Corra Resources, Ltd. v. Commissioner of Internal Revenue
1991 U.S. App. LEXIS 23602, 945 F.2d 224, 68 A.F.T.R.2d (RIA) 5719 (1991)
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Rule of Law:
To claim a loss deduction for an abandoned asset under 26 U.S.C. § 165(a), a taxpayer must demonstrate both subjective intent to abandon and an objective, overt act of abandonment that is evidenced by a closed and completed transaction fixed by identifiable events.
Facts:
- In 1978, Corra Resources, Ltd. (Corra) invested in a coal mining lease in Kentucky from Salem Minerals, paying $77,500 in prepaid royalties.
- The investment was promoted with the promise of significant tax benefits.
- Throughout the investment period, no coal was ever mined, with the promoters providing investors with varied and contradictory excuses for the lack of production.
- In its 1981 fiscal year, Corra's accountant, Leo Eatman, investigated the venture, concluded it was suspicious, and advised Edwin Corra, the principal, to 'wash his hands of the business.'
- Following this advice, Corra Resources took no external action to repudiate the lease, notify the promoters of its withdrawal, or otherwise formally dissociate itself from the venture.
- Corra Resources retained its rights under the lease, meaning it could have potentially reaped benefits if mining had commenced at any point before the lease expired.
Procedural Posture:
- In 1984, the Internal Revenue Service (IRS) assessed tax deficiencies against Corra Resources related to its coal lease investment.
- Corra Resources filed a petition for review in the U.S. Tax Court.
- Corra Resources agreed to be bound by the outcome of a test case, Wiseman v. CIR, which was decided in favor of the IRS in 1987.
- After the adverse Wiseman ruling, Corra Resources argued in the Tax Court that it was entitled to an abandonment loss deduction for its 1981 fiscal year.
- A Special Trial Judge of the Tax Court concluded Corra Resources had not abandoned the lease in 1981, and a Tax Court Judge adopted this opinion, entering judgment for the Commissioner.
- Corra Resources (appellant) appealed the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a taxpayer's subjective intent to abandon a worthless asset, without an externally observable act that irrevocably severs ties to that asset, satisfy the requirements for a loss deduction under 26 U.S.C. § 165(a)?
Opinions:
Majority - Easterbrook, Circuit Judge
No. A taxpayer's subjective intent to abandon a worthless asset, without an externally observable act that irrevocably severs ties to that asset, does not satisfy the requirements for a loss deduction. The tax code requires a loss to be 'evidenced by closed and completed transactions and as fixed by identifiable events.' Mere mental abandonment or internal corporate discussions are insufficient because they are not visible to outside observers and do not prevent the taxpayer from later reaping benefits if the asset's value recovers. The court reasoned that allowing deductions based on intent alone would permit taxpayers to 'hedge bets at the Treasury's expense' by holding onto an asset in hope of a payoff while reserving the option to retroactively claim an abandonment loss in a tax-advantageous year. Although Corra Resources argued it was difficult to abandon the lease, it could have taken overt steps such as sending letters to the promoters renouncing its rights. By failing to take any such observable action, Corra retained the option to profit and therefore had not completed the act of abandonment.
Analysis:
This decision reinforces the principle that tax deductions require objective, verifiable events, not just a taxpayer's subjective state of mind. It prevents taxpayers from using hindsight to time their deductions for maximum tax benefit by claiming a 'mental' abandonment in a prior year. The ruling solidifies the 'overt act' requirement for abandonment losses, ensuring that the loss is fixed in a specific, identifiable tax year. This provides a clear line for the IRS and courts, preventing disputes over when an asset truly became worthless in the taxpayer's mind and demanding concrete proof of termination of interest.
