Intermet Corp. & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 02 October 2001 |
| Docket Number | No. 8246–97.,8246–97. |
| Citation | 117 T.C. 133,117 T.C. No. 13 |
| Parties | INTERMET CORPORATION & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent * |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Parent corporation of affiliated group filed petition contesting deficiency determination arising out of disallowed specified liability loss carryback. The Tax Court, 1998 WL 846521, ruled for IRS, and taxpayer appealed. The Court of Appeals, 209 F.3d 901, reversed. On remand, the Tax Court, Wells, Chief Judge, held that: (1) state tax deficiencies and interest on federal and state tax deficiencies constituted specified liability losses, and (2) act giving rise to daily accrual of interest occurred when erroneous tax returns were filed.
Decision for taxpayer. 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
In Intermet Corp. & Subs. v. Commissioner, 209 F.3d 901 (6th Cir.2000), revg. and remanding 111 T.C. 294, 1998 WL 846591 (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 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 WL 846591 (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.
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 Intermet Corp. & Subs. v. Commissioner, 111 T.C. 294, 1998 WL 846591 (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 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.
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:
(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 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 WL 599766 (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 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...
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