United States v. Foster Lumber Company, Inc.

PETITIONER:United States
RESPONDENT:Foster Lumber Company, Inc.
LOCATION:General Electric Company plant

DOCKET NO.: 74-799
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 429 US 32 (1976)
REARGUED: Oct 05, 1976
DECIDED: Nov 02, 1976
ARGUED: Nov 12, 1975

Russell W. Baker – for respondent
Stuart A. Smith – for petitioner

Facts of the case


Media for United States v. Foster Lumber Company, Inc.

Audio Transcription for Oral Reargument – October 05, 1976 in United States v. Foster Lumber Company, Inc.
Audio Transcription for Oral Argument – November 12, 1975 in United States v. Foster Lumber Company, Inc.

Audio Transcription for Opinion Announcement – November 02, 1976 in United States v. Foster Lumber Company, Inc.

Warren E. Burger:

The judgment and opinion of the Court in Number 74-799 United States against Foster Lumber Company will be announced by Mr. Justice Stewart.

Potter Stewart:

This case is here by way of the grant of a writ of certiorari to the United States Court of Appeals for the Eighth Circuit.

Section 172 of the Internal Revenue Code of 1954 as amended provides that a net operating loss experienced by a corporate tax payer in one year may be carried as a deduction to the preceding three years and the succeeding five years to offset a taxable income of those years.

The entire loss must be carried to the earliest possible year, and any of the loss that is not absorbed by that fi’

dent had had ordinary income of about $7,000.00 and capital gain of about $167,000.00.

The question presented is whether a loss carryover is absorbed by capital gain as well as ordinary income, or is instead limited to offsetting only ordinary income.

The taxpayer, the Foster Lumber Company filed a refund suit on the Federal District Court challenging the Commissioner’s disallowance of its claim that the $35,000.00 of the 1968 loss not used or set is a 1966 ordinary income survived to reduce its 1967 tax liability.

The trial court of the Court of Appeals for the Eighth Circuit agreed with the tax payer and re-granted certiorari to resolve a Circuit conflict on a recurring question of a statutory interpretation in a field of law into the Internal Revenue Code of Continuing Importance.

As even this short statement of the case makes evident, the issues to be decided involved complicated provisions of the Internal Revenue Code that do not lend themselves to intelligible oral discussion.

Suffice it to say that for the reasons spelled out in some detail and a written opinion filed with the clerk today, we have concluded that the Government is correct in its interpretation of the Code in this case.

Accordingly, the judgment before us is reversed.

Mr. Justice Stevens has filed a concurring opinion.

Harry A. Blackmun:

I have filed a dissent in this case and that dissent is joined by the Chief Justice and Mr. Justice Brennan, and Mr. Justice Powell.

This case was argued twice and it is now decided here by a vie before vote on the theory that a net operating loss incurred by the taxpayer and allowed under the statutes to be carried back was absorbed and I put that word in quotes or to use the Government’s term completely absorbed by a capital gain in the carry back year, even though the loss could not be set off against that gain.

There are two policies at work here, both of them favor the taxpayer, neither of them favors the Government and yet the Court by and now a margin comes out in favor of the Government.

The first policy is the Congressional Policy of separating the taxation of capital gains on the one hand and the taxation of ordinary income, that the policy of course in to encourage investment and the formation of capital.

I feel that the Court’s opinion today serves to put capital gain and ordinary income together and thus, to defeat this Congressional Policy.

The second policy is the very existence of the carry back and carryover provisions.

Its purpose of course is ameliorate the effect of spasmatic income to eliminate the peaks and valleys of income at a corporation or an individual for that matter maybe experienced because of our system of reporting and paying taxes on an annual basis.

I think this policy is also defeated when the taxpayer over the period in question is taxed on more than his economic gain realized during that period.

This is illustrated by the fact that have the capital gain in 1966 been sustained in 1967, there would be no problem.

Similarly, if the net ordinary income of 1967 had been sustained in 1966, there would be no problem, but because there was a capital gain, this taxpayer by pure happen snaps, losses the benefit of both policies that Congress has undertaken to effect.

The Court I think also ignores and rides Russia out over an unbroken line of decisions elsewhere originating in a tax court and participated in, in successive cases by recognized judges.

This, as the Court had just stated orally, is a very complicated and detailed area of the law and if ever there is a place where the expertise of a tax court should be given difference, it is in this case.

The same thing is true with the decisions in the District Courts and then the Courts of Appeals.

This is another illustration where the Government by its persistence and its power in tax matters, and lose in one Court of Appeals and lose in the second Court of Appeals, and lose in the third Court of Appeals, but finally go to a fourth and pick the divided decision, create a conflict, and the case brought here and we have a five to four decision.

I disagree emphatically with the Court’s statement that the law here is clear and unambiguous.

The very fact that so many able judges in the tax court and in the District Courts and in the Courts of Appeals decided the other way, I think against the light of that time of reasoning.

It has been said that taxation is a practical matter.

I think we ignore the light’s precept of those words in this decision.

Harry A. Blackmun:

The result for me is a distressing one and I think it is totally wrong and therefore I intercept it.

Warren E. Burger:

Thank you Mr. Justice Blackmun.

Thank you Mr. Justice Stewart.