Intermet Corporation & Subsidiaries v. Commissioner

117 T.C. No. 13UNITED STATES TAX COURT
INTERMET CORPORATION & SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 8246-97. Filed October 2, 2001.
In Intermet Corp. & Subs. v. Commissioner, 209
F.3d 901 (6th Cir. 2000), revg. and remanding 111 T.C.
294 (1998), the Court of Appeals remanded this case to
the Court to determine whether amounts that P paid to
satisfy its State tax liabilities and interest on
Federal and State tax liabilities, qualify as
“specified liability losses” within the meaning of sec.
172(f)(1)(B), I.R.C.
Held: P’s State tax liabilities and interest on
Federal and State tax liabilities qualify as “specified
liability losses” within the meaning of sec.
172(f)(1)(B), I.R.C.
*This opinion supplements Intermet Corp. & Subs. v. Commissioner,
111 T.C. 294 (1998), revd. and remanded 209 F.3d 901 (6th Cir.
2000).
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Eric R. Fox, Dirk J.J. Suringa, Hamish P.M. Hume, and
Clifton B. Cates, for petitioner.
Wilton A. Baker, Alfred C. Bishop, Jr., Steven J. Hankin,
and Teri A. Culberton, for respondent.
SUPPLEMENTAL OPINION
WELLS, Chief Judge: This case is before the Court on remand
from the Court of Appeals for the Sixth Circuit in Intermet Corp.
& Subs. v. Commissioner, 209 F.3d 901 (6th Cir. 2000), revg. and
remanding 111 T.C. 294 (1998). In Intermet Corp. & Subs. v.
Commissioner, supra, the Court of Appeals held that Intermet
Corporation and its subsidiaries (hereinafter petitioner) is
eligible to carry back for 10 years pursuant to section
172(b)(1)(C), certain expenses, i.e., State tax liabilities and
interest on Federal and State tax liabilities, provided that
those expenses qualify as “specified liability losses” within the
meaning of section 172(f)(1)(B). The issue presented on this
remand for further proceedings consistent with the Court of
Appeals’ opinion is whether the expenses so qualify as specified
liability losses. Unless otherwise indicated, section references
are to sections of the Internal Revenue Code, as amended, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
This case was submitted to the Court on the basis of fully
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stipulated facts and certain stipulated exhibits. Our findings
of fact in this case are set forth in full in Intermet Corp. &
Subs. v. Commissioner, 111 T.C. 294 (1998), revd. and remanded
209 F.3d 901 (6th Cir. 2000). For convenience, we only restate
the findings of fact that are material to the issue presented.
Petitioner is the common parent of an affiliated group of
corporations that manufacture precision iron castings for
automotive and industrial equipment producers. Petitioner filed
consolidated Federal income tax returns for calendar years 1984
through 1993. During those years, petitioner’s members used the
accrual method of accounting for both financial accounting and
Federal income tax purposes. During the years 1984 through 1993,
Lynchburg Foundry Co. (Lynchburg) was a member of the
consolidated group.
Petitioner reported a consolidated net operating loss (CNOL)
in the amount of $25,701,038 on its 1992 Federal income tax
return. In October 1994, petitioner filed Form 1120X, Amended
U.S. Corporation Income Tax Return, for 1992, claiming a
carryback of $1,227,973 to 1984 for specified liability losses
incurred by its members. During 1992, petitioner’s CNOL exceeded
the sum of its claimed specified liability losses.
Respondent issued a notice of deficiency to petitioner
determining a deficiency of $615,019 in its consolidated Federal
income tax return for 1984 based upon the disallowance of a
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substantial portion of the specified liability losses that
petitioner claimed in its 1992 tax return. Petitioner
subsequently conceded a portion of the disallowed specified
liability losses, leaving for decision the status of
$1,019,205.23 in purported specified liability losses incurred by
Lynchburg during 1992.
The specified liability losses remaining in dispute consist
of the following items:
Disallowed Specified Liability Losses Amount
State tax deficiencies $717,617.00
Interest on State tax deficiencies 299,412.63
Interest on Federal income tax deficiency 2,175.60
The State of Michigan imposes a Single Business Tax on every
person with business income in the State. Mich. Comp. Laws Ann.
§208.1 to 208.23b (West 1986). During 1992, Lynchburg paid the
aforementioned State taxes and interest to the State of Michigan
following an audit of its 1986, 1987, and 1988 Michigan Single
Business Tax returns. During 1992, Lynchburg paid the
aforementioned interest to the Internal Revenue Service (the IRS)
following an audit of petitioner’s consolidated Federal income
tax return for 1987 and in accordance with an agreed adjustment
to Lynchburg’s separate taxable income for that year. In 1992,
Lynchburg properly deducted the additional State taxes and
Federal and State interest described above under chapter 1 of the
Internal Revenue Code.
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Discussion
Section 172(a) allows a "net operating loss deduction" for
the aggregate of net operating loss carrybacks and carryovers to
the taxable year. The term "net operating loss" (NOL) is defined
in section 172(c) to mean the excess of deductions allowed by
chapter 1 over gross income. Section 172(b) prescribes the
periods for NOL carrybacks and carryovers. Section 172(b)(1)(A)
generally provides that the period for an NOL carryback is 3
years and that the period for an NOL carryover is 15 years.1
Section 172(b)(1)(C) provides a special rule that extends the
carryback period from 3 years to 10 years for specified liability
losses.2 The term "specified liability loss" is defined in
section 172(f), which provides in pertinent part:
SEC. 172(f). Rules Relating to Specified Liability
Loss.-- For purposes of this section--
(1) In general.--The term “specified
liability loss” means the sum of the following
amounts to the extent taken into account in
computing the net operating loss for the taxable year:
1
Effective for taxable years beginning after Aug. 5, 1997,
the carryback period for an NOL is 2 years and the carryforward
period is 20 years. Taxpayer Relief Act of 1997, Pub. L. 105-34,
sec. 1082(a), 111 Stat. 950.
2
The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990),
Pub. L. 101-508, sec. 11811(b), 104 Stat. 1388-532, combined
former sec. 172(j) (relating to product liability losses) and
172(k) (relating to deferred statutory or tort liability losses)
redesignating them sec. 172(f). The provision is effective for
net operating losses for taxable years beginning after Dec. 31,
1990. OBRA 1990 sec. 11811(c), 104 Stat. 1388-534.
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(A) Any amount allowable as a deduction
under section 162 or 165 which is attributable
to--
(i) product liability, or
(ii) expenses incurred in the
investigation or settlement of, or
opposition to, claims against the
taxpayer on account of product liability.
(B) Any amount (not described in
subparagraph (A)) allowable as a deduction
under this chapter with respect to a liability
which arises under a Federal or State law or
out of any tort of the taxpayer if–-
(i) in the case of a liability
arising out of a Federal or State
law, the act (or failure to act)
giving rise to such liability
occurs at least 3 years before the
beginning of the taxable year, or
(ii) in the case of a liability
arising out of a tort, such liability
arises out of a series of actions (or
failures to act) over an extended period
of time a substantial portion of which
occurs at least 3 years before the
beginning of the taxable year.
A liability shall not be taken into account under
subparagraph (B) unless the taxpayer used an
accrual method of accounting throughout the period
or periods during which the acts or failures to
act giving rise to such liability occurred.
(2) Limitation.--The amount of the specified
liability loss for any taxable year shall not exceed
the amount of the net operating loss for such taxable
year.
In sum, a taxpayer is entitled to the 10-year carryback for
specified liability losses under section 172(f)(1)(B) if: (1)
The specified liability loss is taken into account in computing
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the taxpayer’s net operating loss for the taxable year; (2) the
expense generating the specified liability loss is deductible
under chapter 1 of the Internal Revenue Code; (3) the liability
arose under a Federal or State law; (4) the act or failure to act
which gave rise to the liability occurred at least 3 years before
the taxable year at issue; (5) the taxpayer used the accrual
method of accounting throughout the period in which the acts or
failures to act giving rise to the liabilities occurred; and (6)
the specified liability loss does not exceed the taxpayer’s net
operating loss for the year. See Sealy Corp. v. Commissioner,
107 T.C. 177, 183 (1996), affd. 171 F.3d 655 (9th Cir. 1999).3
Petitioner contends that it properly carried back to 1984
the State taxes and interest on Federal and State taxes that
Lynchburg paid during 1992.4 Petitioner argues that the State
3
In the Omnibus Consolidated and Emergency Supplemental
Appropriations Act for 1999 (OCESAA), Pub. L. 105-277, sec.
3004(a), 112 Stat. 2681, 2681-905, Congress amended the
definition of a specified liability loss under sec. 172(f)(1)(B)
to limit it to a liability under a Federal or State law
requiring: (1) The reclamation of land; (2) the decommissioning
of a nuclear power plant; (3) the dismantlement of a drilling
platform; (4) the remediation of environmental contamination; or
(5) a payment under any workers compensation act. The above-
described amendment was made effective with respect to net
operating losses arising in taxable years ending after Oct. 21,
1998. OCESAA sec. 3004(b), 112 Stat. 2681-906. The legislative
history underlying the provision states: “No inference regarding
the interpretation of the specified liability loss carryback
rules under present law is intended.” H. Conf. Rept. 105-825, at
1590 (1998).
4
Notwithstanding the 10-year carryback period provided in
(continued...)
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taxes and interest on Federal and State taxes constitute
specified liability losses within the meaning of section
172(f)(1)(B) because: (1) The liabilities arose out of State and
Federal law; (2) the acts (or failures to act) giving rise to the
liabilities occurred during the years 1986, 1987, and 1988--more
than 3 years before 1992; and (3) all its members used the
accrual method of accounting throughout the period during which
the acts or failures to act giving rise to the liabilities
occurred.
Respondent maintains that the disputed taxes and interest do
not constitute specified liability losses on the ground that
section 172(f)(1)(B) was intended only to apply to a "narrow
class of liabilities", such as tort and product liability
expenses, to which the taxes and interest in question do not
belong. Respondent further contends that, assuming arguendo that
the disputed Federal and State interest payments constitute
specified liability losses in the first instance, a portion of
those interest payments do not qualify for carryback under
section 172(f)(1)(B)(i) because they were not incurred at least 3
years prior to the beginning of the taxable year 1992.
Specifically, respondent contends that all interest that accrued
4
(...continued)
sec. 172(b)(1)(C), specified liability losses may not be carried
back to any taxable year beginning before Jan. 1, 1984. OBRA
1990 sec. 11811(b)(2)(B), 104 Stat. 1388-533.
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within 3 years of January 1, 1992, does not satisfy the
definition of a specified liability loss.
In Sealy Corp. v. Commissioner, supra, the taxpayer incurred
certain costs during the period 1989 through 1992 including:
(1) $1,808,309 paid to an accounting firm to comply with
reporting, filing, and disclosure requirements imposed by the
Securities and Exchange Act of 1934, ch. 404, 48 Stat. 881,
currently codified at 15 U.S.C. secs. 77-78 (1994); (2) $100,650
paid to an accounting firm to examine and prepare financial
statements regarding its employee benefit plans as required under
the Employee Retirement Income Security Act of 1974 (ERISA), Pub.
L. 93-406, 88 Stat. 829; and (3) $567,974 paid for accounting and
legal services relating to an IRS audit of its 1987 tax return.
The taxpayer considered the costs to be specified liability
losses and filed an amended tax return for 1985 on which it
claimed the costs as a loss carryback pursuant to section
172(b)(1)(C). The Commissioner issued a notice of deficiency to
the taxpayer disallowing the loss carryback.
In Sealy, we sustained the Commissioner’s determination that
the disputed costs did not constitute specified liability losses
within the meaning of section 172(f)(1)(B) because the disputed
costs were not incurred “with respect to a liability which arises
under a Federal or State law” as expressly mandated by section
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172(f)(1)(B). In rejecting the taxpayer’s contention that its
accounting and legal fees arose under Federal law, we stated:
It is true that the 1934 Act, ERISA, and the Internal
Revenue Code require petitioners to file financial
reports and disclosure statements, maintain and provide
books and records, and cooperate with IRS audits.
However, those provisions do not establish petitioners’
liability to pay the amounts at issue. Petitioners’
liability to pay those amounts did not arise until
petitioners contracted for and received the services.
Petitioners’ choice of the means of compliance, and not
the regulatory provisions, determined the nature and
amount of their costs. If, on the other hand,
petitioners had failed to comply with the auditing and
reporting requirements or had not obtained the
particular services in issue here, their liability
would have been in amounts not measured by the value of
services. Thus, petitioners’ liability did not arise
under Federal law. [Sealy Corp. v. Commissioner, 107
T.C. at 184.]
Our holding in Sealy Corp. v. Commissioner, supra, was
affirmed by the Court of Appeals for the Ninth Circuit on the
ground that the disputed expenses did not constitute “a liability
arising out of a Federal or State law”. The court stated in
pertinent part:
It is, therefore, not simply an expense incurred with
respect to an obligation under federal law but an act
“giving rise” to the liability that qualifies as a
specified liability under the statute. The act giving
rise to each of the liabilities in question was the
contractual act by which Sealy engaged lawyers or
accountants. In each of these instances the act did
not occur at least three years before the beginning of
the taxable year.
Sealy’s argument essentially is that the act
giving rise to the liability is the first event in a
chain of causes which gives rise to the liability. The
argument leads to a reductio ad absurdum. The
organization of the company gave rise to an obligation
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to comply with all pertinent state and federal laws and
thereby gave rise to the liabilities incurred in
complying with these laws. According to this logic,
every corporation would have a specified liability
carryback for all costs the corporation incurred to
comply with relevant laws. Congress did not create
such a windfall. [Sealy Corp. v. Commissioner, 171 F.3d
at 657-658.]
In Host Marriott Corp. v. United States, 113 F. Supp. 2d 790(D. Md. 2000), affd. without published opinion ___ F.3d ___ (4th
Cir. 2001), the question whether interest payments on Federal
income tax deficiencies constitute specified liability losses
within the meaning of section 172(f)(1) was resolved in favor of
the taxpayer, who reported a CNOL for 1991. In part, the CNOL
consisted of approximately $46 million representing interest paid
on tax deficiencies for the taxable years 1977, 1978, and 1979,
and approximately $7 million in payments made on workers’
compensation claims for injuries sustained before 1988. The
taxpayer argued that both categories of payments constituted
specified liability losses that qualified for carryback to the
taxable years 1984 and 1985.
In holding for the taxpayer, the District Court cited the
plain language of section 172(f)(1)(B), stating:
The statutory language clearly poses two restrictions
upon application of the deduction in this case. First,
the claimed deduction must be a liability that arises
out of Federal or state law. Both of Plaintiff’s
losses meet this requirement. The liability for
federal income tax deficiency interest arises out of 26
U.S.C. §6601(a) under a rate established by §6621. The
liability for workers’ compensation payments arises out
of various state laws. Second, the claims must arise
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out of acts or failures to act more than three years
earlier. In the case of the workers’ compensation
claims, the liability arose from injuries more than
three years before the 1991 tax return. The federal
income tax deficiency interest stems from the acts of
filing tax returns in 1977, 1978, and 1979. [Host
Marriott Corp. v. United States, 113 F. Supp. 2d at
793; fn. ref. omitted.]
The District Court disagreed with the Commissioner’s
arguments that the taxpayer’s liability for interest on its
Federal tax deficiencies arose: (1) In 1991 when it signed a
settlement agreement for the taxable years 1977, 1978, and 1979;
or (2) on a daily basis as it failed to pay the taxes in dispute.
Id. at 793 n.2.
The Court of Appeals for the Fourth Circuit affirmed the
District Court’s holding by way of unpublished opinion.
We hold that the State tax deficiencies and interest on
Federal and State tax deficiencies in issue in the instant case
constitute specified liability losses within the meaning of
section 172(f). Unlike the legal and accounting costs that we
considered in Sealy Corp. v. Commissioner, 107 T.C. 177 (1996),
petitioner’s liability for State taxes, and interest thereon,
arose under the laws of the State of Michigan, and petitioner’s
liability for interest on its Federal income tax deficiencies
arose under Federal law--the Internal Revenue Code. State and
Federal law expressly impose the liabilities for tax and interest
at issue in this case.
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In sum, we conclude that the expenses in question fit within
the plain language of section 172(f)(1)(B). Under the
circumstances, we are not persuaded by respondent’s arguments
that we should narrowly construe the provision to exclude those
expenses or that respondent’s interpretation of section
172(f)(1)(B) is compelled by the legislative history of the
provision.
Additionally, we reject respondent’s argument that all
interest (Federal and State) that accrued within 3 years of
January 1, 1992, should be excluded from the computation of
petitioner’s specified liability losses. Respondent relies on
section 172(f)(1)(B)(i), which provides that, to qualify as a
specified liability loss, the act (or failure to act) giving rise
to such liability must occur at least 3 years before the
beginning of the taxable year. Respondent contends that the act
giving rise to interest on a tax deficiency arises daily as the
taxpayer fails to pay the underlying tax.
We hold that the act giving rise to petitioner’s liability
for interest on its Federal and State tax deficiencies was the
act of filing erroneous tax returns, and, as a consequence,
failing to pay the correct amount of tax on or before the last
date prescribed for payment. See Host Marriott Corp. v. United
States, supra. Simply put, respondent’s position confuses the
method of computing interest under section 6621, under which
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additional interest accrues each day that a tax liability remains
unpaid, with the act giving rise to the liability for interest;
i.e., failure to pay the tax on or before the prescribed date.
To reflect the foregoing,
Decision will be entered
pursuant to Rule 155.