Pilgrim's Pride Corp. v. Comm'r

• Decision Date: 25 February 2015
• Docket Number: No. 14–60295.,14–60295.
• Citation: 779 F.3d 311
• Parties: PILGRIM'S PRIDE CORPORATION, Successor in Interest to Pilgrim's Pride Corporation of Georgia, formerly known as Gold Kist, Incorporated, Successor in Interest to Gold Kist, Incorporated and Subsidiaries, Petitioner–Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

779 F.3d 311

PILGRIM'S PRIDE CORPORATION, Successor in Interest to Pilgrim's Pride Corporation of Georgia, formerly known as Gold Kist, Incorporated, Successor in Interest to Gold Kist, Incorporated and Subsidiaries, Petitioner–Appellant

v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

No. 14–60295.

United States Court of Appeals, Fifth Circuit.

Feb. 25, 2015.

Robert H. Albaral (argued), Todd A. Schroeder, Baker & McKenzie, L.L.P., Dallas, TX, for Petitioner–Appellant.

Jennifer Marie Rubin, Esq. (argued), Kathryn Keneally, Joan I. Oppenheimer, U.S. Department of Justice, Tax Division, William J. Wilkins, Internal Revenue Service, Washington, DC, for Respondent–Appellee.

Appeal from the Decision of the United States Tax Court.

Before PRADO, ELROD, and HAYNES, Circuit Judges.

Opinion

JENNIFER WALKER ELROD, Circuit Judge:

In this tax case, we must determine whether Pilgrim's Pride Corporation's loss from its abandonment of securities is an ordinary loss or a capital loss. The Tax Court—in what appears to be the first ruling of its kind by any court—ruled that 26 U.S.C. § 1234A(1) applies to the abandonment loss and requires that it be classified as capital. We disagree. Because § 1234A(1) only applies to the termination of contractual or derivative rights, and not to the abandonment of capital assets, we REVERSE the judgment of the Tax Court and RENDER judgment in favor of Pilgrim's Pride.

I.

Pilgrim's Pride is the successor-in-interest to Pilgrim's Pride Corporation of Georgia f/k/a Gold Kist, Inc., which was the successor-in-interest to Gold Kist, Inc. (Gold Kist). In 1998, Gold Kist sold its agriservices business to Southern States Cooperative, Inc. To facilitate the purchase, Southern States obtained a bridge loan that was secured by a commitment letter between Southern States and Gold Kist. The commitment letter permitted Southern States to require Gold Kist to purchase certain securities from Southern States (Securities). Southern States exercised this option and Gold Kist purchased the Securities for $98.6 million.¹

In early 2004, Gold Kist and Southern States negotiated a price at which Southern States would redeem the Securities. Gold Kist suggested a price of $31.5 million, but Southern States offered only $20 million. Gold Kist's Board of Directors, instead of accepting the $20 million offer, decided to abandon the Securities for no consideration. The Board reasoned that a $98.6 million ordinary tax loss would produce more than $20 million in tax savings. Gold Kist irrevocably abandoned the Securities for no consideration, effectuating its abandonment by sending Southern States and Wachovia Bank letters stating that Gold Kist “irrevocably abandons, relinquishes, and surrenders all of its rights, title and interest” in the securities.² On its timely filed Form 990–C for the tax year ending June 30, 2004, Gold Kist reported a $98.6 million ordinary loss deduction.

Five years later, while Pilgrim's Pride was in bankruptcy, the Commissioner issued a deficiency notice to Pilgrim's Pride with respect to Gold Kist's 2004 tax year. The deficiency notice asserted that Gold Kist's loss from the abandonment of the Securities was a capital loss, rather than an ordinary loss, creating a tax deficiency of $29,682,682. Pilgrim's Pride timely filed a petition in the Tax Court, challenging the Commissioner's determination that Gold Kist's abandonment loss was a capital loss.³

In their initial briefs and in court-ordered supplemental briefs, the parties focused their arguments on whether the abandonment caused the securities to become “worthless,” making the loss a capital loss under 26 U.S.C. § 165(g). The Tax Court then issued a sua sponte order requesting briefing on a new topic: whether § 1234A(1) applied to Pilgrim's Pride's abandonment of the Securities and required capital loss treatment. Predictably, Pilgrim's Pride argued that § 1234A was inapplicable; the Commissioner argued that § 1234A applied and rendered the abandonment a deemed sale or exchange of capital assets subject to capital loss treatment. The Tax Court agreed with the Commissioner, holding that § 1234A applied to the abandonment of the securities. Pilgrim's Pride timely moved for reconsideration. After briefing, the Tax Court denied the motion. This appeal followed.

II.

The facts of this case were stipulated and the case was submitted for determination without trial. Accordingly, this case presents only legal questions that we review de novo. See Cook v. Comm'r, 349 F.3d 850, 853 (5th Cir.2003).⁴

III.

A.

Taxpayers may deduct from their income “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” 26 U.S.C. § 165(a). The two overarching categories of allowable losses are capital losses and ordinary losses. See Azar Nut Co. v. Comm'r, 931 F.2d 314, 316 (5th Cir.1991). The Tax Code “gives taxpayers a break on capital gains while restricting the tax benefits available from capital losses.^{[ 5 ]} Not surprisingly, then, taxpayers are wont to characterize their gains as capital and their losses as ordinary.” Campbell Taggart, Inc. v. United States, 744 F.2d 442, 448 (5th Cir.1984) (footnote omitted), abrogated on other grounds by Arkansas Best Corp. v. Comm'r, 485 U.S. 212, 108 S.Ct. 971, 99 L.Ed.2d 183 (1988). For obvious reasons, the IRS typically has the opposite inclination.

A capital loss is a loss from the “sale[ ] or exchange[ ]” of a capital asset. See 26 U.S.C. § 165(f).⁶ The abandonment of a capital asset for no consideration is not a “sale or exchange,” as that term is used in § 165(f). See Echols v. Comm'r, 935 F.2d 703, 707 (5th Cir.1991) (approving ordinary loss treatment for abandonment of partnership interest); see also Citron v. Comm'r, 97 T.C. 200, 215 (1991) (“ ‘The touchstone for sale or exchange treatment is consideration.’ ” (quoting La Rue v. Comm'r, 90 T.C. 465, 483 (1988) )). However, the Tax Code contains numerous provisions directing that certain transactions be treated as if they were sales or exchanges. One such provision is § 1234A, which requires capital loss treatment for any loss “attributable to the cancellation, lapse, expiration, or other termination of—(1) a right or obligation ... with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer.” 26 U.S.C. § 1234A(1).

Section 1234A was enacted in 1981 as part of the Economic Recovery Tax Act of 1981 (ERTA), Pub L. No. 97–34, § 507(a), 95 Stat. 172, 333 (1981). Congress passed Section 1234A to address tax straddles, which are transactions in which taxpayers acquire offsetting contractual positions to obtain tax benefits without any economic risk. For example:

[A] taxpayer may simultaneously enter into a contract to buy German marks for future delivery and a contract to sell German marks for future delivery with very little risk. If the price of German marks thereafter declines, the taxpayer will assign his contract to sell marks to a bank or other institution for a gain equivalent to the excess of the contract price over the lower market price and cancel his obligation to buy marks by payment of an amount in settlement of his obligation to the other party to the contract. The taxpayer will treat the sale proceeds as capital gain and will treat the amount paid to terminate his obligation to buy as an ordinary loss.

S.Rep. No. 97–144, at 171 (1981), 1981 U.S.C.C.A.N. 105, 267. Section 1234A closes this loophole by mandating capital loss treatment for the loss from the taxpayer's termination of his contractual obligation to buy German marks—even though no sale or exchange of German marks occurred.Id.

26 U.S.C. § 165(g) is another provision which treats dispositions that are not technically sales or exchanges as equivalent to sales or exchanges. Section 165(g) characterizes as capital any loss that results when a security “becomes worthless during the taxable year,” even if no actual sale or exchange occurred.

B.

The primary question in this case is whether § 1234A(1) applies to a taxpayer's abandonment of a capital asset. The answer is no. By its plain terms, § 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets). It does not apply to the termination of ownership of the capital asset itself. Applied to the facts of this case, Pilgrim's Pride abandoned the Securities, not a “right or obligation ... with respect to” the Securities. 26 U.S.C. § 1234A(1).

The Commissioner simultaneously agrees and disagrees with this reading of the statute. He agrees that § 1234A(1) applies only when a taxpayer terminates rights or obligations with respect to a capital asset, and he agrees that § 1234A does not directly apply to the abandonment of a capital asset itself. However, he contends that § 1234A(1)indirectly applies to the abandonment of a capital asset because the abandonment of a capital asset involves the termination of certain rights and obligations “inherent in” those assets. For example, ownership of stock is both ownership of the stock as a capital asset and ownership of rights in the management, profits, and assets of a corporation. On that logic, abandonment of stock terminates inherent rights “with respect to” that stock. Likewise, the Commissioner argues, the abandonment of the Securities terminated inherent rights “with respect to” the Securities. The Commissioner's position is that Congress, rather than simply stating that the abandonment of a capital asset results in capital loss, chose to legislate that result by reference to the termination of rights and obligations “inherent in” capital assets.

We disagree. Congress does not legislate in logic puzzles, and we do not “tag Congress with an extravagant preference for the opaque when the use of a clear adjective or noun would have worked nicely.” Gutierrez v. Ada, 528 U.S. 250, 256, 120 S.Ct. 740, 145 L.Ed.2d 747 (2000) ; cf. Dep't of...