UNITED STATES TAX COURT

T.C. Memo. 2002-25

UNITED STATES TAX COURT

ANN M. LASSITER AND ESTATE OF HENRY A. LASSITER, DECEASED,

ANN M. LASSITER, ADMINISTRATRIX, CTA, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7324-00.

Filed January 25, 2002.

H and W deducted net operating losses (NOL) on

their joint Federal income tax return for 1994, the

year in which H died. The NOLs, all of which were

attributable to H’s business activities, arose before

and during H’s bankruptcy proceeding under ch. 11 of

the Bankruptcy Code. The bankruptcy proceeding

terminated in 1994 after H’s death. Pursuant to Fed.

R. Bankr. P. 1016, the proceeding was continued and

concluded after H’s death as though he had not died.

Held: Secs. 172(b)(1) and 1398(i), I.R.C., permit

the deduction of the NOLs on the joint return.

- 2 David D. Aughtry, Lawrence Sherlock, and Linda S. Paine, for

petitioners.

David Delduco and Elizabeth B. Williamson, for respondent.

MEMORANDUM OPINION

LARO, Judge:

This case is before the Court fully

See Rule 122.1

stipulated.

Respondent determined a $281,556

deficiency in the 1994 Federal income tax of Henry A. Lassiter

and Ann M. Lassiter (Mr. Lassiter and Ms. Lassiter, respectively;

the Lassiters, collectively) and a $56,311 addition thereto under

section 6662.

Following respondent’s concession that petitioners

are not liable for the addition to tax, we must decide whether

Mr. Lassiter, upon termination of his bankruptcy estate,

succeeded to any net operating losses (NOLs) from the estate

which the Lassiters may use to calculate their 1994 joint Federal

income tax liability.

We hold he did.

Background

The stipulation of facts and the attached exhibits are

incorporated herein.

The stipulated facts are found accordingly.

The Lassiters were married until Mr. Lassiter died on May 9,

1994, and Ms. Lassiter, in her own right and as administratrix of

1

Unless otherwise noted, Rule references are to the Tax

Court Rules of Practice and Procedure, and section references are

to the Internal Revenue Code in effect for the year in issue.

Bankruptcy Code references are to 11 U.S.C.(2000).

- 3 Mr. Lassiter’s estate, filed a joint Federal income tax return

for 1994.

She resided in Georgia when she filed the petition

with this Court.

The record does not disclose where Mr. Lassiter

resided when he died.

Mr. Lassiter built a substantial net worth buying and

selling timberland and other realty.

He had interests in a

number of corporate and noncorporate entities dealing in real

estate, including Lassiter Properties, Inc. (LPI), an S

corporation in which he was the sole shareholder.

his real estate purchases through bank loans.

He financed

In 1989, because

of a downturn in the economy, many banks tightened their lending

policies and refused to renew his loans.

Mr. Lassiter was unable to repay his debts on time, and, on

November 4, 1991, he filed in the Northern District of Georgia an

individual bankruptcy petition under chapter 11 of the Bankruptcy

Code (Chapter 11).

Separate Chapter 11 bankruptcy petitions were

also filed at that time for LPI, Ansley Development Corp.

(Ansley), and Little Henry’s Food Stores, Inc. (Henry’s)

(Henry’s, Ansley, LPI, and Mr. Lassiter are collectively referred

to as the debtors).

Mr. Lassiter had a 50-percent interest in

Ansley, and he was the sole shareholder of Henry’s.

The Bankruptcy Court never consolidated the four separate

bankruptcy cases but allowed the debtors to file a single plan of

reorganization.

The debtors filed a joint plan of reorganization

- 4 on or about June 1, 1992.

After this plan was fine tuned, the

debtors filed a first amended joint plan of reorganization on

April 14, 1994.

Mr. Lassiter’s individual bankruptcy case continued after

his death.

He continued to be included in the proceeding as

debtor-in-possession, as though he had not died.

He continued to

be included in all actions concerning the plan of reorganization,

including the Bankruptcy Court’s December 21, 1994, order of

confirmation.

That order terminated each debtor’s bankruptcy

estate.

Taking into account the Lassiters’ original and amended

income tax returns and all adjustments respondent made to those

returns (other than those at issue in this case), their taxable

income or NOLs for 1987 through 1994 are as follows:

Year

Income/(NOL)

1987

1988

1989

1990

1991

1992

1993

1994

$190,121

-049,967

(1,674,676)

2,963,747

399,836

57,716

811,040

- 5 For 1991 through 1994, the taxable income or NOLs of Mr.

Lassiter, as debtor-in-possession of his bankruptcy estate, are

as follows:

Year

Income/(NOL)

1991

1992

1993

1994

($59,106)

506,922

(2,631,896)

(511,650)

Discussion

Petitioners argue that they may apply against their 1994

income the NOLs which passed to Mr. Lassiter from his bankruptcy

estate under section 1398(i).

Respondent argues that the

Lassiters may not use any of those NOLs because the bankruptcy

estate terminated after Mr. Lassiter’s death.

We agree with

petitioners.

We start our analysis by examining sections 172 and 1398,

the statutory provisions in issue.

We begin first with section

172, which sets out in detail the procedures to be used in

computing the amounts allowable as NOLs and in determining the

years to which an NOL may be carried.

So far as is relevant,

section 172(b)(1) provides:

SEC. 172(b).

Carryovers.–(1)

Net Operating Loss Carrybacks and

Years to which loss may be carried.–-

(A) General rule.-–Except as otherwise

provided in this paragraph, a net operating

loss for any taxable year–-

- 6 (i) shall be a net operating

loss carryback to each of the 3

taxable years preceding the taxable

year of such loss, and

(ii) shall be a net operating

loss carryover to each of the 15

taxable years following the taxable

year of the loss.

Under a plain reading of section 172(b)(1)(A)(i), a taxpayer

such as Mr. Lassiter must first apply an NOL loss to his third

taxable year preceding the loss, then apply any remaining portion

of that loss to his second taxable year preceding the loss, and

then apply any portion of the loss that still remains to his

taxable year immediately preceding the loss.

If the NOL is not

fully absorbed in those 3 carryback years, or if the taxpayer

elects under section 172(b)(3) to waive the carryback of the NOL,

section 172(b)(1)(A)(ii) mandates that the unabsorbed NOL be

carried forward to, and applied in, the first taxable year

postdating the loss.

Section 172(b)(1)(A)(ii) further mandates

that this carryover procedure follow for each of the next 14

years until the NOL is applied in full.

With the exception of

section 172(b)(3), and certain other specialized rules set forth

in section 172(b), none of which are applicable here, the statute

does not provide explicitly any rule that would allow a taxpayer

to decline to apply an NOL in the year which is next in line

under the statutory scheme.

As the U.S. Supreme Court has

observed with respect to the purpose of this statute:

- 7 the net operating loss carryover and carryback

provisions “were enacted to ameliorate the unduly

drastic consequences of taxing income strictly on an

annual basis. They were designed to permit a taxpayer

to set off its lean years against its lush years, and

to strike something like an average taxable income

computed over a period longer than one year.” [United

States v. Foster Lumber Co., 429 U.S. 32, 42 (1976)

(quoting Libson Shops, Inc. v. Koehler, 353 U.S. 382,

386 (1957)).]

The parties agree that if the bankruptcy estate had

terminated in 1994 before the death of Mr. Lassiter, sections 172

and 1398(i) would allow Mr. Lassiter to succeed to the NOLs of

the bankruptcy estate and would allow petitioners to apply those

NOLs on the Lassiters’ 1994 tax return.

The parties also

generally agree on the operation of section 1398, which was

enacted as part of the Bankruptcy Tax Act of 1980, Pub. L.

96-589, sec. 3, 94 Stat. 3397.

In general, and so far as is

relevant to this case, the operation of section 1398 is

summarized as follows.

The filing of a bankruptcy petition under

Chapter 11 creates a new taxable entity, the bankruptcy estate,

that is separate from the debtor.

Sec. 1398.

The bankruptcy

estate computes its taxable income in the same manner as an

individual does, except that the entity must use the tax rates

applicable to a married individual filing a separate return.

Sec. 1398(c).

Further, the bankruptcy estate succeeds to and takes into

account the individual debtor’s tax attributes (e.g., any NOL

carryforward).

Sec. 1398(g).

In the case of NOLs, the

- 8 bankruptcy estate succeeds to the NOLs as determined under

section 172, as of the first day of the individual debtor’s

taxable year in which the case commences.

Sec. 1398(g)(1).

The

NOLs as determined by a calendar year individual debtor, as of

January 1 of the year the debtor files a bankruptcy petition, go

to the bankruptcy estate for its exclusive use for the benefit of

the creditors on the commencement date.

The individual

Id.

debtor then succeeds to and takes into account the NOLs of the

bankruptcy estate at the termination of the bankruptcy case.

Sec. 1398(i).

This includes both the remaining NOLs that the

bankruptcy estate succeeded to under section 1398(g) and the

unused tax attributes accumulated by the operation of the

bankruptcy estate. Id.2

2

The years in which the debtor may use

Specifically, subsecs.(g) and (i) of sec. 1398 provide:

SEC. 1398(g). Estate Succeeds to Tax Attributes

of Debtor.--The estate shall succeed to and take into

account the following items (determined as of the first

day of the debtor’s taxable year in which the case

commences) of the debtor–(1) Net operating loss carryovers.–-The net

operating loss carryovers determined under section

172.

*

*

*

*

*

*

*

(i) Debtor succeeds to tax attributes of

estate.–-In the case of a termination of an estate, the

debtor shall succeed to and take into account the items

referred to in paragraphs (1), (2), (3), (4), (5) and

(6) of subsection (g) in a manner similar to that

provided in such paragraphs (but taking into account

(continued...)

- 9 the estate’s NOLs and the unused NOLs that the estate succeeded

to are governed by section 1398(j)(2).

That section provides:

(2) Treatment of certain carrybacks.-(A) Carrybacks from estate.--If any carryback year

of the estate is a taxable year before the estate’s

first taxable year, the carryback to such carryback

year shall be taken into account for the debtor's

taxable year corresponding to the carryback year.

(B) Carrybacks from debtor's activities.--The

debtor may not carry back to a taxable year before the

debtor’s taxable year in which the case commences any

carryback from a taxable year ending after the case

commences.

The interpretation of the phrase “the debtor shall succeed

to and take into account the items referred to in paragraphs (1)

* * * of subsection (g)” in section 1398(i) is critical to the

resolution of this case.

In determining the meaning of a

statutory provision such as this, the plain meaning of the

provision is ordinarily conclusive.

United States v. Ron Pair

Enters., Inc., 489 U.S. 235, 242 (1989).

Such a plain meaning

must be ascertained in light of the object and structure of the

statute as a whole.

Crandon v. United States, 494 U.S. 152, 158

(1990); K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988).

Bearing in mind the language and design of the statute as a

whole, we focus on three portions of the emphasized phrase, see

supra note 2, in section 1398(i).

2

First, Congress chose to

(...continued)

that the transfer is from the estate to the debtor

instead of from the debtor to the estate). * * *

[Emphasis added.]

- 10 characterize the type of obligation imposed by the subsection by

using the word “shall”.

Congress’ use of the word “shall”

relates to the essence of the statutory provision itself, and,

when viewed in light of the statute as a whole, imposes a

mandatory directive on the debtor in applying the relevant

attributes.

Alabama v. Bozeman, 533 U.S. 146, ___, 121 S. Ct.

2079, 2085 (2001); Estate of La Sala v. Commissioner, 71 T.C.

752, 762-763 (1979) (“the word ‘shall’ is the single most

important textual consideration in evaluating whether compliance

with a statutory provision is mandatory or directory”).

Second,

Congress chose to use the term “succeed to” with no limitation on

the succession.

The ordinary meaning of the term in this context

is to take next in time or to follow in succession (e.g., the

acquisition of rights from another).

Webster’s II New Riverside

University Dictionary 1156 (1994); Black’s Law Dictionary 1431

(6th ed. 1990).

Third, and most importantly, the text of the phrase mandates

that the “debtor” be the person who succeeds to and takes into

account any NOLs from the bankruptcy estate.

We think that

Congress’s use of the word “debtor”, rather than the term

“taxpayer” that is normally used in the Code, is significant.

The word “debtor” in the bankruptcy context is a term of art that

the Bankruptcy Code defines specifically as any “person or

municipality concerning which a case under this title has been

- 11 commenced”.

Bankruptcy Code sec. 101(13).

Given that Congress

promulgated that definition as part of the Bankruptcy Reform Act

of 1978, Pub. L. 95-598, sec. 101(12), 92 Stat. 2551, and that we

must presume that Congress knew of this definition 2 years later

when it enacted section 1398(i), see Cottage Sav. Association v.

Commissioner, 499 U.S. 554, 562 (1991); Lorillard v. Pons,

434 U.S. 575, 581 (1978); Kovacs v. Commissioner, 100 T.C. 124,

133 (1993), affd. without published opinion 25 F.3d 1048 (6th

Cir. 1994), we conclude that Congress intended to import the

Bankruptcy Code’s definition of the word “debtor” into the same

word used in section 1398(i).

In fact, the legislative history

of section 1398 makes it clear, by frequent references to the

Bankruptcy Code, that Congress knew about the Bankruptcy Code’s

terms of art.

E.g., S. Rept. 96-1035, at 28-30 (1980), 1980-2

C.B. 620, 634-636.

Death, in and of itself, does not alter the identity of the

“debtor” for Bankruptcy Code purposes.

Pursuant to statutory

authority,3 the Supreme Court promulgated rule 1016 of the

Federal Rules of Bankruptcy Procedure applicable in the case of

3

As part of the Bankruptcy Reform Act of 1978, Pub. L.

95-598, sec. 247, 92 Stat. 2549, 2672, Congress reaffirmed the

authority of the Supreme Court to prescribe procedural rules for

bankruptcy cases. This authority is codified at 28 U.S.C. sec.

2075 (2000) amongst the provisions which grant the Court the

authority to prescribe the rules of procedure for Federal

District Courts.

- 12 the debtor’s “Death or Incompetency”.

That rule, which carries

the force and effect of law, provides:

Death or Incompetency of Debtor

If a reorganization, family farmer’s debt adjustment,

or individual’s debt adjustment case is pending under

chapter 11, chapter 12, or chapter 13, the case may be

dismissed; or if further administration is possible and

in the best interest of the parties, the case may

proceed and be concluded in the same manner, so far as

possible, as though the death or incompetency had not

occurred. [Emphasis added.]

Taking into account that Congress used the mandatory form

“shall” in section 1398(i), that Congress put no limitation on

the succession, and that death does not necessarily alter the

identity of the debtor in bankruptcy proceedings strongly, we

hold that petitioners are entitled to deduct on their joint

return for 1994 the NOLs in question.

The cases cited by

respondent for a contrary result merely stand for the general

proposition that section 172 shows a general purpose to confine

allowable losses to the taxpayer who sustained them and to treat

those losses as personal and nontransferable to another.4

See,

e.g., New Colonial Ice Co. v. Helvering, 292 U.S. 435, 437 (1934)

4

Respondent relies on Poorbaugh v. United States, 423 F.2d

157 (3d Cir. 1970). We read that case to stand for the

proposition that for a cash basis taxpayer, accounts paid or

received after the taxpayer’s death may not be included in the

taxpayer’s final joint return. The facts of Poorbaugh also are

distinguishable from those of this case. Whereas the taxpayer

there sought to include in the final joint return transactions

that occurred after death, petitioners seek to deduct

expenditures that occurred before Mr. Lassiter’s death.

- 13 (addressing the predecessor to section 172).

Section 1398,

however, provides explicitly a clear exception to this general

rule.

See sec. 1398(g), (i), (j).

We are unpersuaded by the

cases cited that we should deviate from what we perceive is the

intent, purpose, and meaning of the statute.

Mr. Lassiter is the

taxpayer who sustained the NOLs, and he seeks to use those NOLs

on his final income tax return.

In contrast to respondent, we

read no requirement in the statute that those NOLs be “vested” at

the time of Mr. Lassiter’s death in order for him to do so.

Our

reading furthers the purpose of section 172 “to ameliorate the

unduly drastic consequences of taxing income strictly on an

annual basis”, United States v. Foster Lumber Co., 429 U.S. at 42

(citation and quotation marks omitted), and is consistent with

the purpose of section 1398(i) (a statutory exception to the rule

that only the entity that incurs the loss may use the loss).

We conclude that petitioners may use the disputed NOLs on

their 1994 joint return.

On the basis of this conclusion, we

consider it unnecessary to, and do not, consider petitioners’

alternative argument that section 6013 produces the same result.

Decision will be entered

under Rule 155.