LOCATION: Bleckly County Superior Court
DOCKET NO.: 81-485
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 460 US 370 (1983)
ARGUED: Nov 01, 1982
DECIDED: Mar 07, 1983
Harvey B. Stephens - on behalf of Petitioner Hillsboro National Bank
James Silhasek - on behalf of Respondent Bliss Dairy, Inc
Rex E. Lee - on behalf of the Commissioner of Internal Revenue and the United States
Facts of the case
Media for Hillsboro Nat'l Bank v. CommissionerAudio Transcription for Oral Argument - November 01, 1982 in Hillsboro Nat'l Bank v. Commissioner
Audio Transcription for Opinion Announcement - March 07, 1983 in Hillsboro Nat'l Bank v. Commissioner
William J. Brennan, Jr.:
The opinion in 81-485 and 81-930, Hillsboro National Bank versus Commissioner will be announced by Justice O'Connor.
Sandra Day O'Connor:
These consolidated cases present questions of the application of the tax benefit rule.
Hillsboro National Bank versus Commissioner comes to us on writ of certiorari to the United States Court of Appeals for the Seventh Circuit.
In this case, a bank took the deduction allowed by Section 164(e) of the Internal Revenue Code for the payment of its shareholder taxes.
Later, the state taxes were refunded by the State but directly to the shareholders rather than to the bank.
The shareholders included the refund in their income and the Commissioner sought to include it in the income of the bank as well on the theory that the refund was inconsistent with the earlier deduction and the tax benefit rule therefore required the recognition of income.
United States versus Bliss Dairy comes to us on writ of certiorari to the United States Court of Appeals for the Ninth Circuit.
In this case, a closely held dairy purchased cattle feed and immediately deducted the full cost as an expense of doing business.
In the following tax year, it liquidated and distributed the unconsumed feed to its shareholders.
The Commissioner included in the Dairy's income, the amount of the unconsumed feed again on the theory that the distribution of feed was inconsistent with the earlier deduction.
In each of these cases, the taxpayer has argued that the tax benefit rule applies to require the recognition of income only if there is a physical recovery of an amount previously deducted.
The Commissioner on the other hand has taken the position that later inconsistent events will suffice to trigger the recognition of income.
We hold today that a recovery is not a necessary condition for the recognition of income under the tax benefit rule.
If an event occurs that is fundamentally inconsistent with the deduction taken earlier in the sense that had all the events occurred in one year, the deduction would have been denied.
The tax benefit rule requires the recognition of income.
However, if the later inconsistent events occurs in the context of some nonrecognition rule or statute such as the rule that a liquidating corporation does not recognize income in the distribution of its assets to a share -- to shareholders, a careful examination of the nonrecognition rule is necessary in order to determine whether it prevails over the tax benefit rule.
Our examination of the relevant provisions leads us to conclude in Hillsboro that the petitioner bank need not recognize income.
The refund of the taxes to the shareholders was not fundamentally inconsistent with the deduction taken by the banking corporation.
Bliss Dairy, however, must recognize income.
The distribution of assets to its shareholders is inconsistent with taking a deduction for the business consumption of those assets.
Although the distribution occurred in the context of the nonrecognition rule of Section 336, the nonrecognition rule of that Section does not prevail over the tax benefit rule.
Justice Brennan has filed an opinion joining in Parts I, II, and IV of the opinion of the Court and dissenting in Hillsboro.
Justice Stevens has filed an opinion concurring in the judgment in Hillsboro and dissenting in Bliss.
Justice Blackmun has filed a dissenting opinion.
William J. Brennan, Jr.:
Thank you Justice O'Connor.