PILGRIM'S PRIDE CORPORATION, Successor in Interest to Pilgrim's Pride Corporation of Georgia, formerly known as Gold Kist, Incorporated, Successor in Interest to Gold Kist, Incorporated and Subsidiaries, Petitioner - Appellant,
COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee
Appeal from the Decision of the United States Tax Court.
For PILGRIM'S PRIDE CORPORATION, as successor of Pilgrim's Pride Corporation of Georgia, formerly known as Gold Kist, Incorporated, as successor of Gold Kist, Incorporated and Subsidiaries, Petitioner - Appellant: Robert H. Albaral, Todd A. Schroeder, Baker & McKenzie, L.L.P., Dallas, TX.
For COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee: Jennifer Marie Rubin, Esq., Kathryn Keneally, Joan I. Oppenheimer, U.S. Department of Justice, Washington, DC; William J. Wilkins, Internal Revenue Service, Washington, DC.
Before PRADO, ELROD, and HAYNES, Circuit Judges.
JENNIFER WALKER ELROD,
In this tax case, we must determine whether Pilgrim's Pride Corporation's loss from its abandonment of securities is an ordinary loss or a capital loss. The Tax Court--in what appears to be the first ruling of its kind by any court--ruled that 26 U.S.C. § 1234A(1) applies to the abandonment loss and requires that it be classified as capital. We disagree. Because § 1234A(1) only applies to the termination of contractual or derivative rights, and not to the abandonment of capital assets, we REVERSE the judgment of the Tax Court and RENDER judgment in favor of Pilgrim's Pride.
Pilgrim's Pride is the successor-in-interest to Pilgrim's Pride Corporation of Georgia f/k/a Gold Kist, Inc., which was the successor-in-interest to Gold Kist, Inc. (Gold Kist). In 1998, Gold Kist sold its agriservices business to Southern States Cooperative, Inc. To facilitate the purchase, Southern States obtained a bridge loan that was secured by a commitment letter between Southern States and Gold Kist. The commitment letter permitted Southern States to require Gold Kist to
purchase certain securities from Southern States (Securities). Southern States exercised this option and Gold Kist purchased the Securities for $98.6 million.
In early 2004, Gold Kist and Southern States negotiated a price at which Southern States would redeem the Securities. Gold Kist suggested a price of $31.5 million, but Southern States offered only $20 million. Gold Kist's Board of Directors, instead of accepting the $20 million offer, decided to abandon the Securities for no consideration. The Board reasoned that a $98.6 million ordinary tax loss would produce more than $20 million in tax savings. Gold Kist irrevocably abandoned the Securities for no consideration, effectuating its abandonment by sending Southern States and Wachovia Bank letters stating that Gold Kist " irrevocably abandons, relinquishes, and surrenders all of its rights, title and interest" in the securities. On its timely filed Form 990-C for the tax year ending June 30, 2004, Gold Kist reported a $98.6 million ordinary loss deduction.
Five years later, while Pilgrim's Pride was in bankruptcy, the Commissioner issued a deficiency notice to Pilgrim's Pride with respect to Gold Kist's 2004 tax year. The deficiency notice asserted that Gold Kist's loss from the abandonment of the Securities was a capital loss, rather than an ordinary loss, creating a tax deficiency of $29,682,682. Pilgrim's Pride timely filed a petition in the Tax Court, challenging the Commissioner's determination that Gold Kist's abandonment loss was a capital loss.
In their initial briefs and in court-ordered supplemental briefs, the parties focused their arguments on whether the abandonment caused the securities to become " worthless," making the loss a capital loss under 26 U.S.C. § 165(g). The Tax Court then issued a sua sponte order requesting briefing on a new topic: whether § 1234A(1) applied to Pilgrim's Pride's abandonment of the Securities and required capital loss treatment. Predictably, Pilgrim's Pride argued that § 1234A was inapplicable; the Commissioner argued that § 1234A applied and rendered the abandonment a deemed sale or exchange of capital assets subject to capital loss treatment. The Tax Court agreed with the Commissioner, holding that ...