Acme Steel Company v. Commissioner, Docket No. 7885-94.
| Court | United States Tax Court |
| Writing for the Court | Beghe |
| Citation | 85 T.C.M. 1208 |
| Parties | Acme Steel Company (formerly known as Interlake, Inc., and now known as Acme Metals, Inc.) and Consolidated Subsidiaries v. Commissioner. |
| Docket Number | Docket No. 7885-94. |
| Decision Date | 28 April 2003 |
v.
Commissioner.
[85 T.C.M. 1209]
David J. Duez, Matthew P. Larvick, and Gregory G. Palmer, for the petitioners.
Lawrence G. Letkewicz and Dana E. Hundrieser, for the respondent.
Background ........................................................... 1210
The Restructuring and Spinoff....................................... 1210
Tax Indemnification Agreement Between Petitioner and Interlake ..... 1210
Tax Filings by Intertake and Petitioner ............................ 1211
Administrative Proceedings ......................................... 1212
Notice of Deficiency and Stipulation of Settled Issues ............. 1212
Interlake v. Commissioner .......................................... 1213
Summary Assessment of the 1985 Tentative Refund .................... 1214
The Bankruptcy Proceedings.......................................... 1214
Change of Petitioner's Representatives of This Proceeding........... 1215
Positions of the Parties............................................ 1215
Discussion ........................................................... 1216
Rebate and Nonrebate Refunds ....................................... 1216
Jurisdiction ....................................................... 1216
The Notice of Deficiency ........................................... 1217
Respondent's Determination ......................................... 1217
Collateral Estoppel ................................................ 1219
The "Injustice Exception" to Collateral Estoppel ................... 1221
Tentative Refunds as Rebate Refunds ................................ 1222
Rebate v. Nonrebate Refunds ........................................ 1224
Conclusion ........................................................... 1226
BEGHE, Judge:
This case is before the Court on respondent's motion for entry of decision on the parties' stipulation of settled issues. We shall grant respondent's motion and enter decision in accordance with the stipulation.
Background
Some of the facts have been stipulated and are incorporated by this reference. Petitioner's principal place of business was in Riverdale, Illinois, when it filed the petition. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The Restructuring and Spinoff
Prior to summer 1986, petitioner had been the common parent of an affiliated group of corporations (the affiliated group) on whose behalf it filed consolidated Forms 1120, U.S. Corporation Income Tax Return. In spring 1985, petitioner's management developed a plan to restructure the ownership of its businesses through an inversion and spinoff.
Under the plan, petitioner would organize a wholly owned subsidiary, the Interlake Corporation (Interlake); Interlake would then organize a wholly owned subsidiary (Newco Sub 1), followed by Newco Sub 1's organization of its own wholly owned subsidiary (Newco Sub 2). Following the organizations of these new corporations, petitioner would transfer its assets to Interlake and merge with Newco Sub 2, with petitioner surviving as a wholly owned subsidiary of Newco Sub 1. In connection with the merger of Newco Sub 2 into petitioner, each outstanding share of petitioner's common stock would be converted into a share of common stock of Interlake, and the shares of Interlake that petitioner owned prior to the merger would be canceled.
Petitioner would next organize the Interlake Companies as a wholly owned subsidiary and transfer to it all the shares of the subsidiaries that were then owned by petitioner, with the exception of Alabama Metallurgical Corporation (AMC), which remained a subsidiary of petitioner, in exchange for shares of the Interlake Companies and assumption by the Interlake Companies of certain liabilities of petitioner. Petitioner would then distribute all the shares of the Interlake Companies to Newco Sub 1. Newco Sub 1 would distribute all its assets, including the shares of the Interlake Companies and petitioner, to Interlake and then dissolve.
On May 29, 1986, the restructuring plan was carried out, and the directors of Interlake met for the first time. At the meeting, the Interlake directors approved the spinoff by which Interlake would distribute all of petitioner's shares pro rata to Interlake's shareholders. The directors also changed the name of petitioner from Interlake, Inc., to Acme. On June 23, 1986, pursuant to the plan, Interlake carried out the spinoff by distributing, pro rata to its shareholders, all the issued and outstanding shares of petitioner.
Tax Indemnification Agreement Between Petitioner and Interlake
On May 30, 1986, petitioner and Interlake entered into a tax indemnification agreement to memorialize their understanding regarding certain Federal income tax matters for the years ending on or before the effective date of the agreement. The agreement defines the effective date as the date on which all outstanding shares of petitioner's common stock are distributed by Interlake to its shareholders. Petitioner and Interlake were represented by the same law firm during the negotiation and signing of the tax indemnification agreement.
The agreement begins by setting forth the premise that prior to the restructuring, petitioner was the common parent of the affiliated group of which Interlake and its subsidiaries were members. The agreement states that, after the restructuring, Interlake succeeded petitioner as the common parent of the affiliated group of which Interlake, petitioner, and their subsidiaries were members.
Paragraph 4 of the agreement, entitled "Responsibility for Federal Corporate Income Tax Examination and Proceedings Relating Thereto", grants Interlake sole responsibility and authority to handle all Federal income tax matters for all tax years or periods of petitioner or of any subsidiary of petitioner ending on or before the restructuring. Paragraph 4 identifies Interlake as the common parent of the affiliated group under section 1.1502-77, Income Tax Regs.
Paragraph 5 of the agreement, entitled "Responsibility for Federal Corporate Income Taxes Attributable to Taxable Years or Periods Ending After the Effective Date", provides that Interlake shall be solely responsible for all corporate income taxes with respect to the businesses carried on by Interlake and its subsidiaries and, subject to paragraph 6(b), be entitled to all refunds attributable thereto. Paragraph 5 goes on to provide that petitioner shall be responsible for all corporate income taxes due with respect to the businesses carried on by petitioner and its subsidiaries and, subject to paragraph 6(c), be entitled to all refunds attributable thereto.
Paragraph 6 of the agreement, entitled "Refunds of Federal Corporate Income Tax Resulting from Carrybacks of Net Operating Losses and Other Items", provides under subparagraph (a) that if for any period ending after the effective date, petitioner realizes a net operating loss or credits that may be carried back to taxable years ending before December 31, 1986, Interlake, to the extent it receives any refund from the Internal Revenue Service (IRS), shall within
10 days of receiving the refund pay petitioner the amount of the refund, plus interest. All matters relating to the filing of a claim for refund shall be determined and handled solely by petitioner, provided that petitioner furnishes Interlake a copy of any claim for refund within 14 days of filing the claim.
Subparagraph 6(b) provides that if the IRS (A) disallows any portion of the net operating loss or excess credits carried back to a taxable year ending prior to December 31, 1986, or (B) proposes to adjust the Federal corporate income tax liability of petitioner, or of any member of the affiliated group of which petitioner previously was the common parent, and seeks to recover from Interlake all or any portion of the Federal corporate income tax refunded, petitioner shall pay Interlake the lesser of (i) the amount of Federal corporate income taxes at issue, or (ii) the amount Interlake paid to petitioner pursuant to subparagraph 6(a). All matters relating to acceptance or challenge of any disallowance or adjustment to the Federal corporate income tax liability of the carryback year or period shall be handled by petitioner, in its sole discretion and at petitioner's sole cost. If the IRS proposes to adjust the Federal corporate income tax liability of the year to which the loss or credit is carried back, and if the period of limitations for assessment is open, then Interlake shall be solely responsible for handling all matters relating to the IRS's adjustments or proposed adjustments.
Subparagraph 6(c) provides that if Interlake realizes a consolidated net operating loss or credit carryback for any taxable year of Interlake ending after the effective date that Interlake is unable to carry back to 1 or more taxable years ending on or before the effective date, as a result of petitioner's having filed one or more claims for refund, and Interlake's having received and paid petitioner all or a portion of the refund, then petitioner shall repay Interlake a portion of the amount that Interlake paid petitioner on account of the claim or claims for refund.
Under paragraph 11 of the agreement, petitioner agrees that if the IRS should determine that petitioner was the continuing common parent, it would grant Interlake an unqualified power of attorney to represent petitioner in connection with all matters involving Federal income tax for the years ending before the effective date.
Tax Filings by Interlake...
To continue reading
Request your trial