Home Grp., Inc. v. Comm'r of Internal Revenue

• Decision Date: 10 May 1989
• Docket Number: Docket No. 17739-82.
• Citation: 92 T.C. No. 59,92 T.C. 940
• Parties: THE HOME GROUP, INC., AS AGENT UNDER THE PROVISIONS OF TREASURY REGULATION SECTION 1.1502-77(d) FOR CITY INVESTING COMPANY AND THE CONSOLIDATED GROUP OF WHICH CITY INVESTING COMPANY WAS THE COMMON PARENT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

92 T.C. 940

92 T.C. No. 59

THE HOME GROUP, INC., AS AGENT UNDER THE PROVISIONS OF TREASURY REGULATION SECTION 1.1502-77(d) FOR CITY INVESTING COMPANY AND THE CONSOLIDATED GROUP OF WHICH CITY INVESTING COMPANY WAS THE COMMON PARENT, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17739-82.

United States Tax Court

Filed May 10, 1989.

P, in the process of appealing from a decision of this Court, filed an appeal bond for purposes of staying assessment and collection of P's affiliated and consolidated group's redetermined tax deficiency. Sec. 7485(a), I.R.C. 1986. The bond was issued by S, which is otherwise properly authorized as a surety under 31 U.S.C. sec. 9304 (1982). S is also a subsidiary of P and a member of the affiliated group that filed consolidated returns and, as such, is responsible for any finally determined tax deficiency. R objects to the use of S's bond on the ground that it does not represent adequate security because S is already liable for any deficiency.

HELD, the Tax Court has discretionary authority to refuse to accept a surety or a bond proffered by a surety if the bond may not be adequate or appropriate security for eventual collection of any tax deficiency. HELD FURTHER, a surety issuing an appeal bond does not provide adequate security as a surety if said surety is already liable for any tax deficiency. Because S is a member of the taxpayer-affiliated group and, as a result, severally liable for the group's tax deficiency, S is not an acceptable surety and its appeal bond is not adequate security. William L. Goldman, John S. Breckinridge, Jr. and F. Brook Voght, for the petitioner.

Daniel A. Guy, Jr. and Maureen Nelson, for the respondent.

OPINION

GERBER, JUDGE:

This matter is before the Court on respondent's motion to set aside our approval of petitioner's appeal bond. On January 15, 1987, we held that Home Insurance Company (sometimes referred to as Home) and Home Indemnity Company (Indemnity), members of the consolidated group of corporations of which City Investing Company was the common parent, were not entitled to deductions for insurance sales commissions associated with deferred and unearned insurance premiums. ¹ City Investing Co. v. Commissioner, T.C. Memo. 1987-36. In a second opinion we considered disputes arising from differences in the parties' computation of deficiencies under Rule 155. ² The Home Group, Inc. v. Commissioner, 91 T.C. 265 (1988). We redetermined the affiliated group's income tax deficiency to be approximately $20,000,000. In the process of appealing these opinions to the United States Court of Appeals for the Second Circuit, petitioner, as agent for Home, Indemnity and the remaining members of the consolidated group, filed an appeal bond on November 16, 1988, in the amount of $41,949,712 ³ for purposes of staying assessment and collection of the tax deficiency we redetermined. Sec. 7485(a). The bond identifies Home Insurance Company, the same affiliated subsidiary whose deductions are at issue in this case, as the surety. We initially accepted the bond in a routine fashion because Home is an approved surety.

Respondent thereafter filed a motion to have us set aside our approval of petitioner's appeal bond. He argued that Home is incompetent to serve as surety on its own appeal bond under section 7485(a) since it is a member of the consolidated group liable for the tax deficiency.

As a member of the affiliated group of corporations, Home Insurance Company is severally liable for the consolidated tax liability of the entire group. Sec. 1.1502-6(a), Income Tax Regs. Therefore, such total consolidated tax liability, including deficiencies may be collected from Home notwithstanding the allocation of tax liability or other intercompany agreements. Sec. 1.1502-6(c), Income Tax Regs.; Mississippi River & Bonne Terre Ry. v. Commissioner, 39 B.T.A. 995 (1939); Turnbull, Inc. v. Commissioner, 373 F.2d 91 (5th Cir. 1967), cert. denied 389 U.S. 842 (1967); see also H. Lerner, R. Antes, R. Rosen and B. Finkelstein, 1 Federal Income Taxation of Corporations Filing Consolidated Returns, sec. 4.05 (13th ed. 1988). Hence, the issue in this case is whether Home is an acceptable surety for purposes of its own appeal.

Section 7485(a)(1) provides, in part, that in order to stay the assessment and collection of any portion of a deficiency determined by this Court while our decision is pending on appeal, the taxpayer must file ‘with the Tax Court a bond in a sum fixed by the Tax Court * * * and with surety approved by the Tax Court * * *.‘ See also Rule 192.

Generally, to be an acceptable surety a corporation must satisfy the requirements of 31 U.S.C. section 9304 (1982), a statute of general applicability governing sureties qualified to issue Federal bonds. ⁴ Yoke v. Mazzello, 202 F.2d 508, 510-511 (4th Cir. 1953). It provides, in pertinent part, that ‘When a law of the United States Government [in this case, section 7485(a)(1)] requires or permits a person to give a surety bond through a surety, the person satisfies the law if the surety bond is provided for the person by a corporation‘ that (i) is incorporated under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, (ii) may under those laws guarantee bonds and undertakings in judicial proceedings, and (iii) complies with 31 U.S.C. sections 9305 and 9306. ⁵ Pursuant to 31 U.S.C. section 9305(a), the surety must file a copy of its articles of incorporation and a sworn statement of assets and liabilities with the Secretary of the Treasury. If the Secretary is satisfied that the surety has the proper charter authority, paid-up capital of at least $250,000, and the ability to carry out its contracts, then the surety is granted written authorization to provide surety bonds under 31 U.S.C. section 9304 and, in turn, section 7485(a)(1). 31 U.S.C. sec. 9305(b).

Once authorized by the Secretary, the surety may write and issue bonds pursuant to section 9304, 31 U.S.C., and section 7485(a)(1). However, the surety has a continuous obligation to file sworn quarterly financial statements with the Secretary. 31 U.S.C. sec. 9305(c). In addition, Title 31 gives the Secretary continuing oversight authority over the surety by (i) directing the Secretary to revoke the authority of a surety corporation to do new business if he decides the corporation is insolvent or is in violation of 31 U.S.C. sections 9304, 9305 or 9306, and (ii) allowing the Secretary to investigate the solvency of a surety corporation at any time. 31 U.S.C. sec. 9305(d). The Secretary is also given the authority to require additional security from the person required to provide a surety bond if the Secretary decides that a surety corporation no longer is sufficient security. 31 U.S.C. sec. 9305(d)(3). The responsibility and authority given to the Secretary regarding sureties is set forth in more detail in the regulations. See 31 C.F.R. sec. 223 (1982).

The statutory framework governing the continuous authorization of corporate sureties, and the explicit provisions for revoking the right to issue Federal surety bonds, reflect congressional intention that these functions rest with the Secretary of the Treasury. American Druggists Ins. Co. v. Bogart, 707 F.2d 1229, 1232 (11th Cir. 1983). In its discussion regarding the predecessor to Title 31, the Second Circuit, in Concord Casualty & Surety Co. v. United States, 69 F.2d 78, 80-81 (2d Cir. 1934), recognized:

Congress placed in the administrative branch of the government, (in) the Secretary of the Treasury, the government, [in] the Secretary of the Treasury, the power to designate and the power to revoke the authority of sureties. * * * It has not been granted to the courts. * * * Surety companies derive their authority from charter powers and administrative officers of the federal government. Their supervision, conduct, and responsibility are left in the charge of the administrative officers.

With the above described statutory framework as a backdrop, petitioner contends that because Home Insurance Company has satisfied the prerequisites of section 9304, it is an acceptable surety in this case regardless of the fact that as the taxpayer it is already liable for the tax deficiency at issue. Particularly, petitioner relies upon 31 C.F.R. section 223.16, which provides that the ‘Selection of a particular qualified company from among all companies holding certificates of authority [issued by the Secretary] is discretionary with the principal required to furnish bond.‘ Petitioner also contends there is no authority specifically excluding a surety whose tax liability is at issue from posting a bond for its own appeal. Respondent contends that the bond posted does not provide proper or adequate security. For the reasons discussed below, we agree with respondent.

Section 9304(b), 31 U.S.C., generally, and section 7485(a)(1), specifically, give the Tax Court discretion over whether to approve a particular surety bond or surety. Section 9304(b), 31 U.S.C., provides that ‘Each surety bond shall be approved by the official of the Government [here the Tax Court] required to approve or accept the bond.‘ As quoted above, section 7485(a)(1) provides that a bond for appealing a Tax Court decision must be provided by a ‘surety approved by the Tax Court * * *.‘ These statutes implicitly recognize our discretionary authority to protect the United States' ability to collect a tax deficiency we have redetermined. The Secretary's approval of a surety does not foreclose us from exercising our discretion to approve only those bonds and sureties which we feel confident will insure that deficiencies as we have redetermined and which have been affirmed or modified by a reviewing court will be paid. See Adolf Coors Co. v. Commissioner, 62 T.C. 300, 302 (1974); Concord Casualty & Surety Co. v. United States, supra at 81; American Druggists Ins....