Pilgrim's Pride Corp. v. Commissioner , 779 F.3d 311 ( 2015 )

Case: 14-60295 Document: 00512948182 Page: 1 Date Filed: 02/25/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 25, 2015
No. 14-60295
Lyle W. Cayce
Clerk
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.
Appeal from the Decision of the United States Tax Court
Before PRADO, ELROD, and HAYNES, Circuit Judges.
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.
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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.
1 The Securities include 40,000 shares of Step-Up Rate Series B Cumulative
Redeemable Preferred Stock from Southern States and 60,000 shares of Step-Up Rate Capital
Securities, Series A from a Southern States trust.
2 After abandoning the Securities, Gold Kist recorded a loss on its financial statements
of $38.8 million. The parties have stipulated that the securities were worth at least $20
million.
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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
3 The notice of deficiency also asserted a $5,936,536 accuracy-related penalty under
26 U.S.C. § 6662(a). The Commissioner has since conceded the penalty, and it is not at issue
in this appeal.
3
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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 (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
4Because the facts were stipulated, the parties agreed at oral argument that we could
render judgment instead of remanding the case to the Tax Court. See, e.g., Estate of Elkins
v. Comm’r, 767 F.3d 443, 453 (5th Cir. 2014) (“The record on appeal is sufficient for us to
render a final judgment and dispose of the sole issue in this case without prolonging it by
remand at the cost of more time and money to the parties.”).
5 Specifically, capital losses are subject to two limitations: (1) the Tax Code permits
capital losses only to the extent of capital gains and (2) the Tax Code limits corporations’
ability to carry capital losses to future tax years. See Campbell Taggart, Inc. v. United States,
744 F.2d 442, 448 n.16 (5th Cir. 1984), abrogated on other grounds by Arkansas Best Corp. v.
Comm’r, 485 U.S. 212 (1988).
6 The Tax Code broadly defines “capital asset” as “property held by the taxpayer
(whether or not connected with his trade or business),” but then excludes eight specific classes
of property from capital-asset status. 26 U.S.C. § 1221; see Arkansas Best, 485 U.S. at 215–
16. The parties agree that the Securities were capital assets.
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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). 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.
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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
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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 (2000); cf. Dep’t of Homeland Sec. v. MacLean, 135 S. Ct 913, 921
(2015) (“Had Congress wanted to draw that distinction, there were far easier
and clearer ways to do so.”). Instead, we assume that “the ordinary meaning
of [statutory] language accurately expresses the legislative purpose.” Gross v.
FBL Fin. Servs., Inc., 557 U.S. 167, 175 (2009) (internal quotation marks
omitted).
The Commissioner does not provide us any reason to forego that
assumption in this case. He does not point to any other statute referring to so-
called “inherent rights” as “right[s] or obligation[s] with respect to a capital
asset.” Nor does he identify any case interpreting § 1234A(1)—or any similarly
worded statute—in the manner he proposes. The only authorities he cites are
two instances in which the Supreme Court itself used the phrase “with respect
to property” in reference to “inherent” property rights. See United States v.
Craft, 535 U.S. 274, 282 (2002) (“[R]espondent’s husband had, among other
rights, the following rights with respect to the entireties property . . . .”); United
States v. Byrum, 408 U.S. 125, 149 n.33 (1972) (noting that a person may
control a corporation “by a combination of stock owned and that with respect
to which the right to vote was retained”). These two examples do not persuade
us. Although courts presume that Congress legislates with knowledge of the
Supreme Court’s interpretation of certain terms, see Merck & Co. v. Reynolds,
559 U.S. 633, 648 (2010), courts do not presume that Congress’s usage of an
idiom will track the Supreme Court’s own use of that idiom. At most, the two
examples are evidence that the phrase “with respect to” grammatically can be
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used in the manner suggested by the Commissioner. “But that reading, even
if ultimately comprehensible, is far too convoluted to believe Congress intended
it.” Chickasaw Nation v. United States, 534 U.S. 84, 90 (2001).
The Commissioner’s interpretation of § 1234A(1) also would render
superfluous § 1234A(2), violating the rule of statutory interpretation that “we
are obliged to give effect, if possible, to every word Congress used.” Reiter v.
Sonotone Corp., 442 U.S. 330, 339 (1979); see also Antonin Scalia & Bryan A.
Garner, Reading Law: The Interpretation of Legal Texts 174 (2012) (“If
possible, every word and every provision is to be given effect . . . . None should
needlessly be given an interpretation that causes it to duplicate another
provision or to have no consequence.”). Section 1234A(2) mandates capital gain
or loss treatment for the termination of “a section 1256 contract . . . not
described in paragraph (1) which is a capital asset in the hands of the
taxpayer.” For present purposes, the salient fact about section 1256 contracts
is that, like all contracts, they provide their owner with what the
Commissioner refers to as “inherent” rights and obligations. Termination of a
Section 1256 contract would terminate those inherent rights and obligations.
Accordingly, the termination of any Section 1256 contract which is a capital
asset would be covered by the Commissioner’s version of § 1234A(1): the
termination of the Section 1256 contract would terminate inherent rights and
obligations “with respect to” the Section 1256 contract, which is a capital asset
in the hands of the taxpayer. As a result, § 1234A(2) would not serve any
function.
The Commissioner argues that § 1234A(2) is not superfluous because it
ensures that “gain or loss from a deemed termination by offset[7] will be treated
7 A termination by offset occurs when a party buys out its contractual right or
obligation to buy or sell securities in the future.
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as gain or loss from the sale of a capital asset.” This argument fails for two
reasons. First, terminations by offset likely are already covered by § 1234A(1),
which broadly applies to gain or loss attributable to “cancellation, lapse,
expiration, or other termination.” 26 U.S.C. § 1234A (emphasis added).
Second, the Commissioner’s reading would require us to hold that § 1234A(2)’s
only purpose is to address termination by offset, and that Congress chose a
remarkably convoluted way to effectuate that purpose. As we have discussed,
we cannot ascribe to Congress “an extravagant preference for the opaque.”
Gutierrez, 528 U.S. at 256; see also Williams v. United States, 458 U.S. 279,
287 (1982) (declining to read 18 U.S.C. § 1014 as criminalizing check kiting
because, inter alia, “if Congress really set out to enact a national bad check law
in § 1014, it did so with a peculiar choice of language and in an unusually
backhanded manner”).
In contrast, Pilgrim’s Pride’s interpretation of § 1234A(1) leaves room for
§ 1234A(2) to operate. Capital gain or loss results from the termination of
contractual or derivative rights with respect to capital assets, as well as to the
termination of section 1256 contracts, even if the section 1256 contracts do not
relate to capital assets (e.g. if they are settled with cash).
For the foregoing reasons, we hold that 26 U.S.C. § 1234A(1) does not
apply to Pilgrim’s Pride’s abandonment loss. 8
8 Two administrative actions lend further support to Pilgrim’s Pride’s position. In
Revenue Ruling 93-80, the IRS held that a taxpayer is allowed an ordinary loss on the
abandonment of a partnership interest, even if the abandoned partnership interest is a
capital asset. This Ruling directly contradicts the Commissioner’s position in this case.
Although the Commissioner asserts that Revenue Ruling 93-80 was superseded by a 1997
amendment to the statute at issue here, this begs the question presented in this case and is
odd considering that the IRS never has formally revoked the Ruling and has relied on the
Ruling since the statutory amendment.
The second administrative action is Treasury Regulation § 1.165-5(i), issued in 2007,
which prospectively adopts an interpretation of 26 U.S.C. § 165(g) that an abandoned security
is per se “worthless” and therefore any resulting loss is capital. If the Commissioner’s
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C.
The Commissioner argues in the alternative that § 165(g) requires
Pilgrim’s Pride’s abandonment loss to be treated as capital. Section 165(g)
provides, in relevant part: “If any security which is a capital asset becomes
worthless during the taxable year, the loss resulting therefrom shall, for
purposes of this subtitle, be treated as a loss from the sale or exchange . . . of a
capital asset.” Although the parties stipulated that the Securities were worth
at least $20 million when Pilgrim’s Pride abandoned them, the Commissioner
argues that the Securities were “worthless” because they had no value to
Pilgrim’s Pride. In the Commissioner’s view, a security becomes “worthless”
when it is “useless” to its owner, regardless of its market value.
The Commissioner’s position cannot be reconciled with our precedent. In
Echols v. Commissioner, we stated that “the test for worthlessness is a mixed
question of objective and subjective indicia. . . . [P]roperty cannot be treated
as worthless for tax loss purposes if at the time it, objectively, has substantial
value.” 935 F.2d at 707; see also Echols v. Comm’r, 950 F.2d 209, 211 (5th Cir.
1991) (per curiam) (Echols II) (“Worthlessness and abandonment are separate
and distinct concepts and are not, as urged by the Commissioner, simply two
sides of the same coin . . . .”). Here, the parties stipulated that the Securities
were worth at least $20 million at the time of their abandonment. Thus, the
Securities were not objectively worthless.
The Commissioner attempts to distinguish Echols and Echols II on the
ground that neither case specifically addressed the definition of “worthless”
under § 165(g). It is true that both cases discussed worthlessness in the context
of partnership interests and not in the context of securities. But the
interpretation of § 1234A(1) were correct, however, the abandonment of any capital asset
already would result in capital loss. Thus, the Treasury Regulation would be superfluous.
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Commissioner fails to offer any reason why “worthlessness” should have both
objective and subjective components in the context of partnership interests,
but only a subjective component in the context of securities. Likewise, the
Commissioner fails to explain why the terms “worthlessness” and
“abandonment” should be distinct in the context of partnerships but conflated
in the context of securities.
IV.
Neither 26 U.S.C. § 1234A(1) nor 26 U.S.C. § 165(g) requires Pilgrim’s
Pride to treat its abandonment loss as a capital loss. Accordingly, we
REVERSE the judgment of the Tax Court with respect to the alleged deficiency
and RENDER judgment in favor of Pilgrim’s Pride.
11