior Circuit Judge.
Section 165 of the Internal Revenue Code of 1954 allows, as a general rule, deductions for "losses ... not compensated for by insurance or otherwise." 1 In this appeal we are presented with a question of first impression in this circuit; we are called upon to decide whether a voluntary election not to file an insurance claim for a theft loss precludes a casualty loss deduction under this section.
Henry and Frances Hills, taxpayer-appellees, own a vacation home near Dahlonega, Georgia. About April 1, 1976, a thief disturbed the solitude of their secluded retreat, causing a loss of $760. Though the loss was insured, the taxpayers chose not to file a claim under their policy. 2 Instead, the taxpayers claimed a casualty loss deduction on their 1976 federal income tax return. 3
The taxpayers' return was audited and the Commissioner issued a Notice of Deficiency.
The taxpayers, now aggressively trying to prevent economic loss, appealed to the Tax Court. This was also a case of first impression for the full Tax Court. 4 In a fine, thoughtful opinion reviewed by the full court, 5 Judge Nims diverged from prior judicial treatment and allowed the deduction. 6 The Tax Court assumed the existence of a loss and dealt primarily with whether the loss was compensated by insurance or otherwise within the meaning of section 165(a). Relying on the clear statutory language and limited legislative history, the court held the taxpayers' loss was not compensated. The court further held that this loss was not caused by the taxpayers' election not to file an insurance claim, and so was not precluded by the limitations on deductions for personal, nonprofit-seeking losses contained in section 165(c). 7 We affirm
On appeal the Commissioner strongly urges that section 165 calls for a two-part analysis: one must first determine if there has been a loss, and only then consider whether the loss has been compensated by insurance or otherwise. 8 The Commissioner does not deny the Tax Court's view that the economic detriment here was not compensated by insurance or otherwise; rather, he claims that these facts do not meet the first statutory requirement of a loss.
The Commissioner advances three arguments for the position that the taxpayers did not suffer a deductible loss. First, he argues that section 165(a) requires a taxpayer to pursue all reasonable possibilities of recompense before an economic detriment is considered a loss. Because the taxpayers did not file an insurance claim, they did not undergo a loss. Second, he revives the argument rejected by the Tax Court that this loss was caused by the taxpayers' election not to file a claim, and so is not a personal loss of the sort section 165(c) makes deductible. Finally, the Commissioner argues that the economic detriment suffered by the taxpayers was in substance
nothing more than a nondeductible insurance premium. We shall review the Tax Court's holding regarding compensation, and then consider each of the Commissioner's arguments in turn.
Section 165(a) allows a deduction for any "loss ... not compensated for by insurance or otherwise." The plain language of the statute presents a two-part inquiry: (1) Was there a loss?; (2) Was it compensated for by insurance or otherwise? Although the Commissioner does not now rely on any strained gloss on "compensated," we consider that now for two reasons. First, understanding the meaning and history of the compensation half of section 165(a) is necessary to understand the loss half. Second, some courts prior to the Tax Court below have relied on an unusual view of the word. 9
"Compensated" is a respectable, everyday English word with a respectable, everyday meaning. Absent unusual circumstances we are bound by the plain meaning of the language Congress has enacted. 10 "Compensated" here seems quite able to take its everyday meaning of being reimbursed. Indeed, the Commissioner's regulations support and endorse this common-sense construction. 11
The disposition the Commissioner favors in this case would deny a section 165 deduction any time a loss is covered by insurance. This is functionally equivalent to reading the statute as if it said "not covered by insurance." It is sufficient to point out that "covered" also has a plain meaning rather different from that of "compensated," and that this Court must enforce the statute Congress actually enacted. If that were not sufficient response, the small fragment of legislative history on this section surely is dispositive. 12 The initial House Ways and Means Committee language was "losses ... not covered by insurance or otherwise and compensated for." The Senate Finance Committee amended the language to its final and enacted form of "losses ... not compensated for by insurance or otherwise." 13 This change makes clear the fact that Congress was aware of the difference between "covered" and "compensated" and intended to enact what it in fact enacted.
Section 165(a) allows a deduction for an economic detriment that (1) is a loss, and (2) is not compensated for by insurance or The Commissioner's first argument relies on the rule that a loss must be represented by a closed and completed transaction to be deductible. He argues that this requirement means a taxpayer must reasonably pursue all possible sources of recovery before an economic detriment is a deductible section 165(a) loss. In support of his position the Commissioner cites Alison v. United States, 344 U.S. 167, 73 S.Ct. 191, 97 L.Ed. 186 (1952). In Alison, the Supreme Court noted that a theft loss is not sustained when embezzlement takes place because "(o)ne whose funds have been embezzled may pursue the wrongdoer and recover his property wholly or in part." Id. at 170 (emphasis added). See also Treas.Reg. § 1.165-1(d) (). 14 We note in passing that the authority the Commissioner cites all relates to timing of a loss deduction.
otherwise. The Commissioner does not now make a frontal attack on the taxpayers' position by attempting to argue pointlessly that the economic detriment was compensated. Rather, he makes a flanking attack and argues that the detriment was not a deductible loss.
The problem with this argument lies in the two-part nature of the transaction. Congress has divided the transaction into loss and compensation, and just as "compensation" has a clear meaning, "loss" also has a clear meaning different from that the Commissioner proposes. It is plain that if a person takes your property and returns it, no loss has taken place. It is equally plain that if an unknown person takes your property and destroys it, a loss has taken place. There are many shades between these two extremes; however, the line-drawing problem of determining precisely when there is a loss is not before us.
That line-drawing problem is not before us now because it is clear the taxpayers have had a loss; a thief in the night has spirited away their property, which has not subsequently been recovered. Even though the loss might later be compensated by an unrelated third-party "insurer or otherwise" a loss has still been suffered. The distinction between the two phases of loss and compensation is mandated by the statutory language. The distinction between possible recovery from principals in the loss phase 15 and possible recovery from unrelated third parties in the compensation phase is also mandated by the statutory language. It refers to "losses ... compensated for by insurance or otherwise." Thus a potential for recovery from an indemnificator must be treated as part of the compensation phase. 16 Accordingly, the Commissioner's argument that the timing requirement of a closed and completed transaction imposes a duty on the taxpayer to prevent a loss is misdirected because we are now concerned with the compensation half of the transaction. The Commissioner does not attempt to extrapolate a duty to pursue compensation; to do so would be to run afoul of the clear statutory language discussed in Part II, supra. 17
Moreover, the Commissioner's definition of loss renders the second "and not compensated" clause surplusage. According to the Commissioner, to the extent there is even a reasonable possibility of compensation, there is no loss. Thus, an economic detriment that was in fact compensated is certainly not a loss. That would mean that definitionally all deductible losses are not compensated, so Congress wasted energy and ink by limiting deductions to losses not compensated for by insurance or otherwise. We are loathe to ascribe such foolishness to Congress, particularly when a common-sense interpretation based on the plain meaning of the words would avoid the insult. 18
Although the Commissioner does not directly argue that "compensated" should not take its natural meaning, we are urged to read section 165 of the...
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