Ambase Corp. v. United States
| Decision Date | 30 November 2011 |
| Docket Number | No. 3:08–CV–651–WWE.,3:08–CV–651–WWE. |
| Citation | 834 F.Supp.2d 71,108 A.F.T.R.2d 2011 |
| Court | U.S. District Court — District of Connecticut |
| Parties | AMBASE CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant. |
OPINION TEXT STARTS HERE
Peter H. Winslow, Samuel A. Mitchell, Scribner, Hall & Thompson, LLP, Washington, DC, Philip M. Halpern, Collier, Halpern, Newberg, Nolletti & Bock, White Plains, NY, for Plaintiff.
Alex Thomas Case, Washington, DC, Stephen T. Lyons, U.S. Department of Justice, Ndidi N. Moses, U.S. Attorney's Office, New Haven, CT, for Defendant.
Plaintiff AmBase Corporation (“AmBase”) has brought this action seeking a refund of Federal income tax for the tax year 1989. This refund would result from an increased net operating loss (“NOL”) deduction carried back to 1989 under 26 U.S.C. § 172 from AmBase's income tax return from 1992. Plaintiff has moved for partial summary judgment. Plaintiff argues that it is entitled to increase its bad debt reserves because of its amended tax return. Plaintiff also denies having additional unreported income from 1992. For the following reasons, the motion will be granted in part and denied in part.
Carteret was one of the largest saving and loan associations in New Jersey, and was the 19th largest savings and loan association in the country. AmBase acquired Carteret in 1988. On December 4, 1992, the Office of Thrift Supervision (“OTS”) seized Carteret and placed it into conservatorship with the Resolution Trust Corporation (“RTC”) for its failure to satisfy capital requirements under the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”).
In August 1993, after the seizure, AmBase filed its consolidated income tax return for tax year 1992. In that return, AmBase reported the activities of Carteret for the period starting January 1, 1992 through December 4, 1992 (OTS seized Carteret on December 4, 1992). The return did not include the activity of Carteret during the period it was seized and included a statement, pursuant to 26 C.F.R. § 1.597–4(g), that elected to exclude the activities of Carteret for the period that it was seized by the OTS.
AmBase received an extension from the IRS to defer its final decision whether to disaffiliate until April 30, 1997. Disaffiliationwould prevent Carteret's activities from December 5, 1992 through December 31, 1992 from affecting AmBase's tax obligations. By letter dated April 28, 1997, AmBase elected not to disaffiliate Carteret for the 1992 tax year and informed the IRS that an amended claim would be forthcoming.
In March 2000, AmBase filed a formal claim for tax refund that related back to the 1992 tax year. The claim addresses bad debts on Carteret's books and whether AmBase, after electing not to disaffiliate, could adjust its bad debt reserve for 1992. Plaintiff argues that it should be entitled to increase its bad debt reserve for 1992 and that this increase results in a net operating loss for 1992 that may be carried back to tax year 1989 to generate a tax refund. Defendant contends that despite plaintiff's amended claim, plaintiff may not increase its bad debt reserve retroactively.
A motion for summary judgment must be granted if the pleadings, discovery materials before the court and any affidavits show that there is no genuine issue as to any material fact and it is clear that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
A dispute regarding a material fact is genuine if there is sufficient evidence that a reasonable jury could return a verdict for the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The burden is on the moving party to demonstrate the absence of any material factual issue genuinely in dispute. Am. Int'l Group, Inc. v. London Am. Int'l Corp., 664 F.2d 348, 351 (2d Cir.1981).
If a nonmoving party has failed to make a sufficient showing on an essential element of his case with respect to which he has the burden of proof, then summary judgment is appropriate. Celotex Corp., 477 U.S. at 323, 106 S.Ct. 2548. If the nonmoving party submits evidence which is “merely colorable,” legally sufficient opposition to the motion for summary judgment is not met. Liberty Lobby, 477 U.S. at 264, 106 S.Ct. 2505. The mere existence of a scintilla of evidence in support of the nonmoving party's position is insufficient; there must be evidence on which the jury could reasonably find for him. See Dawson v. County of Westchester, 373 F.3d 265, 272 (2d Cir.2004).
On summary judgment, the court resolves all ambiguities and draws all permissible factual inferences in favor of the nonmoving party. See Patterson v. County of Oneida, 375 F.3d 206, 218 (2d Cir.2004). If there is any evidence in the record from which a reasonable inference could be drawn in favor of the opposing party on the issue on which summary judgment is sought, summary judgment is improper. See Security Ins. Co. of Hartford v. Old Dominion Freight Line Inc., 391 F.3d 77, 83 (2d Cir.2004).
Section 166 of the Internal Revenue Code allows taxpayers to take deductions for bad debts, defined as debts that become worthless within the taxable year. Taxpayers applying this section may use the “charge-off” or “direct write off” method, whereby the actual amount of uncollectible accounts is deducted from revenue in the accounting period in which they are determined to be uncollectible.
Banks, as defined by sections 585 and 593 of the Internal Revenue Code, are permitted to use an alternative “reserve” or “allowance” method of deducting bad debts. A taxpayer such as AmBase, who utilizes the reserve method, estimates the additional amount of debts held by the taxpayer that are expected to become worthless in the future. The Internal Revenue Code prescribes three techniques available for calculating this estimated bad debt. The computation sets the maximum possible addition to bad debt reserves a taxpayer may claim. However, a taxpayer may choose to increase its bad debt reserves by any amount under this statutory ceiling. Importantly, the increase in bad debt reserves determines the deduction available to the taxpayer.
The bad debt deduction computation in AmBase's original 1992 return reflected a maximum bad debt reserve addition of $101,555,414. However, AmBase elected to increase its bad debt reserve by only $56,005,961.
The maximum bad debt reserve addition as calculated in plaintiff's amended 2000 claim was $125,253,834. Plaintiff has sought to increase its reserve retroactively from the original $56,005,961 to the new maximum of $125,253,834, a difference of $69,247,873. This increase would give plaintiff a net operating loss for the tax year 1992, which plaintiff wishes to carry back to the tax year 1989. Plaintiff is claiming a tax refund from 1989 because the net operating loss would reduce plaintiff's income for that year.
In Home Group, Inc. v. C.I.R., the Tax Court found that Treasury regulations promulgated under section 7805 of the Internal Revenue Code were considered “interpretive.” 91 T.C. 265, 272 (1988). There, the court invalidated a sentence contained in a Treasury regulation applicable before 1970.1 That regulation would have prevented taxpayers from retroactively decreasing their bad debt reserves. When Home Group was decided, the authoritative weight of a final Treasury regulation and the judicial deference to such regulation depended on whether the regulation was considered legislative or interpretive. The Tax Court declined to defer to the Treasury regulation, in large part because of its interpretive status. The court found that section 593 of the Internal Revenue Code granted wide latitude to taxpayers to decide the amount of bad debt reserves they wished to claim and that the regulation at issue did not harmonize with the origin and purpose of the statute. Home Group, 91 T.C. at 273.
In the twenty years since the Home Group decision, the administrative landscape has changed significantly. Recognizing this, the Supreme Court recently discarded the standard of review that was applied to interpretive tax regulations when Home Group was decided. Mayo Foundation for Medical Educ. and Research v. U.S., ––– U.S. ––––, 131 S.Ct. 704, 713, 178 L.Ed.2d 588 (2011). Interpretive tax regulations are now examined under the Chevron standard previously applied only to legislative regulations. See Chevron U.S.A Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842–43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Chief Justice John Roberts explained the rationale for Chevron being the appropriate standard of review for analyzing interpretive Treasury Regulations:
The principles underlying our decision in Chevron apply with full force in the tax context ... Filling in gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation at least as complex as the ones other agencies must make in administering their statutes ... We see no reason why our review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as our review of other regulations. Mayo Foundation, 131 S.Ct. at 713.
The first step of the two-part framework announced in Chevron asks whether Congress has “directly addressed the precise question at issue.” Chevron, 467 U.S. at 843–43, 104 S.Ct. 2778. Here the question deals with defining the boundaries of retroactive bad debt reserve adjustment based on income tax return adjustments. Congress has not directly addressed this issue through section 593 or otherwise. This leads us inexorably to Chevron step two, under which we may not disturb an agency rule unless it is ...
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Ambase Corp. v. United States
...for the District of Connecticut (Warren W. Eginton, J.), through its November 30, 2011 memorandum of decision, AmBase Corp. v. United States, 834 F.Supp.2d 71 (D.Conn.2011), May 23, 2012 memorandum of decision, AmBase Corp. v. United States, No. 3:08–cv–651–WWE, 2012 WL 1884874 (D.Conn. May......