United States

Third Circuit denies double tax deduction benefits

Broadly interprets Supreme Court’s Ilfeld case, precluding deductions


The Third Circuit Court of Appeals has affirmed the Tax Court denial of about $199 million of deductions in Duquesne.1 In doing so, it applies a broad interpretation of a taxpayer-unfriendly doctrine that may cause taxpayers to exercise additional cautions when considering certain tax deductions.

Double deductions at stake

Current regulations generally preclude the type of double deductions at stake in Duquesne.2  Even so, the Third Circuit’s Duquesne decision is relevant because it addresses principles that may apply to other deductions.

The tax deductions at issue in Duquesne were deductions from loss of a subsidiary’s stock value and loss on sale of the same subsidiary’s assets. The IRS argued that the two deductions represented the same economic loss, so only one loss should be permitted under the principle of a 1934 Supreme Court case, Ilfeld.3 The Tax Court and the Third Circuit both agreed.

Broad interpretation of double deduction disallowance

The Third Circuit’s majority opinion, like the Tax Court, applied a broad interpretation of the Supreme Court’s Ilfeld decision. Absent specific authority supporting a double deduction for a single economic loss, only a single deduction is permitted. The Tax Code’s general authorization of loss deductions was not sufficient because it did not clearly authorize double deductions of the sort sought.

The dissenting opinion in Duquesne advocated a narrower interpretation, denying double deduction under Ilfeld only where the Tax Code may not fairly be read to authorize the deductions. It pointed out that although both the majority’s broad interpretation and its narrow interpretation are consistent with language from the Supreme Court’s 1934 decision in Ilfeld, the majority’s interpretation seemed inconsistent with the Supreme Court’s 2001 decision in Gitlitz.4 

Take away

Of course, the majority opinion prevailed and the Third Circuit adopted its more restrictive view of double deductions. Under this view, a taxpayer seeking to support a double deduction has a heavier burden. As a result, taxpayers may wish to exercise increased caution when claiming tax deductions that might be construed as double deductions, and should consult with their tax advisors about such matters.


1 Duquesne Light Holdings Inc. v. Comm’r, Docket No. 14-1743 (3d Cir. 2017)
2 See generally Reg. section 1.1502-36 (sometimes known as the ‘uniform loss rule’), which replaced Temp. Reg. section 1.337-2T, which in turn replaced Reg. section 1.1502-20, which was invalidated in Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001).
Ilfeld Co. v. Hernandez, 292 U.S.62 (1934).
4 Gitlitz v. Commissioner, 531 U.S. 206 (2001)


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