Goodrich Corp. v. United States

• Decision Date: 18 January 2012
• Docket Number: No. 3:10–cv–00105–W.,3:10–cv–00105–W.
• Citation: 846 F.Supp.2d 445,109 A.F.T.R.2d 2012
• Court: U.S. District Court — Western District of North Carolina
• Parties: GOODRICH CORPORATION, Plaintiff, v. The UNITED STATES of America, Defendant.

846 F.Supp.2d 445

109 A.F.T.R.2d 2012-556

GOODRICH CORPORATION, Plaintiff,

v.The UNITED STATES of America, Defendant.

No. 3:10–cv–00105–W.

United States District Court,

W.D. North Carolina,

Charlotte Division.

Jan. 18, 2012.

Bobby Roy Burchfield, Elizabeth Ann Erickson, Jean Ann Pawlow, Justin Michael Holmes, Thomas Kevin Spencer, McDermott Will & Emery LLP, Washington, DC, Thomas Pearson Holderness, Robinson, Bradshaw & Hinson, P.A., Charlotte, NC, for Plaintiff.

Jan Meir Geht, Katherine M. Walker, U.S. Department of Justice, Washington, DC, for Defendant.

ORDER

FRANK D. WHITNEY, District Judge.

THIS MATTER is before the Court on the parties' cross-motions for partial summary judgment (Docs.Nos.29, 30). The motions have been fully briefed, and on May 23, 2011, the Court held a hearing whereby it received oral argument on the pending motions. The Court subsequently took this matter under advisement. Accordingly, this matter is now ripe for disposition. For the reasons that follow, the United States' Motion for Summary Judgment is GRANTED IN PART and DENIED AS MOOT IN PART, and Plaintiff's Motion for Summary Judgment is DENIED AS MOOT.

I. Background

The facts material to resolution of the instant motions are undisputed. On December 22, 1997, Plaintiff Goodrich acquired Rohr, Inc., (“Rohr”) and its subsidiaries. At the time, the Internal Revenue Service (“IRS”) was examining Rohr for its tax years 1986–89. In late 2000, the IRS issued a notice of deficiency to Rohr asserting that it owed an additional $85 million in federal income tax for the 1986 through 1989 tax years, plus an additional $230 million in interest on the proposed deficiency. Rohr contested owing these additional taxes. Plaintiff employed and sought advice from the firm of Arthur Andersen on the issue of trust strategies for these contested liabilities. On December 20, 2001, Rohr created the Rohr Trust pursuant to a written trust document to provide for the payment of the interest on the income tax that Rohr allegedly owed to the IRS. The Trust Agreement specifically provides, “WHEREAS, Rohr, Inc., (‘Rohr’) which is a wholly-owned subsidiary of Goodrich Corporation (‘Goodrich’), desires to create a trust as a means for providing for the payment of certain contingent liabilities to the Internal Revenue Service of the Department of the Treasury of the United States of America (the ‘IRS').” The Agreement also stated, “Rohr, by virtue of the trust created hereby, intends to relinquish all control over the property contributed to such trust.”

To fund the Rohr Trust, Rohr assigned to Bank One Trust Company, N.A., as the trustee (“Trustee”) unsecured promissory notes (“Notes”) that Rohr received from Plaintiff. Plaintiff contends these Notes were intercompany receivables that represented amounts owed to Plaintiff by its subsidiaries for advancing funds to or on behalf of the subsidiaries, intercompany sales of goods, and intercompany provision of services. Plaintiff used these Notes to fund the Rohr Trust by contributing them to Rohr, who in turn contributed them to the Trust. Plaintiff contends the fair market value of the Notes equaled their face value of approximately $250 million, which also corresponded to the amount of interest liabilities on taxes the IRS claimed Rohr owed. The United States disputes the fair market value of the Notes and contends they were worth much less than the amount Plaintiff asserts.¹

The same day the trust was created, Plaintiff notified the IRS via certified mail that Plaintiff had established the Trust and had transferred the Notes to pay Rohr's interest obligation that could arise from the settlement of the contested interest liability. The United States acknowledges that the IRS received the letter and a copy of the trust agreement after the Trust had been formed.

In 2001 and 2002, Plaintiff filed consolidated tax returns that included, among others, its subsidiary Rohr. Plaintiff then took deductions for the interest expense related to the Rohr Trust on its returns for 2001 and 2002 under 26 U.S.C. § 461(f). On its 2001 tax return, Plaintiff deducted $229,261,071 in interest expense related to the Rohr Trust, which Plaintiff contends represented the interest on the Rohr tax deficiencies that had accrued on or before the day the Rohr Trust was created. This 2001 interest deduction is the subject of a case in the Tax Court and not before this Court. On its 2002 return, Plaintiff claimed a deduction of approximately $13.6 million, which was carried back to 1997 because Plaintiff had a net operating loss and owed no income tax for 2002.² This amount allegedly represented the interest expense that had accrued on the Rohr tax deficiencies from December 20, 2001 (the day of the trust's creation) to June 30, 2002, and is the subject of the instant suit.

On March 28, 2006, the Tax Court approved a settlement between Rohr and the IRS. The Trustee subsequently demanded payment on one of the Notes issued by Plaintiff's subsidiary Coltec Industries, Inc., to pay the IRS the amount of the contested interest liability owed under the settlement. Coltec paid the full face value of the Note to the Trustee, and the Trustee in turn used these cash proceeds to send three checks payable to the United States Treasury to pay the interest liability that had accrued on account of Rohr's underpayment of income tax for the years 1987–1989. In 2007, the Rohr Trust was terminated, and the remaining Notes reverted back to Rohr.

In August 2007, the IRS issued a report denying Plaintiff's interest expense deductions with respect to the Rohr Trust. Plaintiff appealed to the IRS Appeals Office,and on September 10, 2009, the IRS disallowed Goodrich's Claim for Refund resulting from the 2002 deduction of interest expense in the amount of $13,600,369 related to the Rohr Trust. Plaintiff subsequently filed this action seeking to recover at least $2,680,655 in federal income tax erroneously assessed and collected with respect to its tax year ending December 31, 1997, together with overpayment interest thereon.

II. Analysis

Generally speaking, the issue before the Court is whether Plaintiff may claim a tax deduction for its transfer of the Notes to the Rohr Trust to satisfy the contested liability with the IRS, where the IRS never affirmatively consented to the terms of the trust. Based on a plain reading of Treasury Regulation § 1.461–2, which supplements 26 U.S.C. § 461(f)(2), Plaintiff may not claim the deduction.

A. Introduction

In reviewing the cross-motions for summary judgment, “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Here, the relevant facts to the instant motions are undisputed.

As a threshold matter, it is well-settled that “tax deductions are matters of legislative grace to be strictly construed. Only if there is clear provision for a deduction may it be allowed.” Matter of I.J. Knight Realty Corp., 431 F.Supp. 946, 954 (E.D.Pa.1977) (citing Commissioner v. National Alfalfa Dehydrating, 417 U.S. 134, 148–49, 94 S.Ct. 2129, 40 L.Ed.2d 717 (1974); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348 (1934)).

In this case, Plaintiff relies on Section 461(f) of the Internal Revenue Code (26 U.S.C. § 461(f)) to provide the basis for its deduction. Under that statute as it existed in 2002, a taxpayer could take a deduction in the year of a transfer of money or other property to satisfy a contested liability, even though resolution and payment of the contested liability may not occur until another tax year. In order to qualify as a deductible expense, Congress set forth four statutory requirements that must be satisfied:

(1) the taxpayer contests an asserted liability,

(2) the taxpayer transfers money or other property to provide for the satisfaction of an asserted liability,

(3) the contest with respect to the asserted liability exists after the time of the transfer, and

(4) but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer....

26 U.S.C. § 461(f).

Here, the United States concedes that Plaintiff can fulfill the first and third requirements under 26 U.S.C. § 461(f)(1) and (3) respectively. The parties, however, vehemently dispute whether Plaintiff can demonstrate the second requirement, 26 U.S.C. § 461(f)(2), specifically whether Plaintiff transferred money or other property to provide for the satisfaction of an asserted liability. Both parties have moved for partial summary judgment in their favor on this issue.

The United States also contends that Plaintiff cannot satisfy the fourth prong, 26 U.S.C. § 461(f)(4), because Plaintiff did not transfer the type of property that could be used to pay the IRS. The United States has moved for partial summary judgment on this issue. While some discussion of the type of property placed into the Rohr Trust is pertinent to explain compliance with § 461(f)(2), the Court's ruling as to whether Plaintiff satisfied the requirement within § 461(f)(2) moots the issue of whether Plaintiff fulfilled the statutory requirement within § 461(f)(4).

B. 26 U.S.C. § 461(f)(2) and Treas. Reg. § 1.461–2(c)(1)

Section 461(f)(2) of the Internal Revenue Code requires “the taxpayer transfer[ ] money or other property to provide for the satisfaction of an asserted liability.” The language of 26 U.S.C. § 461(f)(2) does not define or further explain the meaning of “transfers,” nor does it expound upon the meaning of “other property.” The Court is thus guided by the pertinent Treasury Regulations, which are issued to interpret the Internal Revenue Code. Chernin v. United States, 149 F.3d 805, 810 (8th Cir.1998) (“Section 461(f) is silent on the mechanics of the transfer requirement. And in such situations, deference is generally accorded the interpretation of the agency...