In September of 2016 we wrote about the case of CRI-Leslie LLC et al. v. Commissioner, 147 T.C. No. 8 where the Tax Court found that, since a §1231 asset is, per §1221(a)(a), not a capital asset, a $9.7 million gain was not a capital gain, but rather was ordinary income. You can read about the details of this case in the original post.
The taxpayer, not happy with the Tax Court's decision, appealed the case to the Eleventh Circuit. And many advisers, seeing this result as odd and not something Congress could have meant to result, may agree. But it turns out the law allows for odd results.
On appeal the Tax Court’s holding was upheld by an Eleventh Circuit panel. Put simply, the panel explains the case as follows:
This partnership-tax case, arising in the same sphere, presents what appears to be a question of first impression: Is a taxpayer that contracts to sell property used in its trade or business entitled to treat as capital gain an advance deposit that it rightfully retains when its would-be buyer defaults and cancels the deal? Constrained by the Internal Revenue Code's plain (if somewhat peculiar) language, we hold that it is not.
The appellate panel notes that this result may be “odd” (see the “somewhat peculiar” reference in the prior paragraph), but that does not mean it is not the proper result given the plain language of the Internal Revenue Code. As the panel notes:
The supposed anomalies that CRI-Leslie posits — between completed and canceled transactions, and between active managers and passive investors — may seem a little (or even more than a little) odd, but oddity is not absurdity. See, e.g., Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 565 (2005). While “[t]here is an absurdity exception to the plain meaning rule,” it is necessarily “very narrow,” United States v. Nix, 438 F.3d 1284, 1286 (11th Cir. 2006), and applies only when a straightforward application of statutory text would compel a truly ridiculous — or to use Justice Story's word, “monstrous” — outcome. We are not in that ballpark here — particularly given that, when the sale fell through, CRI-Leslie got to keep not only the $9.7 million deposit (albeit at an ordinary-income tax rate) but also the Radisson Bay Harbor.
In addition to providing insight into the odd provision that is §1234A, the Circuit opinion also reminds us that Courts are hesitant to override the result imposed by a literal reading of the law. While it can happen, the opinion reminds us that it won't happen very often.
Some advisers are finding some "odd" results arising from a plain language reading of some provisions of the Tax Cuts and Jobs Act. But regardless of how "strange" the result may seem, advisers must remember that the Courts are likely to enforce what they may see as the "odd" result and leave it up to Congress to modify the law if they feel it is necessary to remove the oddity.