DocketNumber: No. 8246-97
Citation Numbers: 117 T.C. 133, 2001 U.S. Tax Ct. LEXIS 44, 117 T.C. No. 13
Judges: \"Wells, Thomas B.\"
Filed Date: 10/2/2001
Status: Precedential
Modified Date: 1/13/2023
*44 Decision will be entered pursuant to Rule 155.
In
(6th Cir. 2000), revg. and remanding
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.
HELD: P's State tax liabilities and interest on Federal and
State tax liabilities qualify as "specified liability losses"
within the meaning of
*134 SUPPLEMENTAL OPINION
WELLS, CHIEF JUDGE: This case is before the Court on remand from the Court of*45 Appeals for the Sixth Circuit in
BACKGROUND
This case was submitted to the Court on the basis of fully stipulated facts and certain stipulated exhibits. Our findings of fact in this case are set forth in full in
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 *135 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*47 Federal income tax return for 1984 based upon the disallowance of a 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.
DISCUSSION
*49
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:
(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 --
*50 (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
taxableyear, 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. -- *51 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.
*137 In sum, a taxpayer is entitled to the 10-year carryback for specified liability losses under
*52 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 taxes and interest on Federal and State taxes constitute specified liability losses within the meaning of
Respondent maintains that the disputed taxes and interest do not constitute specified liability losses*53 on the ground that
In
In Sealy, we sustained the Commissioner's determination that the disputed costs did not constitute specified liability losses within the meaning of
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*55 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, *139 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.
[
Our holding in
It is, therefore, not simply an expense incurred with respect to
an obligation under*56 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 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
In holding for the taxpayer, the District Court cited the plain language of
*140 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
6621. The liability for workers' compensation payments arises
out of various state laws. Second, the claims must arise 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
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.
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*59 constitute specified liability losses within the meaning of
In sum, we conclude that the expenses in question fit within the plain language of
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
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
To reflect the foregoing,
Decision will be entered pursuant to Rule 155.
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
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
4. Notwithstanding the 10-year carryback period provided in
Host Marriott Corporation v. United States of America, ... , 267 F.3d 363 ( 2001 )
Intermet Corporation & Subsidiaries v. Commissioner of ... , 209 F.3d 901 ( 2000 )
sealy-corporation-and-subsidiaries-fka-the-ohio-mattress-company-and , 171 F.3d 655 ( 1999 )
Host Marriott Corp. v. United States , 113 F. Supp. 2d 790 ( 2000 )