United States v. Foster Lumber Co., Inc., 429 U.S. 32 (1976)

United States v. Foster Lumber Co., Inc.

No. 74-799

Argued November 12, 1975
Reargued October 5, 1976
Decided November 2, 1976
429 U.S. 32

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Syllabus

Section 172 of the Internal Revenue Code of 1954, as amended, provides that a "net operating loss" experienced by a corporate taxpayer in one year may be carried as a deduction to the preceding three years and the succeeding five years to offset taxable income of those years. The entire loss must be carried back to the earliest possible year and any of the loss not "absorbed" by that first year may then be carried to succeeding years, since

[t]he 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.

§ 172(b)(2). Proceeding under that provision respondent taxpayer carried back a net operating loss of some $42,000, which it had sustained in 1968, to 1966, in which year respondent had ordinary income of about $7,000 and a capital gain of about $167,000. After applying the "alternative tax" method of § 1201(a), which permits low capital gains taxation, respondent maintained that after subtracting the $42,000 loss deduction from the 1966 ordinary income, the negative balance of about $35,000 was still available to offset income for 1967, respondent taking the position that its 1968 loss had been "absorbed" in 1966 only to the extent of the $7,000 ordinary income. Respondent accordingly made a refund claim for the taxable year 1967, which the Commissioner disallowed but which the District Court upheld. The Court of Appeals affirmed.

Held: In carrying back a net operating loss under § 172 to a year in which the taxpayer had both ordinary income and capital gains and employed the alternative tax computation method of § 1201(a), the loss deduction available for carryover to a succeeding year is the amount by which the loss exceeds the taxpayer’s "taxable income" -- ordinary income plus capital gains for the prior year -- the loss carryover being "absorbed" by capital gains as well as ordinary income. Pp. 36-48.

(a) Absent any specific provision in the Code excluding capital gains from "taxable income," the Code’s definitions of "taxable income" and gross income in §§ 63(a) and 61(a) require that both capital gain and ordinary income must be included in the taxable income that § 172 directs must be offset by the loss deduction before any loss excess can be found available for transfer forward to the succeeding taxable year, and if Congress had intended to permit a loss deduction to offset only ordinary income when § 1201(a) is used, it could easily have said so. Pp. 36-41.

(b) The legislative history of the loss offset provisions does not support respondent’s contention that they were designed to eliminate all consequences of the timing of the loss. Pp. 426.

(c) Had Congress intended substantially to eliminate timing accidents from the calculation of income on an average basis, it would not have tolerated the departure from that purpose in § 172(c), under which a taxpayer cannot have a loss for a particular year unless its deductions exceed its ordinary income and its capital gains. Pp. 467.

500 F.2d 1230, reversed.

STEWART, J., delivered the opinion of the Court, in which WHITE, MARSHALL, REHNQUIST, and STEVENS, JJ., joined. STEVENS, J., filed a concurring opinion, post, p. 48. BLACKMUN, J., filed a dissenting opinion, in which BURGER, C.J., and BRENNAN and POWELL, JJ., joined, post, p. 49.