Bliss Dairy, Inc., an Arizona Corporation v. United States

The Government appeals from an order of the United States District Court for the District of Arizona granting the motion of plaintiff Bliss Dairy, Inc. (“the corporation”) for summary judgment. The sole issue presented in this appeal is whether the district court erred in refusing to apply the “tax benefit” rule to a distribution of assets of a corporation in liquidation pursuant to Sections 333 and 336 of the Internal Revenue Code of 1954 (“the Code”).

The corporation was organized under Arizona law in 1971; as of July 1973, all outstanding shares were held by Mrs. Irene Bliss, her daughter, and her son-in-law. During its fiscal year ending on June 30, 1973, the corporation paid $150,199 for cattle feed for use in its dairy operations, for which it claimed a full tax deduction on its 1973 return in accordance with its cash method of accounting.

On July 2, 1973, immediately after the commencement of its next fiscal year, the corporation adopted a plan of liquidation pursuant to Sections 333 and 336 of the Code. Accordingly, during the month of July 1973, the corporation distributed its assets to its shareholders in proportion to their ownership interest. Among the assets so…