Next time, take the cash. A corporation decided a tax deduction from walking away from securities it had paid $98.6 million for would be worth more than the $20 million in cash it had been offered for them. The Tax Court yesterday told them that they made a big mistake.
Gold Kist, Inc. bought the securities issued by Southern States Cooperative, Inc. and Southern States Capital Trust in 1999. The issuers offered to redeem the securities from Gold Kist in 2004 for $20 million. (Gold Kist was later acquired by Pilgrims Pride Corp, which inherited Gold Kist’s tax history.)
Gold Kist believed that it would get an ordinary loss deduction if it simply abandoned the securities, vs. a capital loss on the sale. Ordinary losses are fully deductible, while corporate capital losses are only deductible against capital gains, and they expire after five years. A $98.6 million ordinary loss would be worth about $34.5 million in tax savings, which would be worth more than $20 million cash and a capital loss, which can only offset capital gains, and only those incurred in the nine-year period beginning in the third tax year before the loss.
Unfortunately, the Tax Court found a flaw in the plan: Sec. 1234A. It reads:
§ 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 preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).
The taxpayer said that Sec. 1234A didn’t apply, according to the court:
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.
The taxpayer said the legislative history of the section supported their argument. The Tax Court thought otherwise:
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.
The taxpayer also said that if that’s what Congress meant, the IRS would have revised Rev. Rul. 93-80, which allows an ordinary loss on certain abandonments of partnership interests. The Tax Court responded:
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 partnership 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.
So it’s a capital loss only for the taxpayer.
Presumably the Gold Kist board didn’t decide to go for the ordinary loss on its own. Somewhere along the way a tax advisor told them that this would work. That person can’t be very happy today for advising the client to walk away from $20 million in cash.
Quad City Times reports Grassley predicts tax credits extensions, but not until 2014:
There won’t be any extension before Christmas, Grassley predicted, but not because of political opposition to the credits. Based on past performance, he said, Congress will return after the New Year and approve four dozen or more tax credits.
“There are a lot of economic interests” represented in the tax credits, he said. Those interest groups collectively “put a lot of pressure on Congress to re-institute the credits.”
The delay, Grassley said, can be attributed to the ongoing discussion about “massive tax reform.”
Senator Grassley has more insight about what will happen than I do, but I can”t share his faith that the lobbyists will overcome Congressional dysfunction. I had hoped any extenders would be included in the budget deal announced this week, and they weren’t.
Actually, I would prefer that the extenders not be extended at all rather than passed temporarily once again. The whole process of passing temporary tax breaks is a brazen accounting lie. Congressional budget rules score temporary provisions as if they will really expire, even when they have been extended every time they expire. Once again, behavior that would lead to prison in the private sector is just another day in Congress.
Roberton Williams, Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More:
The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes.
David Brunori, States Should Just Say No to Boeing (Tax Analysts Blog):
Boeing is acting rationally — politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.
Well, it would be hard to respect them less.
William McBride, Obama: Cut the Corporate Tax Rate to Help the Poor (Tax Policy Blog):
Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere?
Corporate rate cuts would be a good thing, but don’t forget that most business income nowadays is reported on individual returns.
Joseph Thorndike, Congress Is Making a Bad Deal on the Budget, but One Republican Has a Better Idea (Tax Analysts Blog)
It’s amazing what passes for success in Washington these days. Budget negotiators on Capitol Hill have delivered a non-disaster, cobbling together a pathetic half-measure that pleases no one and accomplishes almost nothing.
True, it allows Democrats and Republicans to avoid abject failure, which is no small thing, given recent history. These days, just keeping the wheels from flying off qualifies as statesmanship.
Considering what happens when Congress “accomplishes” something (Obamacare, anyone?), let us praise them for doing as little as possible.
Robert D. Flach has wise counsel for clients: PUT IT IN WRITING.
So if you have a tax question you want to ask your preparer, instead of picking up the phone submit the question in an email, with all the pertinent facts. And if you receive a notice from the IRS or your state, mail it to your tax pro immediately.
Paul Neiffer, Is it Time for an IC-DISC. If you produce for export, an IC-DISC can turn some ordinary income into dividend income, taxed at a lower rate.
TaxProf, The IRS Scandal, Day 217
Cara Griffith, Improving the Transparency of New York’s Tax Collection Process (Tax Analysts Blog)
Jack Townsend, Are Brady Violations Epidemic? A federal appeals judge says prosecutors routinely withhold evidence that would help defendants.
News from the Profession: The PCAOB Is Grateful To The PCAOB For the PCAOB’s Work (Going Concern)
Tags: Anthony Nitti, Cara Griffith, David Brunori, Expiring provisions, extenders, Going Concern, Jack Townsend, Joseph Thorndike, Judge Dawson, Kyle Pomerleau, Paul Neiffer, Robert D Flach, Roberton Williams, tax court, TaxProf, William Perez