Taxing Lessons Case Summaries

Case — Double Deduction Doctrine

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TL Case Summ


Do a taxpayer’s capital loss deductions and environmental remediation expense deductions arise from the same economic loss?


Taxpayer Says: The capital loss and the environmental remediation expense deductions do not represent the same economic loss, and both should be allowed.

Internal Revenue Service Says: The environmental remediation expense deductions duplicate the capital loss deductions, and taxpayer is not entitled to both.


From Charles Ilfeld Co., 292 U.S. at 68: Double deductions (or their practical equivalent) for the same economic loss are impermissible absent a clear declaration of congressional intent.

From Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704-705 (1991): This rule applies even when the deductions are based on separate and distinct sections of the Code.

From United Telecomms., Inc. v. Commissioner, 589 F.2d 1383, 1388 (10th Cir. 1978), aff’g 65 T.C. 278 (1975): To find a clear declaration of congressional intent, a taxpayer must point to “a specific statutory provision authorizing a double deduction”.


Unless a specific tax code provision allows it, you cannot claim two tax benefits for the same loss or expense item.

In this case, the taxpayer, an affiliated group of corporations, was responsible for cleaning up environmental contamination caused by an oil refinery it owned. The taxpayer established a liability reserve for the $29 million expected cost. To better manage the cleanup, in 1996 the parent company transferred the liability to a subsidiary, along with a $29 million promissory note from another subsidiary. The transaction was completed in exchange for stock in the subsidiary, which had a fair market value of $400 per share.

The stock was then sold to three related parties at a discount to fair market value. Since the amount realized was less than the tax basis, the taxpayer claimed a capital loss of $29 million. Part of the loss was deducted on the taxpayer’s 1996 consolidated return, with the balance carried forward and deducted from 1997 through 2001.

During those years, the subsidiary paid to clean up the contamination with funds provided by the parent company. Those costs ($27.7 million) were deducted as environmental remediation expenses.

In 2009, the IRS disallowed the remaining capital loss carryovers for the years not closed by statute (2000 and 2001), as well as the environmental remediation expenses for those years and 2002. The IRS says the taxpayer deducted the same costs twice, once in the form of an unpaid liability as a capital loss, and then again as expenses when the liability was paid. The expenses duplicated the capital loss deductions, and both represent the same economic loss.

The taxpayer says the capital loss and the expenses paid do not represent the same economic loss. Instead, they are two separate transactions, because the capital loss arose from the stock transfer and subsequent sale, and the expenses were caused by the environmental contamination.


Make your selection, then see “The Court’s Decision” below for a full explanation

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Right answer!
For the IRS. The capital loss arose not as a result of how basis was calculated but as a result of the contingent environmental remediation liabilities being taken into account in calculating the amount realized (or fair market value) but not in calculating basis. Payment of the environmental remediation liabilities reduced the subsidiary’s assets (and the consolidated group’s as a whole) regardless of where that money came from. Both deductions arose from the same economic loss, which is the cleanup of the property. As the capital loss deductions and the environmental remediation expense deductions represent the same economic loss, taxpayer must point to a specific provision authorizing the double deduction. Taxpayer fails in this regard. Accordingly, taxpayer is not entitled to the environmental remediation expense deductions claimed on its federal income tax returns for the years in question.