Vanderbilt Law Review


Jerry N. Smith

First Page



In light of the recent Supreme Court holding in United States v. Bliss Dairy, Inc.10 that the tax benefit rule requires income recognition by a corporation when it distributes previously expensed assets in complete liquidation, this Note assesses the dubious continued vitality of the tax benefit rule's single taxpayer construct-that is, the requirement that the same individual or entity serve as both the deducting and the recovering taxpayer. As the following analysis indicates, expansion of the tax benefit rule into a multiple taxpayer construct potentially requires some form of "recapture" in numerous factual settings previously considered non-taxable under existing nonrecognition provisions. In response to the unpredictability of the Bliss 'Dairy analysis in any given non-recognition context and the pervasive recapture implications of either a liberal or literal interpretation of the Bliss Dairy holding,this Note suggests an alternative basis for decision under the Bliss Dairy facts. This alternative requires the use of section 446(b), which would allow the IRS to achieve the Bliss Dairy result without causing any distortion of the tax benefit rule's traditional scope, applicability, or function. This Note also recommends legislation that would define the exact scope of various nonrecognition provisions and that would provide, in the case of "tax benefit rule income" falling outside the scope of those provisions, a recognition scheme that enhances both the policy considerations behind the applicable nonrecognition provision and the corrective goals implicit in section 111.