Duquesne Light Holdings Inc v. Commissioner of Internal Reven

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________________

No. 14-1743

DUQUESNE LIGHT HOLDINGS, INC. & SUBSIDIARIES

f/k/a

DQE, INC & SUBSIDIARIES,

Duquesne Light Holdings, Inc. & Subsidiaries,

Appellant

v.

COMMISSIONER OF INTERNAL REVENUE

________________

Appeal from the Decision of the

United States Tax Court

Docket No. 10-9624

Tax Court Judge: Honorable Carolyn P. Chiechi

Argued July 12, 2016

Before: AMBRO, HARDIMAN,

and KRAUSE, Circuit Judges

(Opinion filed: June 29, 2017)

James C. Martin, Esquire (Argued)

Reed Smith LLP

225 Fifth Avenue, Suite 1200

Pittsburgh, PA 15222

Counsel for Appellant

Caroline D. Ciraolo

Acting Assistant Attorney General

Diana L. Erbsen

Deputy Assistant Attorney General

Arthur T. Catterall, Esquire (Argued)

Jonathan S. Cohen, Esquire

Gilbert S. Rothenberg, Esquire

Jennifer M. Rubin, Esquire

United States Department of Justice

Tax Division, Room 4333

950 Pennsylvania Avenue, N.W.

P.O. Box 502

Washington, DC 20044

Joseph P. Grant, Esquire

Mary H. Weber, Esquire

Internal Revenue Service

Office of Chief Counsel

312 Elm Street, Suite 2350

Cincinnati, OH 45202

Counsel for Appellee

2

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OPINION OF THE COURT

________________

AMBRO, Circuit Judge

This appeal concerns the continued vitality of the so-

called Ilfeld doctrine for interpreting the Internal Revenue

Code. Taken from Charles Ilfeld Co. v. Hernandez, 292 U.S.

62 (1934), this doctrine teaches that “the Code should not be

interpreted to allow [the taxpayer] ‘the practical equivalent of

a double deduction’ … absent a clear declaration of intent by

Congress.” United States v. Skelly Oil Co., 394 U.S. 678, 684

(1969) (quoting Ilfeld, 292 U.S. at 68). Duquesne Light

Holdings, Inc. (“DLH”) and its subsidiaries (DLH and its

subsidiaries are variously referred to as the “Duquesne

group,” the “Duquesne entities,” or simply “Duquesne”)

appeal the Tax Court’s grant of summary judgment to the

Internal Revenue Service based on the Ilfeld doctrine. In

particular, Duquesne challenges the Tax Court’s holding that

the consolidated entities affiliated with DLH claimed a

double deduction for certain losses incurred by its

AquaSource subsidiary and thus disallowed $199 million of

those losses (all numbers are rounded). As we conclude that

the Tax Court properly applied the Ilfeld doctrine, we affirm. 1

I. BACKGROUND

The Duquesne entities, including DLH and

AquaSource, filed their tax returns as a consolidated taxpayer,

1

The Tax Court had jurisdiction to hear this case

under 26 U.S.C. § 6213 and we have jurisdiction to review its

judgment per 26 U.S.C. § 7482(a)(1).

3

meaning they filed a single tax return reflecting their joint tax

liability. Despite allowing corporate groups to file a single

return, the applicable tax laws require a mixed approach of

calculating some aspects of the group’s taxes as though the

entities were a single taxpayer and calculating others as if

each member of the group were a separate taxpayer. 13

Mertens Law of Federal Income Taxation § 46:1 (2016 ed.).

This approach—called the “consolidated return regime”—

reflects how the IRS has chosen to exercise its broad

discretion to issue regulations for consolidated returns “to

reflect the income-tax liability” of the group and “to prevent

avoidance of such tax liability.” 26 U.S.C. § 1502.

The possibility of separate treatment nonetheless

creates the potential for the group to deflect its tax liability by

using stock sales to claim a second deduction for a single loss

at the subsidiary (such as a loss on the subsidiary’s sale of an

asset). See Lawrence Axelrod, 1 Consolidated Tax Returns

§ 18:2 (4th ed. 2015). This is known as a double deduction,

or more technically as loss duplication. It may occur because

by definition the parent company in a corporate group owns

all or most of the stock in its subsidiaries. See 26 U.S.C. §

1504(a). All else being equal, the value of the parent’s stock

depends on the value of the subsidiary’s assets. If the

subsidiary’s assets decline in value, the parent’s stock will as

well. If the subsidiary sells those assets (which may include

stock and other securities) at a loss, it is generally able to

claim a deduction for those losses. See 26 U.S.C. § 165(a)

(“General rule.--There shall be allowed as a deduction any

loss sustained during the taxable year and not compensated

for by insurance or otherwise”). If the parent and subsidiary

are viewed as separate entities, the parent is able to sell its

stock of the subsidiary at a loss and claim a deduction for that

loss as well. See Axelrod, supra, § 18:2. But in fact the

overall group has only suffered one economic loss though it

was deducted twice. For example, suppose that parent P has a

4

wholly owned subsidiary S and its investment in S’s stock is

worth $100. After one of S’s assets declines in value by $50,

S sells the asset and deducts a $50 loss under § 165. P’s stock

value in S also declines by $50, and if P and S are viewed

separately, P is able to sell its stock in S and deduct a further

loss of $50 under § 165. The consolidated group is thus able

to deduct $100 for a single economic loss of $50 resulting

from the decline in value of S’s asset.

To prevent double deductions, the IRS has

promulgated numerous regulations requiring that consolidated

taxpayers be treated as a single entity for stock sales. Of

particular relevance to the events of this case is the former

Treas. Reg. § 1.1502-20. Starting in the early 1990s, it

prevented, among other things, double deductions when the

parent’s loss on its sale of stock occurred before the

subsidiary recognized its loss. See Consolidated Return

Regulations; Special Rules Relating to Dispositions and

Deconsolidations of Subsidiary Stock, 55 Fed. Reg. 9426-01,

9427 (Mar. 14, 1990). In July 2001, however, the Federal

Circuit’s decision in Rite-Aid v. United States, 255 F.3d 1357

(Fed. Cir. 2001), invalidated the pertinent portion of

§ 1.1502-20 as beyond the IRS’s power to issue because it

addressed a problem not specifically attributable to the filing

of consolidated returns. Id. at 1360. Though Rite-Aid has not

been construed to annul any other consolidated return

regulation preventing duplicated loss, invalidating § 1.1502-

20 meant that in its immediate aftermath there was no

regulation expressly preventing a double deduction when the

parent’s stock loss occurred before the subsidiary’s asset loss.

In contrast, Rite-Aid left intact the regulatory prohibition on

double deductions where the transactions are structured in

such a way that the losses occur in reverse order, i.e., the

subsidiary’s loss is recognized before the parent’s loss. See

Treas. Reg. § 1.1502-32.

5

In the aftermath of Rite-Aid, the Duquesne group

arranged a series of transactions in which DLH incurred a

loss on AquaSource stock, and then AquaSource incurred

losses on the sale of its assets (which were stock interests that

AquaSource held directly and indirectly in eight of its own

subsidiaries). DLH formed AquaSource in the late 1990s as a

wholly owned subsidiary to expand into the water utility

business. It funded AquaSource through a series of

contributions in return for AquaSource stock. Through

February 2001, DLH contributed approximately $223 million

in return for 50,000 shares of AquaSource stock. Though

DLH contributed a similar amount to AquaSource in the years

thereafter, it increased its holdings to 1.2 million shares of

AquaSource stock. AquaSource used these contributions to

purchase more than 50 water utility companies, which

became both its subsidiaries and its assets. It began to lose

money, however, and in 2000 the Duquesne group decided to

explore the sale of AquaSource’s assets.

The transactions before us began on December 31,

2001, just before the deadline would expire for the IRS to file

a petition for certiorari in Rite-Aid. DLH transferred 50,000

shares of AquaSource stock to Lehman Brothers, which

Lehman valued at $4 million, as payment for Lehman’s

services rendered to AquaSource. DLH determined that these

particular 50,000 shares of stock were the shares that it had

possessed prior to February 2001 and thus accounted for $223

million of its investment. After various adjustments, DLH

claimed a capital loss of $199 million on the transfer of stock

to Lehman Brothers (the “2001 loss”). On its 2001 tax return,

the Duquesne group carried back $161 million of that loss to

tax year 2000 and claimed a tentative refund of $35 million.

Shortly thereafter, the IRS announced the regulatory

response to Rite-Aid. It declined to litigate further the validity

of Treas. Reg. § 1.1502-20 and instead announced that it

6

would issue new regulations governing stock losses. I.R.S.

Notice 2002-11, 2002-1 C.B. 526 (Jan. 31, 2002). It did so in

early March 2002 by issuing temporary regulations that

included Treas. Reg. § 1.337(d)-2T, which applied to stock

losses occurring on or after March 7, 2002. See Loss

Limitation Rules, 67 Fed. Reg. 11034-01, 11036-37 (Mar. 12,

2002). 2 Though these regulations “[did] not disallow [a]

stock loss that reflects . . . built-in asset losses of a subsidiary

member,” I.R.S. Notice 2002-18, 2002-1 C.B. 644 (Mar. 9,

2002), the IRS published as guidance a draft of a new

regulation barring double deductions in October 2002. See

Guidance Under Section 1502; Suspension of Losses on

Certain Stock Dispositions, 67 Fed. Reg. 65060-01 (Oct. 23,

2002). The new regulation was issued in final form as Treas.

Reg. § 1.1502-35T and applied retroactively to stock sales

occurring on or after March 7, 2002.

In this complex and shifting regulatory environment,

the Duquesne group thereafter incurred further losses on the

sale by AquaSource of its assets. 3 It did so through a series of

2

The IRS also issued Treas. Reg. § 1.1502-20T, which

applied retroactively to stock losses occurring between the

date of the Rite-Aid decision and March 7, 2002. See Loss

Limitation Rules, 67 Fed. Reg. 11034-01, 11037 (Mar. 12,

2002).

3

At oral argument before a prior appellate panel,

Duquesne’s counsel represented that AquaSource had

different subsidiaries in 2001 versus 2002-2003 in support of

its claim that the case should be remanded for further

development of the factual record. Oral Arg. Trans. at 18

(Nov. 18, 2015). When opposing counsel pointed out that the

record demonstrated that AquaSource’s subsidiaries had in

7

transactions after March 2002 and continuing into 2003 in

which AquaSource sold all of its stock in eight subsidiaries,

and thus the resulting losses were also stock losses. 4 In 2002,

these transactions resulted in capital losses for AquaSource

totaling $59.5 million (the “2002 loss”), all of which the

Duquesne group carried back to tax year 2000 on its

consolidated return. Based on the 2002 loss and additional

carrybacks, the group received a tentative refund of $12

million. The sale transactions in 2003 yielded $192.8 million

in capital losses for AquaSource after various adjustments

(the “2003 loss”). Duquesne carried all of the 2003 losses

back to 2000 on its consolidated return and, based on that loss

and additional carrybacks, received a tentative refund of $40

million. Aggregating the 2002-2003 losses, the Duquesne

group deducted approximately $252 million in capital losses

in addition to the $199 million it had already claimed for the

2001 loss.

Though the IRS initially declined to challenge

Duquesne’s deductions in a 2004 audit, it subsequently

fact remained the same, see Oral Arg. Trans. at 26-27 (July

12, 2016), Duquesne abandoned this claim.

4

That AquaSource incurred stock losses on the sale of

its assets was the source of much terminological confusion in

the litigation of this case. As Duquesne did not make this

clear in its individual briefing, and though the record

remained unclear whether all of AquaSource’s losses were

incurred on the sale of stock, the IRS acknowledged that at

least 90% of the losses were stock losses. IRS Supp. Br. at 4.

As this issue is not ultimately relevant to our analysis, we

accept Duquesne’s representation that all of AquaSource’s

losses were stock losses for purposes of this appeal.

8

determined that the Duquesne group had claimed a double

deduction; that is, the 2001 loss and the 2002-2003 losses

reflected a single economic loss in the form of an underlying

decline in the value of AquaSource’s subsidiaries. Based on

its calculations, the IRS concluded that $199 million of these

losses were disallowed under the Ilfeld doctrine. 5 Duquesne

strongly disagreed, and as the parties were unable to resolve

their dispute out of court, the IRS sent Duquesne a formal

notice of deficiency in 2010.

Duquesne began proceedings in the Tax Court by

filing a petition for relief. Rather than following the normal

pretrial procedure, the parties chose to forgo discovery and

filed cross-motions for summary judgment focusing on

whether the Ilfeld doctrine applied. While these motions

were pending, the Tax Court issued its decision in Thrifty Oil

Co. v. Commissioner, 139 T.C. 198 (2012). There the Court

relied on Ilfeld to disallow certain duplicative losses that a

consolidated taxpayer had claimed based on environmental

remediation expenses. As a result, the Tax Court allowed the

parties to this case to file supplemental briefs addressing

Thrifty Oil.

Thereafter the Tax Court granted the IRS’s motion for

summary judgment and concluded that the Ilfeld doctrine

remained good law in our Circuit. Turning to the factual

record, the Tax Court concluded that the IRS met its burden

to show that the 2002-2003 losses duplicated the $199 million

deduction taken in 2001, as they reflected the same economic

loss. It also rejected Duquesne’s argument that it satisfied the

Ilfeld doctrine because its deductions were authorized under

5

The IRS also asserted that a $228 million excess loss

account should be triggered for tax year 2005, which would

have been taxable as income for that year. As this claim is no

longer at issue, we need not decide it.

9

the applicable statutes and regulations as well as its further

argument that the statute of limitations had, in any event,

lapsed. The Tax Court thus disallowed $199 million of the

2002-2003 losses and ordered Duquesne to repay $36.9

million of the refunds it had received based on those losses.

This appeal followed.

II. ANALYSIS

Did the Tax Court properly rely on the Ilfeld doctrine

to disallow $199 million of the 2002-2003 losses? Duquesne

contends that the Court erred for three reasons: (1) the factual

record was inadequate to support summary judgment; (2) the

Ilfeld doctrine does not support disallowing the losses; and (3)

the IRS’s claims are at least partially barred by the statute of

limitations. We consider each contention in turn.

A. Adequacy of the Record

As the Ilfeld doctrine requires a clear declaration of

intent to allow a double deduction for a single economic loss,

its application is premised on a factual question: Did the

deductions claimed by the taxpayer reflect the same economic

loss? See Thrifty Oil, 139 T.C. at 212; see also Denton &

Anderson Co. v. Kavanagh, 164 F. Supp. 372, 378 (E.D.

Mich. 1958). Here the question is whether the 2001 loss and

the 2002-2003 losses are truly duplicative—that is, did they

both reflect the decline in value of the same AquaSource

assets? The Tax Court held that the IRS proved the absence

of a genuine dispute of material fact on this point and that

$199 million of the losses were deducted twice. Though

Duquesne contends that the IRS failed to submit sufficient

evidence to show the existence of a double deduction or its

amount, we disagree in light of Duquesne’s failure to present

any evidence to the contrary despite having all of the relevant

10

documents in its possession and the Supreme Court’s decision

in McLaughlin v. Pacific Lumber Co., 293 U.S. 351 (1934).

We exercise plenary review over the Tax Court’s grant

of summary judgment, Hartmann v. Comm’r of Internal

Revenue, 638 F.3d 248, 249 (3d Cir. 2011) (per curiam), and

the summary judgment standard in Tax Court Rule 121 is

identical to that contained in Federal Rule of Civil Procedure

56, see Rivera v. Comm’r of Internal Revenue, 89 T.C. 343,

346 (1987). The party moving for summary judgment bears

the initial burden to show the absence of a genuine dispute of

material fact, see Celotex Corp. v. Cattrett, 477 U.S. 317,

323 (1986), and thus all that remains is to resolve legal issues.

Though the initial burden of the IRS may be heavy in

some cases, it is far lighter when, as here, it seeks to collect

unpaid taxes. “It is well established that[,] as a general

matter, the [IRS]'s determination of deficiency is presumed

correct, and the taxpayer bears ‘the burden of proving it

wrong.’” Cebollero v. Comm’r of Internal Revenue, 967 F.2d

986, 990 (4th Cir. 1992) (quoting Welch v. Helvering, 290

U.S. 111, 115 (1933)). “This presumption is a procedural

device that places the burden of producing evidence to rebut

the presumption on the taxpayer.” Anastasio v. Comm’r of

Internal Revenue, 794 F.2d 884, 886 (3d Cir. 1986). This is

so because “an income tax deduction is a matter of legislative

grace and . . . the burden of clearly showing the right to the

claimed deduction is on the taxpayer.” INDOPCO, Inc. v.

Comm’r of Internal Revenue, 503 U.S. 79, 84 (1992). The

IRS is thus essentially in the position of a defendant in a civil

case who may meet its initial burden merely by pointing to

the absence of evidence supporting essential elements of the

non-moving party’s case. See Celotex, 477 U.S. at 322-23;

see also Cal-Farm Ins. Co. v. United States, 647 F. Supp.

1083, 1086-87 (E.D. Cal. 1986) (collecting cases stating that

the presumption alone is sufficient to support summary

11

judgment when the taxpayer fails to rebut it); Mitchell v.

Comm’r of Internal Revenue, 38 T.C.M. (CCH) 854 (T.C.

1979) (describing the IRS’s deficiency determination as

“prima facie correct” and concluding that it must be sustained

where “[the taxpayers] have presented no evidence to show

that they are entitled to additional deductions”) (citing Tax

Ct. R. 142(a)).

Duquesne now challenges the adequacy of the record

before the Tax Court, yet it made numerous tactical decisions

to limit that record. While conceding that it has possession of

the records necessary to determine whether its deductions

reflect the same economic loss, Oral Arg. Trans. at 19-20

(Nov. 18, 2015), it nonetheless agreed to limit the scope of

discovery before summary judgment in order to conserve

resources. Duq. Br. at 43. It then filed a motion for summary

judgment raising “only legal issues,” notably whether the

Ilfeld doctrine applied. Id. at 37 n.10.

The IRS responded with a cross-motion for summary

judgment. It pointed to evidence initially filed in an exhibit

to Duquesne’s motion regarding the size and timing of the

deductions. While Duquesne challenged the method the IRS

used to calculate the amount of duplicated losses, it did not

present any evidence rebutting the latter’s claim of a double

deduction and merely promised that “[it] w[ould] challenge at

trial the [IRS’s] erroneous determination of the amount of

purported duplicated losses.” J.A. at 670. After allowing the

parties to submit supplemental briefs on the effect of the

Thrifty Oil decision, the Tax Court held that the IRS had

pointed to sufficient evidence of duplicate losses; hence

Duquesne’s “bald assertions” of a factual dispute were too

little to merit a trial. Id. at 45.

Duquesne claims that the Tax Court applied an

“irrebuttable presumption” based on Thrifty Oil that the

12

deductions were duplicative. Reply Br. at 18. While we may

affirm on any basis supported by the record, it is worth noting

that this argument misrepresents the Court’s reasoning.

Though it stated that Duquesne’s deductions “represent the

same economic loss[es],” J.A. at 42, borrowing this turn of

phrase from Thrifty Oil was not invoking an irrebuttable

presumption. Nor did its conclusion that Thrifty Oil was

consistent with Third Circuit precedent become a

presumption that barred rebuttal. Instead, the Tax Court

determined that the IRS had met its burden based on the

evidence in the record, including the size and timing of the

deductions at issue. There is thus nothing irrebuttable in the

Court’s analysis; it concluded that Duquesne simply failed to

rebut the IRS’s claims as required by ordinary summary

judgment practice.

Though Duquesne contends that it was not required to

present any evidence because the IRS’s case contained

“unexplained gaps,” Reply Br. at 15 (quoting O’Donnell v.

United States, 891 F.2d 1079, 1082 (3d Cir. 1989)), we agree

with the Tax Court that the IRS demonstrated the absence of a

genuine dispute of material fact. As noted, it could have met

its burden here merely by pointing to the absence of evidence

supporting Duquesne’s position that the losses were not

duplicative.

The Supreme Court’s 1934 decision in McLaughlin

also supports the IRS. There a subsidiary between 1920 and

1923 had claimed operating losses three times greater than the

capital invested in it by the parent, and the parent had

attempted to claim further investment losses when it

liquidated the subsidiary. The Court reasoned that “the

circumstances tend strongly to indicate” that the losses had a

common source in the failing business of the subsidiary. Id.

at 357. In addition, as “[p]resumably [the taxpayer] had

within its control the records showing facts that would fully

13

disclose the relations between such losses,” if they were not

duplicative “it reasonably may be presumed that [the

taxpayer] would have shown that fact.” Id. at 356-57. The

Court thus upheld the determination of the IRS that the

parent’s losses should be disallowed.

Here the IRS’s evidence regarding the size and timing

of the losses similarly reveals that Duquesne claimed losses

significantly greater than its net investment in AquaSource.

Aggregating the 2001 loss and the 2002-2003 losses as

provided on AquaSource’s Stock Sales Adjustment

calculation sheet, J.A. at 744, the IRS determined the

Duquesne group deducted far more in aggregate capital losses

than its net investment in AquaSource, the difference being

$281 million. As in Pacific Lumber, the excess of losses over

investment occurred over a few years before the subsidiary

ceased operation. This “tend[s] strongly to indicate” a double

deduction stemming from the declining value of

AquaSource’s assets. Id. at 357. Because Duquesne has

possession of the relevant documents, we presume that it

would have demonstrated that the losses came from different

sources if that were the case. 6 See id. at 356-57. Though it

6

Our decision in Nat’l State Bank v. Federal Reserve

Bank of N.Y., 979 F.2d 1579 (3d Cir. 1992), is not to the

contrary. There National State Bank (“NSB”) bore the

burden of proof as plaintiff to show that the Federal Reserve

Bank of New York had negligently handled certain checks

that were part of a check-kiting scheme. The District Court

granted summary judgment because the Federal Reserve had

taken too long to inform NSB that it had lost the checks in

dispute. We reversed, as there was no evidence on when the

checks were lost or by whom and the Federal Reserve likely

had the relevant records. This is not our case; Duquesne had

14

attempts to distinguish Pacific Lumber on the grounds that it

was not decided at summary judgment and involved a less

complex set of corporate relationships, that is off target in

light of the low burden the IRS faced here.

The IRS also met its burden to show the amount of

duplicative losses. As the aggregate excess of deducted

losses over net investment implies a double deduction, the

IRS compared the amount of excess to each deduction. That

excess was greater than the deduction claimed for the 2001

stock loss ($199 million), and thus the IRS concluded that at

least the amount of the 2001 stock loss was deducted twice.

This calculation of $199 million in duplicated loss thus

abandoned any IRS claim in addition to that loss (and, as in

Pacific Lumber, it reflected the parent’s claimed loss in the

transaction). Duquesne cites no case in which greater proof

was required, nor does it present any evidence that the $199

million figure is inaccurate. 7 We thus see no unexplained

the relevant records and did not produce documents to

counter the IRS’s allegations of duplicate losses.

7

In its brief to the Tax Court, Duquesne suggested that

the IRS should have used a different valuation for the

AquaSource subsidiaries as of December 31, 2001, which

Duquesne asserted would have yielded a different amount of

duplicated loss. J.A. at 660. This argument is waived, as

Duquesne failed to raise it in its opening brief on appeal. See

United States v. Hoeffecker, 530 F.3d 137, 162 (3d Cir.

2008). Moreover, the issue is not material, as the amount of

the 2002-2003 losses must be determined by comparing

AquaSource’s adjusted basis in its subsidiaries’ stock to the

sale price. See 26 U.S.C. § 1001(a). If this calculation uses

Duquesne’s preferred valuation, it does not reduce the amount

of duplicated loss. See IRS Br. at 28 n.5.

15

gaps in the IRS’s case that renders summary judgment in its

favor improper.

Duquesne nonetheless contends that the IRS had to

“trace” the losses between Duquesne’s sale of AquaSource

stock and the losses incurred on the sale of particular

AquaSource assets (that is, the sale of particular AquaSource

subsidiaries). Tracing is necessary, Duquesne asserts, to rule

out the possibility that unspecified intervening event(s)

somehow account for a portion of the 2002-2003 asset losses.

But because Duquesne fails to present evidence of any such

events or of any other effect that tracing would have on the

amount of duplicated loss, this is merely the kind of

speculation that does not defeat summary judgment. 8

In the alternative, Duquesne contends that the District

Court abused its discretion by failing to order further

discovery before deciding the IRS’s summary judgment

motion. Like Federal Rule of Civil Procedure 56(d), Tax

8

To the extent Duquesne contends that tracing is still

required as a matter of law, we reject it as unsupported by any

authority. Though it relies on Edward Katzinger Co. v.

Commissioner, 44 B.T.A. 533 (1941), aff’d, 129 F.2d 74 (7th

Cir. 1942), that case held it was the taxpayer who failed to

show that its deductions reflected different losses. See id. at

76. The IRS’s 2007 comments on a proposal to prevent

double deductions by disallowing asset losses are also of

little-to-no use. See Unified Rule for Loss on Subsidiary

Stock, 72 Fed. Reg. 2964-01, 2976 (Jan. 23, 2007). While the

IRS rejected a proposal that would “present considerable

tracing issues,” id., it was never adopted and hence is

irrelevant to its burden at summary judgment.

16

Court Rule 121(e) confers discretion on the trial court to

order further discovery when the non-moving party files a

motion or affidavit stating that more discovery is needed for it

to justify its opposition to summary judgment. Duquesne,

however, never claimed that it could not justify its opposition

without further discovery, and thus it cannot claim the

protection of Rule 121(e).

Despite its failure to comply with the Rule, Duquesne

contends that our decision in Sames v. Gable, 732 F.2d 49 (3d

Cir. 1984), required the Tax Court to order further discovery

anyway. There two former police officers filed a civil rights

claim against local police officials for retaliatory discharge.

While their interrogatory requests were pending, the

defendants moved for summary judgment and the plaintiffs

failed to request further discovery under Rule 56(d) (then

codified as Rule 56(f)). Relying on the well-settled rule that

summary judgment should not be granted while the material

facts remain in the moving party’s possession, we held “that it

was error for the district court to grant defendants’ motion for

summary judgment while pertinent discovery requests were

outstanding” despite the plaintiffs’ failure to comply with the

Federal Rules. Id. at 51-52. Here, however, Duquesne had

possession of the relevant facts and chose to limit discovery

for reasons only it knows. In sum, it gambled that its legal

arguments were strong enough to win without creating the

factual record necessary to rebut the IRS’s position. After that

gamble failed, Sames did not require the District Court to

delay summary judgment.

We thus conclude that the Tax Court properly held that

$199 million of the 2001 loss and 2002-2003 losses were

deducted for the same underlying economic loss. After

determining that there was no genuine dispute that $199

million in deducted losses for 2002-2003 were duplicative,

the Tax Court disallowed that amount of those losses under

17

the Ilfeld doctrine. 9 We thus turn to Duquesne’s next

contention: that although its consolidated deductions may be

duplicative, the Ilfeld doctrine nonetheless does not support

the Tax Court’s decision to disallow them.

B. The Ilfeld Doctrine

Ilfeld requires a clear declaration allowing double

deductions for the same loss on consolidated returns.

Duquesne contends that the text of 26 U.S.C. § 165 provides

the required authority to satisfy Ilfeld; if § 165 alone proves

insufficient, the combination of it with the applicable

regulations in effect provides clear authority; and in any event

the regulations alone—particularly §1.337(d)-2T—suffice. In

evaluating these arguments we review anew the Tax Court’s

legal conclusions. See Anderson v. Comm’r of Internal

Revenue, 698 F.3d 160, 164 (3d Cir. 2012).

1. The Current Status of the Ilfeld Doctrine

Duquesne does not dispute that Ilfeld remains good

law. While there is dispute as to the scope of the Ilfeld

doctrine — that is, whether it applies outside the consolidated

return context — for consolidated taxpayers it continues to

require that a statute and/or regulation specifically authorize a

double deduction for an underlying economic loss.

9

Duquesne also argues that the Tax Court erred in

how it allocated the $199 million in disallowed loss between

the 2002 loss and the 2003 loss. The Tax Court allocated $59

million to the 2002 loss and the remaining $140 million to the

2003 loss. J.A. at 48-49. This allocation was proposed by

Duquesne, however, and agreed to by the IRS. Id. at 47-48.

Moreover, as we reject below the statute-of-limitations

argument made by Duquesne, the allocation of losses between

2002 and 2003 is irrelevant.

18

Ilfeld, decided in 1934, concerned consolidated tax

returns filed by Charles Ilfeld Co. and two wholly owned

subsidiaries between 1917 and 1929. During this period, the

subsidiaries claimed substantial operating losses and were

eventually liquidated. Ilfeld Co. then attempted to deduct

losses on its investment in the defunct subsidiaries. Though

these investment losses could not be deducted under the

regulations in effect at the time, the Supreme Court

emphasized that, because the investment losses were already

reflected in the subsidiaries’ operating losses, allowing them

“would be the practical equivalent of a double deduction.”

Ilfeld, 292 U.S. at 68. Thus, “[i]n the absence of a provision

of the [applicable statute] definitely requiring it, a purpose so

opposed to precedent and equality of treatment of taxpayers

will not be attributed to lawmakers.” Id. “[D]efinitely

requiring” a provision to authorize a double deduction for the

same economic loss is a very high hurdle, though how high is

debatable when Ilfeld itself stated that “[i]n the absence of a

provision in the [applicable act] or regulation that fairly may

be read to authorize [a double deduction], the deduction

claimed is not allowed.” Id. at 66.

How to interpret this disparity in the degree of

certainty was taken care of when the Supreme Court restated

Ilfeld as requiring a “clear declaration of intent by Congress”

to authorize a double deduction in Skelly Oil Co., 394 U.S. at

684 (citing United States v. Ludey, 274 U.S. 295 (1927)).

Though a declaration by Congress is stated, we do not purport

to rule out clear statements of intent set out in regulations the

IRS Commissioner is empowered to prescribe. See Ilfeld, 292

U.S. at 68. Indeed, Ilfeld itself noted that because “[t]here

[was] nothing in the [Revenue Act of 1928] that purport[ed]

to authorize double deduction of losses or in the regulations

to suggest that the commissioner construed any of its

provisions to empower him to prescribe a regulation that

would permit consolidated returns to be made on the basis

19

now claimed by [Ilfeld Co.],” it could not deduct its

duplicative investment losses. Id. (emphasis added).

Ilfeld quickly became a key precedent in the

consolidated return context. In Pacific Lumber the Supreme

Court relied on Ilfeld for the principle that “[l]osses of [the

subsidiary] that were subtracted from [the group’s] income

are not directly or indirectly again deductible.” 293 U.S. at

355. Our Court similarly relied on Ilfeld to disallow

deductions for consolidated returns. See Grief Cooperage

Corp. v. Comm’r of Internal Revenue, 85 F.2d 365, 366 (3d

Cir. 1936); see also Comm’r of Internal Revenue v. National

Casket Co., 78 F.2d 940, 941-42 (3d Cir. 1935).

Some of our sister Circuits have extended the Ilfeld

doctrine beyond the consolidated-return context — see, e.g.,

Chicago & N.W.R. Co. v. Comm’r of Internal Revenue, 114

F.2d 882, 887 (7th Cir. 1940) (appropriate method of

depreciation for railroad property); Comar Oil Co. v.

Helvering, 107 F.2d 709, 711 (8th Cir. 1939) (deductibility of

anticipated inventory losses); Marwais Steel Co. v. Comm’r

of Internal Revenue, 354 F.2d 997, 997-99 & n.1 (9th Cir.

1965) (investment losses among corporate taxpayers filing

separate returns).

All of the cases questioning the continued viability of

Ilfeld have occurred outside the consolidated-return context.

For example, in a case in our Circuit—Miller’s Estate v.

Commissioner, 400 F.2d 407 (3d Cir. 1968)—the IRS argued

that certain deductions flowing from estates’ donations to

charitable trusts were double deductions. We distinguished

Ilfeld on the ground that it concerned “the peculiar income tax

context of consolidated corporate income tax reporting,” and

thus it “cannot be regarded as a legitimate canon of estate tax

interpretation to assist the court in this case.” Id. at 411

(internal footnotes omitted).

20

The Supreme Court indicated that Ilfeld might apply

beyond consolidated returns the year following Estate of

Miller in Skelly Oil, where it required a non-consolidated

taxpayer to recalculate certain refunds based on oil and gas

revenues. 394 U.S. at 684. But decades later the Court in

Gitlitz v. Commissioner, 531 U.S. 206 (2001), may have

implied that Ilfeld does not apply other than for consolidated

returns. Addressing an argument abandoned by the IRS—

that, if shareholders of an S corporation (in which income is

passed through to shareholders and then taxed as personal

income) were permitted to pass through a discharge of

indebtedness before reducing tax attributes, the shareholders

may have gotten a “double windfall” by being partially

exempted from taxation yet able to increase their basis and

deduct previously suspended losses—the Court elected not to

address this “policy concern.” Id. at 219-20. Though Justice

Breyer’s dissent criticized the majority for failing to apply

Ilfeld, see id. at 224, the majority did not so much as mention

that decision or Skelly Oil; it certainly did not purport to

overrule them. In any event, after Gitlitz the Ilfeld doctrine

thus remains good law in the consolidated-return context. 10

10

In its supplemental briefing, Duquesne also points to

the Supreme Court’s decision in United Dominion Industries,

Inc. v. United States, 532 U.S. 822 (2001), as an indication of

Ilfeld’s diminished role. Though United Dominion is a

consolidated-return case in which the Court declined to rule

in the IRS’s favor with respect to its double-deduction

argument, it does not apply here because the calculation at

issue “[was] not in and of itself the basis for any tax event.”

Id. at 834. What this means is that the Court rejected the

analogy to Ilfeld because there was no loss deduction at issue.

21

With this in mind, we proceed to what is currently

required for a statute to satisfy the Ilfeld doctrine. It reflects

“[t]he presumption … that statutes and regulations do not

allow a double deduction” for the same economic loss.

United Telecomm. v. Comm’r of Internal Revenue, 589 F.2d

1383, 1387-88 (10th Cir. 1978). This presumption must be

overcome by a clear declaration in statutory text or a properly

authorized regulation.

2. Deduction of the 2002-2003 Losses Under § 165

Duquesne argues that a specific authorization for

duplication of loss here may be found in the text of § 165. In

particular, it points to subsections (a) and (f) of that provision.

As these subsections “provide[] for deduction of losses,

including capital losses,” and the 2002-2003 losses were

incurred on AquaSource’s sale of stock in its subsidiaries,

Duquesne contends that the “deductions fall squarely within

§ 165’s text” even if they are duplicative. Duq. Br. at 15. We

conclude otherwise.

The general rule of § 165(a) is that “[t]here shall be

allowed as a deduction any loss sustained during the taxable

year and not compensated for by insurance or otherwise.” 26

U.S.C. § 165(a). That the subsection allows “a deduction”

for “any loss” indicates that it allows a single deduction for a

single loss. Id. (emphases added). The brief text of the

subsection certainly contains no express authorization of a

double deduction, and we are unaware of any evidence of

congressional intent to that effect. Moreover, as the Tax

Court noted, § 165(a) is quite broad in authorizing a

deduction for any loss and is thus a poor candidate to satisfy

the Ilfeld requirement of explicit approval for duplicating the

underlying economic loss. See J.A. at 46-47.

22

Section 165(f)’s limitation on the deductibility of

capital losses also does not support Duquesne’s position. It

provides that “[l]osses from sales or exchanges of capital

assets shall be allowed only to the extent allowed in sections

1211 and 1212.” 26 U.S.C. § 165(f). 26 U.S.C. § 1211(a)

provides that corporations may deduct capital losses only to

offset capital gains from the sale of different assets, and

section 1212(a)(1)(A) allows corporations to carry back

capital losses up to three years. These limitations are

irrelevant to the prospect of a double deduction for the same

economic loss, and in any event they are not at issue here.

Beyond the plain text of the statute, Ilfeld’s case-

specific holding sends a particularly strong signal that § 165

does not authorize a double deduction. At the time Ilfeld was

decided, the Revenue Act of 1928 was in effect and contained

a provision indistinguishable from the current § 165(a): “In

computing net income there shall be allowed as deductions:

… In the case of a corporation, losses sustained during the

taxable year and not compensated by insurance or otherwise.”

Revenue Act of 1928, ch. 852, § 23(f), 45 Stat. 791, 799-800.

The IRS brought this provision to the Court’s attention and

specifically argued that it did not allow Ilfeld Co. to claim a

double deduction. See Brief for Respondent at 22, Charles

Ilfeld Co. v. Hernandez, 292 U.S. 68 (No. 579), 1933 WL

63349 at *22. To uphold that assertion, Ilfeld had to reject

any assertion that this provision demonstrated a clear intent to

allow it.

While Duquesne contends that any consideration of the

Revenue Act by the Supreme Court was a mere dictum

because it had already determined that the taxpayer’s

deductions were barred by applicable regulations, this

contention runs into Pacific Lumber, which also interpreted

virtually identical statutory text. As no applicable regulations

governed the specific deductions, the Court determined

23

whether they were allowed under the applicable statute, the

Revenue Act of 1921. That Act contained the following

provision: “[For purposes of the corporate income tax], there

shall be allowed as deductions: … Losses sustained during

the taxable year and not compensated for by insurance or

otherwise …” Revenue Act of 1921, ch. 136, § 234(a)(4), 42

Stat. 227, 254-55. The IRS also brought this provision to the

Court’s attention in arguing that it did not authorize a double

deduction. See Brief for Petitioner at 20, McLaughlin v.

Pacific Lumber Co., 293 U.S. 351 (No. 125), 1934 WL 60331

at *20. The bottom line: to hold that the taxpayer’s losses

were not deductible a second time, Pacific Lumber rejected a

provision materially identical to § 165(a) without any help

from the consolidated return regulations. Ilfeld and Pacific

Lumber’s rejection of such a strikingly similar predecessor to

§ 165 as a rationale for a double deduction thus provides

further support for our conclusion that the current statute does

not provide that rationale.

We thus turn to Duquesne’s next argument: that even

if § 165 alone does not satisfy Ilfeld’s requirement of a clear

statement of intent to authorize a double deduction, the

combination of that provision with the applicable regulations

in effect does so.

3. Deduction of the 2002-2003 Losses Under § 165 and

Applicable Regulations

Duquesne asserts that it complied with all applicable

regulations in calculating AquaSource’s losses and then

deducted them under § 165. In particular, it calculated the

amount that AquaSource lost on sales of its subsidiaries’

stock per the regulations governing stock losses, primarily

Treas. Reg. §§ 1.1502-32 and 1.337(d)-2T, before deducting

those losses under § 165. As Duquesne thus purports to have

complied with the requirements of both on-point regulations

24

and an on-point statute, it contends that the Tax Court’s

decision in Woods Investment Co. v. Commissioner, 85 T.C.

274 (1985), teaches that Ilfeld’s clear statement rule is

satisfied and we should rule in its favor by applying the

regulations and the Code “as written.” Id. at 282.

In light of the complexity of the regulatory framework,

Duquesne’s argument requires some unpacking. The first

step in determining the amount of the 2002-2003 losses was

calculating AquaSource’s basis in the stock of its subsidiaries.

Under 26 U.S.C. § 1001(a), the amount of loss for tax

purposes on the sale of an asset, including stock, is equal to

the taxpayer’s basis minus the sale price. For stock sales by

consolidated taxpayers, such as AquaSource, Tax Regulation

§ 1.1502-32 requires the parent to adjust its basis to reflect

various events at the subsidiary, including gains and losses. It

is undisputed that the Duquesne group made all the

adjustments required by § 1.1502-32 to AquaSource’s basis in

its subsidiaries’ stock and calculated the amount of loss for

tax purposes accordingly.

The Duquesne group then calculated the amount of

allowable loss on AquaSource’s stock sales per § 1.337(d)-

2T. Paragraph (a)(1) of the regulation provides the general

rule that “[n]o deduction is allowed for any loss recognized

by a member of a consolidated group with respect to the

disposition of stock of a subsidiary.” Paragraph (c)(2),

governing “[a]llowable [l]oss,” then gives a partial exception

to this general rule: “Loss is not disallowed under paragraph

(a)(1) of this section … to the extent the taxpayer establishes

that the loss … is not attributable to the recognition of built-in

gain on the disposition of an asset (including stock and

securities).” Treas. Reg. § 1.337(d)-2T(c)(2). A built-in gain

occurs when an asset increases in value before being sold. As

AquaSource’s subsidiaries had declined in value, none of the

2002-2003 losses reflected built-in gains.

25

With this backdrop to Duquesne’s contention of

statutory/regulatory compliance in conjunction with its

reading of Woods, the Government asserts that Woods does

not control, as here no statute or regulation permitted a double

deduction with anything approaching the specificity that

compelled the outcome in that case. In Woods the issue was

whether the Ilfeld doctrine applied to the calculation of a

parent’s basis in its subsidiary’s stock. At the time

Regulation § 1.1502-32 required the parent to adjust its basis

in line with the subsidiary’s earnings and profits, and 26

U.S.C. § 312(k) required the parent to calculate those

earnings and profits using a straight-line method of

depreciation. Despite its awareness of the potential for

straight-line depreciation to result in the practical equivalent

of a double deduction, the IRS had failed to amend § 1.1502-

32 for almost twenty years. The Tax Court reasoned that the

details of the consolidated return regime were “essentially a

legislative and administrative matter,” and thus it was not a

court’s institutional role to engage in “judicial interference.”

Woods, 85 T.C. at 282. It thus held that it would “apply [the

consolidated return] regulations and the statute as written”: if

the IRS disliked this result, it “should use [its] broad power to

amend [its] regulations.” Id. Ilfeld did not support the IRS’s

position because “the detailed rules in [§ 1.1502-32], which

were enacted to comprehensively address the problem in

[Ilfeld], together with section 312(k), can fairly be read to

authorize the result herein . . . .” Id. at 283 (internal footnote

omitted). Woods thus teaches that when an on-point statute

and an on-point regulation authorize the taxpayer to act as it

did, courts should apply the statute and regulation as written.

The Tax Court clarified in Wyman-Gordon Co. v.

Commissioner, 89 T.C. 207 (1987), that Woods may not apply

in the absence of a statute and/or regulation clearly

authorizing the disputed deductions. At issue was whether

Code § 312(1) and Regulation § 1.1502-32 authorized the

26

taxpayer to include discharge of indebtedness income in the

calculation of its subsidiaries’ earnings and profits. The

Court distinguished Woods on the ground that the latter’s

holding “was based in large part on § 312(k), which

specifically require[d]” the taxpayer to compute its basis as it

had, whereas “there exist[ed] no comparable statutory

provision that require[d] inclusion of discharge of

indebtedness income in earnings and profits.” Id. at 219. As

no specific provision of any regulation, including § 1.1502-

32, supported the taxpayer’s position, the Court disallowed

the deductions as an impermissible duplication of loss. Id. at

224. Though there was thus no on-point regulation at issue in

Wyman-Gordon, it nonetheless indicates that Woods’

instruction to apply the Code and regulations as written

requires a statute and/or regulation affirmatively permitting

the taxpayer to act as it did. 11

Section 165, however, did not specifically authorize

Duquesne to claim a duplicative deduction of the 2002-2003

losses. As discussed above, its subsection (a) broadly allows

a single deduction for any loss, but it does not contemplate

the possibility of a double deduction. Moreover, as a

materially identical statute was at issue in Ilfeld and Pacific

Lumber, those decisions send a particularly strong signal that

11

The Tax Court’s decision in CSI Hydrostatic

Testers, Inc. v. Commissioner, 103 T.C. 398 (1994), is not to

the contrary. In that case, the Court applied Woods when

legislative history indicated clearly that Congress intended the

statute in dispute to require including relevant income in the

calculation of its subsidiaries’ earnings and profits, and thus

no more specific statement was needed for the taxpayer to

adjust its basis under § 1.1502-32. See id. at 405.

27

§ 165 does not authorize a double deduction. Thus it is out of

play for coupling it to potentially applicable regulations.

4. Deduction of the 2002-2003 Losses Under Solely the

Regulations

Duquesne counters that, even absent § 165, its

regulatory compliance with §§ 1.1502-32 and 1.337(d)-2T

alone was sufficient to overcome any effect of Ilfeld. 12 Yet

we are not persuaded that these regulations are sufficiently

clear to preclude application of the Ilfeld doctrine. At the

outset, § 1.1502-32 does not support Duquesne’s position

because its basis adjustments address the prospect of a

duplicated loss in a transaction where the subsidiary

recognizes its loss before the parent engages in a stock sale.

Consolidated Return Regulations; Special Rules Relating to

Dispositions and Deconsolidations of Subsidiary Stock, 55

Fed. Reg. 9426-01, 9427 (Mar. 14, 1990). Where, as here,

the parent’s stock sale occurs first, the prospect of a double

12

Duquesne also posits that Treas. Reg. § 1.1502-80(a)

precludes application of the Ilfeld doctrine because it requires

separate treatment of parent and subsidiary in the absence of a

consolidated return regulation to the contrary. Though the

Tax Court once interpreted the regulation in this manner

without reasoned analysis, see Gottesman & Co., Inc. v.

Commissioner, 77 T.C. 1149, 1156 (1981), this interpretation

finds no support in its text. See Treas. Reg. § 1.1502-80(a)

(as amended March 2003) (“The Internal Revenue Code, or

other law, shall be applicable to the group to the extent the

regulations do not exclude its application”). We therefore

reject it and simply look to other law, including the Ilfeld

doctrine, to determine the proper treatment of stock losses for

entity groups filing consolidated returns.

28

deduction has been addressed by other regulations since §

1.1502-20 was issued in the early 1990s. Id.

We thus turn to the other regulation on which

Duquesne relies, § 1.337(d)-2T. As noted above, subsection

(a)(1) generally forbids any deduction for losses incurred on

sales of subsidiary stock, and subsection (c)(2) provides that

“[l]oss is not disallowed under paragraph (a)(1) . . . to the

extent the taxpayer establishes that the loss . . . is not

attributable to the recognition of built-in gain on the

disposition of an asset (including stock and securities).”

From this double negative (“not disallowed”) on a negative

(“not attributable”), Duquesne asks us to infer that any stock

losses not reflecting a built-in gain, including duplicative

losses, are deductible.

We do not believe that the structure and purpose of the

broader regulatory regime support Duquesne’s interpretation

of § 1.337(d)-2T. Consolidated taxpayers pay based on the

consolidated taxable income (CTI) of the group. United

Dominion Industries, Inc. v. United States, 532 U.S. 822, 826

(2001). CTI is calculated by combining the separate taxable

income (STI) of each member of the group and then

incorporating certain adjustments calculated on a

consolidated basis. Id. Adjustments on a consolidated basis

are an example of the consolidated return regime adopting the

“single entity” approach to prevent distortion of tax liability.

See American Standard, Inc. v. United States, 602 F.2d 256,

261-62 (Ct. Cl. 1979). This treats the entire consolidated

group as a single taxpayer and “reduce[s] the significance of

each member’s separate existence.” Don Leatherman, Why

Rite-Aid Is Wrong, 52 Am. L. Rev. 811, 815-16 (2003). The

Ilfeld doctrine also reflects a single-entity approach by

preventing the group as a whole from claiming duplicative

deductions that the separate existence of parent and

29

subsidiary would otherwise allow. See Axelrod, supra, §

18:2 (4th ed. 2015).

This structure for consolidated returns indicates the

intent that the 2002-2003 losses be dealt with on a

consolidated basis, and thus it reflects the same single-entity

approach as the Ilfeld doctrine. Section 1.1502-32, on which

Duquesne relies, has the express purpose of treating the group

as “a single entity.” Treas. Reg. § 1.1502-32(a)(1). And

Treas. Reg. §§ 1.1502-11(a)(3) and 1.1502-22 provide that

net capital gains and losses — that is, the overall amount of

capital gains or losses in a particular year — are those items

calculated on a consolidated basis.

The calculation of individual stock losses also occurs

on a consolidated basis, see Treas. Reg. 1.1502-12(j), and for

nearly thirty years these calculations have followed detailed

rules designed to prevent tax evasion. Before Rite-Aid,

§ 1.1502-20 limited stock losses based on various loss

disallowance factors. See Corporations; Consolidated

Returns—Special Rules Relating to Dispositions and

Deconsolidations of Subsidiary Stock, 56 Fed. Reg. 47379-01,

47379 (Sept. 19, 1991). Those factors primarily disallowed

stock losses reflecting a built-in gain in the subsidiary’s

assets. See Consolidated Return Regulations; Special Rules

Relating to Dispositions and Deconsolidations of Subsidiary

Stock, 55 Fed. Reg. 9426-01, 9427 (Mar. 14, 1990). Though

the sale of a capital asset with a built-in gain generally results

in tax liability, see 26 U.S.C. § 1231, a formerly common

type of transaction allowed consolidated taxpayers to arrange

a stock loss to offset that gain and thereby avoid tax

liability. 13 Section 1.1502-20 also had the distinct purpose of

13

In what was known as a “son of mirrors”

transaction, a consolidated taxpayer would purchase a new

subsidiary that had assets with built-in gains. See

30

preventing double deductions, see Consolidated Return

Regulations, 55 Fed. Reg. at 9427, which was reflected in the

duplicated loss factors. Specifically, it prevented double

deductions when, as here, the parent’s stock loss occurred

before the subsidiary recognized a loss. Id.

But because Rite-Aid invalidated § 1.1502-20, the IRS

had to issue new regulations limiting stock losses. In doing

so, it separated the rules for stock losses occurring on and

after March 7, 2002, primarily into two temporary

regulations: §§ 1.337(d)-2T and 1.1502-35T. 14 As noted, §

1.337(d)-2T(c)(2)’s exception to the general ban on losses for

subsidiary stock sales in consolidated tax regimes requires the

taxpayer to prove that a loss is not the result of a built-in gain.

Though the IRS acknowledged that § 1.337(d)-2T

“d[id] not disallow stock loss[es] that reflect[] . . . built-in

asset losses of a subsidiary member,” it informed taxpayers

that it “and Treasury believe that a consolidated group should

not be able to benefit more than once from one economic

loss” and would issue another regulation to prevent double

deductions. I.R.S. Notice 2002-18, 2002-1 C.B. 644 (Mar. 9,

Leatherman, supra, at 846-47 & n.172. It would then trigger

a gain by transferring those assets to another member of the

group, which increased the parent’s basis in the new

subsidiary’s stock under § 1.1502-32. Id. But because the

transfer of the assets also reduced the value of the new

subsidiary’s stock, the parent could then sell its stock and

claim a loss to offset the gain realized on the assets. Id.

14

Though § 1.1502-35T was not issued in final form

until 2003, it applied retroactively to stock sales starting on

March 7, 2002 (with certain exceptions not relevant here).

See Treas. Reg. § 1.1502-35T(j).

31

2002). The IRS thus had the prospect of issuing another

regulation to bar double deductions when it issued § 1.337(d)-

2T, and doing so was consistent with the consolidated return

practice of imposing multiple restrictions on stock losses (as

in the former § 1.1502-20).

Section 1.1502-35T was the pertinent regulation, and it

was expressly intended “to prevent a group from obtaining

more than one tax benefit from a single economic loss.”

Treas. Reg. § 1.1502-35T(a). It accomplished this through a

loss suspension rule:

Any loss recognized by a member of a

consolidated group with respect to the

disposition of a share of subsidiary member

stock shall be suspended to the extent of the

duplicated loss with respect to such share of

stock if, immediately after the disposition, the

subsidiary is a member of the consolidated

group of which it was a member immediately

prior to the disposition (or any successor

group).

Treas. Reg. § 1.1502-35T(c)(1) (as issued in 2003 retroactive

to March 7, 2002). Yet this regulation failed to prevent a

double deduction here because of how the Duquesne group

structured the relevant transactions in the wake of Rite-Aid.

The loss suspension rule of paragraph 1.1502-35T(c) applies

only when a member of a consolidated group, such as

AquaSource, sells stock in its subsidiaries and those

subsidiaries remain members of the group after the sale. But

because AquaSource sold all of the stock in its subsidiaries to

third parties, they were no longer members of the group after

the 2002-2003 losses. Paragraph 1.1502-35T(c) thus did not

prevent AquaSource from deducting the 2002-2003 losses.

Though Duquesne may nonetheless claim that it complied

32

with § 1.1502-35T in the sense that it did not violate it, we

agree with the Tax Court that this is not enough to meet the

clear authorization test of Ilfeld.

So this case comes down to whether, under the

interpretive principle of Ilfeld, § 1.337(d)-2T clearly

authorizes the losses in 2002-03 for the Duquesne

consolidated group that duplicates the loss it took for 2001.

Its argument is that, even if Ilfeld applies, while paragraph

(a)(1) bars a deduction for any losses by any member of a

consolidated group with respect to the disposition of stock by

a subsidiary (here the sale by AquaSource of the entire

interest in eight of its direct and indirect subsidiaries),

paragraph (c)(2) does not disallow those losses if AquaSource

shows that they do not result from built-in gain on that sale,

and here they do not.

If literally applied to the exclusion of all other

provisions of the Internal Revenue Code, Duquesne (and our

dissenting colleague) make a strong argument. By regulation

there is excluded —that is, disallowed—any deduction for a

loss that occurs when a member of a consolidated group sells

stock in a subsidiary. 26 C.F.R. § 1.337(d)-2T(a)(1). Yet that

deduction disallowance “is not disallowed” under paragraph

(c)(2) when the sale does not result in the recognition of built-

in gain (an assertion we accept here).

So is the case closed? No. That is because the partial

excision in paragraph (c)(2) is one-time only, for there is no

mention in the regulation of approval for a loss deduction that

duplicates another already taken for the underlying economic

loss. We know that it has nothing to do with loss duplication

because, at the same time paragraph (c)(2) was issued

notwithstanding its exception to loss disallowance, the Notice

accompanying it warned that the “IRS and Treasury believe

that a consolidated group should not be able to benefit more

33

than once from one economic loss.” IRS Notice 2002-18,

2002-1 C.B. 644 (Mar. 9, 2002). In this context, the

blinkered approach of Duquesne does not stand so long as

there is Ilfeld. It remains a valid interpretative principle for

consolidated returns until the Supreme Court tells us

otherwise. 15

We therefore confront circumstances fundamentally

unlike those before the Tax Court in Woods. This is not a

case of the IRS failing to act when its own regulations and

related statute specifically authorize the result sought by the

taxpayer. Here, unlike Woods, the IRS has never had a

regulatory scheme in place that would authorize Duquesne to

take both deductions it has claimed for the same economic

loss. And the text of § 1.337(d)-2T does not clearly allow in

the future losses already taken on consolidated returns. Put

another way, future losses cannot be added to past losses

already deducted for the same group of assets. The dissent

would have us apply Woods and hold that the IRS implicitly

authorized Duquesne’s double deductions when they were not

explicitly banned. For consolidated-return taxpayers, implied

authorizations are not enough; they must be clear statements

15

What our dissenting colleague characterizes as our

deference to the IRS’s “position regarding the status or

strength of judicial precedent,” Dissent at 13, is no deference

at all, but our independent assessment that possibly relevant

regulations did not provide the required authorization under

Ilfeld for Duquesne to take a double deduction. Because we

happen to agree with the IRS as to whether Ilfeld’s

requirements were satisfied in this circumstance does not

mean we defer in any way to its reading of judicial precedent.

34

that can fairly be read to allow double deductions for the

same economic loss, and here that did not occur. 16

C. Statute of Limitations

Finally, Duquesne contends that the IRS is time-barred

from ordering repayment of at least some of its tentative

refunds resulting from the carryback of the 2002 and 2003

losses to tax year 2000. Though we agree with the Tax Court

that it is difficult to understand what Duquesne is attempting

to argue on this issue, its briefing on appeal enables us to

discern the basic contours of the argument. Duquesne asserts

that, to the extent losses were carried back from 2002 to 2000

16

Duquesne also makes the argument that even if its

interpretation of the consolidated return regulations proved

incorrect, it is still entitled to claim a double deduction

because its interpretation of those regulations was reasonable.

Though the Tax Court allowed a reasonableness defense in

Gottesman, this was because the IRS sought to impose a

penalty tax that is strictly construed against the IRS. See 77

T.C. at 1156. Indeed, the Court repeated that its reasoning

rested on the penalty tax at issue “for emphasis.” Id.

Duquesne is unable to cite any case in which reasonableness

was allowed as a defense for non-payment of ordinary

corporate taxes such as those before us today (despite its

insistence that Applied Research Assocs., Inc. v.

Commissioner, 143 T.C. 310 (2014), somehow implies this).

Though Duquesne also argues that Gottesman teaches

courts not to fill gaps in the consolidated return regulations,

Gottesman’s language to that effect is also off point. See 77

T.C. at 1158. It concerned not only a penalty tax, but also, as

in Woods, a situation in which the IRS had failed to amend its

regulations despite having years to do so. See id.

35

and it received tentative refunds for tax year 2000 as a result,

26 U.S.C. § 6501(k) places those refunds beyond the statute

of limitations. As Duquesne agreed to extend the statute of

limitations for losses carried back from 2003 to 2000,

however, well-established law provides that the Government

could demand repayment of any refunds issued for tax year

2000. As we see nothing in § 6501(k) that overcomes the

effect of Duquesne’s agreement with the IRS, we reject the

former’s argument that the tentative refunds here are outside

the limitations period.

Section 6501 provides the framework for determining

the statute of limitations. When a tax year is within the

statute of limitations, it is said to be “open;” when the

limitations period expires, it is “closed.” Under § 6501(a), a

tax year generally remains open for three years after the

taxpayer files its return.

But when a corporate taxpayer carries losses back to

an earlier year, determining the statute of limitations is more

complex. A loss carryback uses capital losses incurred in one

year to offset capital gains in an earlier year. See 26 U.S.C.

§§ 1211-12. Though the statute of limitations is typically

measured from the earlier year, § 6501(h) provides that the

limitations period is extended to include the period applicable

to the later year from which losses were carried back. For

example, if losses were carried back from 1992 to 1989, §

6501(h) would extend the limitations period for 1989 until at

least 1995 (that is, three years after 1992). Subsection

6501(k), on which Duquesne relies, provides in essence that

the extended period provided by § 6501(h) also applies when

the taxpayer carries back losses in order to claim a tentative

refund. 17

17

Subsection 6501(k) reads in full:

36

Regardless whether the taxpayer carries back any

losses at all, it may agree under § 6501(c)(4) to extend the

limitations period for a given tax year. If the taxpayer does

so, the IRS may demand payment of additional taxes for that

year on any ground. See Calumet Industries, Inc. v. Comm’r

of Internal Revenue, 95 T.C. 257, 278 (1990) ( “So long as

the period for assessment is open under some provision in the

year under consideration, we have jurisdiction to consider all

items that may affect that taxable year”). This rule has been

applied repeatedly and specifically to allow the IRS to

disallow losses carried back from a closed year. See id.; see

also Pacific Transport Co. v. Comm’r of Internal Revenue,

483 F.2d 209, 214-15 (9th Cir. 1973); Mecom v. Comm’r of

Internal Revenue, 101 T.C. 374, 392-93 (1993) (collecting

cases), aff’d, 40 F.3d 385 (5th Cir. 1994) (table). As a result,

Tentative carryback adjustment assessment

period.--In a case where an amount has been

applied, credited, or refunded under section

6411 (relating to tentative carryback and refund

adjustments) by reason of a net operating loss

carryback, a capital loss carryback, or a credit

carryback (as defined in section 6511(d)(4)(C))

to a prior taxable year, the period described in

subsection (a) of this section for assessing a

deficiency for such prior taxable year shall be

extended to include the period described in

subsection (h) or (j), whichever is applicable;

except that the amount which may be assessed

solely by reason of this subsection shall not

exceed the amount so applied, credited, or

refunded under section 6411, reduced by any

amount which may be assessed solely by reason

of subsection (h) or (j), as the case may be.

26 U.S.C. § 6501(k).

37

when the taxpayer agrees to extend the statute of limitations

for a particular year, the IRS may disallow within the

extended period any losses carried back to that year and

demand repayment of the resulting refunds.

In this case, Duquesne agreed to extend the statute of

limitations for tax year 2000. After Duquesne carried back

losses from 2003 to 2000 and received a tentative refund, the

statute of limitations for tax year 2000 was extended until at

least 2006 under § 6501(k). It is undisputed that, before that

period lapsed, Duquesne agreed to extend the statute of

limitations and the IRS timely served Duquesne with a notice

of deficiency based on losses carried back to 2000. Though

Duquesne contends that § 6501(k) somehow requires that tax

year 2002 be within the statute of limitations as well, we see

nothing in the subsection’s text to disturb well-settled law on

the effect of a taxpayer’s agreement with the IRS. As 2000

was open by agreement with respect to the 2003 losses and

the 2002 losses were carried back to 2000 as well, we

conclude that the IRS is not time-barred from demanding

repayment of the refunds resulting from any losses carried

back to 2000.

* * * * *

Though it is tempting to dismiss this case as merely

further proof of the “difficult and torturous path” revealed

when “we are constrained to enter the labyrinthine structured

tax laws,” Ambac Industries, Inc. v. Comm’r of Internal

Revenue, 487 F.2d 463, 464 (2d Cir. 1973), it also serves to

remind us that double deductions for consolidated taxpayers

are treated differently from other aspects of tax law. Rite-Aid

created a gap in the regulations preventing them, and thus

Duquesne concluded correctly that a door had opened in the

consolidated-return regime. It took a deduction for losses it

incurred in 2001. That is a ticket for only one ride; Duquesne

38

cannot do so again for the same economic loss. It especially

cannot do so when the IRS told it, when Reg. 1.337(d)-2T

went effective, that a second ride on the same-loss train is

closed to consolidated taxpayers. Yet that is what Duquesne

attempted in the hope that not paying for that ride would go

unchallenged or, if challenged, its position would be upheld

by a court. Duquesne and our dissenting colleague believe

that the authority for a loss given in this temporary regulation

looks forward only, with no accounting for the same loss

already taken. We believe Ilfeld counsels otherwise and thus

affirm the Tax Court’s judgment.

39

HARDIMAN, Circuit Judge, dissenting.

According to the Majority, this case “concerns the

continued vitality of the so-called Ilfeld doctrine for

interpreting the Internal Revenue Code.” Majority Op. 3. Yet

there can be no doubt that Ilfeld retains its vitality as a

precedent of the Supreme Court, and Appellant Duquesne

Light acknowledges as much. As I see it, the true question

presented is whether Ilfeld applies where, as here, a hastily

issued regulation authorizes the very actions that Ilfeld

cautions against. The answer to that question depends on

Ilfeld’s scope, the meaning of the applicable regulations

(specifically § 1.337(d)-2T), and the significance of

Duquesne’s compliance with those regulations. Because I see

those issues differently than my colleagues, I respectfully

dissent.

I. The Scope of Ilfeld

Ilfeld seeks to prevent double deductions. To that end,

the Supreme Court declared that “the practical equivalent of a

double deduction” should not be sanctioned absent “a

provision of the Act definitely requiring it.” Charles Ilfeld

Co. v. Hernandez, 292 U.S. 62, 68 (1934). The Majority

interprets this language to require the taxpayer to identify

three distinct layers of authorization. The first and second

layers would require statutory authorization for each of the

two deductions, while a third layer would need to provide

“explicit approval” for the taxpayer to take both deductions.

See Majority Op. 22. That means even if the Code separately

allows Deduction A and Deduction B, the taxpayer could not

take both deductions unless a provision authorized them to be

taken simultaneously. This triple-authorization requirement, I

1

believe, goes above and beyond any rule envisioned by the

Supreme Court.

As my colleagues acknowledge, disapproval of double

deductions was not Ilfeld’s “case-specific holding.” See

Majority Op. 23. In fact, the Ilfeld Court disallowed the

taxpayer’s claimed deduction not on these overarching policy

grounds, but because the then-applicable regulations

prevented the taxpayer from recognizing the second claimed

loss. 292 U.S. at 67. In that same vein, other courts have

recognized that Ilfeld’s preclusion of double deductions

except where “definitely require[d]” was not essential to the

Court’s disposition. Cf. Marwais Steel Co. v. Comm’r of

Internal Revenue, 354 F.2d 997, 998 (9th Cir. 1965) (“We

follow taxpayer’s argument that part of what was there said

was dicta.”). And when discussing the actual facts and

regulations at issue in the case, the Ilfeld Court seemed to lay

down a less rigorous rule, holding that: “In the absence of a

provision in the Act or regulations that fairly may be read to

authorize it, the deduction claimed is not allowable.” 292

U.S. at 66 (emphasis added).

Thus, two distinct standards (“definitely requires” or

“fairly may be read to authorize”) can be extracted from

Ilfeld. While it is true that the “definitely requires” standard

supports the Majority’s triple-authorization rule, the “fairly

may be read to authorize” standard suggests something

between a watered-down clear statement rule and an

interpretive aid. The Majority acknowledges that choosing

between these standards is both difficult and crucial. See

Majority Op. 19 (explaining that Ilfeld’s standard is

“debatable” and that “‘[d]efinitely requiring’ a provision to

authorize a double deduction . . . is a very high hurdle”). For

2

the reasons I shall explain, we should adopt the “fairly may

be read to authorize” standard.

A.

The disparate standards just mentioned can be

harmonized, despite their apparent inconsistency. See, e.g.,

N.J. Air Nat’l Guard v. Fed. Labor Relations Auth., 677 F.2d

276, 282 (3d Cir. 1982). As a general rule, courts should

preclude double deductions unless “definitely require[d].”

Ilfeld, 292 U.S. at 68. And when is a double deduction

definitely required? When a statute or regulation “fairly may

be read to authorize it.” Id. at 66. The taxpayer lost in Ilfeld

because the Court could point to no authority that “purports

to authorize double deduction of losses.” Id. at 68 (emphasis

added). By requiring merely that the law “purport to

authorize” a double deduction, the Court eschewed a reading

like the Majority’s triple-authorization rule.

B.

Apart from the language of Ilfeld itself, courts

interpreting it have never required the triple authorization that

the Majority articulates today. Just a year after Ilfeld was

decided, our Court explained that the doctrine prohibits

double deductions “except where act and regulation so

provide.” Comm’r of Internal Revenue v. Nat’l Casket Co., 78

F.2d 940, 941 (3d Cir. 1935). Thirty years later, we stated that

despite an obvious double (or even triple) deduction, we had

“no choice . . . other than to apply [the applicable provision]

literally as it is worded.” Miller’s Estate v. Comm’r of

Internal Revenue, 400 F.2d 407, 410 (3d Cir. 1968). We went

on to say that “[t]he line of cases cited by the Commission

descending from [Ilfeld], and allegedly supporting the rule of

3

tax interpretation that double deductions are not permitted

absent express statutory mandate, is merely a variation on the

‘avoid absurd results’ rule.” Id. at 411. We cautioned that

“using broad equitable consideration[s], such as preventing

multiple deductions, to solve problems raised by a tax statute

is a dangerous course.” Id. at 411 n.12.1 Since this weak

embrace, we have not cited Ilfeld.2

1

The Majority says our holding in Miller

“distinguished Ilfeld on the ground that it concerned the

peculiar income tax context of consolidated corporate income

tax reporting.” Majority Op. 20 (internal quotations omitted).

This reading of Miller ignores its primary holding that we

must apply the law “literally as it is worded” and seizes on an

additional reason provided by the court to distinguish Ilfeld.

Miller, 400 F.2d at 411 (“In addition, this tax ‘rule’ has rarely

been applied outside the peculiar income tax context of

consolidated [returns].” (emphasis added)). In fact, the

language quoted by the Majority was not meant to reaffirm

Ilfeld in the consolidated returns context, but to express

skepticism toward the rule generally, as indicated by the

Miller court’s use of scare quotes as a rhetorical device. See

id.

2

Our sister courts have taken a similarly modest view

of Ilfeld’s scope. See Transco Expl. Co. v. Comm’r of Internal

Revenue, 949 F.2d 837, 841 (5th Cir. 1992) (“[Ilfeld] is only

an interpretive principle. It does not require or license us to

rewrite the Code or the Secretary’s regulations. This court

and others have balked in the past at revision of the tax code

to reach what appears to be a more sensible result.”); Transco

v. Comm’r of Internal Revenue, 561 F.2d 1023, 1026 (1st Cir.

4

The Supreme Court’s recent treatment of factually

similar cases indicates that any such “clear statement” rule

yields in the face of compliance with applicable laws and

regulations. In Gitlitz v. Commissioner of Internal Revenue,

the shareholders of an S corporation received a double tax

benefit by excluding a debt cancellation from their income

under one provision (rendering it nontaxable) and then

including that same amount when calculating their stock basis

through another provision (so that it increased their

deductions for losses). 531 U.S. 206, 209–10 (2001). Because

the shareholders’ deductions complied with sequencing

provisions “expressly addressed in the [applicable] statute,”

the Supreme Court held that the statute imposed no restriction

on the deduction. Id. at 218–19. Without citing to Ilfeld, the

majority closed by addressing Ilfeld’s principal concern:

[C]ourts have discussed the policy concern that,

if shareholders were permitted to pass through

the discharge of indebtedness before reducing

any tax attributes, the shareholders would

wrongly experience a “double windfall”: They

would be exempted from paying taxes on the

full amount of the discharge of indebtedness,

and they would be able to increase basis and

deduct their previously suspended losses.

Because the Code’s plain text permits the

1977). But cf. Marwais Steel Co., 354 F.2d at 998 (applying

Ilfeld even though “the argument of [the taxpayer] is very

difficult to answer [and] seems near perfect in logic[,

because] in human experience, most logic can be carried only

so far”).

5

taxpayers here to receive these benefits, we

need not address this policy concern.

Id. at 219–20 (citation omitted).

I find it significant that the only citation to Ilfeld in the

Gitlitz case was in Justice Breyer’s lone dissent. He opined

that the statute was ambiguous and should be interpreted in

favor of “closing, not maintaining, tax loopholes.” Id. at 223

(Breyer, J., dissenting). And he lamented the fact that “[the

majority’s] interpretation of the Code results in the ‘practical

equivalent of [a] double deduction.’” Id. at 224 (quoting

Ilfeld, 292 U.S. at 68). Like the Majority here, Justice Breyer

would have precluded the double deduction because he could

find no “clear declaration of intent by Congress” to allow it.

Id.

Thus, the Gitlitz Court broke along the same

theoretical lines as we do here. Justice Breyer’s view of

Ilfeld’s scope would have required an explicit authorization in

the Code allowing for both tax benefits to be reaped

simultaneously. See id. The eight-justice majority, on the

other hand, was satisfied that the combined provisions

“permit[ted] the taxpayers to receive the[] benefits,” without

requiring an additional statement that the two benefits could

be concurrently utilized.3 Id. at 220. It goes without saying

3

The Majority notes that the Court in Gitlitz “did not

purport to overrule [Ilfeld].” Majority Op. 21. This makes

sense, given that the two cases are perfectly consistent. Each

indicates that the judiciary’s policy concern of precluding

double deductions must yield to positive law that provides

otherwise. The Majority finds support in the fact that the

Gitlitz majority “did not so much as mention” Ilfeld. Id.

6

that we must adhere to the opinion of the Court. And Gitlitz’s

“permit” standard is quite closer to my “fairly may be read to

authorize” standard than it is to the Majority’s triple-

authorization rule.

C.

Next, the Majority’s triple-authorization test should be

rejected because reasonable minds can differ as to when and

how it would be satisfied. The decision of the Tax Court in

Woods Investment Co. v. Commissioner of Internal Revenue,

85 T.C. 274 (1985), is instructive in this regard. The Majority

cites Woods as a case that clears Ilfeld’s “high hurdle.” See

Majority Op. 19, 25–26. I cannot agree. Woods involved the

interplay of a regulation and statute that, when applied

simultaneously, could result in a double deduction. As the

Majority explained:

[Section] 1.1502-32 required the parent to

adjust its basis in line with the subsidiary’s

earnings and profits, and 26 U.S.C. § 312(k)

required the parent to calculate those earnings

and profits using a straight-line method of

depreciation. Despite its awareness of the

potential for straight-line depreciation to result

in the practical equivalent of a double

deduction, the IRS had failed to amend §

1.1502-32 for almost twenty years.

However (as noted above), the Gitlitz majority felt that it

“need not address [the] policy concern” of duplicative

benefits (i.e., the Ilfeld doctrine) and the citation to Ilfeld by

Justice Breyer in dissent emphasizes Ilfeld’s applicability to

the case. 531 U.S. at 219–20.

7

Majority Op. 26. It is difficult to understand how Woods—

where the IRS was aware of the potential of a loophole but

failed to amend the scheme—is one where an on-point statute

and an on-point regulation provide “explicit approval for

duplicating the underlying economic loss,” as the Majority

claims is necessary under Ilfeld. Majority Op. 22. If Woods

passes muster, the Majority’s test is meaningless. Presumably

for that reason, the Woods court did not make such a claim.

Rather, it primarily relied on Ilfeld’s other standard—the

“fairly may be read to authorize” standard that I advocate

here—and wrote that the taxpayer should prevail because the

regulations and statute “can fairly be read to authorize the

result herein.” 85 T.C. at 283.

One final point of policy is worth mentioning: If we

were to adopt the “fairly may be read to authorize” standard,

we would not be opening the double-deduction floodgates.

For example, I agree with the Majority’s excellent analysis

that § 165 does not authorize a double deduction. See

Majority Op. 22–23 (noting, among other things, that the

language of § 165 “allows a single deduction for a single

loss” and that the Court in Ilfeld rejected a similar provision).

In fact, the Majority’s careful parsing of § 165 is just what the

“fairly may be read to authorize” standard encourages—an

examination of the text, history, and scheme to see whether

the taxpayer’s interpretation is a fair one.4

4

The preceding section hopefully makes clear that,

contrary to the Majority’s claim, I do not interpret Ilfeld to

permit double deductions merely “when they [are] not

explicitly banned.” Majority Op. 34. A double deduction is

not authorized by silence; rather it is allowed when a statute

8

II. The On-Point Regulations

The Majority does not dispute that Duquesne’s returns

complied with the applicable regulations: § 1.1502-32 (basis

calculation) and § 1.337(d)-2T (loss allowance). Majority Op.

24. The meaning of those regulations is a point of contention,

however.

A. Section 1.337(d)-2T

Section 1.337(d)-2T says in paragraph (a)(1): “No

deduction is allowed for any loss recognized by a member of

a consolidated group with respect to the disposition of stock

of a subsidiary.” Paragraph (c)(2) qualifies this rule by stating

that the “[l]oss is not disallowed under paragraph (a)(1) of

this section . . . to the extent the taxpayer establishes that the

loss or basis is not attributable to the recognition of built-in

gain.”5

Section 1.337(d)-2T’s quadruple-negative construction

leaves much to be desired, but its clumsy syntax doesn’t

absolve us from enforcing it as written. Specifically, the

provision says that losses such as the one Duquesne took here

are “not disallowed.” While the Majority claims this language

or regulation “fairly may be read to authorize” it. See Ilfeld,

292 U.S. at 66.

5

In my view, the Majority’s discussion of § 1.337(d)-

2T was off track from the outset because its triple-

authorization standard obliges the regulation to bear much

more weight than the caselaw demands for the reasons I

described in Part I. What is actually demanded of § 1.337(d)-

2T is that it can reasonably be interpreted (i.e., read fairly) to

mean what the taxpayer claims it means.

9

does not positively authorize any deductions, I read it

differently. My disagreement with the Majority on this score

is simple: “not disallowed” can be read fairly to mean

“allowed.” It has long been a convention of the English

Language—as with arithmetic and logic—that two negatives

make a positive. See, e.g., Robert Lowth, A Short

Introduction to English Grammar: With Critical Notes 162

(1762) (“Two Negatives in English destroy one another, or

are equivalent to an Affirmative.”); Henry Watson Fowler, A

Dictionary of Modern English Usage 374 (1926) (“You may

treat a double negative expression as though it were formally

as well as virtually a positive one.”). And the convention

remains prevalent today, both in formal writing and in the

vernacular. See, e.g., Martha Rose Shulman, Focaccia: One

Basic Bread, Endless Delicious Options, N.Y. Times, May

13, 2013 (“Focaccia is a flatbread, not unlike a very thick-

crusted pizza”); Tad Friend, Blowback, New Yorker, Oct. 25,

2010 (“He grinned, seeming not displeased to be

complicating the issue.”); Tom Jones, It’s Not Unusual, on

Along Came Jones (Decca Records 1965) (explaining that

“it’s not unusual” to do various everyday activities, such as

“to go out at any time”).

If one accepts that “not disallowed” can reasonably be

interpreted to mean “allowed,” then § 1.337(d)-2T—having

been reduced from a quadruple negative to a double

negative—becomes clearer. The combination of paragraphs

(a)(1) and (c)(2) would read something like this: “No

deduction is allowed for any loss recognized with respect to

the disposition of stock of a subsidiary; however, that

deduction is allowed to the extent the taxpayer establishes

that the loss or basis is not attributable to the recognition of

built-in gain.” Put more simply, a subsidiary’s stock loss is

10

allowed unless it relates to a built-in gain. It is undisputed that

Duquesne would meet this standard.

The Majority acknowledges that the foregoing

interpretation results when § 1.337(d)-2T is “literally

applied,” but claims that “[w]e know” this literal

interpretation cannot be correct because it conflicts with an

IRS notice issued alongside § 1.337(d)-2T. Majority Op. 33.

Specifically, the Majority gives great weight to the IRS’s

statement that it “believe[s] that a consolidated group should

not be able to benefit more than once from one economic

loss.” Id. (quoting IRS Notice 2002-18, 2002-1 C.B. 644

(Mar. 9, 2002)).

I see three principal issues with the Majority’s reliance

on this notice. First, the full context of the language quoted by

the Majority shows that the IRS did not mean to imply that

§ 1.337(d)-2T—or any part of the then-in-effect regulatory

scheme—prevented the deductions taken by Duquesne.

Rather, the IRS’s belief that “a consolidated group should not

be able to benefit more than once from one economic loss”

was the impetus for its forthcoming regulations, namely,

1.1502-35T:

These rules [§§ 1.337(d) and 1.1502] do not

disallow stock loss that reflects net operating

losses or built-in asset losses of a subsidiary

member. Nonetheless, the IRS and Treasury

believe that a consolidated group should not be

able to benefit more than once from one

economic loss. Accordingly, the IRS and

Treasury intend to issue regulations that will

prevent a consolidated group from obtaining a

tax benefit from both the utilization of a loss

11

from the disposition of stock (or another asset

that reflects the basis of stock) and the

utilization of a loss or deduction with respect to

another asset that reflects the same economic

loss.

I.R.S. Notice 2002-18 (March 9, 2002). Thus, the IRS

identified a defect in its regulations and explained that it

would take corrective action to cure that defect. If anything,

this shows that the IRS—at the time Duquesne took its

deductions—did not believe there was a regulatory

mechanism in place to prevent a double deduction.

Second, even if the IRS notice meant what the

Majority claims it does, I would not afford it such deference.

While the IRS may “believe that a consolidated group” should

never receive a double deduction, id. (emphasis added), the

IRS must do more than believe something for it to become

law. See generally 5 U.S.C. §§ 551–559 (The Administrative

Procedure Act). No matter what the IRS says in its informal

notice publications, it cannot alter the plain meaning of its

regulations. To allow otherwise would frustrate the scheme of

the Administrative Procedure Act, essentially permitting the

IRS “to create de facto a new regulation” through the back

door. Christensen v. Harris Cty., 529 U.S. 576, 588, (2000).

“Making regulatory programs effective is the purpose of

rulemaking, in which the agency uses its ‘special expertise’ to

formulate the best rule. But the purpose of interpretation is to

determine the fair meaning of the rule. . . . Not to make

policy, but to determine what policy has been made and

promulgated by the agency[.]” Decker v. Nw. Envtl. Def. Ctr.,

133 S. Ct. 1326, 1340 (2013) (Scalia, J., concurring in part

and dissenting in part).

12

And third, the Majority’s reliance on this IRS notice

goes over and above any canon of judicial deference to

agency interpretation. In this respect, it’s important to ask:

what authority was the IRS interpreting to support its view

that all double deductions should be disallowed? The IRS

does not claim to be “implementing a statute,” so we know

that it is not entitled to Chevron or Skidmore deference. See

United States v. Mead, 533 U.S. 218, 227–28 (2001). And

since the IRS concedes that §§ 1.337(d) and 1.1502 did not

disallow these deductions, its belief could not have been

derived from those regulations—and therefore is not entitled

to deference under Auer v. Robbins. 519 U.S. 452, 461 (1997)

(holding that an agency’s interpretation of its “own

regulations” is entitled to deference). Rather, the Majority

seems to claim that the IRS notice was a gloss on Ilfeld itself,

writing that the notice shows that Duquesne’s approach fails

“so long as there is Ilfeld.” Majority Op. 33. I am aware of no

caselaw that demands (or permits) a court to give such

deference to an agency’s position regarding the status or

strength of judicial precedent. Nor do I see any principled

reason to do so. After all, “[i]t is emphatically the province

and duty of the judicial department to say what the law is.”

Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803).

B.

Linguistics aside, the Majority’s reading of § 1.337(d)-

2T is inconsistent with the IRS’s comprehensive regulatory

scheme. The Majority argues that “the blinkered approach of

Duquesne,” i.e., that it was entitled to follow the regulations

that were before it, “does not stand so long as there is Ilfeld.”

Majority Op. 33. But it seems unnatural for the IRS to write a

regulation that literally authorizes a specific action, only to

expect taxpayers to appreciate that the regulation is

13

undermined by common-law doctrines lurking in the

shadows. And this interpretation would seem to vitiate the

need for much of the IRS’s prior and subsequent regulations.

Why have § 1.337(d)-2T or § 1.1502-32 in place if Ilfeld is

the panacea for all consolidated-return, double-deduction ills?

Indeed, if Ilfeld carried such weight, many IRS

regulations promulgated during the past several decades

would be rendered superfluous. For example, after Woods, the

IRS overhauled the consolidated return rules that had

permitted the taxpayer to prevail in that case. T.D. 8560,

1994-2 C.B. 200 (Aug. 15, 1994). Surely this reform was not

just busywork. And after Rite Aid, the IRS scrambled to

implement temporary regulations and warned taxpayers that it

would soon adopt permanent ones to “prevent duplication of

losses within a consolidated group on dispositions of member

stock.” IRS Notice 2002-18, 2002-1 C.B. 644 (Mar. 9, 2002).

It seems unlikely that the IRS would warn taxpayers that it

would soon pass regulations to ban that which was already

banned.

Finally, the Majority counters that the temporary

regulations created a “gap” that Duquesne exploited. Majority

Op. 38. But the regulations were not so porous. Section

1.337(d)-2T explicitly addresses the scenario that occurred

here—losses by a consolidated group incurred on “disposition

of stock of a subsidiary”—and then describes which losses

are disallowed (those based on built-in gains) and which

losses are not disallowed (those for which the “taxpayer

establishes that the loss or basis is not attributable to the

recognition of built-in gain”). This is a “gap” only in some

philosophical sense. Because of the interstitial nature of

regulatory schemes, not every factual permutation will be

specified in the law. But a “gap” doesn’t exist whenever an

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on-point regulation inadvertently authorizes a result that the

agency later comes to regret.

C. Section 1.1502-35T

Section 1.1502-35T doesn’t affect the meaning of

§ 1.337(d)-2T. The Majority argues that § 1.1502-35T was

the regulation actually intended to prevent Duquesne’s double

deductions but “failed to prevent a double deduction here

because of how the Duquesne group structured the relevant

transactions in the wake of Rite Aid.” Majority Op. 32. But it

doesn’t matter that § 1.1502-35T would—under a different

set of facts—disallow deductions like the ones Duquesne took

here. After all, neither the Tax Court nor the Government

claims that § 1.1502-35T precluded the deductions actually

taken by Duquesne in the relevant time period. And the

Majority concedes that Duquesne “complied with § 1.1502-

35T in the sense that it did not violate it.” Majority Op. 32. I

would require no more.

In this regard, the Majority seems to criticize

Duquesne for acting during the Rite Aid interregnum. But it

matters not whether “[t]he only purpose of [Duquesne] here

was to escape taxation. . . . The fact that [Duquesne] desired

to evade the law, as it is called, is immaterial, because the

very meaning of a line in the law is that you intentionally may

go as close to it as you can if you do not pass it.” Superior Oil

Co. v. Mississippi ex rel. Knox, 280 U.S. 390, 395–96 (1930).

Duquesne was entitled to order its “affairs that [its] taxes

shall be as low as possible;” and was “not bound to choose

that pattern which will best pay the Treasury; there is not

even a patriotic duty to increase one’s taxes.” Helvering v.

Gregory, 69 F.2d 809, 810 (2d Cir. 1934) (Hand, J.) (citations

omitted). For that reason, I disagree with my colleagues’

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implication that Duquesne should have accommodated the

IRS by executing its transaction at a time when the regulatory

scheme was more favorable to the Government.

III. Duquesne’s Compliance

The foregoing discussion establishes (hopefully) that:

(1) Ilfeld yields to a law that can fairly be read to authorize a

double deduction; and (2) § 1.337(d)-2T can fairly be read to

authorize a double deduction. These propositions lead

ineluctably to the conclusion that, by complying with

§ 1.337(d)-2T, Duquesne’s deductions did not run afoul of

Ilfeld.

A.

The Majority’s analysis is not so straightforward,

looking as it does to the “structure and purpose of the broader

regulatory regime,” Majority Op. 29, instead of the language

of § 1.337(d)-2T. In that regard, I have no quarrel with the

Majority’s convincing argument that Duquesne’s reading of

§ 1.337(d)-2T runs contrary to the provision’s context and

broad purposes. “Let us not forget, however, why context

matters: It is a tool for understanding the terms of the law, not

an excuse for rewriting them.” King v. Burwell, 135 S. Ct.

2480, 2497 (2014) (Scalia, J., dissenting). And “even the

most formidable argument concerning [a law’s] purposes

could not overcome the clarity [found] in the [law’s] text.”

Kloeckner v. Solis, 133 S. Ct. 596, 607 n.4 (2012); see also

Hanover Bank v. Comm’r of Internal Revenue, 369 U.S. 672,

687 (1962) (“[W]e are not at liberty, notwithstanding the

apparent tax-saving windfall bestowed upon taxpayers, to add

to or alter the words employed to effect a purpose which does

not appear on the face of the statute.”).

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Section 1.337(d)-2T may not be a model of clarity, but

its tortured prose does not necessarily beget ambiguity. When

the IRS writes that a deduction is “not disallowed,” we should

accept that it is not. And without that ambiguity, it is not our

place to investigate the structure and purpose of the scheme in

order to restyle the language of the regulation. See Cent. Tr.

Co., Rochester, N.Y. v. Official Creditors’ Comm. of Geiger

Enters., 454 U.S. 354, 359 (1982) (“It is elementary that the

meaning of a [law] must, in the first instance, be sought in the

language in which the [law] is framed, and if that is plain, . . .

the sole function of the courts is to enforce it according to its

terms.” (quoting Caminetti v. United States, 242 U.S. 470,

485 (1917))).

Nor does the seemingly unfair result mean that we

should ignore § 1.337(d)-2T’s text. Duquesne’s duplicative

deductions “would show only that the statutory scheme

contains a flaw; they would not show that [§ 1.337(d)-2T]

means the opposite of what it says.” King, 135 S. Ct. at 2503

(Scalia, J., dissenting). And we are not at liberty to revise a

regulation “just because the text as written creates an apparent

anomaly.” Michigan v. Bay Mills Indian Cmty., 134 S. Ct.

2024, 2033 (2014).

Perhaps the Majority’s forecast of the IRS’s intent is

correct and § 1.337(d)-2T’s plain meaning is inadvertent.

That’s beside the point. If the IRS “enacted into law

something different from what it intended, then it should

amend the [law] to conform it to its intent. It is beyond our

province to rescue [lawmakers] from [their] drafting errors,

and to provide for what we might think . . . is the preferred

result.” Lamie v. U.S. Tr., 540 U.S. 526, 542 (2004) (internal

quotations and citation omitted).

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B.

Until today Ilfeld had never displaced both the Code

and the relevant regulations that allowed the double

deduction at issue. In fact, Ilfeld itself suggests that it would

give way to permissive regulations. See 292 U.S. at 68

(“There is nothing in the Act that purports to authorize double

deduction of losses or in the regulations to suggest that the

[IRS] construed any of its provisions to empower [the IRS] to

prescribe a regulation that would permit consolidated returns

to be made on the basis now claimed by [the parent].”

(emphases added)). The deductions in Ilfeld violated the

existing regulations, which was the basis of the decision. Id.

at 67.

Nor do any other Supreme Court cases make such a

leap. See McLaughlin v. Pac. Lumber Co., 293 U.S. 351,

355–56 (1934) (holding that the claimed deductions were

inconsistent with the governing statute, where no on-point

regulations permitted the duplicative deductions); United

States v. Skelly Oil Co., 394 U.S. 678, 683–84 (1969) (ruling

against the taxpayer who did not refer to an on-point

regulation—just to a bare, general Code provision that the

Court interpreted, under Ilfeld, not to allow double-dipping).

The same goes for our decisions applying Ilfeld in National

Casket and Greif Cooperage: in neither case did an on-point

regulation actually permit the double deduction challenged by

the IRS. See Nat’l Casket, 78 F.2d at 942 (offering the

qualification: “except where act and regulation so provide,

double deduction of the same losses . . . is not permissible”

(emphasis added)); Greif Cooperage Corp. v. Comm’r of

Internal Revenue, 85 F.2d 365, 365 (3d Cir. 1936).

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To the contrary, courts have set Ilfeld aside where, as

here, two separate provisions combine to (perhaps

accidentally) authorize the taxpayer’s double deduction. See

Gitlitz, 531 U.S. at 219–20 (explaining that a taxpayer may

receive a “double windfall” because the “Code’s plain text”

contained separate provisions that “permitted” taxpayers to

“be exempted from paying taxes on the full amount of the

discharge of indebtedness and [to] be able to increase basis

and deduct their previously suspended losses”); Woods, 85

T.C. at 282 (“If respondent believes that his regulations and

section 312(k) together cause petitioner to receive a ‘double

deduction,’ then respondent should use his broad power to

amend his regulations.”).

* * *

Duquesne concedes that it took a double deduction.

Although that action might be criticized on policy grounds, it

complied with the laws and regulations applicable at the time.

For that reason, I respectfully dissent.

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