260 F.3d 637 (6th Cir. 2001), 99-5580, Nichols, III v United States

Docket Nº:99-5580
Citation:260 F.3d 637
Party Name:George Nichols, III, in his capacity as Liquidator of Kentucky Central Life Insurance Company, Plaintiff-Appellant, v. United States of America, Defendant-Appellee.
Case Date:August 13, 2001
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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260 F.3d 637 (6th Cir. 2001)

George Nichols, III, in his capacity as Liquidator of Kentucky Central Life Insurance Company, Plaintiff-Appellant,

v.

United States of America, Defendant-Appellee.

No. 99-5580

United States Court of Appeals, Sixth Circuit

August 13, 2001

Argued: June 8, 2001

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Gregory P. Parsons, W. Bradford Boone, STITES & HARBISON, Lexington, Kentucky, for Appellant.

David E. Middleton, Asst. U.S. Attorney, Lexington, KY, Stuart M. Fischbein, Trial Attorney, Washington, DC, Steven W. Parks, UNITED STATES DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX DIVISION, Washington, D.C., for Appellee.

Before: KENNEDY, SILER, and CLAY, Circuit Judges.

OPINION

CLAY, Circuit Judge.

Plaintiff, George Nichols, III, the state-appointed liquidator for Kentucky Central Life Insurance Company ("KCL"), filed a complaint in the United States District Court for the Eastern District of Kentucky alleging that the Internal Revenue Service (IRS) owed KCL income tax refunds totaling $18,502,455 plus interest for the taxable years 1989, 1990, and 1991. Plaintiff claimed that losses incurred during the taxable years 1992 and 1993 by KCL's life insurance company, losses which KCL sought to carry back to the income of its nonlife insurance company affiliate groups, reduced its taxable income on its consolidated tax returns for 1989 through 1991. Under Treas. Reg. § 1.1502-47(a)(2)(ii) (the "anti-carryback regulation"), which prohibits KCL from carrying back losses from its life subgroup to its non-life subgroup, KCL would not be entitled to an income tax refund. Plaintiff argued, however, that the anti-carryback regulation is an invalid exercise of the Secretary of the Treasury's power to promulgate consolidated tax return regulations and is thus void. Rejecting Plaintiff's argument, the district court granted summary judgment to the government and denied Plaintiff's motion to alter or amend the grant of summary judgment. Plaintiff now appeals. For the reasons that follow, we AFFIRM the district court's orders granting summary judgment to the government and denying Plaintiff's motion to alter or amend.

BACKGROUND

KCL is a life insurance company organized under the laws of Kentucky with its principal place of business in Lexington, Kentucky. KCL is the common parent of an affiliated group of corporations that includes insurance companies that are not life insurances companies ("nonlife companies" or "nonlife insurance companies"). After a series of financial setbacks, on August 18, 1994, KCL was placed into liquidation by the Franklin Circuit Court in Frankfort, Kentucky. The court appointed the Kentucky Commissioner of Insurance as the liquidator. Plaintiff is Kentucky's current Commissioner of Insurance.

KCL filed consolidated tax returns in the years preceding its liquidation. KCL, along with its affiliated group of corporations, reported its income and losses as follows on its consolidated income tax returns for the years 1989 through 1993.

Life Nonlife Year Subgroup Subgroup Total 1989 ($2,210,059) $26,318,335 $24,108,276 1990 (17,017,595) 18,572,183 1,554,588 1991 35,986,616 55,787,879 91,032,938 1992 (57,762,953) (5,778,174) (63,541,127) 1993 (53,248,866) 2,628,602 (50,620,264)

KCL filed the above income tax returns in accordance with the anti-carryback regulation which prohibits the carryback of losses in life-nonlife consolidated tax returns

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from one subgroup to another subgroup. The regulation adopts a subgroup method, providing one subgroup for life insurance companies and another subgroup for nonlife insurance companies. In calculating the loss of a subgroup, the regulation provides as follows:

one subgroup's loss must first be carried back against income of the same subgroup before it may be used as a setoff against the second subgroup income in the taxable year the loss arose. (See section 1503(c)(1)). The carryback of the losses from one subgroup may not be used to offset income of the other subgroup in the year to which the loss is to be carried. This carryback of the first subgroup's loss may "bump" the second subgroup's loss that in effect previously reduced the income of the first subgroup. The second subgroup's loss that is bumped in appropriate cases may in effect reduce a succeeding year's income of the second or first subgroup. This approach gives the group the tax savings of the use of losses but the bumping rules assures that insofar as possible life deductions will be matched against life income and nonlife deductions against nonlife income.

Treas. Reg. § 1.1502-47(a)(2)(ii). In other words, under this regulation, KCL could not use the losses of its life subgroup in 1992 and 1993 to offset the income of its nonlife subgroup in 1989, 1990, and 1991.

However, on September 13, 1996, Plaintiff sought to do exactly what is prohibited under the anti-carryback regulation. On KCL's behalf, Plaintiff filed timely claims with the Internal Revenue Service ("IRS") seeking refunds for the tax years 1989, 1990 and 1991. While Plaintiff acknowledged the ban on the carryback of losses across subgroups, Plaintiff nevertheless argued that the regulation contravened the intentions of Congress in enacting the Tax Reform Act of 1976 (hereinafter the "Act" or the "Tax Reform Act") and was therefore invalid. In KCL's claims for refunds, Plaintiff attempted to carryback life losses from 1992 and 1993 against nonlife income for 1989, 1990, and 1991. Plaintiff claimed that KCL was due refunds for taxable years 1989, 1990, 1991 of $5,540,246, $2,964,978 and $9,997,231, respectively.

Within six months of filing its claims for refunds and without response from the government, Plaintiff filed the instant action seeking a total refund of $18,502,455 plus interest. The parties filed joint stipulations of facts and cross-motions for summary judgment. On July 17, 1998, the district court granted the government's motion for summary judgment but denied Plaintiff's motion for summary judgment.

On July 30, 1998, Plaintiff filed a motion to alter or amend the district court's order and judgment granting summary judgment to the government. The district court denied Plaintiff's motion to alter or amend on March 10, 1999.

Plaintiff filed a timely notice of appeal on April 27, 1999 appealing both the March 10, 1999 order and the July 17, 1998 order of the district court.

STANDARD OF REVIEW

We review de novo the district court's order granting summary judgment to the government and its subsequent order denying Plaintiff's motion to alter or amend the judgment. Smith v. Wal-Mart Stores, Inc., 167 F.3d 286, 289 (6th Cir. 1999); Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609, 613 (6th Cir. 1998). Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).

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Furthermore, whether the anti-carryback regulation is a valid exercise of the Secretary's power is a question of law. Questions of law, of course, are subject to de novo review. United States v. Jackson, 181 F.3d 740, 743 (6th Cir. 1999);United States v. Knipp, 963 F.2d 839, 843 (6th Cir. 1992).

DISCUSSION

On appeal, Plaintiff argues that the district court erred in granting summary judgment to the government on Plaintiff's claim seeking income tax refunds on behalf of KCL. Whether KCL is entitled to the income tax refunds claimed in the complaint turns on its ability to carryback losses from its life subgroup for the years 1992 and 1993 to the income of its nonlife subgroup for the years 1989-1991. The anti-carryback regulation, however, prohibits carrybacks between life and nonlife subgroups. Pursuant to the anti-carryback regulation, KCL would not be entitled to the refunds Plaintiff now seeks. Plaintiff nevertheless argues that KCL is entitled to income tax refunds because the anti-carryback regulation is an invalid exercise of the Secretary's power to make regulations because it contravenes the Tax Reform Act, § 1507, 26 U.S.C. §1504(c)(2)(A).

We disagree. A review of the law, the Tax Reform Act, the legislative history of the Act, and the facts make clear that, when issuing the anti-carryback regulation, the Secretary acted within his authority under sections 1502 and 1503(c)(1) to create consolidated tax return regulations. The district court therefore properly concluded that the anti-carryback regulation is not arbitrary, capricious, or manifestly contrary to the Tax Reform Act.

I.

Prior to 1976 and the Tax Reform Act, nonlife insurance companies were prohibited from filing consolidated tax returns with affiliated life insurance companies. S. Rep. No. 94-938 (Part I), at 454 (1976), reprinted in1976 U.S.C.C.A.N. 3438, 3881. This prohibition was aimed at ensuring that life companies were taxed on an amount approximately equal to their taxable investment income. Id. Congress, however, noted that a recession and inflation in prices had caused casualty insurance companies to incur large losses. Id. Whereas casualty insurance companies that were affiliated with nonlife insurance companies were permitted to file consolidated tax returns to offset their losses, casualty insurance companies that were affiliated with life insurance companies were not allowed to file consolidated income tax returns. Id. Recognizing that the ban on life-nonlife consolidated tax returns "ha[d] been a hardship for casualty companies which are affiliated with life companies," Congress enacted the Tax Reform Act of 1976. Id.

The Tax Reform Act eliminated the ban on life-nonlife consolidated tax returns. The Act allowed life and nonlife companies that were affiliated to file consolidated tax returns in order to "provide[] substantial relief in the future for casualty insurance companies with...

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