Landreth v. C.I.R.

• Decision Date: 04 October 1988
• Docket Number: Nos. 86-7588,86-7636,s. 86-7588
• Citation: 859 F.2d 643
• Parties: -5641, 88-2 USTC P 9543 Ivan K. LANDRETH; Lucille Landreth, Petitioners-Appellants, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 643

859 F.2d 643

62 A.F.T.R.2d 88-5641, 88-2 USTC P 9543

Ivan K. LANDRETH; Lucille Landreth, Petitioners-Appellants, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellee.

Nos. 86-7588, 86-7636.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 8, 1987.

Decided Oct. 4, 1988.

Robert J. Shaw, Short Cressman & Burgess, Seattle, Wash., for petitioners-appellants.

Kenneth L. Greene, Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from a Decision of the Tax Court of the United States.

Before FLETCHER and NORRIS, Circuit Judges, and MacBRIDE ^*, District Judge.

ORDER

The petition for rehearing is granted. This court's opinion, Landreth v. Commissioner, 845 F.2d 828 (9th Cir.1988), filed on April 26, 1988, is hereby vacated.

OPINION

WILLIAM A. NORRIS, Circuit Judge:

The principal issue in this case is whether the Landreths (taxpayers) can deduct losses from commodity futures "straddles," ¹ incurred in 1978, if their primary motive for entering into those straddle transactions was to create tax losses rather than to realize a profit. Unless engaged in a trade or business, taxpayers can deduct losses from straddle transactions only if the losses are "incurred in a transaction entered into for profit" within the meaning of section 108 of the Deficit Reduction Act of 1984, Pub.L. No. 98-369, 98 Stat. 494, 630 ("section 108"). ² Our circuit and the Tenth Circuit have disagreed as to whether this language embodies an objective "reasonable prospect of any profit" standard or a subjective "primarily for profit" standard. In Wehrly v. United States, 808 F.2d 1311 (9th Cir.1986), our circuit interpreted the language of section 108 as "requir[ing] the investor to have only a reasonable expectation of a profit. Profit must be a motive but not necessarily the primary motive for entering into a transaction." Id. at 1312. In Miller v. Commissioner, 836 F.2d 1274 (10th Cir.1988), the Tenth Circuit, expressly disagreeing with Wehrly, interpreted section 108 as incorporating a subjective "primarily for profit" standard. Id. at 1285, 1287.

I

Before section 108 was enacted in 1984, it was unclear when a taxpayer could deduct the losses from a commodity futures straddle. In 1977, the IRS took the position that losses on one leg of a straddle were not completed transactions and thus could not be realized until the taxpayer disposed of the other leg. See Rev.Rul. 77-185, 1977-1 C.B. 48. In Smith v. Commissioner 8 T.C. 350, 385-94 (1982), aff'd, 820 F.2d 1220 (4th Cir.1987) (unpublished opinion), the Tax Court rejected this view and went on to hold that a taxpayer could not realize a loss in year one unless he could show that the straddle transaction was "entered into for profit" under section 165(c)(2), ³ which has long been construed as imposing a subjective standard requiring that the taxpayer's motive in entering the transaction be "primarily for profit." See Helvering v. National Grocery Co., 304 U.S. 282, 289 n. 5, 58 S.Ct. 932, 936 n. 5, 82 L.Ed. 1346 (1938). Because the IRS continued to litigate the issue, Congress became concerned about the volume of litigation arising from the conflict between the IRS and the Tax Court over whether losses on one leg of a commodity futures straddle constituted a completed transaction. See H.R.Conf.Rep. No. 861, 98th Cong., 2d Sess. 916-17, reprinted in 1984 U.S.Code Cong. & Admin.News 697, 1445, 1604-05. Accordingly, in 1984 Congress adopted section 108 for all straddles entered into before 1982. ⁴ Section 108 settled the dispute by coming down on the side of the Tax Court: "[I]n the case of any disposition of 1 or more positions ... [that] form part of a straddle ... any loss from such disposition shall be allowed for the taxable year of the disposition if such position is part of a transaction entered into for profit." Pub.L. No. 98-369, 98 Stat. 494, 630 (1984).

Although section 108 resolved the conflict over when the losses on one leg of a straddle could be deducted, its language presented a new question, namely the meaning of "entered into for profit." Since this language is identical to the language of section 165(c)(2), the statute on its face strongly suggests that Congress intended the subjective "primarily for profit" standard of section 165(c)(2) to govern under section 108 as well. Nonetheless, in Miller v. Commissioner, 84 T.C. 827 (1985) (10-8) ⁵, a sharply divided Tax Court held that the "entered into for profit" language of section 108 was sufficiently ambiguous to warrant study of the legislative history, 84 T.C. at 834-46. In considering the legislative history, the Tax Court focused on the following statement in the Conference Report: " 'In determining whether the position is part of a transaction entered into for profit, it is intended that the provision be applied by treating the condition as satisfied if there is a reasonable prospect of any profit from the transaction.' " 84 T.C. at 839 (quoting H.R.Conf.Rep. No. 861, 98th Cong., 2d Sess. 917, reprinted in 1984 U.S.Code Cong. & Admin.News 697, 1445, 1605) (emphasis provided in Miller ). After reviewing this legislative history, the Tax Court in Miller concluded that section 108 dispensed with the subjective "primarily for profit" standard:

We hold that section 108 adopts an objective test and directs that losses be allowed on the disposition of a position if that particular straddle transaction can be said to have held "a reasonable prospect of any profit" at the time the straddle was acquired.

84 T.C. at 842.

The Tenth Circuit has since reversed the Tax Court in Miller, 836 F.2d at 1276 reasoning that the language of section 108--"entered into for profit"--is unambiguous because it is identical to the language used in section 165(c)(2). Id. at 1280. The Tenth Circuit specifically rejected the Tax Court's "reliance on extrinsic legislative material in interpreting the statute in a way which conflicts with the long-accepted meaning of the words used therein," id. at 1279, and concluded that the meaning of the "entered into for profit" language of section 108 is identical to the meaning of the same language in section 165(c)(2). ⁶ Id. at 1280.

After the Tenth Circuit reversed the Tax Court in Miller, the Tax Court reexamined its holding in that case in light of both the Tenth Circuit's opinion and Congress' 1986 amendments to section 108. ⁷ See Boswell v. Commissioner, 91 T.C. No. 15 (July 26, 1988). In 1986, Congress retroactively amended section 108 to expressly distinguish between straddle transaction losses incurred in a trade or business and all other straddle transaction losses:

Section 108 of the Tax Reform Act of 1984 is amended ... by striking out "if such a position is part of a transaction entered into for profit" and inserting in lieu thereof "if such loss is incurred in a trade or business or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business."

Pub.L. No. 99-514, 100 Stat. 2085, 2817-18 (1986). These amendments further harmonize section 108 with section 165(c)(1), which allows the deduction of all straddle losses incurred in a trade or business, and section 165(c)(2), which allows the deduction of such losses in non-trade or business transactions only if entered into for profit. The House Report accompanying the bill amending section 108 explains that its purpose was to dispel any uncertainty created by the Tax Court's decision in Miller and to clarify that it had been the intent of Congress in enacting section 108 to adopt the section 165(c)(2) subjective "primarily for profit" standard. The House Report states in pertinent part:

Section 108 also restated the general rule that losses from the disposition of a position in a straddle are only allowable if such position was part of a transaction entered into for profit. A majority of the Tax Court in Miller interpreted section 108 as providing a new, less stringent profit standard for losses incurred with respect to pre-1981 commodity straddles. It was not the intent of Congress in enacting section 108 to change the profit-motive standard of section 165(c)(2) or to enact a new profit-motive standard for commodity straddle activities. This technical correction is necessary to end any additional uncertainty created by the Miller case.

H.R.Rep. No. 426, 99th Cong., 1st Sess. 911 (1986). The House-Senate Conference Committee Report provides that the "conference agreement follows the House bill." See H.R.Rep. No. 481, 99th Cong., 2d Sess. 845 (1986), 1986 U.S.Code Cong. & Admin.News 4075, 4933. ⁸ After reviewing the 1986 amendments and this legislative history, the Tax Court in Boswell concluded

under amended section 108(a) investors in commodity straddle transactions must establish that they entered into straddle transactions primarily for profit in order to deduct related losses. In our opinion, in light of the 1986 amendment to section 108(a), there no longer can be any serious doubt as to the proper profit-motive test ... In light of the retroactive effect of amended section 108(a), our prior opinion in Miller will no longer be followed.

91 T.C. No. 15 at 13-14.

II

With this background, we now consider Wehrly, 808 F.2d 1311, in which our court rejected the government's argument that the meaning of the phrase "entered into for profit" is clear because it is identical to the language in section 165(c)(2). Id. at 1313-14. Relying specifically on the Tax Court's opinion in Miller, the Wehrly court found the "entered into for profit" language of section 108 sufficiently ambiguous to require an examination of the legislative history for "interpretative assistance." Id. at 1314. In considering the legislative history, the Wehrly court, like the Tax Court in Miller, see 84 T.C. at 839, focused on the 1984 Conference Report, 808 F.2d at 1314, and concluded that section 108 "requires the investor to have only a reasonable expectation...