Judges: WHERRY
Attorneys: Gary S. Colton, Jr. , Daniel A. Dumezich , and Richard E. Kurkowski , for petitioner. Kevin G. Croke , Davis G. Yee , and Matthew A. Williams , for respondent.
Filed: Aug. 30, 2012
Latest Update: Nov. 21, 2020
Summary: THRIFTY OIL CO. & SUBSIDIARIES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 1376–10. Filed August 30, 2012. P filed consolidated Federal income tax returns for the years at issue (TYE Sept. 30, 2000, 2001, and 2002) on which it claimed environmental remediation expense deductions. R disallowed the claimed deductions after determining that they were each the second tax deduction P had claimed for a single economic loss. The first deduction had been reported as a cap- ita
Summary: THRIFTY OIL CO. & SUBSIDIARIES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 1376–10. Filed August 30, 2012. P filed consolidated Federal income tax returns for the years at issue (TYE Sept. 30, 2000, 2001, and 2002) on which it claimed environmental remediation expense deductions. R disallowed the claimed deductions after determining that they were each the second tax deduction P had claimed for a single economic loss. The first deduction had been reported as a cap- ital..
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THRIFTY OIL CO. & SUBSIDIARIES, PETITIONER v.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 1376–10. Filed August 30, 2012.
P filed consolidated Federal income tax returns for the
years at issue (TYE Sept. 30, 2000, 2001, and 2002) on which
it claimed environmental remediation expense deductions. R
disallowed the claimed deductions after determining that they
were each the second tax deduction P had claimed for a single
economic loss. The first deduction had been reported as a cap-
ital loss on P’s Federal income tax return for TYE Sept. 30,
1996, and carried forward, with the last portion claimed on
P’s Federal income tax return for TYE Sept. 30, 2001. Held:
P is not entitled to the environmental remediation expense
deductions claimed on its Federal income tax returns for TYE
Sept. 30, 2000, 2001, and 2002.
Gary S. Colton, Jr., Daniel A. Dumezich, and Richard E.
Kurkowski, for petitioner.
Kevin G. Croke, Davis G. Yee, and Matthew A. Williams,
for respondent.
OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of income tax deficiencies determined by
respondent for petitioner’s taxable years ended (TYE) Sep-
tember 30, 2000, 2001, and 2002. In its simplest form, the
issue is whether, given Charles Ilfeld Co. v. Hernandez, 292
U.S. 62 (1934), and its progeny, petitioner is entitled to
environmental remediation expense deductions claimed for
the years at issue when, economically, those same losses
were claimed as capital loss deductions for years not before
the Court.
198
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 199
Background
This case was submitted fully stipulated pursuant to Rule
122. 1 The parties’ stipulations of issues and stipulations of
facts, with accompanying exhibits, are incorporated herein by
this reference. Petitioner is a California corporation and its
subsidiaries with its principal place of business in Santa Fe
Springs, California.
I. Overview of Petitioner
Thrifty Oil Co. (Thrifty) is the common parent of an affili-
ated group of corporations that for 1995 through 2002 (rel-
evant years) filed consolidated Federal income tax returns
using a September 30 yearend and the accrual method of
accounting. During the relevant years Thrifty’s direct and
indirect subsidiaries included: (1) Earth Management Co.
(Earth Management); (2) Golden West Refining Co. (Golden
West); (3) Golden West Distribution Co. (Distribution Co.);
and (4) Benzin Supply Co. (Benzin).
Ted Orden was the president and controlling shareholder
of petitioner during the relevant years. Moshe Sassover,
Barry Berkett, and Robert Flesh are sons-in-law of Ted
Orden. Mr. Sassover and Mr. Berkett were employees of
Thrifty and Mr. Flesh worked for Thrifty and the Thrifty
consolidated group as an independent contractor during the
relevant years.
II. Refinery Property and Bankruptcy
In 1983 Thrifty, through Golden West, acquired property
in Santa Fe Springs, California, on which an oil refinery was
located (Golden West Refinery property). 2 The oil refinery
proved unprofitable, and in February 1992 refining oper-
ations were suspended. As a result of refining operations, the
Golden West Refinery property had suffered environmental
contamination, leaving Thrifty and Golden West with the
responsibility for remediating the environmental problems.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986
(Code), as amended and in effect for the years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2 Before Sept. 28, 1998, Distribution Co., was the holding company for Golden West. On Sept.
28, 1998, Distribution Co. was merged into Golden West. Until the merger, Golden West was
100% owned by Distribution Co., which was 100% owned by Thrifty. After the merger, Golden
West was 100% owned by Thrifty.
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200 139 UNITED STATES TAX COURT REPORTS (198)
On July 31, 1992, Thrifty and certain of its subsidiaries
including Golden West filed for bankruptcy protection under
chapter 11 of the Bankruptcy Code. See Bankruptcy Petition
In re Thirfty Oil, No. 92–09132–LA11 (Bankr. S.D. Cal.). On
February 16, 1995, the bankruptcy court confirmed the plan
of reorganization. Petitioner’s environmental remediation
liabilities, which had a major impact on the chapter 11
reorganization, were not discharged.
III. Environmental Remediation Strategy
In 1996 petitioner, on the advice of individuals at Deloitte
& Touche LLP (Deloitte), including Robert Wenger, peti-
tioner’s long-time adviser, decided to enter into a strategy to
consolidate the contingent environmental remediation liabil-
ities into one entity (environmental remediation strategy). 3
As of September 1996, the contingent environmental remedi-
ation liabilities with respect to the Golden West Refinery
property totaled $29,070,000.
In an interoffice memorandum dated August 1, 1996,
detailing the environmental remediation strategy, Mr.
Sassover stated:
As a result of the strategy, Thrifty may be able to generate a capital loss
of approximately $60 million. The basic concept is to contribute Thrifty
and Golden West Refining’s environmental liabilities to a subsidiary of
Thrifty while also contributing intercompany receivables. * * * Due to an
IRS published ruling and the consolidated return regulations, the trans-
action with the subsidiary generates a capital loss immediately. When the
consolidated group expends funds on the environmental remediation, the
consolidated group is entitled to a deduction.
On September 27, 1996, Golden West and Earth Manage-
ment engaged in a section 351 transaction. For 90 shares of
Earth Management stock, Golden West transferred a
$29,100,000 promissory note executed by Benzin (Benzin
note) in favor of Golden West to Earth Management and
3 In addition to the environmental liabilities at the Golden West Refinery property, Thrifty
faced significant costs due to environmental regulations at gasoline stations that it operated.
The environmental liabilities associated with the gasoline stations were estimated to be
$19,126,000. Petitioner also entered into the environmental remediation strategy with respect
to these environmental liabilities; the transaction gave rise to a $5,836 capital loss. However,
because respondent has not challenged the transaction involving Thrifty’s liabilities at the gaso-
line stations, we need not discuss it further. For a full expose´ of Deloitte’s proprietary ‘‘Double
Deduction’’ tax product strategy during this timeframe see Gerdau Macsteel, Inc. v. Commis-
sioner, 139 T.C. 67, 82–84 (2012).
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 201
Earth Management assumed Golden West’s $29,070,000
contingent environmental remediation liabilities.
The Benzin note required Benzin to pay Golden West prin-
cipal of $29,100,000 together with interest at a rate of 11.5%
per annum calculated from September 20, 1996, until the
principal sum was paid in full. The Benzin note was a bal-
loon note and specified a maturity date of September 30,
2006. As of May 16, 2011, no payments of principal or
interest had been made on the Benzin note. The Benzin note
was intended to provide Earth Management with additional
collateral to facilitate borrowing any funds needed to pay the
environmental remediation liabilities as they came due, but
it was never pledged as collateral on any borrowing by Earth
Management.
Golden West claimed a tax basis in its 90 shares of Earth
Management stock equal to the face value of the Benzin note
($29,100,000) without adjusting for the $29,070,000 of contin-
gent environmental remediation liabilities Earth Manage-
ment assumed. See secs. 358(a), (d), 357(c)(3). 4 Petitioner
filed a statement with its TYE September 30, 1996, Federal
income tax return, disclosing the tax treatment of the trans-
action (disclosure statement). The disclosure statement
reported that Golden West had transferred a promissory note
with a fair market value (FMV) and tax basis of $29,100,000
and environmental remediation liabilities with an FMV of
$29,070,000 and tax basis of zero to Earth Management for
total property transferred with an FMV of $30,000 and a tax
basis of $29,100,000. The disclosure statement also reported
that the 90 shares of Earth Management stock Golden West
received had an FMV of $400 per share. 5
4 In cases with similar factual backgrounds, the Courts of Appeals for the Fourth and Federal
Circuits have both held that pursuant to the Code, the basis of the stock received was increased
by the value of the promissory note transferred but not reduced by contingent liabilities as-
sumed. Coltec Indus. Inc. v. United States, 454 F.3d 1340, 1351 (Fed. Cir. 2006); Black & Decker
Corp. v. United States, 436 F.3d 431, 434–440, 443 (4th Cir. 2006). The courts did not stop there.
In Coltec Indus. Inc., the Court of Appeals for the Federal Circuit went on to find that the trans-
fer ‘‘had no meaningful economic purpose, save the tax benefits to Coltec’’ and ‘‘must be ignored
for tax purposes.’’ Coltec Indus. Inc., 454 F.3d at 1347. In Black & Decker Corp., the Court of
Appeals for the Fourth Circuit remanded the case to the lower court for a determination of
whether the transaction was a sham. Black & Decker Corp., 436 F.3d at 442–443. The case then
settled before trial. Today, sec. 358(h) would require that basis be reduced by the amount of
the transferred liabilities.
5 Ninety shares received at a total value of $30,000 could lead to the conclusion that each
share of stock was worth $333.33. And it is not exactly clear to this Court why each share of
stock was reported as being worth $400. However, we surmise it was because Earth Manage-
Continued
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202 139 UNITED STATES TAX COURT REPORTS (198)
IV. Double the Benefits
A. First Tax Benefit
On September 30, 1996, Golden West sold its Earth
Management stock in equal amounts to Mr. Sassover, Mr.
Berkett, and Mr. Flesh for $8,400 each (total of 90 shares
sold for $25,200 or $280 per share). 6 Petitioner reported a
capital loss of $29,074,800 on its TYE September 30, 1996,
Federal income tax return from the sale (amount realized of
$25,200 less basis of $29,100,000). Petitioner deducted
$2,882,469 of the capital loss on its TYE September 30, 1996,
Federal income tax return, and carried the remainder for-
ward.
Petitioner deducted a total of $18,347,205 of the capital
loss on its TYE September 30, 1996, 1997, 1998, and 1999,
Federal income tax returns. 7 Each of these four years was
closed to adjustment by the statute of limitations at the time
of this dispute. Petitioner claimed deductions for the
remaining $10,727,595 of the capital loss on its TYE Sep-
tember 30, 2000 and 2001, Federal income tax returns. As
discussed infra, the capital loss carryforwards petitioner
claimed on its TYE September 30, 2000 and 2001, Federal
income tax returns were disallowed by respondent in his
notice of deficiency.
B. Second Tax Benefit
Earth Management made expenditures during the relevant
years for the actual cleanup of the Golden West Refinery
property. Thrifty provided the funds Earth Management used
to pay for the costs related to the environmental cleanup. For
these expenditures, petitioner claimed environmental remedi-
ation expense deductions of $339,435, $1,854,405, and
ment was not a new subsidiary formed solely for the purpose of the environmental remediation
strategy and therefore the $30,000 worth of property Golden West transferred was not the only
property Earth Management held. See infra note 6.
6 Deloitte determined the $280-per-share value by discounting the $400-per-share value re-
ported in the disclosure statement by 30% to account for the stock’s lack of marketability. In
addition to the 90 shares of Earth Management stock Golden West sold, there were another 150
shares of Earth Management common stock outstanding. Sixty of these shares had been re-
ceived by Thrifty when it entered into the environmental remediation strategy with regard to
the environmental remediation liabilities at Thrifty’s gasoline stations. See supra note 3. The
remaining 100 shares were also held by Thrifty and had been outstanding for some time.
7 Specifically, petitioner claimed capital loss deductions of $2,882,469, $5,348,310, $3,755,873,
and $6,360,553 on its Federal income tax returns for TYE September 30, 1996, 1997, 1998, and
1999, respectively.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 203
$14,505,358 on its TYE September 30, 1997, 1998, and 1999,
Federal income tax returns. These years are closed to adjust-
ment by the statute of limitations. Petitioner claimed
environmental remediation expense deductions for the years
at issue in the following amounts:
TYE Sept. 30 Amount
2000 ................................................................... $3,109,962
2001 ................................................................... 4,108,429
2002 ................................................................... 3,891,571
Total ............................................................... 11,109,962
V. Respondent’s Determination
Respondent issued a notice of deficiency dated October 22,
2009, in which he disallowed capital loss carryovers claimed
for TYE September 30, 2000 and 2001, of $1,426,576 and
$9,301,019, respectively, 8 and environmental expense deduc-
tions claimed for TYE September 30, 2000, 2001, and 2002, of
$4,370,802, $4,108,429, and $3,891,571, respectively. 9 The
stated reasons for disallowing both the capital loss carryovers
and the environmental remediation expense deductions
included that they ‘‘duplicate tax benefits already claimed for
a single economic loss.’’ Respondent determined the following
deficiencies and penalties:
Penalties
TYE Sept. 30 Deficiency Sec. 6662(a) Sec. 6662(h) 1
2000 $1,552,450 $310,490 ---
2001 5,192,608 287,590 $1,501,863
2002 1,325,984 265,197 ---
1 Respondent determined that petitioner was liable for a sec. 6662(h)
40% gross valuation misstatement penalty for the portion of the un-
derpayment attributable to the capital loss carryforwards.
Petitioner timely petitioned this Court. In a stipulation of
settled issues filed April 8, 2011, petitioner conceded that its
8 The $1,426,576 capital loss disallowance for TYE September 30, 2000, resulted in no tax ef-
fect for that year. Instead it reduced the capital loss carryover to the subsequent tax year and
when combined with the disallowed 2001 capital loss carryover of $9,301,019 created a
$10,727,595 adjustment to the capital loss for TYE September 30, 2001.
9 See infra p. 204 and note 10 for a discussion of why respondent disallowed environmental
remediation expense deductions for TYE September 30, 2000, in an amount greater than that
claimed by petitioner.
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204 139 UNITED STATES TAX COURT REPORTS (198)
capital gain for TYE September 30, 2001, should be increased
by $10,727,595, and respondent conceded petitioner was not
liable for a section 6662(a) or (h) accuracy-related penalty
with respect to the disallowed capital loss carryovers. In a
stipulation of settled issues filed October 27, 2011,
respondent conceded petitioner was not liable for a section
6662(a) accuracy-related penalty with respect to the dis-
allowed environmental remediation expense deductions. In a
stipulation of settled issues filed December 13, 2011, the par-
ties stipulated that petitioner claimed a deduction for
environmental remediation expenses incurred in cleaning up
the Golden West Refinery property for TYE September 30,
2000, of only $3,109,962, and accordingly respondent con-
ceded $1,260,840 of environmental remediation expense
deductions originally disallowed in the notice of deficiency. 10
On December 21, 2011, the parties filed a joint motion to
submit this case under Rule 122. We granted the joint
motion on January 3, 2012, and set a briefing schedule. On
February 14, 2012, Duquesne Light Holdings, Inc. & Subsidi-
aries (Duquesne) filed a motion for leave to file a brief
amicus curiae in support of petitioner. 11 We granted
Duquesne’s motion and filed the amicus brief on March 21,
2012. On May 9, 2012, respondent’s reply to Duquesne’s
amicus brief was filed. On May 30, 2012, Duquesne’s
response to respondent’s reply was filed.
Discussion
After the stipulations, we are left with just one question:
Is petitioner entitled to environmental remediation expense
deductions claimed on its Federal income tax returns for TYE
September 30, 2000, 2001, and 2002? Respondent’s sole argu-
10 For financial accounting purposes, Earth Management’s assumption of Golden West’s con-
tingent liabilities was accounted for by the creation of a reserve account. Specifically, the as-
sumption was reflected on Earth Management’s books as a $29,070,000 credit to an account en-
titled ‘‘Environmental Reserve—GWR’’. When the exact amount and the payee of an environ-
mental expense were determined, the reserve account would be debited and accounts payable
credited. When payments were made for the specific accounts payable, cash would be credited
and accounts payable debited. Additionally, the reserve account was reviewed at the end of each
year; and if an adjustment was needed, a postclosing entry would be made the following year.
In a year in which there were no postclosing adjustments to the reserve account, the tax deduc-
tion would equal the net change in the reserve account. For TYE September 30, 2000, the re-
serve account showed a net decrease of $4,370,802. This is where respondent obtained the
amount he disallowed in the notice of deficiency.
11 Duquesne currently has a case pending before this Court at docket No. 9624–10.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 205
ment is that the claimed deductions duplicate $18,347,205 in
capital loss deductions petitioner claimed for years not before
the Court, and hence petitioner is not entitled to up to
$18,347,205 of the claimed environmental remediation
expense deductions. 12
I. Double Deductions—Generally, the Tax Court, and the
Ninth Circuit
A. Current State of the Law
Double deductions (or their practical equivalent) for the
same economic loss are impermissible absent a clear declara-
tion of congressional intent. Charles Ilfeld Co., 292 U.S. at
68; Marwais Steel Co. v. Commissioner, 354 F.2d 997, 998–
999 (9th Cir. 1965) (stating the court would follow the mes-
sage in Charles Ilfeld Co. ‘‘in cases having any similarity at
all on double deductions for a single economic loss’’), aff ’g 38
T.C. 633 (1962); see also McLaughlin v. Pac. Lumber Co.,
293
U.S. 351, 355 (1934) (holding that ‘‘a consolidated return
must truly reflect taxable income of the unitary business and
consequently it may not be employed to enable the taxpayer
to use more than once the same losses for reduction of
income’’); Spokane Dry Goods Co. v. Commissioner, 125 F.2d
865, 867 (9th Cir. 1942) (noting that the court was con-
strained ‘‘by the rule against interpretations which allow a
double deduction’’), aff ’g 43 B.T.A. 793 (1941); Willamette
Indus., Inc. v. Commissioner, T.C. Memo. 1991–389 (acknowl-
edging that ‘‘[a] fundamental tax principle is that a taxpayer
cannot receive a double deduction or claim a double credit for
the same item’’); Mo. Pac. Corp. v. United States, 5 Cl. Ct.
296, 302 (1984) (decreeing that it is a fundamental principle
that one cannot get a double deduction for the same
expense). This rule applies even when the deductions are
based on separate and distinct sections of the Code. Rome I,
Ltd. v. Commissioner, 96 T.C. 697, 704–705 (1991) (citing
Charles Ilfeld Co., 292 U.S. at 68, United States v. Skelly Oil
Co., 394 U.S. 678, 684 (1969), and O’Brien v. Commissioner,
79 T.C. 776, 786–788 (1982), aff ’d and remanded on other
issues, 771 F.2d 476 (10th Cir. 1985)).
12 Whether the claimed deductions meet the deductibility requirements of secs. 162 and 461
is not at issue. Respondent concedes that they do.
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206 139 UNITED STATES TAX COURT REPORTS (198)
To find a clear declaration of congressional intent, a tax-
payer must point to ‘‘a specific statutory provision author-
izing a double deduction’’. United Telecomms., Inc. v.
Commissioner, 589 F.2d 1383, 1388 (10th Cir. 1978), aff ’g
65
T.C. 278 (1975). General allowance provisions are insuffi-
cient; and when the statute is silent, it is presumed that
double deductions are not allowed. O’Brien v. Commissioner,
79 T.C. at 786–788; see also Rome I, Ltd. v. Commissioner,
96 T.C. at 704–705 (finding an impermissible double tax ben-
efit when a taxpayer claimed both a tax credit and a chari-
table contribution deduction); Brenner v. Commissioner, 62
T.C. 878, 884–885 (1974) (pointing out that section 162(a) did
not reflect a ‘‘clear declaration of intent by Congress’’ to allow
a double deduction).
B. Tax Court
The Tax Court has applied the Supreme Court’s
pronouncement of the Ilfeld doctrine in several cases, three
of which we will examine here. In Woods Inv. Co. v. Commis-
sioner, 85 T.C. 274, 276–277 (1985), the taxpayer sold all of
the stock of four wholly owned subsidiaries. The subsidiaries
had used accelerated methods to depreciate their business
property when permitted. Id. at 276. The issue was the
amount of the taxpayer’s basis in the stock of its subsidiaries
for purposes of determining the gain on the sale. Id. at 277.
The Court first looked at section 1.1502–32, Income Tax
Regs., which provided rules for adjusting the basis of a
subsidiary’s stock held by a parent. Id. at 278. Pursuant to
this section, basis adjustments were made in accordance with
the subsidiaries’ earnings and profits. 13 Id. at 278–279. Then
the Court looked at section 312(k), which provided that in
computing earnings and profits, the allowance for deprecia-
tion was deemed to be the amount which would be allowable
if the straight-line method of depreciation were used. Id. at
278.
13 The parent’s basis in the stock of its subsidiary is adjusted by the difference between the
required positive adjustments and the required negative adjustments. Sec. 1.1502–32, Income
Tax Regs. Generally, the amount of a subsidiary’s yearend undistributed earnings and profits
that increases consolidated taxable income results in a positive adjustment and increases the
parent’s basis in the stock. Sec. 1.1502–32(b)(1)(i), Income Tax Regs. A loss of a subsidiary that
is used to reduce the affiliated group’s consolidated income results in a negative adjustment and
decreases the parent’s basis in the subsidiary’s stock. Sec. 1.1502–32(b)(2)(i), Income Tax Regs.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 207
The taxpayer computed earnings and profits in accordance
with section 312(k), arguing this was proper. The Commis-
sioner found fault with this and argued that the taxpayer
had to use accelerated depreciation because otherwise the
taxpayer was obtaining a ‘‘double deduction’’. 14 Id. at 279.
We agreed with the taxpayer. We distinguished Charles
Ilfeld Co. on the grounds that the Supreme Court had stated
that a double deduction would not be allowed ‘‘ ‘in the
absence of a provision in the Act or regulations that fairly
may be read to authorize it’ ’’ and here there was such a
provision. Id. at 282.
Section 1.1502–32, Income Tax Regs., however, deals comprehensively with
this problem by requiring in paragraph (b)(2)(i) that the basis of the stock
of the loss subsidiary in the hands of the parent be reduced by any deficit
in the earnings and profits. That regulation also prevents a double inclu-
sion in income by providing in paragraph (b)(1)(i) that the basis of the
subsidiary’s stock be increased by the subsidiary’s undistributed earnings
and profits. Thus, even assuming petitioner is receiving a double deduc-
tion, we believe that the detailed rules in section 1.1502–32 * * * together
with section 312(k), can fairly be read to authorize the result herein, and,
therefore, Ilfeld Co. is inapplicable. [Id. at 282–283.]
We later acknowledged our holding in CSI Hydrostatic
Testers, Inc. v. Commissioner, 103 T.C. 398, 405 (1994), aff ’d,
62 F.3d 136 (5th Cir. 1995), where we stated that in Woods
Inv. we concluded Charles Ilfeld Co. was ‘‘inapplicable
because section 312(k) together with section 1.1502–32,
Income Tax Regs., authorized the result we reached.’’
Wyman-Gordon Co. & Rome Indus. Inc. v. Commissioner,
89 T.C. 207 (1987), also involved the determination of a
subsidiary’s earnings and profits. The specific issue was
whether discharge of indebtedness income realized by the
subsidiary should be included in earnings and profits,
reducing the parent’s excess loss account to zero, 15 even
14 Essentially, the lower the amount of depreciation used in the calculations, the higher earn-
ings and profit would be, which in turn would make the parent’s basis in the stock of the sub-
sidiaries higher and lead to a lower amount of gain on the sale of stock.
15 As discussed supra note 13, a parent’s basis in its subsidiary’s stock is adjusted according
to the subsidiary’s earnings and profits, the annual adjustment being the net of the positive and
negative adjustments. If a yearend net negative adjustment exceeds the parent’s basis in the
stock of a subsidiary, the parent must establish an ‘‘excess loss account’’ with respect to the
stock it owns. Sec. 1.1502–32, Income Tax Regs. When a parent corporation sells or otherwise
disposes of stock in a subsidiary, the parent is required to include in income the balance of any
excess loss account outstanding with respect to its stock in that subsidiary immediately before
the disposition event occurred. Sec. 1.1502–19(a)(1)(i), Income Tax Regs. In Wyman-Gordon Co.
Continued
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208 139 UNITED STATES TAX COURT REPORTS (198)
though the discharge of indebtedness income was not
included in consolidated taxable income pursuant to section
108(a)(1) (the subsidiary was insolvent). Id. at 215. Including
it in earnings and profits would effectively allow the affili-
ated group of corporations excessive tax benefits by avoiding
recognition of latent income otherwise existing in the excess
loss account balance. Id. The Court looked at the regulations
and found no provision as to how discharge of indebtedness
income factors into the computation of earnings and profits
and so held it should not increase earnings and profit in this
situation. Id. at 218–219. We distinguished Woods Inv. on
the grounds that there section 312(k) specifically required
earnings and profits to be computed on the basis of straight-
line depreciation, whereas in Wyman-Gordon there existed
no comparable statutory provision requiring inclusion of dis-
charge of indebtedness income in earnings and profits. Id. at
219.
Finally, in CSI Hydrostatic Testers, Inc. v. Commissioner,
103 T.C. at 403, 405, we considered the same issue as in
Wyman-Gordon. However, in the years intervening between
the two cases Congress had enacted section 312(l), which
required discharge of indebtedness income to be included in
earnings and profits. Because there was a specific provision
leading to the double deduction, the Court allowed it. Id. at
411.
These three cases illustrate how the Ilfeld doctrine has
been applied by the Court. In two of the cases, Woods Inv.
and CSI Hydrostatic, the taxpayer could point to a specific
provision showing Congress’ intent to allow the double deduc-
tions, and so we allowed the second deduction. In the third
there was no provision, and so the Court disallowed the
second deduction.
C. The Ninth Circuit
Because of this Court’s holding in Golsen v. Commissioner,
54 T.C. 742 (1970), aff ’d,
445 F.2d 985 (10th Cir. 1971), we
& Rome Indus. Inc. v. Commissioner, 89 T.C. 207 (1987), the subsidiary had realized net oper-
ating losses which reduced the consolidated taxable income and left the subsidiary with a deficit
earnings and profits account. This, in turn, reduced the parent’s basis in the subsidiary’s stock
below zero and created an excess loss account. The regulations also expressly provided that the
realization of discharge of indebtedness income not included in taxable income constitutes a dis-
position event and triggers recognition of the excess loss account. Sec. 1.1502–19(a)(2)(ii), Income
Tax Regs.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 209
are bound by precedent from the Court of Appeals for the
Ninth Circuit, the court to which this case is appealable
absent a stipulation of facts to the contrary. Three Ninth Cir-
cuit cases are of importance here: Commissioner v. Laguna
Land & Water Co., 118 F.2d 112 (9th Cir. 1941), Marwais
Steel Co. v. Commissioner, 354 F.2d 997, and Stewart v.
United States, 739 F.2d 411 (9th Cir. 1984).
In Commissioner v. Laguna Land & Water Co., 118 F.2d
at 114, the taxpayer bought a tract of land and subdivided
it into lots. In early years not before the court, an erro-
neously high basis had been applied and the entire basis
used. Id. at 114–116. The Commissioner argued that no basis
should be allocated to sales in years before the court because
this would be a double deduction. Id. at 117. The taxpayer
asserted that a proportionate amount of the true basis should
be allowed in the years at issue. Id. The Board of Tax
Appeals held for the taxpayer, and the Court of Appeals
affirmed. Important to this holding was a regulation in effect
at the time which provided:
Sale of real property in lots.—Where a tract of land is purchased with a
view to dividing it into lots or parcels of ground to be sold as such, the
cost or other basis shall be equitably apportioned to the several lots or par-
cels and made a matter of record on the books of the taxpayer, to the end
that any gain derived from the sale of any such lots or parcels which con-
stitutes taxable income may be returned as income for the year in which
the sale is made. This rule contemplates that there will be a measure of
gain or loss on every lot or parcel sold, and not that the capital in the
entire tract shall be returned. The sale of each lot or parcel will be treated
as a separate transaction, and gain or loss computed accordingly. [Id. at
114–115. 16]
The Court of Appeals found that the regulation had the effect
and force of law and mandated the result the taxpayer
sought. Id. at 115, 117–118. 17
16 The quoted regulation appeared as art. 61 of Treasury Regulation 74 promulgated under
the Internal Revenue Act of 1928. See Commissioner v. Laguna Land & Water, 118 F.2d 112,
114 (9th Cir. 1941).
17 Important here is the Court of Appeals’ statement in Commissioner v. Laguna Land &
Water, 118 F.2d at 117, that
Nor is the contention of the Commissioner correct that an over allowance of base cost to cer-
tain lots sold in earlier years makes the proper base cost deduction on other lots sold in a subse-
quent year a ‘double deduction’ such as is considered in * * * Ilfeld Co. v. Hernandez, * * *.
None of these cases holds that an improper deduction from the gross receipts from a specific
piece of property sold in one year may be corrected by refusing a deduction upon the sale of
a difference piece of property in a different year.
Continued
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210 139 UNITED STATES TAX COURT REPORTS (198)
Marwais Steel Co. v. Commissioner, 354 F.2d at 997,
involved bad debt deductions claimed by the parent on loans
made to a subsidiary and the subsidiary’s operating losses
the parent later assumed. Marwais Steel Co. (Marwais) lent
its wholly owned subsidiary, Wilmington Metal Manufac-
turing Co. (Wilmington), $57,857.35. Id. Wilmington was
never successful, and the amount was forgiven on the eve of
Wilmington’s eventual dissolution. Id. Marwais had pre-
viously claimed additions to its reserve for bad debts
resulting in tax deductions of $22,000 on its 1953 tax return
and $35,122.35 on its 1957 tax return as a result of the loans
it had made to Wilmington. Id. at 997–998. At the time of
Wilmington’s liquidation, Marwais claimed a deduction that
represented the net operating losses of $59,774.87 of Wil-
mington. Id. at 997. Specifically, Marwais claimed a deduc-
tion of $23,967.52 on its 1957 tax return and carried the
remaining $35,807.35 over to its 1958 tax return. Id. The
Commissioner argued that because Marwais had claimed
$57,122.35 in bad debt deductions, it was not entitled to
$57,122.35 of the claimed operating loss deductions because
they represented the same economic loss. Id. at 998. We
agreed with the Commissioner, and the Court of Appeals
affirmed. Id. Importantly, the Court of Appeals stated:
We conclude, as the tax court did, plausible as the position of Marwais
is, there is a message in Ilfeld Co. v. Hernandez, Collector, 292 U.S. 62,
54
S. Ct. 596,
78 L. Ed. 1127, another double tax deduction disallowed. We fol-
low taxpayer’s argument that part of what was there said was dicta. And,
of course, the sequence of facts there is reversed from what we have here.
If what it said there was dicta, we believe that it is dicta the court will
follow in cases having any similarity at all on double deductions for a
single economic loss. [Id. at 998–999; emphasis added. 18]
We do not read this case as being inconsistent with the law on double deductions. It simply
acknowledges the regulation providing that the determination of cost and the gain or loss for
each parcel should be separately determined for tax purposes. See Stewart v. United States, 739
F.2d 411, 415 (9th Cir. 1984).
18 In its amicus brief, Duquesne states: ‘‘The First Circuit Court of Appeals, however, reached
the opposite conclusion on facts very similar to Marwais.’’ See Textron, Inc. v. United States,
561 F.2d 1023 (1st Cir. 1977). Even if true, this case is not appealable in the First Circuit. We
also note Textron dealt with a parent and a subsidiary that did not file a consolidated return,
a point which was carefully noted by the court in Textron. Id. at 1026 (stating: ‘‘We have grave
doubts about the dissent’s casual eliding of the distinction between parent and subsidiary. They
are separate taxpayers. In the absence of a consolidated return, * * * treating the two corpora-
tions as one may not be justified.’’). We recognize that Marwais Steel Co. did not involve a con-
solidated return. Marwais Steel Co. v. Commissioner, 354 F.2d 997, 997 n.1 (9th Cir. 1965), aff ’g
38 T.C. 633 (1962). But petitioner files consolidated returns, thus distinguishing it from the tax-
payer in Textron.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 211
In Stewart, the taxpayers reported gain from the sale of a
water utility using the installment sale method. Stewart, 739
F.2d at 412. In determining the amount of the gain, the tax-
payers originally calculated their basis in the water utility
sold as $671,758.88 and deducted $161,593 against a
$325,000 installment payment as a return of basis for 1968,
a year closed to adjustment by the statute of limitations. Id.
at 412, 414. They then discovered they were wrong and that
the actual basis was $28,268. Id. at 412. The taxpayers
wanted to deduct a proportionate share of the true basis for
1969 and 1970 even though they had already erroneously
deducted more than the total basis for 1968. Id. at 414. The
District Court allowed the taxpayers to do so, but the Court
of Appeals reversed. Id. at 415 (citing Robinson v. Commis-
sioner, 181 F.2d 17, 18 (5th Cir. 1950), aff ’g
12 T.C. 246
(1949)). In response to the taxpayer’s reliance on Laguna
Land & Water Co., the Court of Appeals stated that
the Laguna decision rested on the fact that the regulations required the
taxpayer ‘‘to treat each parcel sold as a separate capital transaction having
a separate basic cost and yielding a separate profit in the year of its sale.’’
* * * [118 F.2d at 117.] In contrast, there is no indication that Congress
intended installment sales to be treated as a number of separate trans-
actions. Installment reporting is not even required; the taxpayer may elect
not to use it. * * * [Id.]
Petitioner, focusing on language in Commissioner v.
Laguna Land & Water Co., 118 F.2d at 117, and quoting
from Stewart, 739 F.2d at 415, contends ‘‘that the govern-
ment cannot make up for its failure to correct an erroneous
deduction in one year by disallowing a deduction in a sepa-
rate transaction.’’ Petitioner then paraphrases this language
to argue that ‘‘the government is attempting to make up for
its failure to correct an erroneous deduction in one trans-
action [Great West’s sale of its Earth Management stock] by
disallowing a deduction in a separate transaction [Earth
Management’s environmental clean-up activities with respect
to the Refinery property].’’
We do not believe the language warrants the emphasis
petitioner gives to it. It simply arose out of the regulation in
Laguna Land & Water mandating that ‘‘The sale of each lot
or parcel will be treated as a separate transaction.’’ As
already discussed supra note 17, the court in Laguna Land
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212 139 UNITED STATES TAX COURT REPORTS (198)
& Water found that regulations in effect at that time man-
dated that the sale of each lot be treated as a separate trans-
action. This was sufficient to demonstrate congressional
intent to allow the double deduction. Over 20 years after
Laguna Land & Water was decided, the Court of Appeals
held it would follow Charles Ilfeld Co. in ‘‘cases having any
similarity at all on double deductions for a single economic
loss’’. Marwais Steel Co. v. Commissioner, 354 F.2d at 998–
999. In that case, no mention was made of Laguna Land &
Water Co. or separate and different transactions. The Court
of Appeals for the Ninth Circuit, like the Tax Court, follows
the Ilfeld doctrine. If a taxpayer can point to a specific provi-
sion demonstrating congressional intent to allow the double
deduction, the second deduction would be authorized. If the
taxpayer cannot show congressional intent, then the double
deduction would not be allowed.
II. The Law Applied to Petitioner
If the deductions represent the same economic loss to peti-
tioner and petitioner cannot point to a specific provision dem-
onstrating Congress’ intent to allow the double deductions,
then the claimed environmental remediation expense deduc-
tions must be disallowed.
A. Whether the Deductions Represent the Same Economic
Loss
Petitioner asserts that the capital loss and the environ-
mental remediation expense deductions do not represent the
same economic loss. We disagree. Both the capital loss and
the environmental remediation expense deductions represent
costs associated with the cleanup of the Golden West
Refinery property. The capital loss represents the unpaid
liability, and the environmental remediation expense deduc-
tions represent the actual cost when paid. This—deducting
the unpaid liability in the form of a capital loss and then
deducting it again when paid—is the core problem of this
case. Petitioner raises two arguments which we will address
as to why they do not represent the same economic loss.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 213
1. Calculation of Basis
Petitioner states: ‘‘GWRC’s [Golden West’s] capital loss on
the sale of its EMC [Earth Management] stock did not rep-
resent an economic loss for the environmental cleanup of the
Refinery Property, but rather was the result of the manner
in which basis was required to be computed under the provi-
sions of the Code’’. Section 1001(a) provides that loss ‘‘from
the sale or other disposition of property * * * shall be the
excess of the adjusted basis * * * over the amount realized.’’
(Emphasis added.) Hence, contrary to petitioner’s assertion,
calculation of basis, while important, is not the only factor
when determining a loss. One must also consider amount
realized. Section 1001(b) provides that ‘‘[t]he amount realized
from the sale or other disposition of property shall be the
sum of any money received’’.
The amount realized was $25,200 and basis was
$29,100,000, leading to a loss of $29,074,800. 19 Basis took
into account the face value of the Benzin note but did not
take into account the contingent environmental remediation
liabilities (the expected amount it would cost to clean up the
Golden West Refinery property). The amount realized took
into account both the Benzin note and the contingent
environmental remediation liabilities. Therefore, the capital
loss arose not as a result of how basis was calculated but as
a result of the contingent environmental remediation liabil-
ities being taken into account in calculating the amount
realized (or fair market value) but not in calculating basis. 20
19 The sale price of the Earth Management stock was $280 per share for a total of $25,200
(90 shares × $280). An appraisal report prepared by Deloitte states: ‘‘as of September 1, 1996,
the fair market value of a minority and noncontrolling interest in the common equity of Earth
Management Company is reasonably estimated to be $70,000 or $280 per share.’’ Therefore, the
amount realized equals the fair market value in this case.
20 Petitioner also argues that ‘‘Because GWRC’s [Golden West’s] capital loss did not represent
an economic loss from the cleanup of the Refinery Property, Earth Management’s subsequent
environmental remediation expense deductions cannot constitute a second deduction for the
same economic loss.’’ We recognize that no economic loss occurred when petitioner sold the
Earth Management stock, leading to the capital loss; however, we consider this to be immate-
rial. That one economic loss occurs and two tax losses are claimed is a trademark of double de-
duction cases. For example, in Comar Oil Co. v. Helvering, 107 F.2d 709 (8th Cir. 1939), the
taxpayer opened a reserve account in 1926 in anticipation of losses that would be incurred when
warehouse material was sold or junked. Id. at 710. It credited to the reserve $120,000 and
claimed a deduction in that amount on its 1926 tax return. Id. In 1929 the taxpayer’s actual
losses from the warehouse were $208,189.04, and on its 1929 tax return the taxpayer claimed
a deduction in that amount. Id. The court agreed with the Commissioner that the claimed
$208,189.04 deduction should be reduced by the remaining reserve account balance of
Continued
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214 139 UNITED STATES TAX COURT REPORTS (198)
2. The Benzin Note v. Cash Advances From Thrifty
Petitioner next argues the deductions are economically not
the same because ‘‘the asset that established GWRC’s [Golden
West’s] basis in the EMC [Earth Management] stock (the
Benzin note) was not the same asset that gave rise to EMC’s
[Earth Management] environmental remediation expense
deductions (the Thrifty cash advances).’’ Petitioner appar-
ently believes that if the Benzin note had been used to pay
the environmental expenses to clean up the Golden West
Refinery property, then the capital loss and the environ-
mental remediation liabilities would represent the same eco-
nomic loss. But because the liabilities were paid from money
Thrifty advanced to Earth Management, they are not. We
view this as nothing more than a distinction without a dif-
ference. 21 Payment of the environmental remediation liabil-
ities reduced Earth Management’s assets (and the consoli-
dated group’s as a whole) regardless of where that money
came from.
B. No Specific Provision Demonstrating Intent
As the capital loss deductions and the environmental
remediation expense deductions represent the same economic
loss, petitioner must point to a specific provision authorizing
the double deduction. Petitioner fails in this regard, pointing
only to section 162. As stated, general allowance provisions
are insufficient, and this Court has previously held that sec-
tion 162 does not reflect a ‘‘clear declaration of intent’’ to
allow a double deduction. O’Brien v. Commissioner, 79 T.C.
at 786–788; Brenner v. Commissioner, 62 T.C. at 884–885.
Accordingly, petitioner is not entitled to the environmental
remediation expense deductions claimed on its Federal
$87,824.30 for which a deduction had previously been allowed in 1926. Id. at 711. The fact that
the deduction claimed on the 1926 tax return did not represent an economic loss whereas the
deduction claimed on the 1929 return did represent an economic loss did not matter. The court
acknowledged that the double deduction cases cited involved situations where an economic loss
had actually occurred and been allowed as a deduction for a preceding year and then claimed
a second time. In the case before it ‘‘the loss was anticipated and a deduction claimed and al-
lowed for it in a year preceding the occurrence of the actual loss.’’ Id. However, the court found
‘‘no difference in principle’’, and the claimed second loss was not allowed. Id.
21 The Benzin note’s stated purpose was to provide Earth Management with additional collat-
eral to facilitate borrowing any funds needed to pay the contingent environmental remediation
liabilities as they came due. However, the Benzin Note was never pledged as collateral on any
borrowing by Earth Management and as of May 16, 2011, no payments of principal or interest
had been made on the Benzin Note, despite the September 30, 2006, maturity date.
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 215
income tax returns for TYE September 30, 2000, 2001, and
2002. 22 For completeness, we next briefly discuss petitioner’s
remaining arguments.
III. Petitioner’s Remaining Arguments
A. Whether Respondent Ignored Taxable Periods
Petitioner argues respondent is ignoring the taxable
periods for which the deductions were claimed and is
impermissibly matching capital loss carryforwards claimed
for years not before the Court with environmental remedi-
ation expense deductions claimed for years before the Court.
Petitioner states that the capital loss carryforwards of
$18,347,205 claimed for closed years correspond to
$16,699,198 of environmental remediation expense deduc-
tions claimed for closed years and that capital loss deduc-
tions of $10,727,802 claimed for open years and conceded by
petitioner correspond to $11,109,962 of environmental
expense deductions claimed for open years. Petitioner
believes that because it conceded the capital loss
carryforwards claimed for years before the Court, ‘‘there is no
‘first tax benefit’ in the years at issue and therefore, there
can be no ‘double tax benefit’ in the years at issue.’’
Again, we disagree with petitioner. As of September 1996
the contingent environmental remediation liabilities associ-
ated with the Golden West Refinery property totaled
$29,070,000. By engaging in the environmental remediation
strategy, petitioner essentially accelerated the deductions
attributable to payment of the environmental remediation
liabilities. The capital loss was realized in a single year—
1996. The second deduction was claimed for the years in
which the actual remediation cleanup expenses were paid.
22 We are mindful of the result we have reached. For years closed by the statute of limitations,
petitioner claimed capital loss deductions of $18,347,205 and environmental remediation ex-
pense deductions of $16,699,198 for total deductions of $35,046,403 for the cleanup of the Golden
West Refinery property. Then for years not closed by the statute of limitations, petitioner
claimed capital loss deductions of $10,727,595 and environmental remediation expense deduc-
tions of $11,109,962. Petitioner conceded the capital loss deductions, and we have disallowed the
environmental remediation expense deductions. In effect, petitioner was allowed both capital
loss and environmental remediation expense deductions for closed years and then was not al-
lowed deductions for both for open years. We believe this result is in line with the Supreme
Court’s pronouncement that double deductions (or their practical equivalent) for the same eco-
nomic loss are impermissible absent a clear declaration of congressional intent. Charles Ilfeld
Co. v. Hernandez, 292 U.S. 62, 68 (1934); see also Marwais Steel Co. v. Commissioner, 354 F.2d
at 998–999.
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216 139 UNITED STATES TAX COURT REPORTS (198)
Both deductions arose from the same economic loss, which is
the cleanup of the Golden West Refinery property. To the
extent of the first deduction, petitioner is not entitled to a
second deduction for the same economic loss.
Petitioner argues that ‘‘[i]t is clear that Petitioner is not
receiving a ‘double tax benefit’ in the years before Court and,
in fact, Respondent is seeking a double disallowance of Peti-
tioner’s ‘tax benefits’ in the years at issue’’. We still disagree.
What is in fact clear to this Court is that if we grant peti-
tioner’s request and sustain the claimed $11,109,962 in
environmental remediation expense deductions, petitioner in
total will have claimed $46,156,365 in tax deductions for an
economic event that was estimated to cost $29,070,000 and
has, at least to date, incurred $27,759,160 of actual cost. 23
B. Whether the First Deduction Was Erroneous and There-
fore Charles Ilfeld Co. Is Inapplicable
Petitioner argues that Charles Ilfeld Co. is inapplicable
because it is limited to situations where the taxpayer cor-
rectly treated an item for an earlier barred year. According
to petitioner, since the capital loss deductions claimed for
closed years were improper, Charles Ilfeld Co. is inapplicable.
Petitioner places great emphasis on B.C. Cook & Sons, Inc.
v. Commissioner, 59 T.C. 516, 521–522 (1972).
In B.C. Cook & Sons we stated: ‘‘The prohibition against
double deductions evolved in the context of cases where the
taxpayer correctly treated an item in an earlier barred year
and received a tax benefit therefrom and then sought to
obtain a similar tax benefit in a later year.’’ Id. at 521. We
went on to state:
If we were to apply the doctrine prohibiting double deductions in a situa-
tion such as this, where the petitioner’s action in earlier years was erro-
neous, we would turn that doctrine into a sword to pierce the shield of
repose provided by the statute of limitations, and there would appear to
be little need for the mitigation provisions applicable to double deductions
contained in sections 1311–1315 * * *. * * * Moreover, a deduction which
is incorrectly taken in one year should be corrected by eliminating it from
the year in which it was taken. * * * [Id.]
23 This $46,156,365 is the sum of (1) $18,347,205 of capital loss deductions claimed for years
not before the Court; (2) $16,699,198 of environmental remediation expense deductions claimed
for years not before the Court; and (3) $11,109,962 in environmental remediation expense deduc-
tions claimed for years before the Court (and at issue in this case).
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(198) THRIFTY OIL CO. & SUBS. v. COMMISSIONER 217
While we acknowledge the holding in B.C. Cook & Sons
supports petitioner, we also recognize that the precedential
value of the decision has been questioned. See Alling v.
Commissioner, 102 T.C. 323, 333 (1994), aff ’d without pub-
lished opinion sub nom. Handelman v. Commissioner, 57
F.3d 1063 (2d Cir. 1995), and aff ’d without published opinion
sub nom. Eisenman v. Commissioner, 67 F.3d 291 (3d Cir.
1995).
Regardless of our holding in B.C. Cook & Sons, the Court
of Appeals for the Ninth Circuit has stated: ‘‘The applicable
principle here is that ‘when a taxpayer receives a tax advan-
tage from an erroneous deduction, he may not deduct the
same amount in a subsequent year after the Commissioner
is barred from adjusting the tax for the prior year.’’ Stewart,
739 F.2d at 415 (citing Robinson v. Commissioner, 181 F.2d
at 18). 24 Accordingly, we conclude that, as we are bound by
Ninth Circuit precedent, the fact that the capital loss deduc-
tions claimed for earlier years may have been erroneous is
immaterial. 25 See Golsen v. Commissioner, 54 T.C. 742.
24 We find further support for the Court of Appeals for the Ninth Circuit’s not placing empha-
sis on whether the original deduction was improper in Unvert v. Commissioner, 656 F.2d 483
(9th Cir. 1981), aff ’g 72 T.C. 807 (1979). The taxpayers in Unvert concluded they had erro-
neously claimed a $54,500 deduction for prepaid interest on their 1969 Federal income tax re-
turn. Id. at 484. In 1972 the taxpayers were refunded the $54,500 they had paid. Id. The Inter-
nal Revenue Service argued that the $54,500 was taxable income to the taxpayers in 1972 under
the tax benefit rule. Id. The taxpayers argued that the tax benefit rule was inapplicable on the
basis of cases which have held that the rule did not apply when the original deduction was im-
proper. Id. at 485. This Court held for the Internal Revenue Service on the basis that the tax-
payers were estopped from contending their 1969 deductions improper. Id. The Court of Appeals
affirmed, but for a different reason. It stated:
Because we affirm on the basis that the erroneous deduction exception should be rejected, we
do not consider the Tax Court’s estoppel theory.
The logic of the erroneous deduction exception is that an improper deduction should be cor-
rected by assessing a deficiency before the statute of limitations has run, not by treating recov-
ery of the expenditure as income. This rationale was explained most comprehensively in Canelo:
‘‘We realize that petitioners herein have received a windfall through the improper deductions.
But the statue of limitations requires eventual repose. * * * Here the deduction was improper,
and respondent should have challenged it before the years prior to 1960 were closed by the stat-
ute of limitations.’’ * * * [Canelo v. Commissioner, 53 T.C. 217, 226–227 (1969), aff ’d,
447 F.2d
484 (9th Cir. 1971).].
We find this unpersuasive. * * *
[Id. (fn. ref. omitted).]
The Court of Appeals went on to state that ‘‘[t]he erroneous deduction exception is also poor
public policy. * * * [and] improperly taken tax deductions should not be rewarded.’’ Id. at 486.
25 In B.C. Cook & Sons, Inc. v. Commissioner, 59 T.C. 516 (1972), we stated that the earlier
deduction the taxpayer claimed was ‘‘erroneous’’. In the case at hand, while petitioner has con-
ceded the capital loss and states that ‘‘its capital loss carry-forwards should have been dis-
allowed’’, petitioner also states:
Continued
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218 139 UNITED STATES TAX COURT REPORTS (198)
As previously noted, other courts have also held that
whether the first deduction was erroneous is immaterial. See
Robinson v. Commissioner, 181 F.2d at 18; Comar Oil Co. v.
Helvering, 107 F.2d 709, 711 (8th Cir. 1939) (holding that
whether the original claimed deductions were correctly
allowed was immaterial and the first deductions ‘‘were
allowed with * * * [the taxpayer’s] approval and by its
inducement, if not its direct request. Under these cir-
cumstances it can not complain because it is not allowed a
second deduction for the same losses after the bar of the
statute has run against a correction of the error made in
1926.’’); Stoecklin v. Commissioner, T.C. Memo. 1987–453
(citing Robinson), aff ’d, 865 F.2d 1221 (11th Cir. 1989); see
also Cincinnati Milling Mac. Co. v. United States, 83 Ct. Cl.
392 (1936).
IV. Conclusion
For the reasons discussed above, petitioner is not entitled
to environmental remediation expense deductions claimed for
TYE September 30, 2000, 2001, and 2002, of $3,109,962,
$4,108,429, and $3,891,571, respectively. The Court has
considered all of petitioner’s contentions, arguments,
requests, and statements. To the extent not discussed herein,
we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decision will be entered under Rule 155.
f
Petitioner conceded this issue years after it entered into the transaction which produced the cap-
ital loss carry-forward, after courts found that similar transactions lacked economic substance,
and thus the capital loss was not properly deductible. While Petitioner believed its transaction
did have economic substance when it engaged in the transaction, Petitioner determined that the
risk and cost of litigation given the subsequent development of the case law did not justify fur-
ther litigation of the matter. * * *
These seemingly conflicting statements lead us to question whether petitioner is conceding that
the capital loss was erroneous or whether petitioner conceded the capital loss issue simply be-
cause it foresaw a probable litigation defeat. Even if the former is correct, there are and will
be cases where whether the first deduction was erroneous is at issue. The Court of Appeals for
the Ninth Circuit recognized this problem and concluded that ‘‘[i]f the erroneous deduction ex-
ception is retained in any form, there always will be inquiry as to whether the original deduc-
tion was erroneous. In this sense, the erroneous deduction exception actually undermines the
policies of the statute of limitations.’’ Unvert v. Commissioner, 656 F.2d at 483, 486 n.2.
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