The opinion
Wilbur, J., dissenting: We are concerned here with a series of checks written to J. C. Jackson for fictitious fruit purchases. These checks, in the words of the majority, “were reflected on petitioner’s books as payments for fruit purchases” and “petitioner’s taxable income was * * * understated in each of such years.” (Emphasis added.) These very same checks to J. C. Jackson (to the extent the amounts were not recovered) again served to reduce taxable income when they were deducted as an embezzlement loss in 1965.
The mitigation provisions are applicable assuming the offset in both instances may be described as a deduction for purposes of the statutory provisions in issue. In both instances the same checks, written for the same purpose, to the same payee, for precisely the same dollar and cents amount was involved. If several people focus their attention on the same brick rambler, in the same city block, on the same corner lot, their perception will be identical whether the rambler is identified as a “house,” “home,” “dwelling,” “abode,” or some other term. In my opinion, we are confronted with a similar situation, and the use of different labels — deduction, reduction, etc. — does not alter the identity of the item involved.
The majority frustrates the remedial intent of the statute by holding that the word “deduction” is a “term of art” that will not encompass a deductible item (such as depreciation, etc.) that is run through cost of goods sold. By “term of art” the majority apparently has in mind a word that, regardless of context, will always identify for all people precisely the same phenomena. It is doubted such words exist, for as Justice Holmes said, “a word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.” Towne v. Eisner, 245 U.S. 418, 425 (1918).
Words are simply symbols identifying categories of human experience, the medium through which principles breathe or suffocate. The broad remedial purpose underlying sections 1311-1315 suffocates under the technical interpretation of the word deduction as a “term of art” having a constant meaning throughout the Internal Revenue Code. I had previously thought that “the same phrase used in different parts of a complex statute does not necessarily carry the same meaning in two different contexts.” Folker v. Johnson, 230 F. 2d 906, 908 (2d Cir. 1956). Even a technical and carefully defined term like reorganization (which appears to be as close as the Code gets to a “term of art”) has been given an interpretation and meaning, in light of the context and purpose of the provisions involved, quite different from its purely literal meaning. 1 The words “trade or business,” like the word “deduction,” a bread-and-butter term in the tax lexicon, have been given different meanings depending on context and legislative purpose. 2 Why, in the context of a broad remedial statute, involving some of the most complex provisions in the Code, the word “deduction” should be rigidly immune from these fundamental rules of statutory construction escapes me.
The majority notes that the broad remedial purpose of Congress to eliminate “a double reduction of tax, or an inequitable avoidance of tax” is qualified by legislative history indicating Congress had in mind “specified types of cases.” 3 Reading the two statements together, in the words of the majority, “convinces us that Congress intended to preclude the possibility of a double tax benefit only in the specified circumstances set forth in section 1312.” But this is a tautology of sorts, 4 that begs the question of what these circumstances actually are by assuming that a deduction is a “term of art” with a constant meaning inapplicable to the present case and incompatible with the broad remedial intent expressed by Congress.
No doubt Congress focused on the abuse in the context of specified factual patterns called to its attention, and the words used in expressing its remedial intent with great specificity derive from this specific focus. But the need for interpretation is not thereby suspended when we confront a situation involving an abuse on all fours with the abuse Congress confronted, but not reflected in precisely the same factual configuration on which Congress focused. As Justice Cardozo said:
No doubt the ideal system, if it were attainable, would be a code at once so flexible and so minute, as to supply in advance for every conceivable situation the just and fitting rule. But life is too complex to bring the attainment of this ideal within the compasé of human powers. * * * [Cardozo, “The Nature of the Judicial Process,” p. 143 (Yale University Press 1921).]
By interpreting words to be terms of art, having a literal meaning aside from context and the remedial purpose of Congress, the majority opts for the minute at the expense of any flexibility. Since the legislative history does not indicate how Congress intended this particular ambiguity to be resolved, the resolution should be in accord with the remedial purposes of the statute. 5
Without belaboring the point, the cases cited by the majority either involved the interplay between the estate and income taxes in the context of a much narrower statute with entirely different origins, 6 or involve the mitigation provisions in the context of adjustments to the basis of capital assets. Not only is the handling of basis a quite different question, both mechanically and substantively, than taking a deduction for cost of goods sold, but the mitigation provisions deal extensively with basis questions separate and apart from the language dealing with double deductions, making it clear the latter does not encompass basis adjustments. 7
Raum and Drennen, JJ., agree with this dissent. Gregory v. Helvering, 293 U.S. 465 (1935). Judge Hand has said “such a corporation [in form but not substance] might be in some contexts a ‘corporation’; but words are chameleons, which reflect the color of their environment, and in a tax statute ‘corporation’ could not have been so intended.” Commissioner v. National Carbide Corp., 167 F. 2d 304, 306 (2d Cir. 1948), affd. 336 U.S. 422 (1949).
Saunders, “Trade or Business Under the Code,” U. So. Cal. 12th Tax Inst. 693 (1960), noting that the term “trade or business” is used 170 times in 60 different sections of the Code. The author states:
“Generalizations are probably less useful in the law of taxation than in any other branch of the law. Each tax question involves the wording and meaning of a particular Code section and each factual situation must be viewed conceptually in relation to the particular Code section in issue. * * * [Id. at 695.]”
Congress, in imposing limitations on the mitigation provisions, was very concerned about directly relating an adjustment to an inconsistent position, for it is the inconsistent position rather than the double deduction that justifies suspending the statute of limitations. Maguire, Surrey & Traynor, “Section 820 of the Rev. Act of 1938,” 48 Yale L.J. 509 , 516 (1939). It expressed this concern often, and it is this concern that qualifies the language expressing the broad remedial purpose of Congress (rather than the language the majority refers to). Thus, the Senate report states:
“The legislation here proposed is based upon the following principles:
“(1) To preserve unimpaired the essential function of the statute, of limitations, corrective adjustments should (a) never modify the application of the statute except when the party or parties in whose favor it applies shall have justified such modification by active inconsistency, and (b.) under no circumstances affect the tax save with respect to the influence of the particular items involved in the adjustment.
“(2) Subject to the foregoing principles, disputes as to the year in which income or deductions belong, or as to the person who should have the tax burden of income or the tax benefit of deductions, should never result in a double tax or a double reduction of tax, or an inequitable avoidance of tax. [S. Rept. No. 1567,75th Cong., 3d Sess. (1938), 1939-1 (Part 2) C.B. 779,815.]”
Sec. 1312 equals sec. 1312.
This statute cuts both ways. A taxpayer would undoubtedly feel a strong sense of injustice, and rightly so, at being asked to pay a tax twice, on such a narrow technical construction, when the Government has maintained an inconsistent position.
Sec. 642(g) came into the Code in 1942 in connection with the enactment of the predecessor of sec. 212. While the Senate broadened the House provision somewhat, it is clear Congress was concerned primarily with “expenses” to manage and conserve property, and not adjustments to basis (which were not dealt with at all in sec. 23 of the 1939 Code). See S. Rept. No. 1631, to accompany H.R. 7378 (Pub. L. No. 753), 77th Cong., 2d Sess. 136 (1942); H, Rept. No. 2333, to accompany H.R. 7378 (Pub. L. No. 753), 77th Cong., 2d Sess. 74,75 (1942).
See sec. 1312(7). See S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. 448 (1954); 110 Tax Management Portfolio, Statute of Limitations-Mitigation A-25 (1965).