© Steven J. Willis 2006 1

INTRODUCTION TO TAX SCHOOL

Top 100 Cases

U.S. v. Bliss Dairy 460 U.S. 370 (1982)

INTRODUCTION TO TAX SCHOOL

Top 100 Cases

U.S. v. Bliss Dairy 460 U.S. 370 (1982)

© Steven J. Willis 2006 2

Hillsboro/Bliss Dairy 460 U.S. 370

• Bliss Dairy is famous for important propositions:

• An event “Fundamentally Inconsistent” with a proper beneficial deduction in an earlier year sometimes results in income.

• The tax benefit rule applies only if the original treatment resulted from a court-created policy doctrine rather a congressionally created doctrine.

© Steven J. Willis 2006 3

Hillsboro/Bliss Dairy 460 U.S. 370

• The famous language of the Doctrine.

“Not every unforeseen event will require the taxpayer to report income in the amount of his earlier deduction. On the contrary, the tax benefit rule will "cancel out" an earlier deduction only when a careful examination shows that the later event is indeed fundamentally inconsistent with the premise on which the deduction was initially based.”

“Not every unforeseen event will require the taxpayer to report income in the amount of his earlier deduction. On the contrary, the tax benefit rule will "cancel out" an earlier deduction only when a careful examination shows that the later event is indeed fundamentally inconsistent with the premise on which the deduction was initially based.”

© Steven J. Willis 2006 4

Hillsboro/Bliss Dairy 460 U.S. 370

• FACTS: A liquidating dairy distributed cattle feed to its shareholders that was purchased and deducted in a prior year. Corporation did not recognize gain under § 336 liquidating distribution. The commissioner challenged the result under the tax benefit rule and required the distribution of the feed to be included in income in the current year.

• ISSUE: Whether the tax benefit rule will apply to require inclusion in income of the previously deducted items.

• HOLDING: In Bliss, the liquidating distribution under § 336 does not prevent application of the tax benefit rule.

• FACTS: A liquidating dairy distributed cattle feed to its shareholders that was purchased and deducted in a prior year. Corporation did not recognize gain under § 336 liquidating distribution. The commissioner challenged the result under the tax benefit rule and required the distribution of the feed to be included in income in the current year.

• ISSUE: Whether the tax benefit rule will apply to require inclusion in income of the previously deducted items.

• HOLDING: In Bliss, the liquidating distribution under § 336 does not prevent application of the tax benefit rule.

© Steven J. Willis 2006 5

Hillsboro/Bliss Dairy 460 U.S. 370

• To summarize:

– When you hear of “Hillsboro,” or “Bliss Dairy,” you should think of:

– An event “Fundamentally Inconsistent” with a proper beneficial deduction in an earlier year sometimes results in income.

• The Claim of Right Doctrine

– You should also associate the case with transactional accounting and the notion that every year stands alone.• Ideally, you would also associate the case with

– Burnet v. Sanford & Brooks, 282 U.S. 359 (1931) – U.S. v. Lewis, 340 U.S. 590 (1951).