Pilgrim's Pride Corporation Successor in Interest to Pilgrim's Pride Corporation of Georgia f/k/a Gold Kist, Inc. v. Commissioner , 141 T.C. 533 ( 2013 )

PILGRIM’S PRIDE CORPORATION SUCCESSOR IN INTEREST TO
PILGRIM’S PRIDE CORPORATION OF GEORGIA F.K.A. GOLD
KIST, INC. SUCCESSOR IN INTEREST TO GOLD KIST INC.
AND SUBSIDIARIES, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 12089–10. Filed December 11, 2013.
P is the successor in interest to G. G was contractually obli-
gated to purchase, and in 1999 did purchase, securities from
S and T for $98.6 million. The securities were capital assets
of G. In 2004 S offered to redeem the securities for $20 mil-
lion. G’s board of directors decided to abandon the securities
for no consideration because a $98.6 million ordinary loss
would produce tax savings greater than the $20 million
offered by S. On June 24, 2004, G voluntarily surrendered the
securities to S and T for no consideration. On its Federal
income tax return for the tax year ending June 30, 2004, G
reported a $98.6 million ordinary abandonment loss deduction
under I.R.C. sec. 165(a) pursuant to sec. 1.165–2(a), Income
Tax Regs. An abandonment loss cannot be claimed on a sale
or exchange of property. Sec. 1.165–2(b), Income Tax Regs.
Pursuant to I.R.C. sec. 165(f) losses from sales or exchanges
of capital assets are subject to the limitations on capital losses
under I.R.C. secs. 1211 and 1212. I.R.C. sec. 1234A requires
gain or loss attributable to the cancellation, lapse, expiration,
or other termination of a right with respect to property that
is (or on acquisition would be) a capital asset in the hands of
533
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534 141 UNITED STATES TAX COURT REPORTS (533)
a taxpayer to be treated as gain or loss from the sale of a cap-
ital asset. Held: The securities are intangible property com-
prising rights that G had in the management, profits, and
assets of S and T. Those rights were terminated when G
surrendered the securities. Held, further, the $98.6 million
loss on the surrender of the securities is attributable to the
termination of G’s rights with respect to the securities, which
are capital assets, and pursuant to I.R.C. sec. 1234A the loss
is treated as a loss from the sale or exchange of capital assets.
Held, further, G is not entitled to an ordinary loss deduction
for abandonment, because the loss is treated as a loss from
the sale or exchange of capital assets pursuant to I.R.C. sec.
1234A. See sec. 1.165–2(b), Income Tax Regs. Held, further,
pursuant to I.R.C. sec. 165(f), P’s losses from the surrender of
the securities, deemed to be a sale or exchange under I.R.C.
sec. 1234A, are subject to the limitations on capital losses
under I.R.C. secs. 1211 and 1212.
Robert H. Albaral and Todd A. Schroeder, for petitioner.
John Wayne Duncan and J. Greg Marble, for respondent.
OPINION
DAWSON, Judge: Petitioner petitioned the Court pursuant
to section 6213(a) and (f)(1) 1 for redetermination of a
$29,682,682 deficiency in Federal income tax and a
$5,936,536 accuracy-related penalty under section 6662(a)
that respondent determined against petitioner as successor
in interest to Gold Kist Inc. (GK Co-op), a Georgia coopera-
tive marketing association, for its tax year ending June 30,
2004. After a concession by respondent, 2 the only issue
remaining for decision is whether a $98.6 million loss
resulting from GK Co-op’s abandonment of certain securities
in 2004 is ordinary or capital.
Background
This case was submitted fully stipulated pursuant to Rule
122. 3 The stipulation of facts and the exhibits attached
1 Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) of 1986 in effect for the year at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
2 Respondent concedes that petitioner is not liable for the accuracy-re-
lated penalty under sec. 6662(a) for the year at issue.
3 On April 24, 2013, this case was reassigned by order of the Chief Judge
to Judge Howard A. Dawson, Jr., for disposition.
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 535
thereto are incorporated herein by this reference. At the time
petitioner filed its petition its principal place of business was
in Pittsburg, Texas.
Petitioner is a corporation organized under the laws of the
State of Delaware. It is the successor in interest to Pilgrim’s
Pride Corp. of Georgia f.k.a. Gold Kist, Inc., a Delaware cor-
poration (GK Inc.), which was the successor in interest to
Gold Kist Inc., a Georgia cooperative marketing association
(GK Co-op). GK Co-op was organized as a cooperative
association in 1936 under the Georgia Cooperative Marketing
Act. Beginning in 1978, GK Co-op was taxed as a nonexempt
cooperative under subchapter T of the Code and was required
to file an annual Form 990–C, Farmers’ Cooperative Associa-
tion Income Tax Return.
In 1999 GK Co-op was contractually required to purchase
certain securities for an aggregate total of $98.6 million from
Southern States Cooperative, Inc. (Southern States), and
Southern States Capital Trust I (Trust), a Delaware statu-
tory trust established by Southern States. 4 Consequently, on
October 5, 1999, GK Co-op purchased 40,000 shares of Step-
Up Rate Series B Cumulative Redeemable Preferred Stock
(series B preferred stock) 5 of Southern States for $39.2 mil-
4 Pursuantto an asset purchase agreement dated July 23, 1998, GK Co-
op agreed to sell one of its divisions to Southern States for approximately
$255 million paid in part in cash and in part by Southern States’ assump-
tion of certain liabilities. The sale was completed in October 1998. South-
ern States obtained a bridge loan which it expected to repay with funds
raised in a public offering. As part of the financing arrangement, when
Southern States failed to consummate the public offering by October 5,
1999, it required GK Co-op to purchase the securities central to the issue
in this case. Southern States and the Trust filed a Form S–1 with the U.S.
Securities and Exchange Commission to register (i) capital securities in the
Trust for sale to the public and (ii) common securities in the Trust for sale
to Southern States. Southern States intended to use the proceeds from the
sale of these securities to repay the outstanding principal balance of the
bridge loan.
5 The certificate evidencing the series B preferred stock states:
This certifies that Gold Kist Inc. [GK Co-op] is the owner of Forty
Thousand (40,000) fully-paid and non-assessable shares of the Step-Up
Rate Series B Cumulative Redeemable Preferred Stock, of the par value
of $100.00 each, with a stated liquidation preference of $1000.00 per
share, of Southern States Cooperative, Incorporated (the ‘‘Association’’),
transferable on the books of the Association by the holder hereof in per-
Continued
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536 141 UNITED STATES TAX COURT REPORTS (533)
lion and 60,000 shares of Step-Up Rate Capital Securities,
Series A (series A securities) 6 issued by the Trust for $59.4
son or by duly authorized attorney upon the surrender of this certificate
properly endorsed.
* * * * * * *
The Association will furnish to any stockholder without charge, upon
written request, a full statement of the designations, preferences, limita-
tions and relative rights of the shares of the Step-Up Rate Series B Cu-
mulative Redeemable Preferred Stock and to each other class or series
of shares of the Association.
The shares represented hereby have not been registered under the Se-
curities Act of 1933 or under the securities laws of any state and are
subject to certain restrictions on the transfer hereof, which restrictions
are set forth in Section 9 of Article C(1)(c) of the Articles of Incorporation
of the Association and in a Purchase Agreement of even date herewith
between the Association and Gold Kist Inc.
6 The certificate evidencing the series A securities states:
Southern States Capital Trust I, a statutory business trust created
under the laws of the State of Delaware (the ‘‘Issuer Trust’’), hereby cer-
tifies that Gold Kist, Inc. [GK Co-op] (the ‘‘Holder’’) is the registered
owner of Sixty thousand (60,000) capital securities (aggregate Liquida-
tion Amount Sixty Million ($60,000,000) Dollars) of the Issuer Trust rep-
resenting a preferred undivided beneficial interest in the assets of the
Issuer Trust and designated the Step-up Rate Capital Securities, Series
A (liquidation amount $1,000 per Capital Security) (the ‘‘Capital Securi-
ties’’). The Capital Securities are transferable on the books and records
of the Issuer Trust, in person or by a duly authorized attorney, upon sur-
render of this certificate duly endorsed and in proper form for transfer
as provided in Section 5.5 of the Trust Agreement (as defined below).
The designations, rights, privileges, restrictions, preferences and other
terms and provisions of the Capital Securities are set forth in, and this
certificate and the Capital Securities represented hereby are issued and
shall in all respects be subject to the terms and provisions of, the
Amended and Restated Trust Agreement of the Issuer Trust, dated as
of October 5, 1999, as the same may be amended from time to time (the
‘‘Trust Agreement’’), among Southern States Cooperative, Incorporated,
an agricultural cooperative corporation organized under the laws of Vir-
ginia, as Depositor, First Union National Bank, as Property Trustee,
First Union Trust Company, National Association, as Delaware Trustee,
and the Administrative Trustees named therein, including the designa-
tion of the terms of the Capital Securities as set forth therein. The Hold-
er is entitled to the benefits of the Guarantee Agreement, dated as of
October 5, 1999 (the ‘‘Guarantee Agreement’’), entered into by Southern
States Cooperative, Incorporated and First Union National Bank, as
guarantee trustee, to the extent provided therein. The Issuer Trust will
furnish a copy of the Trust Agreement and the Guarantee Agreement to
the Holder without charge upon written request to the Issuer Trust at
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 537
million. The series B preferred stock and the series A securi-
ties, collectively referred to herein as the Securities, are secu-
rities as defined in section 165(g)(2).
The Securities generally provided for quarterly dividend
payments that under certain circumstances could be unilater-
ally deferred by Southern States. Southern States ceased
paying and began to defer the quarterly dividends payable on
the series B preferred stock beginning with the April 2002
quarterly dividend. In October 2002 Southern States notified
GK Co-op that the quarterly dividends on the series A securi-
ties for that quarter and subsequent quarters were deferred
and would not be paid by Southern States.
In early 2004 Southern States offered to redeem the Secu-
rities from GK Co-op for less than GK Co-op had paid for
them. 7 At that time GK Co-op was planning to merge with
and into its wholly owned subsidiary GK Inc., a for-profit
business corporation taxable under subchapter C of the Code,
and to take the company public shortly after the end of its
2004 tax year. GK Co-op made a counteroffer of $31.5 million
in May 2004 because it wanted to dispose of the Securities
and remove them from its balance sheet before making the
public offering. Southern States rejected GK Co-op’s
counteroffer and instead proposed to redeem the Securities
for $20 million.
At a meeting held on May 24, 2004, GK Co-op’s board of
directors decided to abandon the Securities for no consider-
ation because a $98 million ordinary loss would produce tax
savings greater than the $20 million offered by Southern
States. As a result, GK Co-op rejected the $20 million offer
and ceased all negotiations with Southern States. At the
time, GK Co-op valued the Securities at $38.8 million on its
Generally Accepted Accounting Principles (GAAP) financial
statements.
On June 24, 2004, GK Co-op voluntarily and irrevocably
surrendered the Securities to Southern States and the Trust
its principal place of business or registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
7 The terms of the Securities neither required Southern States to offer
to redeem the Securities from GK Co-op nor required GK Co-op to accept
such an offer or make a counteroffer.
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538 141 UNITED STATES TAX COURT REPORTS (533)
for no consideration 8 and recorded a $38.8 million loss on its
GAAP financial statements for the tax year ended June 30,
2004. After surrendering the Securities, GK Co-op had no
further ownership interest in Southern States or the Trust.
The parties have stipulated that immediately before GK Co-
op surrendered the Securities they were worth at least the
$20 million Southern States offered to pay for them.
On its timely filed Form 990–C for the tax year ending
June 30, 2004, GK Co-op reported a $98.6 million ordinary
loss deduction under section 165(a) and pursuant to section
1.165–2(a), Income Tax Regs. 9 In October 2004 GK Co-op
converted from a cooperative association to a for-profit cor-
poration and merged into GK Inc., and GK Inc. completed an
initial public offering of its common stock.
In 2007 petitioner completed its acquisition of all the stock
of GK Inc., and GK Inc. merged with and into petitioner. On
December 1, 2008, petitioner and certain of its subsidiaries
commenced a voluntary case under chapter 11 of title 11 of
8 GK Co-op sent Southern States and Wachovia Bank, the registrar for
the series A securities, letters dated June 24, 2004, stating that GK Co-
op was irrevocably abandoning, relinquishing, and surrendering all of its
rights, title, and interest to the Securities. The letters requested that
Southern States and Wachovia take all necessary actions to remove GK
Co-op’s name and all other references to its ownership of the Securities.
GK Co-op attached to the letter sent to Southern States the stock certifi-
cate for the series B preferred stock and a signed stock power. GK Co-op
also attached to the letter sent to Wachovia the certificate for the series
A securities and a signed stock power. By letter dated June 28, 2004,
Southern States acknowledged its and Wachovia’s receipt of the letters and
the stock certificates attached thereto. Southern States also agreed to re-
move GK Co-op’s name from the appropriate securities registers and to
take all other necessary actions to carry out GK Co-op’s surrender of the
Securities.
9 The parties stipulated into evidence a copy of an opinion letter dated
July 30, 2004, from the law firm of Alston & Bird, LP, to GK Co-op, setting
forth its opinion as to the Federal income tax treatment of the loss that
GK Co-op had incurred when it abandoned the Securities (opinion letter).
Respondent objects to the opinion letter only with respect to the deficiency
on the ground of relevancy because respondent has conceded the accuracy-
related penalty. Therefore, respondent’s objection to the opinion letter on
the ground of relevancy as to the deficiency is sustained because that in-
volves an issue of law. See Fed. R. Evid. 401. In addition, the opinion letter
acknowledges that there ‘‘can be no assurance that the Service will not
take a position contrary to our opinion or that a court will not hold con-
trary to our opinion.’’
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 539
the U.S. Code (Bankruptcy Code) in the U.S. Bankruptcy
Court for the Northern District of Texas, Fort Worth Divi-
sion. See In re Pilgrim’s Pride Corp., No. 08–45664 (Bankr.
N.D. Tex. filed Dec. 1, 2008).
On December 21, 2009, respondent issued the statutory
notice of deficiency to petitioner as successor in interest to
GK Co-op with respect to GK Co-op’s tax year ending June
30, 2004. The notice of deficiency determined, inter alia, that
GK Co-op’s loss on the abandonment of the Securities was a
capital loss rather than an ordinary loss as claimed by GK
Co-op on its tax return. 10
When the notice of deficiency was issued, petitioner was
prohibited by section 362(a)(8) of the Bankruptcy Code from
filing a petition in the Tax Court to challenge the determined
deficiency. On December 28, 2009, the debtors’ amended joint
plan of reorganization under chapter 11 of the Bankruptcy
Code, as modified, became effective, and petitioner was no
longer prohibited from filing a petition in the Tax Court. 11
On May 26, 2010, petitioner timely filed a petition in this
Court, challenging respondent’s determination that GK Co-
op’s loss on the abandonment of the Securities was a capital
loss rather than an ordinary loss as claimed by GK Co-op on
its tax return and the accuracy-related penalty. Respondent
now concedes the penalty. See supra note 2.
Discussion
A. Section 165(a)
Generally, section 165(a) allows as a deduction any loss
sustained during the taxable year that is not compensated
for by insurance or otherwise. A loss from the sale or
10 In
the petition, petitioner did not allege error with respect to respond-
ent’s adjustments in the notice of deficiency (i) allowing GK Co-op an addi-
tional bad debt deduction, (ii) adjusting GK Co-op’s net operating loss, and
(iii) adjusting GK Co-op’s minimum tax credits from an earlier year.
11 Respondent filed numerous proofs of claim in the bankruptcy case for
various Federal taxes including, but not limited to, income tax related to
the deficiency determined in the notice of deficiency. Petitioner timely ob-
jected to the proofs of claim in the Bankruptcy Court. Pursuant to the
order of the Bankruptcy Court entered July 8, 2010, the Bankruptcy Court
will resolve respondent’s proofs of claim and petitioner’s objection to those
claims in accordance with the final resolution of the underlying Federal
tax disputes in this case.
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540 141 UNITED STATES TAX COURT REPORTS (533)
exchange of a capital asset is subject to the limitations on
capital losses under sections 1211 and 1212. 12 Sec. 165(f). In
the case of a corporation, capital losses from sales or
exchanges of capital assets are allowed only to the extent of
capital gains from sales or exchanges of capital assets. Sec.
1211(a). Although by its terms section 1211 does not apply
to gain or loss resulting from a disposition that is not a ‘‘sale
or exchange’’, see, e.g., Helvering v. William Flaccus Oak
Leather Co., 313 U.S. 247 (1941) (demonstrating that the
term ‘‘sale or exchange’’ is narrower than the term ‘‘sale or
other disposition’’), Congress has enacted numerous statutes
that require capital gain and/or loss in certain situations
where the dispositions are technically not sales or exchanges,
including, inter alia, section 165(g), applicable to losses for
worthless securities, and section 1234A, applicable to certain
terminations of rights or obligations with respect to property
that is (or on acquisition would be) a capital asset. 13 If a dis-
position of a capital asset is not a sale or exchange or
required by statute to be treated as such, section 1211 does
not apply and the loss allowable under section 165 is an ordi-
nary loss. See, e.g., Halata v. Commissioner, T.C. Memo.
2012–351, at *19 (theft loss deducted against ordinary
income).
It appeared to the Court that section 1234A might require
the loss attributable to the abandonment of the Securities to
be deemed a loss from the sale of a capital asset. We there-
fore sought the parties’ views on the issue. 14 Respondent
argues that section 1234A applies, but petitioner argues that
it does not. We address their arguments herein.
12 Sec. 1212(a) establishes rules governing carrybacks and carryovers of
a corporation’s net capital losses, permitting such losses to offset capital
gains in certain earlier or later years.
13 See also, e.g., secs. 302 (stock redemptions), 1038 (foreclosures), 1234
(loss attributable to failure to exercise certain options to buy or sell prop-
erty), 1234B (certain securities future contracts), 1235 (transfers of patents
other than transfers by gift, inheritance, or devise), 1241 (cancellation of
lease or distributor’s agreement), 1271 (retirement of debt instruments).
14 The parties did not address sec. 1234A in their opening and reply
briefs. However, because it appeared to the Court that sec. 1234A might
determine the proper tax treatment in this case, we ordered the parties to
file supplemental briefs on the issue. On July 2 and 5, 2013, respondent
and petitioner, respectively, filed second supplemental reply briefs address-
ing the application of sec. 1234A to the surrender of the Securities.
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 541
B. Section 1234A
Section 1234A provides:
SEC. 1234A. GAINS OR LOSSES FROM CERTAIN TERMINATIONS.
Gain or loss attributable to the cancellation, lapse, expiration, or other
termination of—
(1) a right or obligation (other than a securities futures contract, as
defined in section 1234B) with respect to property which is (or on
acquisition would be) a capital asset in the hands of the taxpayer, or
(2) a section 1256 contract (as defined in section 1256) not described
in paragraph (1) which is a capital asset in the hands of the taxpayer,
shall be treated as gain or loss from the sale of a capital asset. The pre-
ceding sentence shall not apply to the retirement of any debt instrument
(whether or not through a trust or other participation arrangement).
The parties agree that the Securities are property and
were capital assets in the hands of GK Co-op. Shares of stock
are intangible interests or rights that the owner has in the
management, profits, and assets of a corporation, while the
certificate of stock is tangible evidence of the stock ownership
of the person designated therein and of the rights and liabil-
ities resulting from such ownership. Commissioner v.
Scatena, 85 F.2d 729, 732 (9th Cir. 1936), aff ’g 32 B.T.A. 675(1935); Howbert v. Penrose, 38 F.2d 577, 579 (10th Cir. 1930);
Storrow v. Tex. Consol. Compress & Mfg. Ass’n, 87 F. 612,
615 (5th Cir. 1898). Shares of stock ‘‘generally have been rec-
ognized as resting in contract, or, technically, as ‘choses in
action.’ ’’ First Nat’l Bank of Bos. v. Maine, 284 U.S. 312,
327–328 (1932). Stock, like any other chose in action, is a
contract susceptible of ownership. See Burnet v. Wells, 289
U.S. 670, 679 (1933) (finding that a policy of life insurance
is a contract susceptible of ownership like any other chose in
action); Estate of Davenport v. Commissioner, 184 F.3d 1176,
1185 (10th Cir. 1999), aff ’g T.C. Memo. 1997–390.
The rights set forth in the certificate of the series A securi-
ties are similar to the stock rights set forth in the certificate
of the series B preferred stock. The series A securities, as
well as the series B preferred stock, were intangible property
comprising those rights. The value of the Securities was
attributable to the aggregate value of those intangible rights,
and the loss from the abandonment of the Securities is the
result of the termination of those rights.
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542 141 UNITED STATES TAX COURT REPORTS (533)
Respondent asserts that the surrender of the Securities
terminated all of petitioner’s rights with respect to those cap-
ital assets, and therefore section 1234A requires that the loss
be treated as a loss from the sale or exchange of capital
assets. In contrast, petitioner asserts that under section
1234A a right or obligation with respect to property refers
only to a contractual or other derivative right to property and
not property rights inherent in the ownership of the prop-
erty. Therefore, petitioner contends that section 1234A does
not apply to the cancellation, lapse, expiration, or termi-
nation of GK Co-op’s property rights in the Securities.
Statutes are to be construed so as to give effect to the plain
meaning of the words in the text unless we find that a word’s
plain meaning is inescapably ambiguous. United States v.
Am. Trucking Ass’ns, 310 U.S. 534, 543–544 (1940); Venture
Funding, Ltd. v. Commissioner, 110 T.C. 236, 241–242
(1998), aff ’d without published opinion, 198 F.3d 248 (6th
Cir. 1999); Rath v. Commissioner, 101 T.C. 196, 200–201
(1993). Where legislative ‘‘ ‘will has been expressed in reason-
ably plain terms, that language must ordinarily be regarded
as conclusive.’ ’’ Negonsott v. Samuels, 507 U.S. 99, 104
(1993) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S.
564, 570 (1982)). We interpret the text with reference to the
legislative history primarily to learn the purpose of the
statute and to resolve any ambiguity in the words in the
text. Landgraf v. USI Film Prods., 511 U.S. 244 (1994);
Commissioner v. Soliman, 506 U.S. 168, 174 (1993); Trans
City Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996).
‘‘Moreover, where a statute is clear on its face, we require
unequivocal evidence of legislative purpose before construing
the statute so as to override the plain meaning of the words
used therein.’’ Rath v. Commissioner, 101 T.C. at 200–201
(citing Halpern v. Commissioner, 96 T.C. 895, 899 (1991),
and Huntsberry v. Commissioner, 83 T.C. 742, 747–748
(1984)).
1. Plain Meaning
We look first to the relevant text of section 1234A: ‘‘Gain
or loss attributable to the cancellation, lapse, expiration, or
other termination of * * * a right or obligation * * * with
respect to property which is (or on acquisition would be) a
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 543
capital asset in the hands of the taxpayer * * * shall be
treated as gain or loss from the sale of a capital asset.’’
Petitioner appears to argue that, under section 1234A, it is
the right or obligation that must be a capital asset in the
hands of the taxpayer, and therefore section 1234A does not
apply because GK Co-op’s inherent rights in the Securities
were not themselves capital assets in the hands of GK Co-
op. The flaw with that argument is made obvious by the facts
that (1) section 1234A applies to gain or loss on the termi-
nation of a right or obligation with respect to property that
would upon acquisition become a capital asset in the hands
of the taxpayer, and (2) a taxpayer cannot incur gain or loss
on the termination of a right or obligation that the taxpayer
has not yet acquired. Thus, it is not the right or obligation
with respect to property but the property itself that must be
or on acquisition become a capital asset in the hands of the
taxpayer. Here, the Securities were capital assets in the
hands of GK Co-op and the question is whether section
1234A applies to the termination of the rights with respect
to those capital assets when they were surrendered.
Petitioner’s primary position is that the phrase ‘‘right or
obligation with respect to property’’ means a contractual and
other derivative right or obligation with respect to property
and not the inherent property rights and obligations arising
from the ownership of the property. We disagree.
Webster’s Third New International Dictionary 1934 (2002)
defines the prepositional phrase ‘‘with respect to’’ to mean
‘‘as regards: insofar as concerns: with reference to’’. In its
everyday usage the phrase ‘‘rights with respect to property’’
includes the rights inherent in the ownership of the property,
including stock. See, e.g., United States v. Craft, 535 U.S.
274, 282–283 (2002) (stating that the taxpayer’s husband had
‘‘the following rights with respect to the entireties property:
the right to use the property, the right to exclude third par-
ties from it, the right to a share of income produced from it,
the right of survivorship, the right to become a tenant in
common with equal shares upon divorce, the right to sell the
property’’); Singleton v. Commissioner, 439 U.S. 940, 940
(1978) (Blackmun, J., dissenting) (stating that the issue was
whether a cash distribution that the taxpayer received ‘‘with
respect to his shares’’ in a corporation was taxable to him as
a dividend or whether the distribution was an untaxed
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544 141 UNITED STATES TAX COURT REPORTS (533)
return of capital); United States v. Byrum, 408 U.S. 125, 149
n.33 (1972) (refers to stock ‘‘with respect to which the right
to vote was retained’’); Anschutz Co. v. Commissioner, 664
F.3d 313, 328 (10th Cir. 2011) (stating that agreements
significantly altered the shareholder’s ‘‘dividend rights with
respect to the pledged shares’’), aff ’g 135 T.C. 78 (2010);
Florida v. United States, 285 F.2d 596, 598–599 (8th Cir.
1960) (referring to an amended court’s order that provided:
‘‘The receiver appointed herein is hereby vested with all of
the rights and powers with respect to said stock, including
voting rights, which could be exercised by the owners of said
stock at this time[.]’’); Trotz v. Commissioner, 43 T.C. 127,
132 (1964) (‘‘Petitioner’s rights with respect to the stock
* * * were so complete that they were tantamount to owner-
ship by petitioner for the purposes of section 1239.’’), rev’d,
361 F.2d 927, 929 (10th Cir. 1966).
Most significantly, Congress has used the phrase ‘‘with
respect to property’’ in other provisions of the Code to include
rights arising out of the ownership of the property or
characteristics of the property. See, e.g., secs. 126(e) (‘‘no
adjustment to basis shall be made with respect to property’’),
704(c)(1)(A) (‘‘income, gain, loss, and deduction with respect
to property’’), 772(c)(3)(A) (‘‘an item of income or expense
* * * with respect to property held for investment’’),
877A(h)(1)(A) (‘‘the amount of gain recognized with respect to
property disposed of by the taxpayer’’), 954(i)(4)(A)
(‘‘unearned premiums and reserves of a qualifying insurance
company * * * with respect to property, casualty, or health
insurance contracts’’). Indeed, Congress has used the phrase
‘‘with respect to stock’’ to refer to rights arising from owner-
ship of the stock. See, e.g., secs. 301(a) (‘‘a distribution of
property * * * made by a corporation to a shareholder with
respect to its stock’’), 993(a)(1)(E) (qualified export receipts of
a corporation include ‘‘dividends * * * with respect to stock
of a related foreign export corporation’’).
We hold that the plain meaning of the phrase ‘‘a right or
obligation * * * with respect to property’’ encompasses the
property rights inherent in intangible property as well as
ancillary or derivative contractual rights.
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 545
2. Legislative History
Petitioner asserts that the legislative history to the 1997
amendment of section 1234A shows that Congress intended
that section 1234A apply only to contractual and other
derivative rights and obligations with respect to property and
not to the inherent property rights and obligations arising
from the ownership of the property. We disagree.
Section 1234A was added by the Economic Recovery Tax
Act of 1981, Pub. L. No. 97–34, sec. 507, 95 Stat. at 333,
when Congress adopted a number of provisions dealing with
offsetting contractual interests in actively traded personal
property commonly known as straddles. See S. Rept. No. 97–
144, at 143–154, 170 (1981), 1981–2 C.B. 412, 468–473, 480.
Congress believed that a change in the sale or exchange rule
with respect to straddles was ‘‘necessary to prevent tax-
avoidance transactions designed to create fully deductible
ordinary losses on certain dispositions of capital assets,
which if sold at a gain, would produce capital gains.’’ 15 Id.
at 170, 1981–2 C.B. at 480.
Congress made relatively minor changes to section 1234A
in the Technical Corrections Act of 1982, Pub. L. No. 97–448,
sec. 105(e), 96 Stat. at 2387, and in the Deficit Reduction Act
of 1984, Pub. L. No. 98–369, sec. 102(e)(4), 98 Stat. at 624,
and a major change in the Taxpayer Relief Act of 1997 (TRA
1997), Pub. L. No. 105–34, sec. 1003(a)(1), 111 Stat. at 909–
910. Before TRA 1997, section 1234A applied only to (1) per-
sonal property of a type that is actively traded that is (or
would be on acquisition) a capital asset in the hands of the
taxpayer, except for stock that was not part of a straddle or
15 As
originally enacted in the Economic Recovery Tax Act of 1981
(ERTA), Pub. L. No. 97–34, sec. 507(a), 95 Stat. at 333 (1981), sec. 1234A
provided: ‘‘Gain or loss attributable to the cancellation, lapse, expiration,
or other termination of a right or obligation with respect to personal prop-
erty (as defined in section 1092(d) (1)) which is (or on acquisition would
be) a capital asset in the hands of the taxpayer shall be treated as gain
or loss from the sale of a capital asset.’’ As originally enacted by ERTA sec.
501, 95 Stat. at 325, sec. 1092(d)(1) defined personal property as ‘‘any per-
sonal property (other than stock) of a type which is actively traded’’. In the
Taxpayer Relief Act of 1997, Pub. L. No. 105–34, sec. 1003(a)(1), 111 Stat.
at 909–910, Congress broadly extended the application of sec. 1234A by
substituting ‘‘property’’ for ‘‘personal property (as defined in sec.
1092(d)(1))’’.
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546 141 UNITED STATES TAX COURT REPORTS (533)
of a corporation that was not formed or availed of to take
positions which offset positions in personal property of its
shareholders and (2) ‘‘section 1256 contracts’’ that were cap-
ital assets.
The legislative history to TRA 1997 shows that Congress
believed that the law was deficient because (1) it taxed trans-
actions involving capital assets that were economically
equivalent to a sale or exchange of a capital asset differently
from a sale or exchange, (2) it effectively provided some, but
not all, taxpayers with an election to treat gains from modi-
fications of property rights as capital gains or losses from
such modifications as ordinary losses, and (3) its lack of cer-
tainty made the tax laws unnecessarily difficult to admin-
ister. See S. Rept. No. 105–33, at 134–135 (1997), 1997–4
C.B. (Vol. 2) 1067, 1214–1215. By TRA 1997 Congress
broadly extended the application of section 1234A beyond
just straddles and other transactions exploited by tax shelter
promoters to all types of property that are (or on acquisition
would be) capital assets in the hands of the taxpayer.
In describing the then-current law, the Senate Finance
Committee referred to the considerable amount of litigation
dealing with whether modifications of legal relationships
between taxpayers are to be treated as a ‘‘sale or exchange’’.
Id. at 132–136, 1997–4 C.B. (Vol. 2) at 1213–1216. As an
example, the committee cited Fairbanks v. United States, 306
U.S. 436 (1939), where the Supreme Court held that gain
realized on the redemption of bonds before their maturity
was not entitled to capital gain treatment because the
redemption was not a ‘‘sale or exchange’’. The committee also
pointed to court decisions holding that a disposition that
occurs as a result of a lapse, cancellation, or abandonment
produces ordinary income or loss because it is not a sale or
exchange of a capital asset. The committee gave the following
examples: Commissioner v. Pittston Co., 252 F.2d 344 (2d
Cir. 1958) (holding the amount the taxpayer received for can-
cellation of its exclusive right to purchase a coal company’s
entire coal output did not constitute a ‘‘sale or exchange’’
because the payments were in lieu of profits that would have
been taxed as ordinary income), rev’g 26 T.C. 967 (1956);
Commissioner v. Starr Bros., Inc., 204 F.2d 673 (2d Cir.
1953) (holding payment a retail distributor received from a
manufacturer for waiver of a contract provision prohibiting
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 547
the manufacturer from selling to the distributor’s competition
was not a sale or exchange), rev’g 18 T.C. 149 (1952); Gen.
Artists Corp. v. Commissioner, 205 F.2d 360 (2d Cir. 1953)
(holding amounts received by a booking agent for cancella-
tion of a contract to be the exclusive agent of a singer was
not a sale or exchange), aff ’g 17 T.C. 1517 (1952); Nat’l-
Standard Co. v. Commissioner, 749 F.2d 369 (6th Cir. 1984)
(holding a transfer of foreign currency to discharge the tax-
payer’s liability was not a ‘‘sale or exchange’’ of that cur-
rency, and the loss on transfer was an ordinary loss), aff ’g
80 T.C. 551 (1983); Stoller v. Commissioner, 994 F.2d 855(D.C. Cir. 1993) (holding losses incurred before the enact-
ment of section 1234A on the cancellation of forward con-
tracts to buy and sell short-term Government securities that
formed a straddle were ordinary because the cancellation of
the contracts was not a ‘‘sale or exchange’’), aff ’g in part,
rev’g in part T.C. Memo. 1990–659.
Petitioner points to those examples and the committee’s
statement that it ‘‘believes that some transactions, such as
settlements of contracts to deliver a capital asset, are
economically equivalent to a sale or exchange of such con-
tracts since the value of any asset is the present value of the
future income that such asset will produce.’’ S. Rept. No.
105–33, supra at 134, 1997–4 C.B. (Vol. 2) at 1214. Petitioner
asserts that the examples and statement show that Congress
intended section 1234A to apply only to contractual and
other derivative rights and obligations with respect to prop-
erty and not to the inherent property rights and obligations
arising from the ownership of the property. To the contrary,
we do not think that the examples do more than show that
section 1234A applies broadly to derivative contractual rights
and obligations as well as inherent property rights. We think
Congress’ intent that section 1234A also apply to rights
inherent in the property is evidenced by the committee’s
example of the redemption of a bond which, like a share of
stock, is intangible property—a bundle of contractual rights.
See First Nat’l Bank of Bos., 284 U.S. at 327–328 (‘‘[B]oth
[stock and bonds] generally have been recognized as resting
in contract, or, technically, as ‘choses in action.’ ’’). The
example of a redemption of a bond is most significant given
that Congress had long since overturned the result in Fair-
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548 141 UNITED STATES TAX COURT REPORTS (533)
banks by enacting the predecessor of section 1271(a) in the
Revenue Act of 1934, ch. 277, sec. 117, 48 Stat. at 714–715.
Moreover, the Senate Finance Committee was critical of
the existing law because it taxed similar economic trans-
actions differently and effectively provided taxpayers with an
election to sell the property right if the resulting transaction
results in a gain or extinguish the property right if the
resulting transaction results in a loss. The intended effects
of extending section 1234A to all types of property that are
capital assets ‘‘would be to remove the effective ability of a
taxpayer to elect the character of gains and losses from cer-
tain transactions’’ and ‘‘to reduce the uncertainty concerning
the tax treatment of modifications of property rights.’’ S.
Rept. No. 105–33, supra at 135, 1997–4 C.B. (Vol. 2) at 1215.
In our view Congress extended the application of section
1234A to terminations of all rights and obligations with
respect to property that is a capital asset in the hands of the
taxpayer or would be if acquired by the taxpayer, including
not only derivative contract rights but also property rights
arising from the ownership of the property.
3. Amendment of Section 1.165–5, Income Tax Regs.
Petitioner also argues that the amendment in 2008 to sec-
tion 1.165–5, Income Tax Regs., generally applicable to secu-
rities that become worthless during the taxable year, shows
that the Department of the Treasury does not interpret sec-
tion 1234A to apply to property ownership rights. Pursuant
to section 165(g), if a security that is a capital asset becomes
worthless during the taxable year, the loss resulting there-
from is treated as a loss from a sale or exchange. The regula-
tion promulgated under section 165(g) clarifies that, if a
security that becomes worthless during the taxable year is
not a capital asset, the loss is deductible under section 165
as an ordinary loss. Sec. 1.165–5(b), Income Tax Regs. The
regulation, promulgated in 1960, was first amended in 1972
and remained unchanged until 2008. In 2008 the regulation
was amended by adding a new paragraph (i) which provides
that (1) a security that becomes wholly worthless includes a
security that is abandoned and (2) if the abandoned security
is a capital asset (and is not a worthless security of certain
affiliated corporations described in section 165(g)(3)), the
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 549
resulting loss is treated as a loss from the sale or exchange
of a capital asset.
Petitioner argues that, if section 1234A applies to the
deductibility of a loss on abandonment of property under sec-
tion 165, there would have been no reason for the Depart-
ment of the Treasury to have added paragraph (i) to the
regulation and concludes that ‘‘[t]he only logical conclusion
that can be reached based on the existence of the Regulation
and its history is that Treasury did not, and it currently does
not, believe that Section 1234A applies to the abandonment
of a security.’’ Petitioner also argues that the regulation cre-
ates an exception to section 1234A for securities in affiliated
corporations. We disagree.
Under section 165(g)(3) a security in a domestic corpora-
tion that is affiliated with the taxpayer is not treated as a
capital asset. Thus, the regulation does not create an excep-
tion to section 1234A; it is the more specific provision of sec-
tion 165(g)(3) that creates an exception for affiliated corpora-
tions. Thus, section 1.165–5(i), Income Tax Regs., gives effect
to, and is consistent with, section 1234A, as well as section
165(g)(3). Moreover, the fact that the regulation was not
issued until 2008 is irrelevant. The Commissioner is not
required to assert a particular position as soon as the statute
authorizes such an interpretation. Dickman v. Commissioner,
465 U.S. 330, 343 (1984); Dresser Indus., Inc. v. United
States, 238 F.3d 603, 609 (5th Cir. 2001); Yarbro v. Commis-
sioner, 737 F.2d 479, 483 (5th Cir. 1984), aff ’g T.C. Memo.
1982–675.
4. Abandonment Losses: Section 1.165–2, Income Tax Regs.,
and Rev. Rul. 93–80, 1993–2 C.B. 239On its return GK Co-op claimed an ordinary loss on the
surrender of the Securities as an abandonment under section
1.165–2(a), Income Tax Regs. However, the regulation does
not apply to, and an abandonment loss deduction is not
allowed for, ‘‘losses sustained upon the sale or exchange of
property, losses sustained upon the obsolescence or
worthlessness of depreciable property, casualty losses, or
losses reflected in inventories required to be taken under sec-
tion 471.’’ Sec. 1.165–2(b), Income Tax Regs. Consequently,
GK Co-op’s claimed abandonment loss is disallowed by sec-
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550 141 UNITED STATES TAX COURT REPORTS (533)
tion 1.165–2(b), Income Tax Regs., because the loss from the
surrender of the Securities is deemed to be a loss from a sale
or exchange of a capital asset pursuant to section 1234A.
Petitioner argues that, if section 1234A applied to the
deductibility of a loss on abandonment of intangible property
under section 165 after it was amended in 1997, the Commis-
sioner would have revised Rev. Rul. 93–80, 1993–2 C.B. 239.
We disagree.
Rev. Rul. 93–80, supra, addresses the character of a loss
on the abandonment of a partnership interest when the tax-
payer’s share of partnership liabilities is reduced as a result
of the termination of his ownership in the partnership. In
situation 1 there was a deemed distribution to the partner
resulting from the reduction in his share of partnership
liabilities. The ruling held that the loss on the abandonment
was a capital loss. In situation 2, the partner was not enti-
tled to include any portion of partnership liabilities in the
basis of his partnership interest and did not receive any
actual or deemed distributions when he abandoned his part-
nership interest. The ruling held that the loss in situation 2
was an ordinary loss. The ruling holds that a loss incurred
on the abandonment or worthlessness of a partnership
interest is an ordinary loss only if sale or exchange treatment
does not apply. The ruling makes clear that, if a provision of
the Code requires the transaction to be treated as a sale or
exchange, such as when there is a deemed distribution
attributable to the reduction in the partner’s share of part-
nership liabilities pursuant to section 752(b), the partner’s
loss is capital. Rev. Rul. 93–80, supra, was issued four years
before section 1234A was amended in 1997 to apply to all
property that is (or would be if acquired) a capital asset in
the hands of the taxpayer. As we previously stated, the
Commissioner is not required to assert a particular position
as soon as the statute authorizes such an interpretation,
whether that position is taken in a regulation or in a revenue
ruling. Dickman v. Commissioner, 465 U.S. at 343; Dresser
Indus., Inc., 238 F.3d at 609; Yarbro v. Commissioner, 737
F.2d at 483.
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(533) PILIGRIM’S PRIDE CORP. v. COMMISSIONER 551
5. Section 1234A Applies to Surrender of Securities
The surrender of the Securities terminated all of GK Co-
op’s rights with respect to the Securities which were capital
assets in the hands of GK Co-op. The loss on the surrender
of the Securities is attributable to the termination of those
rights. Accordingly, the loss is treated as a loss from the sale
of a capital asset pursuant to section 1234A.
C. Conclusion
Petitioner is not entitled to a deduction for an abandon-
ment loss pursuant to section 1.165–2(a), Income Tax Regs.,
on the surrender of the Securities, because the losses are
treated as losses from a sale or exchange pursuant to section
1234A. See sec. 1.165–2(b), Income Tax Regs. However,
pursuant to section 165(f), petitioner is entitled to a capital
loss on the surrender of the Securities, as allowed by
respondent.
In reaching our holdings, we have considered the argu-
ments and contentions of the parties not discussed herein,
and conclude that they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered for respondent
with respect to the deficiency and for peti-
tioner with respect to the accuracy-related
penalty.
f
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