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Duquesne Light Holdings, Inc. v. Commissioner of Internal Revenue

United States Court of Appeals, Third Circuit

June 29, 2017

DUQUESNE LIGHT HOLDINGS, INC. & SUBSIDIARIES f/k/a DQE, INC & SUBSIDIARIES, Duquesne Light Holdings, Inc. & Subsidiaries, Appellant
v.
COMMISSIONER OF INTERNAL REVENUE

          Argued July 12, 2016

         Appeal from the Decision of the United States Tax Court Docket No. 10-9624 Tax Court Judge: Honorable Carolyn P. Chiechi

          James C. Martin, Esquire (Argued) Reed Smith LLP 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 Joseph P. Grant, Esquire Mary H. Weber, Esquire Internal Revenue Service Office of Chief Counsel Counsel for Appellee

          Before: AMBRO, HARDIMAN, and KRAUSE, Circuit Judges

          OPINION

          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, 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 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.

         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 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 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 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 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 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 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 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 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 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 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 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 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.

         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 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).

         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]

         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, ยง 165(a) is quite broad in authorizing a deduction for any loss and is ...


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