George Freitas Dairy, Inc. v. The United States of America, Henry Costa, Jr. Dairy, Inc. v. The United States of America

George Freitas Dairy, Inc. and Henry Costa, Jr. Dairy, Inc. (“taxpayers”) prevailed below in these tax refund actions. The district court found that taxpayers had sustained deductible losses under I.R.C. § 165(a), 26 U.S.C., when their production quotas were cancelled in 1967.

The primary issue on appeal is whether taxpayers were compensated for their losses by legislative action taken the same year. We cannot agree with appellant’s conclusion that this was compensatory legislation and affirm the district court.

FACTS

In Hawaii prior to 1967, a balance between supply and demand for wholesale milk was maintained through production quotas whereby producers, such as taxpayers, enjoyed the right to sell a certain amount of milk to processors at a premium. These production contracts were freely traded among producers.

Demand for milk declined in 1966. Dissatisfaction with the quota arrangements arose among the producers; a series of disputes with the processors followed. In February 1967 the producers decided to cancel the contracts, and eventually the processors acquiesced.

The producers were unable to formulate an acceptable substitute marketing system. The producers began to…