Oren L. Benton v. Commissioner

122 T.C. No. 20UNITED STATES TAX COURT
OREN L. BENTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7602-02. Filed May 12, 2004.
P’s ch. 11 bankruptcy commenced in 1995, and he
was discharged upon the confirmation of his plan of
reorganization during 1997. Effectively, at the time
of confirmation, all of the estate’s assets were
transferred to a liquidating trust for the benefit of
creditors. P had net operating losses (NOLs) that
arose in years prior to the bankruptcy commencement.
P’s bankruptcy estate also incurred tax losses. The
bankruptcy estate succeeded to P’s precommencement
NOLs. Under sec. 1398(i), I.R.C., P would succeed to
the tax attributes (NOLs) of the bankruptcy estate,
upon its termination. P contends that his ch. 11
bankruptcy terminated upon the confirmation of the plan
and the discharge of the debtor. R contends that a ch.
11 bankruptcy does not terminate until closed by a
final order of a bankruptcy court.
- 2 -
P seeks to apply NOLs to his 1995, 1996, and 1997
income which was not includable in the bankruptcy
estate. R contends that P may not carry NOLs to any
years prior to the termination of P’s bankruptcy
estate; i.e., 1996 or 1995.
1. Held: The “termination” of P’s ch. 11
bankruptcy, for purposes of sec. 1398, I.R.C., occurred
upon the confirmation of the plan and discharge of the
debtor.
2. Held, further, P may use NOLs with respect to
his separate tax reporting in the year of the
commencement of his bankruptcy and later years, to the
extent allowed under sec. 172, I.R.C., and the
regulations thereunder.
Oren L. Benton, pro se.
Frederick J. Lockhart, Jr., and John A. Weeda, for
respondent.
OPINION
GERBER, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes, an addition to tax, and
penalties for the short taxable year of February 23 through
December 31, 1995, and the taxable years 1996 and 1997, as
follows:
Accuracy-
Addition to Tax Related Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662
19951 $75,771 -- $15,154
1996 240,565 -- 48,113
1997 249,337 $57,967 46,374
1
Pursuant to sec. 1398(d)(2)(D), petitioner elected to
terminate his taxable year as of the bankruptcy commencement
date, Feb. 23, 1995. The deficiency is with respect to the short
tax year of Feb. 23 through Dec. 31, 1995.
- 3 -
This matter is before the Court on respondent’s motion for
partial summary judgment. See Rule 121.1 The issues presented
for our consideration are: (1) Whether petitioner succeeded to
the tax attributes of his chapter 11 bankruptcy estate at the
time of confirmation of the plan of reorganization or,
alternatively, upon entry of a final order closing the bankruptcy
proceeding, see sec. 1398(i); (2) whether petitioner may carry
net operating losses (NOLs) to his 1995, 1996, and 1997 tax
years; and (3) whether certain payments petitioner received were
compensation for his services.
Background
Petitioner resided in Oto, Iowa, at the time his petition
was filed in this proceeding. On February 23, 1995, petitioner
filed a voluntary petition with the U.S. Bankruptcy Court for the
District of Colorado under chapter 11 of the Bankruptcy Code.
Concurrently, four related petitions were filed for business
entities controlled by petitioner. An additional entity
controlled by petitioner filed a petition under chapter 11 during
1996. All six bankruptcy cases were administered as a related
group. A separate bankruptcy estate was established for each
entity, including the Oren L. Benton Bankruptcy Estate (Benton
1
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
taxable years at issue.
- 4 -
estate) and the Nuexco Trading Corp. Bankruptcy Estate (NTC
bankruptcy estate). As of the date of each petition, the
entity’s assets became assets of its bankruptcy estate. Pursuant
to section 1398(d)(2)(D), petitioner elected to terminate his
taxable year as of February 23, 1995. A separate Federal income
tax return was filed for petitioner’s short taxable year February
23 through December 31, 1995.
Among the assets that made up the Benton estate were
petitioner’s interests in three entities that were involved in
the operation and ownership of the Colorado Rockies National
League Baseball Franchise. The three interests included a
limited partnership interest in the Colorado Baseball Club
Limited Partnership (CBCLP), which was the owner of the National
League franchise. In addition, Colorado Baseball Management,
Inc. (CBM), was a corporation entitled to a percentage of the
gross revenues of CBCLP. Lastly, Colorado Baseball, Inc. (CBI),
was the managing general partner in CBCLP.
A second amended plan of reorganization (the plan), dated
August 18, 1997, for petitioner and his related bankruptcy
estates was to be effective on August 31, 1997. Until the August
18, 1997, confirmation of the plan, petitioner served as the
debtor in possession. Among other things, the plan provided that
on August 31, 1997, most of the various bankruptcy estates’
assets would be transferred into a liquidating trust to be
- 5 -
administered for the benefit of creditors by a trustee. The
trustee was responsible for all tax matters relating to the
estates subject to the supervision of an oversight committee.
The creditors agreed in the plan that the tax attributes would go
to the debtor (petitioner) upon confirmation of the plan.
The plan also provided that the interest in CBCLP was to be
placed in the NTC bankruptcy estate, and the CBM and CBI
interests were to remain in the Benton estate. The motivation
for not transferring these assets to the liquidating trust was to
maintain the S corporation status of CBM and CBI. This limited
exception to the general transfer of assets to the liquidating
trust was approved by the Benton estate’s creditors and promoted
by Benton’s fellow S corporation shareholders. Those
shareholders were concerned about whether the placement of an
interest in an S corporation into a bankruptcy liquidating trust
would result in the termination of S corporation status. Their
concern was focused upon whether a liquidating trust and/or
liquidating trustee would be a qualified shareholder of an S
corporation.2
2
We note that sec. 1361(b)(1)(B) and (c)(3) permits the
estate of an individual in bankruptcy to become a shareholder of
an S corporation without triggering termination of S corporation
status. Cf. Mourad v. Commissioner, 121 T.C. 1 (2003). We
surmise that the shareholders were concerned about S corporation
status in the event that the stock were transferred from the
bankruptcy estate to the liquidating trust.
- 6 -
The Benton estate retained bare legal title to the interests
in CBI and CBM with no rights of ownership. The plan included
the following terms, which in effect made the Benton estate a
mere nominee:
i) the Liquidating Trustee shall be deemed to hold an
irrevocable proxy and power of attorney to act on the
Benton Estate’s behalf with respect to the Baseball
Interests or any of them;
ii) * * * [the Baseball Interests] shall be deemed
ordered * * * to pay over all payments on account of
the Baseball Interests as the Liquidating Trustee shall
direct;
iii) the Benton Estate shall not sell, encumber, or
otherwise dispose of any interest in the Baseball
Interests without the express prior written consent of
the Liquidating Trustee. To the extent required to
effectuate the purposes of this section, the
Liquidating Trustee shall be deemed the representative
of the Estates in regard to the administration of the
Baseball Interests.
On September 1, 1997, the first day following the effective
date of the plan, petitioner was discharged under the provisions
of Bankruptcy Code section 1141(d) from any debt that arose
before confirmation, and he was relieved of his status as
“debtor-in-possession”.
On his 1997 Federal income tax return, petitioner claimed
approximately $84 million in NOLs that had arisen before the
commencement of the bankruptcy and had not been used by his
bankruptcy estate. Petitioner contended that he received the
NOLs from his bankruptcy estate as of August 31, 1997, the
effective date of the confirmed plan. During April 1999
- 7 -
petitioner filed a Form 1040X, Amended U.S. Individual Income Tax
Return, for the short taxable year 1995 and the calendar year
1996, attempting to use NOLs initially reported on his 1997
return. During October 2001, petitioner filed amended returns
containing $59 million in increased claims for NOLs.
Petitioner received the following amounts from CBM during
his taxable years ended December 31, 1995, 1996, and 1997:
Taxable
Year Amount
1995 $200,000
1996 1,000,000
1997 925,000
1997 60,000
Petitioner reported the amounts received in 1995 and 1996 as
wages on his Forms 1040, U.S. Individual Income Tax Return. He
did not, however, report as income the amounts he received during
1997 on his original 1997 return. Instead, petitioner attached a
statement to his 1997 return asserting that the amounts he
received from CBM in 1997 belonged to the Benton estate and were
loans from the estate to him. On the statement, he also
maintained that the Benton estate was challenging the
characterization of the payments as compensation, asserting that
they were payments with respect to the stock. Petitioner, in
amended returns for 1995 and 1996, included statements similar to
those included on his 1997 return, asserting that the payments
were erroneously included as compensation and should be properly
characterized as loans from the Benton estate.
- 8 -
Discussion
I. Summary Judgment
Respondent moved for partial summary judgment with respect
to three issues in this case. Summary judgment is intended to
expedite litigation and avoid unnecessary trials. Fla. Peach
Corp. v. Commissioner, 90 T.C. 678, 681 (1988). A motion for
partial summary judgment may be granted if there is no genuine
issue as to any material fact. See Rule 121(b); Elec. Arts, Inc.
v. Commissioner, 118 T.C. 226, 238 (2002). The moving party
bears the burden of showing that there is no genuine issue of
material fact, and factual inferences will be read in a manner
most favorable to the party opposing summary judgment. Bond v.
Commissioner, 100 T.C. 32, 36 (1993); Dahlstrom v. Commissioner,
85 T.C. 812, 821 (1985). A partial summary adjudication is
appropriate if all issues in the case are not disposed of. See
Rule 121(b); Turner Broad. Sys., Inc. & Subs. v. Commissioner,
111 T.C. 315, 323-324 (1998). This case is ripe for partial
summary judgment with respect to the termination and net
operating loss issues. Genuine issues of material fact exist
however, with respect to the compensation issue.
II. The Controversy--Generally
Petitioner seeks to use NOLs that arose before and during
his bankruptcy proceeding. Under section 1398(i), petitioner
would succeed to such tax attributes upon the “termination of an
- 9 -
estate”. Petitioner contends that, in the context of his chapter
11 bankruptcy reorganization, the estate terminated at the time
of the confirmation of the plan of reorganization and discharge
of the debtor.3 Respondent contends that the bankruptcy estate
does not terminate until the bankruptcy proceeding is formally
closed.4 We must resolve this threshold question before
considering whether petitioner is entitled to use certain net
operating loss deductions from the bankruptcy estate.
The relationship, for Federal tax purposes, between a
bankrupt and a chapter 11 bankruptcy estate has been described as
follows:
The filing of a bankruptcy petition under Chapter 11
creates a new taxable entity, the bankruptcy estate,
that is separate from the debtor. Sec. 1398. The
bankruptcy estate computes its taxable income in the
same manner as an individual does, except that the
entity must use the tax rates applicable to a married
individual filing a separate return. Sec. 1398(c).
Further, the bankruptcy estate succeeds to and
takes into account the individual debtor’s tax
attributes (e.g., any NOL [net operating loss]
3
Our consideration of the issues in this case is limited to
the effect of sec. 1398 in the context of an individual ch. 11
bankruptcy reorganization.
4
We note that at the time of the filing of the motion for
summary judgment, the bankruptcy court had not entered a final
order closing petitioner’s ch. 11 proceeding. If we were to hold
that the closing of the bankruptcy proceeding was the time of
“termination”, the bankruptcy estate’s tax attributes would not
transfer to petitioner until the closing of the estate. That
could create a situation where petitioner would not be able to
use the tax attributes even though the bankruptcy estate no
longer controlled the assets or needed the tax attributes.
- 10 -
carryforward). Sec. 1398(g). In the case of NOLs, the
bankruptcy estate succeeds to the NOLs as determined
under section 172, as of the first day of the
individual debtor’s taxable year in which the case
commences. Sec. 1398(g)(1). The NOLs as determined by
a calendar year individual debtor, as of January 1 of
the year the debtor files a bankruptcy petition, go to
the bankruptcy estate for its exclusive use for the
benefit of the creditors on the commencement date. Id.The individual debtor then succeeds to and takes into
account the NOLs of the bankruptcy estate at the
termination of the bankruptcy case. Sec. 1398(i).
* * * [Lassiter v. Commissioner, T.C. Memo. 2002-25.]
III. Termination for Purposes of Section 1398(i)
Petitioner seeks to use tax losses from his bankruptcy
estate. Section 1398(i) provides for the circumstances under
which such tax attributes become available to the debtor/
taxpayer. Section 1398(i) provides:
SEC. 1398(i). Debtor Succeeds to Tax Attributes
of Estate.--In the case of a termination of an estate,
the debtor shall succeed to and take into account the
items referred to in paragraphs (1), (2), (3), (4),
(5), and (6) of subsection (g) in a manner similar to
that provided in such paragraphs (but taking into
account that the transfer is from the estate to the
debtor instead of from the debtor to the estate). In
addition, the debtor shall succeed to and take into
account the other tax attributes of the estate, to the
extent provided in regulations prescribed by the
Secretary as necessary or appropriate to carry out the
purposes of this section. [Emphasis added.]
The parties disagree about the meaning of the phrase
“termination of an estate”. Petitioner argues that the
termination of his estate occurred when his plan of
reorganization was confirmed. Respondent, however, argues that
termination occurs only at the time when a bankruptcy court
- 11 -
enters an order formally closing the proceeding and releasing its
jurisdiction over a bankruptcy estate.
The phrase “termination of an estate” could have differing
meanings in the context of a bankruptcy proceeding. If Congress
had used the phrase “closing of the bankruptcy proceeding”, there
would have been less ambiguity or room for interpretation.
However, either respondent’s or petitioner’s interpretation could
fit within the meaning of the phrase “termination of an estate”.
For example, a bankruptcy estate could be considered to be
terminated when a bankruptcy court enters an order closing the
estate. Likewise, in the context of a plan of reorganization,
when a bankruptcy court confirms a plan and discharges the
debtor, the estate, in substance and effect, may be considered to
be terminated. At that point in the proceeding, the bankruptcy
court’s role is to monitor the plan of reorganization. The
disputed phrase is not defined in the Internal Revenue Code or
the underlying regulations.
Section 350(a) of the Bankruptcy Code specifically provides
for the closing of a bankruptcy proceeding “After an estate is
fully administered and the court has discharged the trustee”. 11
U.S.C. sec. 350(a) (2000). Bankruptcy courts have regularly
defined closing of an estate as the time a final decree is
entered closing the case. See S.S. Retail Stores v. Ekstrom, 216
F.3d 882, 884 (9th Cir. 2000); In re Duplan Corp., 212 F.3d 144,
- 12 -
148 (2d Cir. 2000); Duebler v. Sherneth Corp., 160 F.2d 472, 474
(2d Cir. 1947).
Similarly, the phrase “termination of an estate” has, by
necessity, been interpreted and defined by numerous bankruptcy
courts. For example, one bankruptcy court, in deciding whether
the bankruptcy estate had incurred certain administrative
expenses in a chapter 11 bankruptcy proceeding, held that the
estate had terminated upon the confirmation of the plan of
reorganization. See In re Westholt Manufacturing, Inc., 20
Bankr. 368 (1982), affd. sub nom. United States v. Redmond, 36
Bankr. 932 (D. Kan. 1984). In the In re Westholt case, the
Government argued that the debtor’s unpaid employment taxes were
incurred while the debtor was under chapter 11 bankruptcy
protection and therefore the taxes were administrative expenses
of the estate. In In re Westholt the Government argued, as it
has in the case before us:
until a case is closed pursuant to a final decree at
the consummation of the Chapter 11 plan, the bankruptcy
estate remains in existence and the court retains
jurisdiction over the reorganization plan so that
employment and unemployment taxes incurred by the
debtor in possession following confirmation of the plan
are taxes incurred by the estate and, thus, properly
characterized as administrative expenses. * * * [Id.
at 371.]
The court in In re Westholt, however, held that the estate
was not obligated for the employment tax because the estate
terminated upon the confirmation of the plan. The court
- 13 -
explained that “At confirmation, all the property of the estate
is vested in the debtor, thereby terminating the estate’s
existence, although the court has continued jurisdiction under
section 1142 to oversee the plan’s execution.” Id. at 372 (fn.
ref. omitted). The principle that an estate terminates upon
confirmation of the plan of reorganization is one that is widely
held amongst the bankruptcy courts. See, e.g., In re Walker, 198
Bankr. 476 (Bankr. E.D. Va. 1996); Cook v. Chrysler Credit Corp.,
174 Bankr. 321 (M.D. Ala. 1994); In re Mold Makers, Inc., 124
Bankr. 766 (Bankr. W.D. Ill. 1990); Marine Iron & Shipbuilding
Co. v. City of Duluth, 104 Bankr. 976 (D. Minn. 1989); In re Tri-
L Corp., 65 Bankr. 774 (Bankr. D. Utah 1986).
In a similar vein, it was held in Gen. Elec. Credit Corp. v.
Nardulli & Sons, Inc., 836 F.2d 184, 190 (3d Cir. 1988), that
“Insolvency proceedings terminate upon confirmation of a plan of
reorganization, or on the effective date or consummation date of
the plan, if provided for in the plan.” The specific issue
considered in that chapter 11 bankruptcy proceeding was whether a
creditor’s perfected security interest had expired. As a
threshold to the primary issue, the court had to decide when the
insolvency proceeding terminated.
Likewise, it was held that a bankruptcy court’s
postconfirmation jurisdiction was limited to matters concerning
the operation of the confirmed plan and did not extend to
- 14 -
questions interpreting substantive aspects underlying the plan.
In re Greenly Energy Holdings, Inc., 110 Bankr. 173 (Bankr. E.D.
Pa. 1990). In that case, the bankruptcy court was considering
whether it retained postconfirmation jurisdiction to decide
corporate matters, such as who owned stock, entitlement to
distributions, shareholder representation on a board of
directors, and voting rights under the confirmed plan of
reorganization. The court “[balanced] the need to retain
jurisdiction [of] post-confirmation [matters] with the need to
end the reorganization process at some point.” Id. at 180. The
court did not decide the corporate matters and relied on the
holding in In re Westholt Manufacturing, Inc., supra, and other
cases that “‘At confirmation, all the property of the estate is
vested in the debtor, thereby terminating the estate’s existence,
although the court has continued jurisdiction under section 1142
* * * to oversee the plan’s execution.’” In re Greenly Energy
Holdings, Inc., supra at 180 (quoting In re Westholt
Manufacturing, Inc., supra at 372).
The above-referenced line of chapter 11 bankruptcy cases
uniformly holds that, for purposes of determining substantive
questions regarding the estate, a “termination” occurs at the
time the debtor’s plan of reorganization is confirmed. In a
chapter 11 proceeding involving a venue question, however, the
holding of the Court of Appeals for the Third Circuit varied from
- 15 -
the above holdings. The Court of Appeals held that for the
procedural purpose of venue, the bankruptcy estate did not
terminate at the time of confirmation. In re Emerson Radio
Corp., 52 F.3d 50, 54 (3d Cir. 1995). In In re Emerson, the
court considered whether to transfer venue in a chapter 11
bankruptcy proceeding under bankruptcy rule 1014(b). That rule
provides procedures for when petitions of related debtors are
filed in different bankruptcy courts. Bankruptcy rule 1014(b),
in pertinent part, provides:
“If petitions commencing cases under the Code are filed
in different districts * * * the court may determine,
in the interest of justice or for the convenience of
the parties, the district or districts in which the
case or cases should proceed. * * * ” [In re Emerson
Radio Corp., supra at 53.]
In In re Emerson, one party argued that the bankrupt was no
longer a “debtor” for purposes of bankruptcy rule 1014(b) because
its bankruptcy estate terminated upon confirmation of the
reorganization plan. The Court of Appeals for the Third Circuit
rejected that argument and held that for purposes of bankruptcy
rule 1014(b), the debtor’s status was not ended at the time of
confirmation of its plan of reorganization.
In holding that the venue rules apply until such time as the
bankruptcy proceeding is closed, the court in In re Emerson
focused on the need of the bankruptcy parties to “know with a
fair degree of certainty the court which can entertain an
application”, and that “Applying Rule 1014(b) and section 350 [of
- 16 -
the Bankruptcy Code] as written supplies that certainty.” Id. at
55. We note that the court in In re Emerson did not attempt to
define “terminate” in the context of section 1398, but held that
it retained jurisdiction over the debtor until the bankruptcy
proceeding finally closed.
The holding in In re Emerson is readily distinguishable
from the holdings in numerous cases that have held that a
“termination” occurs at the point of confirmation. The holding
in In re Emerson was applied in a procedural context to generally
determine the proper venue for a chapter 11 proceeding. The
focus of that inquiry must necessarily be the entire chapter 11
proceeding from the time of petition to the closing.
In the setting of a bankruptcy reorganization, it would be
more appropriate to transfer the tax attributes of the bankruptcy
estate to the discharged debtor when the plan of reorganization
is confirmed. The underlying purpose of a bankruptcy
reorganization is “rehabilitating the debtor and avoiding
forfeitures by creditors.” Pioneer Inv. Servs. Co. v. Brunswick
Associates Ltd. Partnership, 507 U.S. 380, 389 (1993). “[T]o
achieve that purpose, the debtor has to continue to operate
between the filing of the petition and the adjudication of
bankruptcy.” Pa. Dept. of Envtl. Res. v. Tri-State Clinical
Labs., Inc., 178 F.3d 685, 690 (3d Cir. 1999).
- 17 -
The approval of the plan and the concurrent discharge
facilitates the debtor’s continuing his prebankruptcy activity.
At that juncture, the estate is generally relieved of the
administration of the debtor’s property. Logically, the debtor
should be able to go forward with prebankruptcy activity,
including any assumption of tax attributes of the bankruptcy
estate. It would be illogical to keep a debtor from a tax loss
that might assist in the rehabilitation process during a period
when the estate was, for all effects and purposes, dormant.
In the case we consider, petitioner was the debtor in his
chapter 11 reorganization.5 Recognizing that chapter 11
bankruptcy reorganizations are intended to rehabilitate the
debtor, we note that section 1141 of the Bankruptcy Code provides
“Except as otherwise provided in the plan or the order confirming
the plan, the confirmation of a plan vests all of the property of
the estate in the debtor.” 11 U.S.C. sec. 1141(b) (2000). Those
bankruptcy cases which have held that termination occurs upon
confirmation were chapter 11 bankruptcy reorganizations, and the
deciding courts placed reliance on section 1141 of the Bankruptcy
Code. We must note that section 1141 of the Bankruptcy Code
applies only to chapter 11 bankruptcies. See Cusano v. Klein,
264 F.3d 936 (9th Cir. 2001). We also recognize that the phrase
5
We do not consider here whether the phrase “termination of
an estate” should be universally understood in the context of all
types of bankruptcy proceedings.
- 18 -
“termination of an estate” as used in section 1398(i) could have
a different meaning in the context of other types of bankruptcy
proceedings, e.g., chapter 7 liquidating proceedings. The
possibility of differing treatment, however, may be appropriate
and may account for the use of “terminate” in section 1398(i),
instead of the term “closed”.
An important difference between chapter 11 and other
bankruptcy proceedings is that the chapter 11 debtor is generally
discharged at the time of confirmation of the plan. In addition,
at or about the time of confirmation the estate’s assets are
either returned to the debtor and/or (as in this case)
transferred to a liquidating trust for the benefit of creditors.
A liquidating trust for the benefit of the estate’s creditors has
been treated as a taxable entity separate from and not a
continuation or arm of the estate and/or the debtor. Holywell
Corp. v. Smith, 503 U.S. 47 (1992); see also In re Shank, 240
Bankr. 216 (Bankr. D. Md. 1999). In Holywell, the Supreme Court,
in overruling the lower courts, held that when a plan of
reorganization caused the transfer of the bankruptcy estate’s
assets to a liquidating trust for the benefit of creditors, the
plan did not merely substitute the trustee for the debtor as the
fiduciary of the bankruptcy estate, but created the trust as a
separate entity and taxpayer.
- 19 -
Accordingly, once a plan vesting an estate’s assets in a
liquidating trust is confirmed, the estate is generally not
required to report or pay tax on gains derived by the trust from
disposition of those assets. In that respect, the estate lacks
the potential for the incidence of tax or use of tax losses.
Conversely, at that time the debtor is being released for the
purpose of rehabilitation. Those factors are most conducive to
and support an approach where the estate’s tax attributes be
returned to the debtor.6
In the case before us, all but two of the estate’s assets
were transferred to the liquidating trust. The two assets were
the stock of S corporations, which the estate was permitted to
hold as a mere nominee in order to maintain S corporation status.
Under the terms of the plan, the estate did not maintain control
or, in effect, ownership of the stock. Accordingly, there is no
reason to delay the transfer of the estate’s tax attributes to
the debtor/petitioner in this case. We hasten to note that as of
the time of the summary judgment motion in 2003, petitioner’s
chapter 11 bankruptcy proceeding had not been formally closed.
Under those circumstances, waiting until the closing of the
chapter 11 proceeding would be unjust and a possible detriment to
6
The parties in this case do not contend that the trustee
or the liquidating trust should be considered as a part of the
estate for purposes of sec. 1398 or the use of the estate’s or
the debtor’s tax attributes.
- 20 -
the debtor’s opportunity for rehabilitation, without providing
any particular benefit to the estate or the estate’s creditors.
Our analysis of this matter is focused on the facts before
us. On the basis of those facts and in accord with established
bankruptcy case precedent, we hold that termination of
petitioner’s bankruptcy estate occurred at the time of the
confirmation of the plan of reorganization. In reaching this
holding, we do not attempt to establish a “bright-line rule”
under which all chapter 11 bankruptcy reorganizations would
“terminate”, within the meaning of section 1398(i), at the time
of the plan’s confirmation. The circumstances of each case
should dictate whether a “termination” has occurred.
In prior Memorandum Opinions of this Court, the view was
expressed that the phrase “termination of an estate”, as used in
section 1398(i), should be the same as or compatible with the
phrase closing of the estate as used in section 346(i)(2) of the
Bankruptcy Code, 11 U.S.C. section 346(i)(2) (2000). See McGuirl
v. Commissioner, T.C. Memo. 1999-21; Beery v. Commissioner, T.C.
Memo. 1996-464; cf. Firsdon v. United States, 95 F.3d 444, 446
(6th Cir. 1996); Banks v. Commissioner, T.C. Memo. 2001-48, affd.
in part, revd. in part and remanded 345 F.3d 373 (6th Cir. 2003);
Gulley v. Commissioner, T.C. Memo. 2000-190; Kahle v.
Commissioner, T.C. Memo. 1997-91. However, all of those cases
either began as chapter 7 liquidations or were converted from
- 21 -
chapter 11 reorganizations to chapter 7 liquidations and are thus
distinguishable from the current case. In addition, the question
of whether a “termination” occurred before the closing of the
estate was not squarely presented in any of those cases.
Section 346(i)(2) of the Bankruptcy Code, like section 1398,
provides for the succession of tax attributes from the estate to
the debtor in cases under chapter 7 or 11 of the Bankruptcy Code.
Section 346(i)(2) of the Bankruptcy Code provides: “After such a
case is closed or dismissed, the debtor shall succeed to any tax
attribute to which the estate succeeded under paragraph (1) of
this subsection but that was not utilized by the estate.” 11
U.S.C. sec. 346. Section 346(i)(2) of the Bankruptcy Code is
unambiguous and provides for the transfer of tax attributes after
the bankruptcy case is closed. As we have already noted, the
term “closed” is well established in bankruptcy parlance.
In Firsdon v. United States, supra, the issue before the
court was whether the bankrupt’s time for claiming a refund had
expired so as to deny the District Court jurisdiction over the
bankrupt’s refund claim.7 The bankrupt relied on section
346(i)(2) of the Bankruptcy Code, which provides for the tolling
of limitation periods during the pendency of a bankruptcy case.
The Court of Appeals for the Sixth Circuit analyzed section
7
The limitations question had to be resolved before the
District Court could consider the bankrupt’s claims to the
estate’s losses within the context of sec. 1398(i).
- 22 -
346(i)(2) of the Bankruptcy Code and its relationship to section
1398(i). The Court of Appeals found significant the following
language contained in section 346(a) of the Bankruptcy Code:
“Except to the extent otherwise provided for in this section,
subsections (b), (c), (d), (e), (g), (h), (i), and (j) of this
section apply notwithstanding any State or local law imposing a
tax, but subject to the Internal Revenue Code of 1986.”
The Court of Appeals for the Sixth Circuit reasoned that the
phrase “subject to the Internal Revenue Code” in section 346(a)
of the Bankruptcy Code contemplated that the Bankruptcy Code
sections had no effect on the Federal tax laws, and that
subsection (a) applies “‘only to state and local laws’”. Firsdon
v. United States, supra at 446 (quoting In re Page, 163 Bankr.
196, 197-198 (Bankr. D. Kan. 1994)). The Court of Appeals also
referenced the legislative history and noted that “a potential
jurisdictional conflict” existed resulting in a “compromise * * *
whereby the tax provisions [of Bankruptcy Code section 346(i)]
were made ‘inapplicable to Federal taxes,’ in the hope that
comparable federal provisions would be enacted during the
subsequent (96th) Congress.” Id. at 447 (quoting H. Rept. 95-
595, at 3 (1977)). It also explained:
although I.R.C. sec. 1398(i) follows 11 U.S.C. sec.
346(i)(2) in providing for the succession of a
bankruptcy estate’s tax attributes for federal tax
purposes, it does not contain any of the tolling
language found in the second sentence of sec.
346(i)(2). [Id.]
- 23 -
As a consequence, sec. 346(i)(2) remains
inapplicable to the federal tax laws, even though it
was originally drafted with those laws in mind. [Id.]
The Court of Appeals also pointed out that, while Congress had
section 346(i)(2) of the Bankruptcy Code in mind when enacting
section 1398(i), Congress drafted section 1398(i) to stand on its
own and have distinct differences from section 346(i)(2) of the
Bankruptcy Code.
It was not a matter of coincidence that section 346(i)(2)
of the Bankruptcy Code and section 1398(i) were enacted
approximately 2 years apart. Congress, in the first instance,
used the term “closed” in section 346 of the Bankruptcy Code and
then chose to use the term “termination” in the subsequent
enactment of section 1398. If Congress had intended for tax
attributes to pass from a bankruptcy estate to a debtor at the
same point in the proceeding under titles 11 and 26 of the United
States Code, the term “closed” or “termination” could have been
used in both provisions. However, Congress chose not to use the
same language, and some distinction may reasonably be drawn from
this difference.
Another possible reason for Congress’s use of the phrase
“termination of an estate” in section 1398(i) was to provide
symmetry for use of that phrase in subsection (f) of section
1398. The phrase “termination of the estate” is also used in
section 1398(f)(2). Where Congress uses the same term or phrase
- 24 -
in more than one place in the same statutory section, the term or
phrase should have the same meaning. See Venture Funding v.
Commissioner, 110 T.C. 236, 250 (1998).
The phrase “termination of the estate” in section 1398(f)(2)
has been considered in the context of a chapter 7 liquidating
bankruptcy. Section 1398(f)(2) provides:
In the case of a termination of the estate, a transfer
(other than by sale or exchange) of an asset from the
estate to the debtor shall not be treated as a
disposition for purposes of any provision of this title
assigning tax consequences to a disposition, and the
debtor shall be treated as the estate would be treated
with respect to such asset.
The bankruptcy court analyzed whether abandonment of assets
of a bankruptcy estate by the trustee triggers tax consequences
to the estate in In re McGowan, 95 Bankr. 104 (Bankr. N.D. Iowa
1988). The bankruptcy trustee and the debtor argued that the
trustee’s abandonment of the property was a disposition for tax
purposes and that the tax liability arising from the disposition
was the obligation of the estate or the trustee. The trustee and
the debtor stood to gain by their argument because there were no
assets in the estate and the parties agreed that the trustee
would not be personally liable for the taxes of the estate. The
Internal Revenue Service and the State of Iowa argued that the
abandonment of the assets was a “transfer” of assets from the
bankruptcy estate to the debtor pursuant to section 1398(f)(2),
and therefore the estate would not have any tax consequences
- 25 -
pursuant to section 346(g)(1) of the Bankruptcy Code. As a
result, the transaction would be a taxable event to the debtor.
The holding in In re McGowan, supra at 107, depended upon
the definition of the phrase “termination of an estate”. If the
estate had terminated as of the date of the abandonment, then the
transaction would have qualified under section 1398(f)(2) as a
transfer of assets, nontaxable to the estate. Otherwise, the
transaction would have been a taxable disposition to the estate.
The bankruptcy court recognized, as we have, that the phrase
“termination of the estate” is susceptible of differing
definitions. That court held that the definition of “termination
of the estate”, within the context of section 1398(f)(2),
included the termination of the estate’s interest in property,
including the abandonment of property.
The effect of that holding was to place the tax liability on
the debtor. The court reasoned that it had
difficulty with the notion that the mere act of
abandoning burdensome property creates tax liability
for the trustee. The effect of such a rule could be to
place the burden of any taxes arising from such
“dispositions” upon the unencumbered assets which might
otherwise be distributed to unsecured creditors. [Id.
at 108.]
While the bankruptcy court was concerned that the burden of the
tax liability on the debtor could inhibit the debtor’s fresh
start, in those circumstances, the interests of the creditors
were considered to be of higher priority.
- 26 -
A similar result was reached in another opinion rendered by
the same bankruptcy judge who had decided In re McGowan, supra.
See In re Olson, 121 Bankr. 346 (N.D. Iowa 1990), affd. 930 F.2d
6 (8th Cir. 1991). In affirming the opinion of the bankruptcy
court, the Court of Appeals agreed that there should not be
differing tax results where bankruptcy property is abandoned
during administration or at the closing of the estate.
In the case of In re A.J. Lane & Co., 133 Bankr. 264 (Bankr.
D. Mass. 1991), the bankruptcy court also considered the
abandonment of property and the related tax consequences under
section 1398(f).8 In that case, the court referenced an Internal
Revenue Service Private Letter Ruling that included the
Government’s position that the phrase “termination of the estate”
in section 1398(f)(2) includes termination of the estate’s
interest in property by virtue of abandonment or exemption.
The court then examined the interplay and design of section
1398(f) and (i) and commented:
8
We have cited In re A.J. Lane & Co., 133 Bankr. 264
(Bankr. D. Mass. 1991), and In re Olson, 121 Bankr. 346 (N.D.
Iowa 1990), affd. 930 F.2d 6 (8th Cir. 1991), merely to show that
a “termination” may occur at some time other than the closing of
a bankruptcy case and that a parallel result is appropriate under
subsecs. (f) and (i) of sec. 1398. We recognize that with
respect to sec. 1398(f) the courts in In re A.J. Lane & Co.,
supra, and In re Olson, supra, had differing rationales. The
differing rationales, however, have no bearing on the issue we
consider. We also note that In re Olson, supra, is a ch. 7
bankruptcy proceeding, whereas In re A.J. Lane & Co., supra, is a
ch. 11 proceeding.
- 27 -
The design of the statute is clear. The party holding
the property, whether the debtor or the estate, is also
entitled to any available net operating loss carryover,
so that if that party incurs a taxable gain in the
disposition of the property he can use the net
operating loss carryover to offset the gain. * * *
[Id. at 272.]
The court further reasoned that the intended symmetry of the two
subsections warranted that the phrase “termination of the estate”
should have the same meaning in the context of subsections (f)
and (i) of section 1398. This would satisfy the congressional
intent to place net operating loss deductions with the party that
recognizes the gain upon the disposition of the property.9
The interpretation that subsections (f) and (i) of section
1398 were intended to cause tax losses to vest with the party
recognizing gain on the disposition of property is a reasonable
one. As previously explained, in the context of section 1398,
9
Under sec. 1398, the tax attributes (net operating losses)
follow the assets of the debtor and the debtor’s bankruptcy
estate. Those parties are expressly contemplated within the
context of sec. 1398 and, in particular, subsecs. (f), (g), and
(i). The use of the debtor’s or the estate’s tax attributes is a
limited one and does not extend to unrelated third parties.
Congress specifically provided that the bankruptcy estate
succeeds to the debtor’s tax attributes and that those attributes
return to the debtor upon the termination of the estate. Other
entities that may be connected with the bankruptcy estate, such
as a liquidating trust for the benefit of creditors, have been
found to be separate or unrelated entities for purpose of
taxation. See Holywell Corp. v. Smith, 503 U.S. 47 (1992).
Accordingly, when petitioner’s bankruptcy estate assets were
transferred to the liquidating trust for the benefit of
creditors, it was not contemplated that the creditors or the
trust for their benefit would succeed to the tax attributes of
petitioner/debtor or his estate.
- 28 -
that concept does not extend beyond the debtor and the bankruptcy
estate. In the setting of this chapter 11 bankruptcy, gains and
losses of the debtor and/or the estate would vest with the
appropriate party if “termination” occurred at the time of
confirmation.
We hold that the concept of closing an estate, as used in
section 346 of the Bankruptcy Code, is not identical for all
purposes to the phrase “termination of an estate” as used in
section 1398. To the extent that the rationale or holding of
McGuirl v. Commissioner, T.C. Memo. 1999-21, or Beery v.
Commissioner, T.C. Memo. 1996-464, indicates otherwise, it is
distinguished.
IV. Petitioner’s Use of the Net Operating Losses
Having decided that the tax attributes of the bankruptcy
estate transferred to petitioner upon the confirmation of the
plan of reorganization, we now address the parties’ disagreement
over which, if any, net operating losses (NOLs) are available to
petitioner and the years to which they may be carried. In this
motion for partial summary judgment, the parties are focused on
generalized threshold legal questions.10 Those questions concern
whether petitioner may apply losses acquired from his bankruptcy
estate upon its termination against his nonbankruptcy income
10
The parties have not addressed the specifics of the
losses, such as the amounts available and the mechanics of
application under sec. 172.
- 29 -
recognized during 1995, 1996, and 1997 (during the pendency of
the bankruptcy proceeding).11
Petitioner contends that he is entitled to $136 million in
NOLs and $440 million in capital losses from years before and
after the commencement of the bankruptcy. Petitioner’s
contentions present two questions with respect to the application
of the losses to his 1995, 1996, and 1997 nonbankruptcy income,
which petitioner would have earned during the pendency of the
bankruptcy. One question concerns NOL deductions that arose
before the commencement of the bankruptcy and are succeeded to by
the bankruptcy estate, after which any unused losses are returned
to the discharged debtor. The other question involves
circumstances where the NOL deduction arises in the bankruptcy
estate. In that regard, the question is whether the debtor can
use the estate’s losses, succeeded to by the debtor, with respect
to the debtor’s nonbankruptcy income recognized after the
commencement and before the termination of the bankruptcy.
Respondent argues that petitioner is entitled to carry
forward qualified NOLs only to years occurring after the
11
Petitioner’s income tax deficiencies for 1995, 1996, and
1997 are based on respondent’s determination that petitioner
received compensation/income from his bankruptcy estate for each
year. Petitioner contends that the amounts received were
nontaxable proceeds of loans, and respondent contends that the
amounts were compensation or otherwise taxable income. We note
that petitioner’s bankruptcy commenced on Feb. 23, 1995, and
terminated (upon confirmation and discharge) on Aug. 31, 1997.
- 30 -
bankruptcy termination (the year in which petitioner succeeded to
the NOLs from the bankruptcy estate). Petitioner argues that he
may apply losses of the bankruptcy estate that he succeeded to at
confirmation to any year after the commencement of the bankruptcy
(1995 and later). Petitioner also argues that he may apply his
own prebankruptcy NOLs, to the extent not used by the bankruptcy
estate, to his tax years following the commencement of the
bankruptcy.
Section 1398 was enacted to provide rules relating to the
Federal tax regimen to be used in connection with individuals’
chapter 7 or chapter 11 bankruptcies under title 11, U.S.C. See
sec. 1398(a). Section 1398, among other matters, addresses
questions concerning which entity is to recognize income and when
either entity may succeed to the tax attributes of the other.
Ultimately, the question we consider is whether the estate
becomes the preeminent or sole taxpayer (to petitioner’s
exclusion) for purposes of application of NOLs to income for
years occurring during the bankruptcy proceeding. At the
commencement of the bankruptcy, the estate becomes a taxable
entity treated as an individual taxpayer with respect to the
computation of income from assets being administered in the
estate under title 11, U.S.C. The debtor continues as a separate
taxable entity during the pendency of the bankruptcy, with
respect to income that the bankruptcy estate is not entitled to
- 31 -
under title 11, U.S.C.
Under section 1398(g), the estate succeeds to certain of the
debtor’s income tax attributes, including the debtor’s NOL
carryovers (under section 172) and capital loss carryovers (under
section 1212) from tax periods prior to the commencement of the
bankruptcy. Sec. 1398(g)(1), (5). In a like manner, to the
extent the estate has not used those same tax attributes, the
debtor succeeds to them at the termination of the estate. Sec.
1398(i). Accordingly, upon the commencement of a bankruptcy, the
estate becomes a taxpayer with respect to the debtor’s property
in the bankruptcy proceeding. Upon termination of the estate,
the estate’s status as a separate parallel taxpayer ends and its
unused tax attributes transfer to the debtor. Id.Although a debtor may succeed to the estate’s NOLs at the
termination of the estate, section 1398(j)(2)(B) places certain
limitations on a debtor’s ability to use NOLs. Section
1398(j)(2)(B) provides the following rules with respect to net
operating losses: “The debtor may not carry back to a taxable
year before the debtor’s taxable year in which the [bankruptcy]
case commences any carryback from a taxable year ending after the
case commences.” This section expressly prohibits a debtor from
carrying back the estate’s or the debtor’s postcommencement
- 32 -
losses to prepetition taxable years.12 We note that section
1398(j)(2)(B) applies with respect to “any carryback from a
taxable year ending after the case commences.” The use of the
all-inclusive adjective “any” in section 1398(j)(2)(B) would be
inclusive of the estate’s NOLs that are succeeded to by the
debtor. Accordingly, section 1398(j)(2)(B) prohibits only
carrybacks to precommencement years and does not place any
limitation on postcommencement years.13
The use of the bankruptcy commencement date in section
1398(j)(2)(B), to demarcate the earliest year to which a loss may
be carried back as well as the earliest year from which such a
loss may emanate, appears to favor petitioner’s position that he
may carry forward the NOLs received from the bankruptcy estate to
postcommencement years (1995 and forward). The purpose of
section 1398 is achieved during the bankruptcy by causing the
estate to be responsible for income attributable to assets which
are part of the bankruptcy estate. In that regard, the debtor is
12
No reference is made in sec. 1398(j)(2)(B) to the
carryback of precommencement NOLs to precommencement years.
Whether such a carryback is permitted is not a matter that need
be decided with respect to the factual circumstances presented in
this case.
13
We recognize that sec. 1398(g)(1) uses the word
“carryovers” in describing the attributes to which the debtor may
succeed, but the operative language, as discussed above,
indicates that the use of the word “carryovers” was not intended
as a limitation. Rather, the word “carryovers” appears to
reference the movement of the attribute from the estate to the
debtor.
- 33 -
responsible for the income tax attributes for any assets that the
debtor retains outside of the bankruptcy proceeding. In effect,
the statute creates two separate, but parallel, taxpayers during
the bankruptcy estate, followed by the recombination of both
their attributes into one upon the estate’s termination.14
Significantly, with respect to the tax attributes, the
debtor/taxpayer is the predecessor to and successor of the
bankruptcy estate.
The parties agree that section 1398 permits a debtor to
carry forward either losses sourced in tax years prior to the
bankruptcy commencement or losses which the debtor acquired from
the estate. The dispute concerns whether the losses may be
carried forward from the commencement of the bankruptcy
proceeding or are limited to the period beginning with the
termination of the estate. So, for example, we consider whether
petitioner may carry forward his own prebankruptcy NOL, to the
extent not used or absorbed by the estate, to his 1995, 1996,
and/or 1997 tax years. This matter is further complicated by the
two parallel but separate taxpayers (estate and debtor) for the
1995, 1996, and 1997 tax years. Ultimately, the question is
whether the bankruptcy estate becomes the preeminent or sole
taxpayer (to petitioner’s exclusion) for purposes of carryforward
14
We note that only the estate is expressly permitted to
carry back losses to precommencement years during the bankruptcy.
Sec. 1398(j)(2)(A).
- 34 -
of pretermination NOLs to the bankruptcy years; in other words,
whether petitioner is limited to posttermination (1997 and later)
year carryforwards because of the estate’s application of the
debtor’s precommencement losses and the estate’s losses to any of
the debtor’s precommencement and the estate’s postcommencement
income. Although the statute expressly prohibits carrybacks by
the debtor with respect to years before the commencement of the
bankruptcy, there is no such limitation with respect to
carryforwards to postcommencement years.
Because of the parallel treatment on the income side of the
equation (requiring the debtor and the estate to report only the
income to which each is entitled), it follows that the debtor’s
precommencement and the estate’s losses, to the extent not fully
absorbed during the bankruptcy years, should be applied to any
parallel income of the debtor during those same years. Although
the ordering of such losses (computation and application) could
become complex, it is, nevertheless, appropriate. There is
nothing in section 1398 which would prohibit such treatment.15
Indeed, the approach of section 1398 regarding the income side
would seem to promote this result with respect to the losses. If
a debtor were unable to apply post- or pre-bankruptcy losses to
15
Other than the limitation on the debtor’s ability to
apply carrybacks to prebankruptcy years, sec. 1398 does not
provide any rules or limitations as to the calculation or use of
carrybacks or carryovers of NOLs. Sec. 1398 references sec. 172
for such matters.
- 35 -
reduce the debtor’s nonbankruptcy income realized during the
bankruptcy, those losses might never be used.16 It is unlikely
that such a result was intended.
We must, however, also consider section 172, which defines
the key terms and provides for the computations of net operating
losses, carrybacks, and carryforwards. Subsections (g)(1) and
(i) of section 1398 each provide that a debtor succeeds to loss
carryovers under section 172. Section 172(a) allows a deduction
for the taxable year of “an amount equal to the aggregate of (1)
the net operating loss carryovers to such year, plus (2) the net
operating loss carrybacks to such year.” The allowable carryback
and carryforward periods for the taxable years at issue are 3
years and 15 years, respectively. See sec. 172(b).17
Section 172(b)(2), in pertinent part, provides:
Amount of carrybacks and carryovers.--The entire amount
of the net operating loss for any taxable year * * *
shall be carried to the earliest of the taxable years
to which * * * such loss may be carried. The portion
of such loss which shall be carried to each of the
other taxable years shall be the excess, if any, of the
amount of such loss over the sum of the taxable income
for each of the prior taxable years to which such loss
may be carried.
16
The losses could be carried forward, but may be lost if
subsequent years’ gains are insufficient to absorb the losses.
17
The amendments to sec. 172 by the Taxpayer Relief Act of
1997, Pub. L. 105-34, sec. 1082(a)(1) and (2), 111 Stat. 950,
revised the allowable carryback and carryforward periods to 2 and
20 years, respectively. These amendments do not apply to
petitioner’s 1995 and 1996 tax years because the amendment is
effective for years after Aug. 5, 1997.
- 36 -
Section 1.172-1(b), Income Tax Regs., also describes the
steps to be taken to ascertain an NOL deduction for a given
taxable year. It describes NOL carryovers from “preceding
taxable years” and NOL carrybacks from such “succeeding taxable
years”. An NOL deduction from any given year maintains its
character of arising in that year when carried back or carried
forward. See sec. 1.172-6, Income Tax Regs. In addition,
section 1.172-4(a)(3), Income Tax Regs., provides:
The amount which is carried back or carried over to any
taxable year is the net operating loss to the extent it
was not absorbed in the computation of the taxable (or
net) income for other taxable years, preceding such
taxable year, to which it may be carried back or
carried over.
Section 172, therefore, requires that the losses be carried
back and forward in a certain order and places outer limits on
the years to which the losses may be applied. The regimen of
section 172 also provides that the year from which the loss
emanates does not change. Therefore, losses acquired by the
estate or acquired or reacquired by the debtor would be time
limited according to the source year of the loss.
Accordingly, sections 1398 and 172 do not circumscribe
petitioner’s ability to carry forward prepetition NOLs that he
succeeded to from the bankruptcy estate. This view is supported
in the following dicta:
Any remaining NOL belonging to the estate will be
returned to the debtor-taxpayer after the discharge in
bankruptcy and termination of the estate. Sec.
- 37 -
1398(i). The debtor is then free to use the NOL as a
carryforward, section 1398(i), or carryback, as long as
the NOL arose before the commencement of the bankruptcy
case, section 1398(j)(2)(B). [Kahle v. Commissioner,
T.C. Memo. 1997-91.]
See also McGuirl v. Commissioner, T.C. Memo. 1999-21.
Petitioner argues that he succeeded to NOLs that were
incurred by the operation of the bankruptcy estate and that
section 1398(j)(2)(B) limits only his ability to carry back such
NOLs to his taxable years that preceded the commencement of his
bankruptcy case. Thus, he argues, he may use the NOLs in
postcommencement tax years. We agree with petitioner that the
losses succeeded to from the estate may be used, to the extent
permitted in section 172, in the debtor’s taxable years beginning
with the year in which the bankruptcy commenced.
Some commentators have drawn an analogy between section
1398(g) and (i), and section 642(h), which governs the
availability of a trust’s or estate’s unused loss carryovers to
the beneficiaries. In section 642(h) it is clear that a
beneficiary may only carry forward the trust’s or estate’s unused
loss carryovers beginning with the year the trust or estate
terminates. The analogy was likely drawn because of the
acquisition of a trust’s or estate’s tax losses upon the
termination of the trust or estate. The analogy diminishes in
significance, however, because of an important distinction
between the section 642(h) situation and the section 1398
- 38 -
situation we consider in this case. In the section 642 setting,
the estate or trust and the beneficiary are wholly separate
taxpayers, and a carryback to years before the commencement of
the estate or trust would not be a logical extension of the
succession concept in that setting. Conversely, a bankruptcy
estate subsists as a parallel portion of the same taxpayer, the
debtor. The bankruptcy estate is allowed to use the debtor’s
precommencement losses to offset any portion of the estate’s
income during the bankruptcy proceeding. Upon the termination of
the bankruptcy estate, the losses of the bankruptcy estate
received by the debtor may, in part, include the debtor’s
precommencement losses. Those differences make inappropriate any
attempt to draw an analogy between section 1398(g) and (i), and
section 642(h).18
The parties have not provided any precedent or in-depth and
consequential deliberation concerning the question we consider.
Although a few cases have peripherally focused on this question,
no analysis or legislative history exists from which guidance may
prudently be sought. Respondent referenced a few commentators’
prognoses of how losses from a bankruptcy would be treated.
Those commentaries are terse and contain no analysis, policy
18
As previously explained, sec. 1398 contemplates the use
of the debtor’s tax attributes by the bankruptcy estate and their
return to the debtor upon the termination of the estate. This
same reasoning distinguishes the analogy to sec. 642(h).
- 39 -
considerations, or precedents in support of the comments or
conclusions reached.19 Accordingly, we place no reliance on
these extraneous offerings.
We therefore hold that petitioner is entitled to carry
forward losses inherited from the bankruptcy estate and those to
which the debtor was already entitled in accord with section 172
and the underlying regulations. Those losses may be applied, in
accord with the provisions of section 172, for the year of the
commencement of the bankruptcy and later years.
V. CBM and Bankruptcy Estate Payments to Petitioner
Petitioner argues that the more than $2 million in payments
received from CBM were dividends or profits to the Benton estate
on account of its ownership of shares in CBM. Petitioner further
asserts that the payments from CBM and a $25,000 payment he
received from the Benton estate constituted loans to him from the
Benton estate. Finally, petitioner contends that the loans were
discharged as part of the plan and nontaxable to him pursuant to
section 108(a)(1)(A).
Respondent argues that petitioner received the payments from
CBM and the Benton estate as compensation under a claim of right
without restriction as to disposition.
19
McQueen & Williams, Tax Aspects of Bankruptcy Law and
Practice, sec. 18-23 (2d ed. 1995); Newton & Bloom, Bankruptcy
and Insolvency Taxation, sec. 2.16 (John Wiley & Sons, 1991);
Tatlock, Discharge of Indebtedness, Bankruptcy, and Insolvency,
540-2d Tax Mgmt. (BNA), at A-37 (2003).
- 40 -
Upon a careful review of the record and analyzing factual
inferences in a manner most favorable to the party opposing
summary judgment, we conclude that genuine issues of material
fact exist relating to this issue. See Dahlstrom v.
Commissioner, 85 T.C. at 821. Accordingly, summary judgment is
inappropriate with respect to this issue.
An appropriate order
will be issued.