concurring: I agree with the result reached by the majority and append these comments for two reasons: (1) To attempt to eliminate some of the confusion which seems to me to have arisen due to the play on words in which the courts have engaged in their efforts to avoid what they considered to be the plain language of section 337 and (2) the possible conflict which might be thought to exist between the majority opinions in this case and in John T. Stewart III Trust, decided this day (63 T.C. 682).
The need to assess and collect taxes at fixed and relatively short intervals underpins the principle of taxation that transactions which may possibly be subject to further developments substantially altering their character for tax purposes should nevertheless be treated as final and closed so that their tax consequences can be determined. Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931); United States v. Rexach, 482 F. 2d 10 (C.A. 1, 1973). On the other hand, a taxpayer should not be permitted to take advantage of this governmental exigency to establish a distorted picture of his income for tax purposes. It is this countervailing consideration which spawned the tax benefit rule. See Bishop v. United States, 324 F. Supp. 1105, 1111 (M.D. Ga. 1971); Mayfair Minerals, Inc., 56 T.C. 82, 86 (1971), affirmed per curiam 456 F. 2d 622 (C.A. 5, 1972). Compare United States v. Skelly Oil Co., 394 U.S. 678, 684-685 (1969). The most common, and most nearly accurate, explanation of the rule is that it recognizes the “recovery” in the current year of taxable income earned in an earlier year but offset by the item deducted. Commissioner v. Anders, 414 F. 2d 1283 (C.A. 10, 1969), reversing 48 T.C. 815 (1967); Alice Phelan Sullivan Corporation v. United States, 381 F. 2d 399 (Ct. Cl. 1967); West Seattle National Bank of Seattle v. Commissioner, 288 F. 2d 47 (C.A. 9, 1961), affirming 33 T.C. 341 (1959); Buck Glass Co. v. Hofferbert, 176 F. 2d 250 (C.A. 4, 1949).
When the tax benefit rule is viewed in its true character — as a necessary counterweight to the consequences of the annual accounting principle — much of the difficulty of this case disappears. Judicial preoccupation with the questions whether items like those involved herein are “property” (D. B. Anders, 48 T.C. 815 (1967)) or whether the proceeds from the.disposition of such items constitute “gain” (Anders v. United States, 462 F. 2d 1147 (Ct. Cl. 1972)) becomes unnecessary. See also S. E. Evans, Inc. v. United States, 317 F. Supp. 423, 426-427 (W.D. Ark. 1970). Rather, the focus of inquiry is on three elements: (1) An amount previously deducted, (2) which resulted in a tax benefit, and (3) was recovered during the taxable year in issue. There can be no doubt that each of these requirements was met in the instant case.
There is no indication that Congress intended section 337 to override the above principles. That section extends nonrecognition in general to gains from liquidating transactions but preserves the taxability of income arising in the ordinary course of business. In this context, there is no reason to permit section 337 to exempt actual recoveries from tax where a tax benefit has been derived from income offsets in earlier years; they should retain the characteristics of ordinary business income. Cf. Citizens’ Acceptance Corporation v. United States, 462 F. 2d 751 (C.A. 3, 1972); Winer v. Commissioner, 371 F. 2d 684 (C.A. 1, 1967), affirming T.C. Memo. 1966-99; Citizens Federal S. & L. Assn, of Cleveland v. United States, 290 F. 2d 932 (Ct. Cl. 1961). To hold otherwise would enable a taxpayer to enjoy what would amount to a “double” deduction. See Bishop v. United States, supra.
Petitioner’s reliance on the application by analogy of Fribourg Nav. Co. v. Commissioner, 383 U.S. 272 (1966), is misplaced. In addition to the reasoning set forth in the majority opinion, I would note that the issue of recovery of depreciation is closely integrated with the specific provisions relating to adjustments to basis contained in section 1016(a). Depreciation has been and continues to be considered sui generis and the tension between the recovery of amounts previously deducted and the tax benefit rule has not been considered of such a character as to cause that rule to prevail. See sec. l.lll-l(a), Income Tax Regs. In this connection, it is not without significance that, in Fribourg, the Supreme Court made no reference whatsoever to the tax benefit rule. Moreover, it is at least open to question whether there is sufficient similarity between the expense deducted herein and the allowance for depreciation to support any argument by analogy. Compare Coca-Cola Bottling Co. of Baltimore v. United States, 487 F. 2d 528 (Ct. Cl. 1973).
I now turn to the question of the correlation of the majority opinion herein with the majority opinion in John T. Stewart III Trust, supra. The latter opinion rejects the play-on-words efforts of prior decisions to avoid the applicability of section 337 (Hollywood Baseball Association v. Commissioner, 423 F. 2d 494 (C.A. 9, 1970), affirming 49 T.C. 338 (1968); Pridemark, Inc. v. Commissioner, 345 F. 2d 35, 42-45 (C.A. 4, 1965), affirming 42 T.C. 510, 536-538 (1964); Coast Coil Co., 50 T.C. 528, 535 (1968) (alternative holding), affirmed per curiam 422 F. 2d 402 (C.A. 9, 1970); Frank W. Verito, 43 T.C. 429, 441 (1965)) and squarely holds that mortgaging service contracts are “property.”1 The opinion then articulates the distinction between cases involving the applicability of section 337 to a distribution in liquidation of a right to a fixed or calculable amount of income which has been earned or accrued (Midland-Ross Corp., Tr. of Sur. Com. Corp. v. United States, 485 F. 2d 110 (C.A. 6, 1973); Family Record Plan, Incorporated v. Commissioner, 309 F. 2d 208 (C.A. 9, 1962); Commissioner v. Kuckenberg, 309 F. 2d 202 (C.A. 9, 1962); cf. Williamson v. United States, 292 F. 2d 524 (Ct. Cl. 1961))2 and a situation involving a distribution of a right to earn income in the future, or to receive income in the future where the amount has not become so fixed or calculable that distribution should produce taxability (cf. Williamson v. United States, supra; Shea Co., 53 T.C. 135, 156-157 (1969); United Mercantile Agencies, 34 T.C. 808 (1960); Pat O’Brien, 25 T.C. 376, 384-385 (1955)). That articulation is accomplished upon the basis that if the distribution of a right to income would not produce taxability to the corporation under section 336, the gain from the sale of that right should be accorded the nonrecognition benefits of section 337.
Taking the same approach herein poses a problem because there is some difficulty in seeing how a distribution in liquidation under section 336 of an asset that has previously been expensed can constitute a “recovery” so as to justify the application of the tax benefit rule. Cf. Commissioner v. South Lake Farms, Inc., 324 F. 2d 837 (C.A, 9, 1963), affirming 36 T.C. 1027 (1961). But cf. Argus, Inc., 45 T.C. 63 (1965). Contrast the respondent’s recent acquiescence in South Lake Farms, Inc., 1975-7 I.R.B. 6, with Rev. Rul. 74-396, 1974-2 C.B. 106. Compare Nash v. United States, 398 U.S. 1 (1970); General Utilities Co. v. Helvering, 296 U.S. 200 (1935); sec. 1.111-1(a)(2), Income Tax Regs. See O’Hare, “Statutory Nonrecognition of Income and the Overriding Principle of the Tax Benefit Rule in the Taxation of Corporations and Shareholders,” 27 Tax L. Rev. 215, 233-238 (1972); Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders (3d ed.), secs. 11.62 and 11.65. The majority opinion herein expressly leaves open the question whether the tax benefit rule would apply to tax the corporation despite the provisions of section 336. Nevertheless, it cannot be gainsaid that if such taxability does not result, the tracking approach of the majority opinion in Stewart should produce a different result herein. Otherwise, the effect would be to create a potential for disparate tax treatment between sales of expensed property during liquidation at the corporate level and those made at the shareholder level following distribution of the expensed property in kind. In this way, yet another trap for the unwary like that created by United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950), and Commissioner v. Court Holding Co., 324 U.S. 331 (1945), would result — a condition that section ,337 was designed to overcome. See Waltham Netoco Theatres, Inc., 49 T.C. 399 (1968), affd. 401 F. 2d 333 (C.A. 1, 1968).
But even if this dichotomy between sections 336 and 337 should ultimately be held to exist in situations such as that involved herein, I am satisfied that the policy considerations upon which the tax benefit rule is posited are sufficiently strong to overcome the desirability of consistent application of those sections where the liquidating corporation actually receives property for the transfer of the expensed items. The presence of an actual economic benefit was recognized as possibly justifying the application of the tax benefit rule in Nash v. United States, 398 U.S. at 4. See also Citizens’ Acceptance Corporation v. United States, 462 F. 2d at 751; Bishop v. United States, 324 F. Supp. at 1111-1112. And in Commissioner v. South Lake Farms, Inc., supra, the Court of Appeals inferred that differing results might obtain under sections 336 and 337. See 324 F. 2d at 839. Additionally, I note that, to the extent that the tax benefit rule does not apply, section 337 is given full force and effect in a situation such as is involved herein. See Spitalny v. United States, 430 F. 2d 195, 198 (C.A. 9, 1970).
One final word. As far as the 1967 taxable year is concerned, I am satisfied that, aside from any question of the applicability of the tax benefit rule, it was clearly appropriate for respondent, acting under section 446(b), to make the adjustment with respect to the rental items expensed in that year. See Spitalny v. United States, supra at 197.3
Raum, J., agrees with this concurring opinion.A fortiori, the rental linens are clearly “property.”
Compare Sol C. Siegel Productions, Inc., 46 T.C. 15, 23 (1966).
Respondent’s concession that the method of accounting used by the corporation clearly reflected income in prior years does not preclude a challenge to that method for the year of liquidation. Jud Plumbing & Heating, Inc., 5 T.C. 127 (1945), affd. 153 F. 2d 681 (C.A. 5, 1946).