UNITED STATES TAX COURT

139 T.C. No. 6

UNITED STATES TAX COURT

THRIFTY OIL CO. & SUBSIDIARIES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1376-10.

Filed August 30, 2012.

P filed consolidated Federal income tax returns for the years at

issue (TYE Sept. 30, 2000, 2001, and 2002) on which it claimed

environmental remediation expense deductions. R disallowed the

claimed deductions after determining that they were each the second tax

deduction P had claimed for a siñgle economic loss. The first deduction

had been reported as a capital loss on P's Federal income tax return for

TYE Sept. 30, 1996, and carried forward, with the last portion claimed

on P's Federal income tax return for TYE Sept. 30, 2001.

Held: P is not entitled to the environmental remediation expensè

deductions claimed on its Federal income tax returns for TYE Sept. 30,

2000, 2001, and 2002.

SERVED AUG 3 0 2012

-2Gary S. Colton, Jr., Daniel A. Dumezich, and Richard E. Kurkowski, for

petitioner.

Kevin G. Croke, Davis G. Yee, and Matthew A. Williams, for

respondent.

OPINION

WHERRY, Judae: This case is before the Court on a petition for

redetermination of income tax deficiencies determined by respondent for petitioner's

taxable years ended (TYE) September 30, 2000, 2001, and 2002. In its simplest

form, the issue is whether, given Charles Ilfeld Co. v. Hernandez, 292 U.S. 62

(1934), and its progeny, petitioner is entitled to environmental remediation expense

deductions claimed for the years at issue when, economically, those same losses

were claimed as capital loss deductions for years not before the Court.

Backaround

This case was submitted fully stipulated pursuant to Rule 122.1 The parties'

stipulations of issues and stipulations of facts, with accompanying exhibits, are

IUnless otherwise indicated, all section references are to the Internal Revenue

Code of 1986 (Code), as amended and in effect for the years at issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

-3incorporated herein by this reference. Petitioner is a California corporation and its

subsidiaries with its principal place of business in Santa Fe Springs, California.

I.

Overview of Petitioner

Thrifty Oil Co. (Thrifty) is the common parent of an affiliated group of

corporations that for 1995 through 2002 (relevant years) filed consolidated Federal

income tax returns using a September 30 yearend and the accrual method of

accounting. During the relevant years Thrifty's direct and indirect subsidiaries

included: (1) Earth Management Co. (Earth Management); (2) Golden West

Refining Co. (Golden West); (3) Golden West Distribution Co. (Distribution Co.);

and (4) Benzin Supply Co. (Benzin).

Ted Orden was the president and controlling shareholder of petitioner during

the relevant years. Moshe Sassover, Barry Berkett, and Robert Flesh are sons-inlaw of Ted Orden. Mr. Sassover and Mr. Berkett were employees of Thrifty and

Mr. Flesh worked for Thrifty and the Thrifty consolidated group as an independent

contractor during the relevant years.

IL

Refinery Property and Bankruptcy

In 1983 Thrifty, through Golden West, acquired property in Santa Fe Springs,

California, on which an oil refinery was located (Golden West Refinery

property).2 The oil refinery proved unprofitable, and in February 1992 refining

operations wére suspended. As a result of refining operations, the Golden West

Refinery property had suffered environmental contamination, leaving Thrifty and

Golden West with the responsibility for remediating the environmental problems.

On July 31, 1992, Thrifty and certain of its subsidiaries including Golden

West filed for bankruptcy protection under chapter 11 of the Bankruptcy Code. See

Bankruptcy Petition In re Thirfty Oil, No. 92-09132-LAl l (Bankr. S.D. Cal.). On

February 16, 1995, the bankruptcy court confirmed the plan of reorganization.

Petitioner's environmental remediation liabilities, which had a major impact on the

chapter 11 reorganization, were not discharged.

III.

Environmental Remediation Strategy

In 1996 petitioner, on the advice of individuals at Deloitte & Touche LLP

(Deloitte), including Robert Wenger, petitioner's long-time adviser, decided to

enter into a strategy to consolidate the contingent environmental remediation

2Before Sept. 28, 1998, Distribution Co., was the holding company for

Golden West. On Sept. 28, 1998, Distribution Co. was merged into Golden West.

Until the merger, Golden West was 100% owned by Distribution Co., which was

100% owned by Thrifty. After the merger, Golden West was 100% owned by

Thrifty.

-5liabilities into one entity (environmental remediation strategy).3 As of September

1996, the contingent environmental remediation liabilities with respect to the Golden

West Refinery property totaled $29,070,000.

In an interoffice memorandum dated August 1, 1996, detailing the

environmental remediation strategy, Mr. Sassover stated:

As a result of the strategy, Thrifty may be able to generate a capital

loss of approximately $60 million. The basic concept is to contribute

Thrifty and Golden West Refining's environmental liabilities to a

subsidiary of Thrifty while also contributing intercompany receivables.

* * * Due to an IRS published ruling and the consolidated return

regulations, the transaction with the subsidiary generates a capital loss

immediately. When the consolidated group expends funds on the

environmental remediation, the consolidated group is entitled to a

deduction.

On September 27, 1996, Golden West and Earth Management engaged in a

section 351 transaction. For 90 shares of Earth Management stock, Golden West

transferred a $29,100,000 promissory note executed by Benzin (Benzin note), in

3In addition to the environmental liabilities at the Golden West Refinery

property, Thrifty faced significant costs due to environmental regulations at gasoline

stations that it operated. The environmental liabilities associated with the gasoline

stations were estimated to be $19,126,000. Petitioner also entered into the

environmental remediation strategy with respect to these environmental liabilities;

the transaction gave rise to a $5,836 capital loss. However, because respondent has

not challenged the transaction involving Thrifty's liabilities at the gasoline stations,

we need not discuss it further. For a full exposé of Deloitte's proprietary "Double

Deduction" tax product strategy during this timeframe see Gerdau Macsteel, Inc. v.

Commissioner, 139 T.C. __, __ -__ (slip op. at 26-30) (Aug. 30, 2012).

-6favor of Golden West to Earth Management and Earth Management assumed

Golden West's $29,070,000 contingent environmental remediation liabilities.

The Benzin note required Benzin to pay Golden West principal of

$29,100,000 together with interest at a rate of 11.5% per annum calculated from

September 20, 1996, until the principal sum was paid in full. The Benzin note was a

balloon note and specified a maturity date of September 30, 2006. As of May 16,

2011, no payments of principal or interest had been made on the Benzin note. The

Benzin note was intended to provide Earth Management with additional collateral to

facilitate borrowing any funds needed to pay the environmental remediation

liabilities as they came due, but it was never pledged as collateral on any borrowing

by Earth Management.

Goldeñ West claimed a tax basis in its 90 shares of Earth Management stock

equal to the face value of the Benzin note ($29,100,000) without adjusting for the

$29,070,000 of contingent environmental remediation liabilities Earth Management

assumed. See secs. 358(a), (d), 357 (c)(3).* Petitioner filed a statement with its

4In cases with similar factual backgrounds, the Courts of Appeals for the

Fourth and Federal Circuits have both held that pursuant to the Code, the basis of

the stock received was increased by the value of the promissory note transferred but

not reduced by contingent liabilities assumed. Coltec Indus. Inc. v. United States,

454 F.3d 1340, 1351 (Fed. Cir. 2006); Black & Decker Corp. v. United States, 436

(continued...)

-7TYE September 30, 1996, Federal income tax return, disclosing the tax treatment of

the transaction (disclosure statement). The disclosure statement reported that

Golden West had transferred a promissory note with a fair market value (FMV) and

tax basis of $29,100,000 and environmental remediation liabilities with an FMV of

$29,070,000 and tax basis of zero to Earth Management for total property

transferred with an FMV of $30,000 and a tax basis of $29,100,000. The disclosure

statement also reported that the 90 shares of Earth Management stock Golden West

received had an FMV of $400 per share.5

4(...continued)

F.3d 431, 434-440, 443 (4th Cir. 2006). The courts did not stop there. In Coltec

Indus. Inc., the Court of Appeals for the Federal Circuit went on to find that the

transfer "had no meaningful economic purpose, save the tax benefits to Coltec" and

"must be ignored for tax purposes." Coltec Indus. Inc., 454 F.3d at 1347. In Black

& Decker Corp., the Court of Appeals for the Fourth Circuit remanded the case to

the lower court for a determination of whether the transaction was a sham. Black &

Decker Corp., 436 F.3d at 442-443. The case then settled before trial. Today, sec.

358(h) would require that basis be reduced by the amount of the transferred

liabilities.

5Ninety shares received at a total value of $30,000 could lead to the

conclusion that each share of stock was worth $333.33. And it is not exactly clear

to this Court why each share of stock was reported as being worth $400. However,

we surmise it was because Earth Management was not a new subsidiary formed

solely for the purpose of the Enviromnental remediation strategy and therefore the

$30,000 worth of property Golden West transferred was not the only property Earth

Management held. See infra note 6.

-8IV. Double the Benefits

A.

First Tax Benefit

On September 30, 1996, Golden West sold its Earth Management stock in

equal amounts to Mr. Sassover, Mr. Berkett, and Mr. Flesh for $8,400 each (total of

90 shares sold for $25,200 or $280 per share).6 Petitioner reported a capital loss of

$29,074,800 on its TYE September 30, 1996, Federal income tax return from the

sale (amount realized of $25,200 less basis of $29,100,000). Petitioner deducted

$2,882,469 of the capital loss on its TYE September 30, 1996, Federal income tax

return, and carried the remainder forward.

Petitioner deducted a total of $18,347,205 of the capital loss on its TYE

September 30, 1996, 1997, 1998, and 1999, Federal income tax returns.7 Each of

these four years was closed to adjustment by the statute of limitations at the time of

6Deloitte determined the $280-per-share value by discounting the $400-pershare value reported in the disclosure statement by 30% to account for the stock's

lack of marketability. In addition to the 90 shares of Earth Management stock

Golden West sold, there were another 150 shares of Earth Management common

stock outstanding. Sixty of these shares had been received by Thrifty when it

entered into the Environmental remediation strategy with regard to the

environmental remediation liabilities at Thrifty's gasoline stations. See supra note 3.

The remaining 100 shares were also held by Thrifty and had been outstanding for

some time.

7Specifically, petitioner claimed capital loss deductions of $2,882,469,

$5,348,310, $3,755,873, and $6,360,553 on its Federal income tax returns for TYE

September 30, 1996, 1997, 1998, and 1999, respectively.

-9this dispute. Petitioner claimed deductions for the remaining $10,727,595 of the

capital loss on it 541

TYE September 30, 2000 and 2001, Federal income tax returns.

As discussed infra, the capital loss cariyforwards petitioner claimed on its TYE

September 30, 2000 ând 2001, Federal income tax returns were disallowed by

respondent in his notice of deficiency.

B.

Second Tax Benefit

Earth Management made expenditures during the relevant years for the actual

cleanup of the Golden 'West Refinery property. Thrifty provided the funds Earth :

Management used to pay for the costs related to the environmental cleanup: For

these expenditures, petitioner claimed environmental remediation expense

deductions of $339,435, $1,854,405, and $14,505,358 on its TYE September 30,

1997, 1998, and 1999, Federal income tax returns. These years are closed to

adjustment by the statute of limitations. Petitioner claimed environmental

remediation expense deductions for the years at issue in the following amounts:

TYE Sept. 30

Amount

2000

$3,109,962

2001

4,108,429 .

2002

3,891,571

Total

11,109,962

- 10 V. Respondent's Determination

Respondent issued a notice of deficiency dated October 22, 2009, in which he

disallowed capital loss carryovers claimed for TYE September 30, 2000 and 2001,

of $1,426,576 and $9,301,019, respectively,8 and environmental expense

deductions claimed for TYE September 30, 2000, 2001, and 2002, of $4,370,802,

$4,108,429, and $3,891,571, respectively.9 The stated reasons for disallowing both

the capital loss carryovers and the environmental remediation expense deductions

included that they "duplicate tax benefits already claimed for a single economic

loss." Respondent determined the following deficiencies and penalties:

8The $1,426,576 capital loss disallowance for TYE September 30, 2000,

resulted in no tax effect for that year. Instead it reduced the capital loss carryover to

the subsequent tax year and when combined with the disallowed 2001 capital loss

carryover of $9,301,019 created a $10,727,595 adjustment to the capital loss for

TYE September 30, 2001.

9See infra p. 11 and note 10 for a discussion of why respondent disallowed

environmental remediation expense deductions for TYE September 30, 2000, in an

amount greater than that claimed by petitioner.

- 11'Penalties

TYE Sept. 30

Deficiency

Sec. 6662(a)

Sec. 6662(h)1

2000

$1,552,450

$310,490

---

2001

5,192,608

287,590

$1,501,863

2002

1,325,984

265,197

---

1 Respondent determined that petitioner was liable for a sec. 6662(h) 40%

gross valuation misstatement penalty for the portion of the underpayment

attributable to the capital loss carryforwards.

Petitioner timely petitioned this Court.' In a stipulation of settled issues filed

April 8, 2011, petitioner conceded that its capital gain for TYE September 30, 2001,

should be increased by $10,727,595, and respondent conceded petitioner was not

liable for a section 6662(a) or (h) accuracy-related penalty with respect to the

disallowed capital loss carryovers. In a stipulation of settled issues filed October

27, 2011, respondent conceded petitioner was not liable for a section 6662(a)

accuracy-related penalty with respect to the disallowed environmental remediation

expense deductions. In a stipulation of settled issues filed December 13, 2011, the

parties stipulated that petitioner .claimed a deduction for environmental remediation

expenses incurred in cleaning up the Golden West Refinery property for TYE

September 30, 2000, of only $3,109,962, and accordingly respondent conceded

- 12 $1,260,840 of environmental remediation expense deductions originally disallowed

in the notice of deficiency.1°

On December 21, 2011, the parties filed a joint motion to submit this case

under Rule 122. We granted the joint motion on January 3, 2012, and set a

briefing schedule. On February 14, 2012, Duquesne Light Holdings, Inc. &

Subsidiaries (Duquesne) filed a motion for leave to file a brief amicus curiae in

support of petitioner." We granted Duquesne's motion and filed the amicus brief

on March 21, 2012. On May 9, 2012, respondent's reply to Duquesne's amicus

i°For financial accounting purposes, Earth Manaáement's assumption of

Golden West 's contingent liabilities was accounted for by the creation of a reserve

account. Specifically, the assumption was reflected on Earth Management's books

as a $29,070,000 credit to an account entitled "Environmental Reserve--GWR".

When the exact amount and the payee of an environmental expense were

determined, the reserve account would be debited and accounts payable credited.

When payments were made for the specific accounts payable, cash would be

credited and accounts payable debited. Additionally, the reserve account was

reviewed at the end of each year; and if an adjustment was needed, a postclosing

entry would be made the following year. In a year in which there were no

postclosing adjustments to the reserve account, the tax deduction would equal the

net change in the reserve account. For TYE September 30, 2000, the reserve

account showed a net decrease of $4,370,802. This is where respondent obtained

the amount he disallowed in the notice of deficiency.

"Duquesne currently has a case pending before this Court at docket

No. 9624-10.

- 13 brief was filed. On May 30, 2012, Duquesne's response to respondent's reply was

filed.

Discussion

After the stipulations, we are left with just one question: Is petitioner entitled

to environmental remediation expense deductions claimed on its Federal.income tax

returns for TYE September 30, 2000, 2001, and 2002? Respondent's sole argument

is that the claimed deductions duplicate $18,347,205 in capital loss deductions

petitioner claimed for years not before the Court, and hence petitioner is not entitled

to up to $18,347,205 of the claimed environmental remediation expense

deductions."

I.

Double Deductions--Generally, the Tax Court, and the Ninth Circuit

A.

Current State of the Law

Double deductions (or their practical equivalent) for the same economic loss

are impermissible absent a clear declaration of congressional intent. Charles Ilfeld

Co., 292 U.S. at 68; Marwais Steel Co. v. Commissioner, 354 F.2d 997, 998-999

(9th Cir. 1965) (stating the court would follow the message in Charles Ilfeld Co. "irr

cases having any similarity at all on double deductions for a single economic loss"),

"Whether the claimed deductions meet the deductibility requirements of secs.

162 and 461 is not at issue. Respondent concedes that they do.

- 14 aff'g 38 T.C. 633 (1962); see also McLaughlin v. Pac. Lumber Co., 293 U.S. 351,

355 (1934) (holding that "a consolidated return must truly reflect taxable income of

the unitary business and consequently it may not be employed to enable the taxpayer

to use more than once the same losses for reduction of income."); Spokane Dry

Goods Co. v. Commissioner, 125 F.2d 865, 867 (9th Cir. 1942) (noting that.the

court was constrained "by the rule against interpretations which allow a double

deduction"), affg 43 B.T.A. 793 (1941); Willamette Indus., Inc. v. Commissioner,

T.C. Memo. 1991-389 (acknowledging that "A fundamental tax principle is that a

taxpayer cannot receive a double deduction or claim a double credit for the same

item."); Mo. Pac. Corp. v. United States, 5 Cl. Ct. 296, 302 (1984) (decreeing that it

is a fundamental principle that one cannot get a double deduction for the same

expense). This rule applies even when the deductions are based on separate and

distinct sections of the Code. Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704-705

(1991) (citing Charles Ilfeld Co., 292 U.S. at 68, United States v. Skelly Oil Co.,·

394 U.S. 678, 684 (1969), and O'Brien v. Commissioner, 79 T.C. 776, 786-788

(1982), aff'd and remanded on other issues, 771 F.2d 476 (10th Cir. 1985)).

To find a clear declaration of congressional intent, a taxpayer must point to "a

specific statutory provision authorizing a double deduction". United Telecomms.,

- 15 Inc. v. Commissioner, 589 F.2d 1383, 1388 (10th Cir. 1978), aff'g 65 T.C. 278

(1975). General allowance provisions are insufficient; and when the statute is silent,

it is presumed that double deductions are not allowed. O'Brien v. Commissioner,

79 T.C. at 786-788; see also Rome I, Ltd. v. Commissioner, 96 T.C. at 704-705

(finding an impermissible double tax benefit when a taxpayer claimed both a tax

credit and a charitable contribution deduction); Brenner v. Commissioner:62 T.C.

878, 884-885 (1974) (pointing out that section 162(a) did not reflect a "clear

declaration of intent by Congress" to allow a double deduction).

B.

Tax Court

The Tax Court has applied the Supreme Court's pronouncement of the Ilfeld

doctrine in several cases, three of which we will examine here. In Woods Inv. Co.

v. Commissioner, 85 T.C. 274, 276-277 (1985), the taxpayer sold all of the stock of

four wholly owned subsidiaries. The subsidiaries had used accelerated methods to

depreciate their business property when permitted. Id. at 276. The issue was the

amount of the taxpayer's basis in the stock of its subsidiaries for purposes of

determining the gain on the sale. Id. at 277. The Court first looked at section

1.1502-32, Income Tax Regs., which provided rules for adjusting the basis of a

subsidiary's stock held by a parent. Id. at 278. Pursuant to this section, basis

-16adjustments were made in accordance with the subsidiaries' earnings and profits."

Id. at 278-279. Then the Court looked at section 312(k), which provided that in

computing earnings and profits, the allowance for depreciation was deemed to be

the amount vèhich would be allowable if the straight-line method of depreciation

were used. Id. at 278.

The taxpayer computed earnings and profits in accordance with section

312(k), arguing this was proper. The Commissioner found fault with this and

argued that the taxpayer had to use accelerated depreciation because otherwise the

taxpayer was obtaining a "double deduction"." Id. at 279. We agreed with the

taxpayer. We distinguished Charles Ilfeld Co. on the grounds that the Supreme

Court had stated that a double deduction would not be allowed "'in the absence of a

"The parent's basis in the stock of its subsidiary is adjusted by the difference

between the required positive adjustments and the required negative adjustments.

Sec. 1.1502-32, Income Tax Regs. Generally, the amount of a subsidiary's yearend

undistributed earnings and profits that increases consolidated taxable income results

in a positive;adjustment and increases the parent's basis in the stock. Sec. 1.150232(b)(1)(i), Income Tax Regs. A loss of a subsidiary that is used to reduce the

affiliated group's consolidated income results in a negative adjustment and

decreases the parent's basis in the subsidiary's stock. Sec. 1.1502-32(b)(2)(i),

Income Tax Regs.

"Essentially, the lower the amount of depreciation used in the calculations,

the higher earnings and profit would be, which in turn would make the parent's

basis in the stock of the subsidiaries higher and lead to a lower amount of gain on

the sale of stock.

- 17 provision in the Act or regulations that fairly may be read to authorize it'" and here

there was such a provision. Id. at 282.

Section 1.1502-32, Income Tax Regs., howéver, deals

comprehensively with this problem by requiring in paragraph (b)(2)(i)

that the basis of the stock of the loss subsidiary in the hands of the

parent be reduced by any deficit in the earnings and profits. That

regulation also prevents a double inclusion in income by providing in

paragraph (b)(1)(i) that the basis of the subsidiary's stock be increased

by the subsidiary's undistributed earnings and profits. 042Thus, even

assuming petitioner is receiving a double deduction, we believe that the

detailed rules in section 1.1502-32 * * * together with section 312(k),

can fairly be read to authorize the result herein, and, therefore, Ilfeld

Co. is inapplicable.

Id. at 282-283. We later acknowledged our holding in CSI Hydrostatic Testers, Inc.

v. Commissioner, 103 T.C. 398, 405 (1994), aff'd, 62 F.3d 136 (5th Cir. 1995),

where we stated that in Woods Inv. we concluded Charles Ilfeld Co. was

"inapplicable because section 312(k) together with section 1.1502-32, Income Tax

Regs., authorized the result we reached."

Wyman-Gordon Co. & Rome Indus. Inc. v. Commissioner, 89 T.C. 207

(1987), also involved the determination of a subsidiary's earnings and profits. The

specific issue was whether discharge of indebtedness income realized by the

subsidiary should be included in earnings and profits, reducing the parent's excess

- 18 loss account to zero,15 even though the discharge of indebtedness income was not

included in consolidated taxable income pursuant to section 108(a)(1) (the

subsidiary was insolvent). Id. at 215. Including it in earnings and profits would

effectively allow the affiliated group of corporations excessive tax benefits by

avoiding recognition of latent income otherwise existing in the excess loss account

balance. Id. The Court looked at the regulations and found no provision as to how

discharge of indebtedness income factors into the computation of earnings and

profits and so held it should not increase earnings and profit in this situation. Id. at

218-219. We distinguished Woods Inv. on the grounds that there section 312(k)

specifically required earnings and profits to be computed on the basis of straight-line

t5As discussed supra note 13, a parent's basis in its subsidiary's stock is

adjusted according to the subsidiary's earnings and profits, the annual adjustment

being the net of the positive and negative adjustments. If a yearend net negative

adjustment exceeds the parent's basis in the stock of a subsidiary, the parent must

establish an "excess loss account" with respect to the stock it owns. Sec. 1.150232, Income Tax Regs. When a parent corporation sells or otherwise disposes of

stock in a subsidiary, the parent is required to include in income the balance of any

excess loss account outstanding with respect to its stock in that subsidiary

immediately before the disposition event occurred. Sec. 1.1502-19(a)(1)(i), Income

Tax Regs. In Wyman-Gordon Co. & Rome Indus. Inc. v. Commissioner, 89 T.C.

207 (1987), the subsidiary had realized net operating losses which reduced the

consolidated taxable income and left the subsidiary with a deficit earnings and

profits account. This, in turn, reduced the parent's basis in the subsidiary's stock

below zero and created an excess loss account. The regulations also expressly

provided that the realization of discharge of indebtedness income not included in

taxable income constitutes a disposition event and triggers recognition of the excess

loss account. Sec. 1.1502-19(a)(2)(ii), Income Tax Regs.

- 19 depreciation, whereas in Wyman-Gordon there existed no comparable statutory

provision requiring inclusion of discharge of indebtedness income in earnings and

profits. Id. at 219.

Finally, in CSI Hydrostatic Testers, Inc. v. Commissioner, 103 T.C. at 403,

405, we considered the same issue as in Wyman-Gordon. However, in the years

mtervemng between the two cases Congress had enacted section 312(1), which

required discharge of indebtedness income to be included in earnings and profits.

Because there was a specific provision leading to the double deduction, the Court

allowed it. Id. at 411.

These three cases illustrate how the Ilfeld doctrine has been applied by the

Court. In two of the cases, Woods Inv. and CSI Hydrostatic, the taxpayer could

point to a specific provision showing Congress' intent to allow the double

deductions, and so we allowed the second deduction. In the third there was no

provision, and so the Court disallowed the second deduction.

C. The Ninth Circuit

Because of this Court's holding in Golsen v. Commissioner, 54 T.C. 742

(1970), aff'd, 445 F.2d 985 (10th Cir. 1971), we are bound by precedent from the

Court of Appeals for the Ninth Circuit, the court to which this case is appealable

absent a stipulation of facts to the contrary. Three Ninth Circuit cases are of

- 20 importance here: Commissioner v. Laguna Land & Water Co., 118 F.2d 112 (9th

Cir. 1941); Marwais Steel Co. v. Commissioner, 354 F.2d 997; and Stewart v.

United States, 739 F.2d 411 (9th Cir. 1984).

In Commissioner v. Laguna Land & Water Co., 118 F.2d at 114, the taxpayer

bought a tract of land and subdivided it into lots. In early years not before the court,

an erroneously high basis had been applied and the entire basis used. Id. at 114116. The Commissioner argued that no basis should be allocated to sales in years

before the court because this would be a double deduction. Id. at 117. The

taxpayer asserted that a proportionate amount of the true basis should be allowed in

the years at issue. Id. The Board.of Tax Appeals held for the taxpayer, and the

Court of Appeals affirmed. Important to this holding was a regulation in effect at

the time which provided:

Sale of real property in lots.--Where a tract of land is purchased with a

view to dividing it into lots or parcels of ground to be sold as such, the

cost or other basis shall be equitably apportioned to the several lots or

parcels and made a matter of record on the books of the taxpayer, to

the end that any gain derived from the sale of any such lots or parcels

which constitutes taxable income may be returned as income for the

year in which the sale is made. This rule contemplates that there will

be a measure of gain or loss on every lot or parcel sold, and not that the

capital in the entire tract shall be returned. The sale of each lot or

parcel will be treated as a separate transaction, and gain or loss

computed accordingly.

-21Id. at 114-115.16 The Court of Appeals found that the regulation had the effect and

force of law and mandated the result the taxpayer sought. Id. at 115, 117-118."

Marwais Steel Co. v. Commissioner, 354 F.2d at 997, involved bad debt

deductions claimed by the parent on loans made to a subsidiary and the subsidiary's

operating losses the parent later assumed. Marwais Steel Co. (Marwais) lent its

wholly owned subsidiary: Wilmington Metal Manufacturing Co. (Wilmington),

$57,857.35. kl_ Wilmington was never successful, and the amount was forgiven on

the eve of Wilmington's eventual dissolution. Id. Marwais had previously claimed

16The quoted regulation appeared as art. 61 of Treasury Regulation 74

promulgated under the Internal Revenue Act of 1928. See Commissioner v. Laguna

Land & Water, 118 F.2d 112, 114 (9th Cir. 1941).

"Important here is the Court of Appeals' statement in Commissioner v.

Laguna Land & Water, 118 F.2d at 117, that

Nor is the contention of the Commissioner correct that an over .

allowance of base cost to certain lots sold in earlier years makes the

proper base cost deduction on other lots sold in a subsequent year a

'double deduction' such as is considered in* * * Ilfeld Co. v. .

Hernandez, * * *. None of these cases holds that an improper

deduction from the gross receipts from a specific piece of property sold

in one year may be corrected by refusing a deduction upon the sale of a

difference piece of property in a different year.

We do not read this case as being inconsistent with the law on double deductions. It

simple acknowledges the regulation providing that the determination of cost and the

gain or loss for each parcel should be separately determined for tax purposes. See

Stewart v. United States, 739 F.2d 411, 415 (9th Cir. 1984).

- 22 additions to its reserve for bad debts resulting in tax deductions of $22,000 on its

1953 tax return and $35,122.35 on its 1957 tax return as a result of the loans it had

made to Wilmington. Id. at 997-998. At the time of Wilmington's liquidation,

Marwais claimed a deduction that represented the net operating losses of

$59,774.87 of Wilmington. Id. at 997. Specifically, Marwais claimed a deduction

of $23,967.52 on its 1957 tax return and carried the remaining $35,807.35 over to

its 1958 tax return. E The Commissioner argued that because Marwais had

claimed $57,122.35 in bad debt deductions, it was not entitled to $57,122.35 of the

claimed operating loss deductions because they represented the same economic loss.

Id. at 998. We agreed with the Commissioner, and the Court of Appeals affirmed.

Importantly, the Court of Appeals stated:

We conclude, as the tax court did, plausible as the position of

Marwais is, there is a message in Ilfeld Co. v. Hernandez, Collector,

292 U.S. 62, 54 S.Ct. 596, 78 L.Ed. 1127, another double tax

deducfion disallowed. We follow taxpayer's argument that part of

what was there said was dicta. And, of course, the sequence of facts

there is reversed from what we have here. If what it said there was

dicta, we believe that it is dicta the court will follow in cases having

any similarity at all on double deductions for a single economic loss.

E at 998-999 (emphasis added).18

18In its amicus brief, Duquesne states: "The First Circuit Court of Appeals,

however, reached the opposite conclusion on facts very similar to Marwais." See

Textron, Inc: v. United States, 561 F.2d 1023 (1st Cir. 1977). Even if true, this case

(continued...)

- 23 In Stewart, the taxpayers reported gain from the sale of a water utility using

the installment sale method. Stewart, 739 F.2d at 412. In determining the amount

of the gain, the taxpayers originally calculated their basis in the water utility sold as

$671,758.88 and deducted $161,593 against a $325,000 installment payment as a

return of basis for 1968, a year closed to adjustment by the statute of limitations. Ldd

at 412, 414. They then discovered they were wrong and that the actual basis was

$28,268. Id. at 412. The taxpayers wanted:to deduct a proportionate share of the

true basis for 1969 and 1970 even though they had already erroneously deducted

more than the total basis for .1968.. Id. at 414. The District Court allowed the

taxpayers to do so, but the Court of Appeals reversed. Id. at 415 (citing Robinson

v. Commissioner, 181 F.2d 17, 18 (5th Cir. 1950), aff'g 12 T.C. 246 (1949)). In

response to the taxpayer's reliance on Laguna Land & Water Co., the Court of

Appeals stated that

(...continued)

. .

.

is not appealable in the First Circuit. We also note Textron dealt with a parent and a

subsidiary that did not file a consolidated return, a point which was carefully noted

by the court in Textron. Id. at 1026 (stating: "We have grave doubts about the

dissent's casual eliding of the distinction between parent and subsidiary. They are

separate taxpayers. In the absence of a consolidated return, * * * treating the two

corporations as one may not be justified."). We recognize that Marwais Steel Co.

did not involve a consolidated return. Marwais Steel Co. v. Commissioner, 354

F.2d 997, 997 n.1 (9th Cir. 1965), aff'g 38 T.C. 633 (1962). But petitioner files

consolidated returns, thus distinguishing it from the taxpayer in Textron.

- 24 the Laguna decision rested on the fact that the regulations required the

taxpayer "to treat each parcel sold as a separate capital transaction

having a separate basic cost and yielding a separate profit in the year of

its sale." [118 F.2d at 117.] In contrast, there is no indication that

Congress intended installment sales to be treated as a number of

separate transactions. Installment reporting is not even required; the

taxpayer may elect not to use it. * * *

Id. at 415.

Petitioner, focusing on language in Commissioner v. Laguna Land & Water

Co.,.118 F.2d at 117, and quoting from Stewart, 739 F.2d at 415, contends "that the

government cannot make up for its failure to correct an erroneous deduction in one

year by disallowing a deduction in a separate transaction." Petitioner then

paraphrases this language to argue that "the government is attempting to make up

for its failure to correct an erroneous deduction in one transaction [Great West's

sale of its Earth Management stock] by disallowing a deduction in a separate

-

transaction [Earth Management's environmental clean-up activities with respect to

the Refinery Property]."

We do not believe the language warrants the emphasis petitioner gives to it.

It simply arose out of the regulation in Laguna Land & Water mandating that "The

sale of each lot or parcel will be treated as a separate transaction." As already

discussed supra note 17, the court in Laguna Land & Water found that regulations in

effect at that time mandated that the sale of each lot be treated as a separate

- 25 transaction. This was sufficient to demonstrate congressional intent to allow the

double deduction. Over 20 years after Laguna Land & Water was decided, the

Court of Appeals held it would follow Charles Ilfeld Co. in "cases having any

similarity at all on double deductions for a single economic loss". Marwais Steel

Co. v. Commissioner, 354 F.2d at 998-999. In that case, no mention was made of

Laguna Land & Water Co. or separate and different transactions. The Court of

Appeals for the Ninth Circuit, like the Tax Court, follows the Ilfeld doctrine. If a

taxpayer can point to a specific provision demonstrating congressional intent to

allow the double deduction, the second deduction would be authorized. If the

taxpayer cannot show congressional intent, then,the double deduction would not be

allowed.

II.

The Law Applied to Petitioner

.

If the deductions represënt the same economic loss to petitioner and petitioner

cannot point to a specific provision demonstrating Congress' intent to allow the

double deductions, then the claimed environmental remediation expense deductions

must be disallowed.

A.

.

Whether the Deductions Represent the Same Economic Loss

Petitioner asserts that the capital·loss and the environmental remediation

expense deductions do not represent the same economic loss. We disagree. Both

-26the capital loss and the environmental remediation expense deductions represent

costs associatéd with the cleanup of the Golden West Refinery property. The

capital loss represents the unpaid liability, and the environmental remediation

expense deductions represent the actual cost when paid. This--deducting the unpaid

liability in the form of a capital loss and then deducting it again when paid --is the

core problem of this case. Petitioner raises two arguments which we will address as

to why they do not represent the same economic loss.

1.

Calculation of Basis

Petitioner states: "GWRC's [Golden West's] capital loss on the sale of its

EMC [Earth Management] stock did not represent an economic loss for the

environmental cleanup of the Refinery Property, but rather was the result of the

manner in which basis was required to be computed under the provisions of the

Code". Section 1001(a) provides that loss "from the sale or other disposition of

property * * * shall be the excess of the adjusted basis * * * over the amount

realized." (Emphasis added.) Hence, contrary to petitioner's assertion, calculation

of basis, while important, is not the only factor when determining a loss. One must

also consider amount realized. Section 1001(b) provides that "[t]he amount realized

from the sale or other disposition of property shall be the sum of any money

received".

- 27 The amount realized was $25,200 and basis was $29,100,000, leading to a

loss of $29,074,800.19 Basis took into account the face value of the Benzin note but

did not take into account the contingent environmental remediation liabilities (the

expected amount it would cost to clean up the Golden West Refinery Property).

The amount realized took into account both the Benzin note and the contingent

environmental remediation liabilities. Therefore, the capital loss arose not as a result

of how basis was calculated but as ä result of the contingent environmental

remediation liabilities being taken into account in calculating the amount realized (or

fair market value) but not in calculating basis?°

19The sale price of the Earth Management stock was $280 per share for a total

of $25,200 (90 shares x $280). An apprisal report prepared by Deloitte states: "as

of September 1, 1996, the fair market value of a minority and noncontrolling interest

in the common equity of Earth Management Company is reasonably estimated to be

$70,000 or $280 per share." Therefore, the amount realized equals the fair market

value in this case.

20Petitioner also argues that "Because GWRC's [Golden West's] capital loss

did not represent an economic loss from the cleanup of the Refinery Property, Earth

Management's subsequent environmental remediation expense deductions cannot

constitute a second deduction for the same economic loss." We recognize that no

economic loss occurred when petitioner sold the Earth Management stock, leading

to the capital loss; however, we consider this to be immaterial. That one economic

loss occurs and two tax losses are claimed is a trademark of double deduction cases.

For example, in Comar Oil Co. v. Helvering, 107 F.2d 709 (8th Cir. 1939), the

taxpayer opened a reserve account in 1926-in anticipation of losses that would be

incurred when warehouse material was sold or junked. Id. at 710. It credited to the

reserve $120,000 and claimed a deduction in that amount on its 1926 tax return. _Ijl

(continued...)

- 28 2.

The Benzin Note v. Cash Advances From Thrifty

Petitioner next argues the deductions are economically not the same because

"the asset that established GWRC's [Golden West's] basis in the EMC [Earth

Management] stock (the Benzin note) was not the same asset that gave rise to

EMC's [Earth Management] environmental remediation expense deductions (the

Thrifty cash advances)." Petitioner apparently believes that if the Benzin note had

been used to pay the environmental expenses to clean up the Golden West Refinery

property, then the capital loss and the environmental remediation liabilities would

represent thessame economic loss. But because the liabilities were paid from money

Thrifty advanced to Earth Management, they are not. We view this as nothing more

20(...continued)

In 1929 the taxpayer's actual losses from the warehouse were $208,189.04, and on

its 1929 tax return the taxpayer claimed a deduction in that amount. Id. The court

agreed with the Commissioner that the claimed $208,189.04 deduction should be

reduced by the remaining reserve account balance of $87,824.30 for which a

deduction had previously been allowed in 1926. Id. at 711. The fact that the

deduction claimed on the 1926 tax return did not represent an economic loss

whereas the deduction claimed on the 1929 return did represent an economic loss

did not matter. The court acknowledged that the double deduction cases cited

involved situations where an economic loss had actually occurred and been allowed

as a deduction for a preceding the year and then claimed a second time. In the case

before it "the loss was anticipated and a deduction claimed and allowed for it in a

year precediàg the occurrence of the actual loss." Id. However, the court found

"no difference in principle", and the claimed second loss was not allowed. Id.

- 29 than a distinction without a difference.21 Payment of the environmental remediation

liabilities reduced Earth Management's assets (and the consolidated group's as a

whole) regardless of where that money came from.

B.

No Specific Provision Demonstrating Intent

As the capital loss deductions and the environmental remediation expense

deductions represent the same economic loss, petitioner must point to a specific

provision authorizing the double deduction. Petitioner fails in this regard, pointing

only to section 162. As stated, general allowance provisions are insufficient;.and

this Court has previously held that section 162 does not reflect a "clear declaration

of intent" to allow a double deduction. O'Brien v. Commissioner, 79 T.C. at 786788 (1982); Brenner v. Commissioner, 62 T.C. at 884-885. Accordingly, petitioner

is not entitled to the environmental remediation expense deductions claimed on its

2iThe-Benzin note's stated purpose was to^provide Earth Management with

additional collateral to facilitate borrowing any funds needed to pay the contingent

environmental remediation liabilities as they came due. However, the Benzin Note

was never pledged as collateral on any borrowing by Earth Management and as of

May 16, 2011, no payments of principal or interest had been made on the Benzin

Note, despite the September 30, 2006, maturity date.

- 30 Federal income tax returns for TYE September 30, 2000, 2001, and 2002.22 For

completeness; we next briefly discuss petitioner's remaining arguments.

III.

Petitioner's Remaining Arguments

A. Whether Respondent Ignored Taxable Periods

Petitioner argues respondent is ignoring the taxable periods for which the

deductions were claimed and is impermissibly matching capital loss carryforwards

claimed for years not before the Court with environmental remediation expense

deductions claimed for years before the Court. Petitioner states that the capital loss

carryforwards of $18,347,205 claimed for closed years correspond to $16,699,198

of environmental remediation expense deductions claimed for closed years and that

capital loss deductions of $10,727,802 claimed for open years and conceded by

22We aie mindful of the result we have reached. For years closed by the

statute of limitations, petitioner claimed capital loss deductions of $18,347,205 and

environmental remediation expense deductions of $16,699,198 for total deductions

of $35,046,403 for the cleanup of the Golden West Refinery property. Then for

years not closed by the statute of limitations, petitioner claimed capital loss

deductions of $10,727,595 and environmental remediation expense deductions of

$11,109,962. Petitioner conceded the capital loss deductions, and we have

disallowed the environmental remediation expense deductions. In effect, petitioner

was allowed both capital loss and environmental remediation expense deductions

for closed years and then was not allowed deductions for both for open years. We

believe this result is in line with the Supreme Court's pronouncement that double

deductions (or their practical equivalent) for the same economic loss are

impermissible absent a clear declaration of congressional intent. Charles Ilfeld Co.

v. Hernandez, 292 U.S. 62, 68 (1934); see also Marwais Steel Co. v.

Commissioner, 354 F.2d at 998-999.

- 31 petitioner correspond to $11,109,962 of environmental expense deductions claimed

for open years. Petitioner believes that because it conceded the capital loss

carryforwards claimed for years before the Court, "there is no 'first tax benefit' in

the years at issue and therefore, there can be no 'double tax benefit' in the years at

issue."

Again, we disagree with petitioner. As of September 1996 the contingent

environmental remediation liabilities associated with the Golden West Refinery

property totaled $29,070,000. By engaging in the Environmental remediation

strategy, petitioner essentially accelerated the deductions attributable to payment of

the environmental remediation liabilities. The capital loss was realized in a single

year--1996. The second deduction was claimed for the years in which the actual

remediation cleanup expenses were paid. Both deductions arose from the same

economic loss, which is the cleanup of the Golden West Refinery property. To the

extent of the first deduction, petitioner is not entitled to a second deduction for the

same economic loss.

Petitioner argues that "[i]t is clear that Petitioner is not receiving a 'double

tax benefit' in the years before Court and, in fact, Respondent is seeking a double

disallowance of Petitioner's 'tax benefits' in the years at issue". We still disagree.

What is in fact clear to this Court is that if we grant petitioner's request and sustain

- 32 the claimed $11,109,962 in environmental remediation expense deductions,

petitioner in total will have claimed $46,156,365 in tax deductions for an economic

event that was estimated to cost $29,070,000 and has, at least to date, incurred

$27,759,160 of actual cost."

B. Whether the First Deduction Was Erroneous and Therefore Charles

Ilfeld Co. Is Inapplicable

Petitioner argues that Charles Ilfeld Co. is inapplicable because it is limited to

situations where the taxpayer correctly treated an item for an earlier barred year.

According to petitioner, since the capital loss deductions claimed for closed years

were improper, Charles Ilfeld Co. is inapplicable. Petitioner places great emphasis

on B.C. Cook & Sons, Inc. v. Commissioner, 59 T.C. 516, 521-522 (1972).

In B.C. Cook & Sons we stated: "The prohibition against double deductions

evolved in the context of cases where the taxpayer correctly treated an item in an

earlier barred year and received a tax benefit therefrom and then sought to obtain a

similar tax benefit in a later year." Id. at 521. We went on to state:

"This $46,156,365 is the sum of (1) $18,347,2,05 of capital loss deductions

claimed for years not before the Court; (2) $16,699,198 of environmental

remediation expense deductions claimed for years not before the Court; and (3)

$11,109,962 in environmental remediation expense deductions claimed for years

before the Court (and at issue in this case).

- 33 If we were to apply the doctrine prohibiting double deductions in

a situation such as this, where the petitioner's action in earlier years

was erroneous, we would turn that doctrine into a sword to pierce the

shield of repose provided by the statute of limitations, and there would

appear to be little need for the mitigation provisions applicable to

double deductions contained in sections 1311-1315

* * *: * * *

Moreover, a deduction which is incorrectly taken in one year should be

corrected by eliminating it from the year in which it was taken. * * *

Id.

While we acknowledge the holding in B.C. Cook & Sons supports petitioner,

we also recognize that the precedential value of the decision has been questioned.

See Allina v. Commissioner, 102 T.C. 323, 333 (1994), aff'd without published

opinion sub. nom. Handelman v. Commissioner, 57 F.3d 1063 (2d Cir. 1995), and

aff'd without published opinion sub. nom. Eisenman v. Commissioner, 67 F.3d 291

(3d Cir. 1995).

Regardless of our holding in B.C. Cook & Sons, the Court of Appeals for

the Ninth Circuit has stated: "The applicable principle here is that 'when a

taxpayer receives a tax advantage from an erroneous deduction, he may not deduct

the same amount in a subsequent year after the Commissioner is barred from

adjusting the tax for the prior year." Stewart, 739 F.2d at 415 (citing Robinson v.

- 34 Commissioner, 181 F.2d at 18).24 Accordingly, we conclude that, as we are bound

24We find further support for the Court of Appeals for the Ninth Circuit's not

placing emphasis on whether the original deduction was improper in Unvert v.

Commissioner, 656 F.2d 483 (9th Cir. 1981), afff'g 72 T.C. 807 (1979). The

taxpayers in Unvert concluded they had erroneously claimed a $54,500 deduction

for prepaid interest on their 1969 Federal income tax return. Id. at 484. In 1972 the

taxpayers were refunded the $54,500 they had paid. Id. The Internal Revenue

Service argued that the $54,500 was taxable income to the taxpayers in 1972 under

the tax benefit rule. Id. The taxpayers argued that the tax benefit was inapplicable

on the basis of cases which have held that the rule did not apply when the original

deduction was improper. him at 485. This Court held for the Internal Revenue

Service on the basis that the taxpayers were estopped from contending their 1969

deductions improper. Id. The Court of Appeals affirmed, but for a different reason.

It stated:

Because we affirm on the basis that the erroneous deduction

exception should be rejected, we do not consider the Tax Court's

estoppel theory.

The logic of the erroneous deduction exception is that an

improper deduction should be corrected by assessing a deficiency

before the statute of limitations has run, not by treating recovery of the

expenditure as income. This rationale was explained most

compreliensively in Canelo:

"We realize that petitioners herein have received a windfall

through the improper deductions. But the statue of limitations requires

eventual repose. * * * Here the deduction was improper, and

respondent should have challenged it before the years prior to 1960

were closed by the statute of limitations." * * * [Canelo v.

Commissioner, 53 T.C. 217, 226-227 (1969), aff'd, 447 F.2d 484 (9th

Cir. 1971).].

We find this unpersuasive. * * *

(continued...)

- 35 by Ninth Circuit precedent, the fact that the capital loss deductions claimed for

earlier years may have been erroneous is immaterial." See Golsen v.

Commissioner, 54 T.C. 742.

-

"(...continued)

Id. (fn. ref. omitted).

The Court of Appeals went on to state that "The erroneous deduction

exception is also poor public policy. * * * [and] improperly taken tax deductions

should not be rewarded." Id. at 486.

"In B.C. Cook & Sons, Inc. v. Commissioner, 59 T.C. 516 (1972), we stated

that the earlier deduction the taxpayer claimed was "erroneous". In the case at

hand, while petitioner has conceded the capital loss and states that "its capital loss

carry-forwards should have been disallowed", petitioner also states:

Petitioner conceded this issue years after it entered into the transaction

which produced the capital loss carry-forward, after courts found that

similar transactions lacked economic substance, and thus the capital

loss was not properly deductible. While Petitioner believed its

transaction did have economic substance when it engaged in the

transaction, Petitioner determined that the risk and cost of litigation

given the subsequent development of the case law did not justify

further litigation of the matter. * * *

These seemingly conflicting statements lead us to question whether petitioner is

conceding that the capital loss was erroneous or whether petitioner conceded the

capital loss issue simply because it foresaw a probable litigation defeat. Even if the

former is correct, there are and will be cases where whether the first deduction was

erroneous is at issue. The Court of Appeals for the Ninth Circuit recognized this

problem and concluded that "If the erroneous deduction exception is retained in any

form, there always will be inquiry as to whether the original deduction was

erroneous. In this sense, the erroneous deduction exception actually undermines the

policies of the statute of limitations." Unvert v. Commissioner, 656 F.2d at 483,

486 n.2.

- 36 As previously noted, other courts have also held that whether the first

deduction was erroneous is immaterial. See Robinson v. Commissioner, 181 F.2d at

18; Comar Oil Co. v. Helvering, 107 F.2d 709, 711 (8th Cir. 1939) (holding that

whether the original claimed deductions were correctly allowed was immaterial and

the first deductions "were allowed with * * * [the taxpayer's] approval and by its

inducement, if not its direct request. Under these circumstances it can not complain

because it is not allowed a second deduction for the same losses after the.bar of the

statute has run against a correction of the error made in 1926."); Stoecklin v.

Commissioner, T.C. Memo. 1987-453 (citing Robinson), aff'd, 865 F.2d 1221 (11th

Cir. 1989); see also Cincinnati Milling Mac. Co. v. United States, 83 Ct. Cl. 392

(1936).

IV.

Conclusion

For the reasons discussed above, petitioner is not entitled to environmental

remediation expense deductions claimed for TYE September 30, 2000, 2001, and

2002, of $3,109,962, $4,108,429, and $3,891,571, respectively. The Court has

considered all of petitioner's contentions, arguments, requests, and statements. To

the extent not discussed herein, we conclude that they are meritless, moot, or

irrelevant.

- 37 To reflect the foregoing,

Decision will be entered

under Rule 155.