In re Corp.
| Decision Date | 01 June 2011 |
| Docket Number | CASE NO. 91-41518 |
| Parties | In re: FRANKLIN SAVINGS CORPORATION, DEBTOR. |
| Court | U.S. Bankruptcy Court — District of Kansas |
The relief described hereinbelow is SO ORDERED.
ROBERT D. BERGER
United States Bankruptcy Judge
MEMORANDUM OPINION AND ORDERDebtor Franklin Savings Corporation (Debtor or FSC) moves for summary judgment on its objection to the Internal Revenue Service's Amended Proof of Claim and Request for Payment of $7,096,121.87 in taxes, interest, and penalties.1 The Court has jurisdiction.2
Debtor objects to the IRS's administrative expense claim for three years of post-petition taxes. Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.3 A genuine issue of material fact is a factual dispute that may affect the outcome of the case and leave a reasonable trier of fact able to find in favor of either party.4 In applying this standard, the Court views the factual record and draws all reasonable inferences in the light most favorable to the nonmovant.5
On October 13, 1998, the IRS filed its third Request for Payment of Internal Revenue Taxes as an administrative expense for tax periods ending June 30, 1993, through June 30, 1995.6 Debtor objects to the tax claim because it is based on Federal financial assistance7 received by Franklin Federal Savings Association (FFSA), which Debtor contends should not have been included in its consolidated tax returns under IRC §1504(a) for the years in issue. The IRS counters IRC §597 and its implementing regulations require FFSA's income and that of its predecessor, Franklin Savings Association (FSA), be included in Debtor's consolidated tax returns because both were members of FSC's affiliated group.8 The Debtor has not met its burden to show it is entitled to judgment as a matter of law.
Beginning in 1985, FSC and members of its affiliated group, including FSA and other subsidiaries, elected to file consolidated income tax returns. FSC owned more than 80 percent of FSA's stock, and FSA owned more than 80 percent of the other subsidiaries' stock. Thus, FSA's income and that of the subsidiaries were included in FSC's consolidated returns.
On February 15, 1990, the Office of Thrift Supervision (OTS) appointed the Resolution Trust Corporation (RTC) Conservator of FSA. The RTC thereby succeeded to the rights of FSA stockholders, and FSC no longer owned FSA's stock by operation of law. Debtor filed for relief under Chapter 11 on July 26, 1991.
On July 16, 1992, the OTS changed the RTC's oversight of FSA from a conservatorship to a receivership. The OTS also approved the RTC's request to form a new federal mutual savings association, FFSA. FFSA is a "bridge bank" and has no stock.9 The RTC transferred FSA's assets and liabilities to FFSA. The RTC immediately became the Conservator of FFSA. FFSA received Federal financial assistance during the FSC tax years ending on June 30, 1993, through June 30, 1995.
Between 1994 and 1996, Debtor filed Form 1120 Corporation Income Tax returns for taxable years ending June 30, 1993, 1994, and 1995. Each return identified FFSA as an FSC affiliated group member. Ernest M. Fleischer, in his capacity as Chairman of FSC's Board of Directors, signed the returns.
On October 29, 1997, Debtor and its subsidiaries filed Form 1120X Amended U.S. Corporation Income Tax Returns for taxable years ending June 30, 1993, through June 30, 1995.Each amended return again specifically identified FFSA as an affiliated group member and detailed how Federal financial assistance was treated.10 The IRS examined the amended returns and recommended they be accepted - resulting in a tax abatement of approximately $160 million. These returns were not prepared from Debtor's own records, but from Debtor's receipt of amended returns from the receiver. The IRS $7,096,121.87 claim, as computed through August 10, 1998, is based on these 1997 amended returns.
In 2004, the United States District Court for the District of Kansas held "FSC was deprived of its ownership of [FSA's] stock when the RTC was appointed conservator;" and "[o]n February 15, 1990, the RTC succeeded by operation of law to 'all rights, titles, powers, and privileges . . . of any stockholder,'" and "upon appointment of the RTC as conservator, FSC no longer possessed good, legal, or rightful title to the stock, and therefore it no longer 'owned' its stock in FSA."11 In the district court case, Debtor had objected to the OTS's proof of claim seeking over $271,000,000 as a deficit caused by FSC's alleged breach of a capital maintenance commitment.
In July 2008, Debtor filed a second set of amended returns for the taxable years ending June 30, 1993, through June 30, 1995, based on the 2004 district court decision. The amended returns eliminated FSA and FFSA as members of FSC's affiliated group and eliminated FSC's tax liability. The IRS has not accepted these amended returns and has not abated any taxes.
One controverted fact is whether FSA received Federal financial assistance during its conservatorship under the RTC between February 15, 1990, and the fiscal year ending on June 30, 1993. The parties agree FFSA received Federal financial assistance during the fiscal years ending June 30, 1993, 1994, and 1995, after FFSA was created on July 16, 1992.
The IRS asserts FSA received Federal financial assistance prior to the fiscal year ending on June 30, 1993, based on an IRS worksheet prepared when examining the Debtor's amended tax returns filed in 1997. The worksheet states the "6/30/93 FFA provided represented the book balance, i.e., included all FFA received in 93 and prior years."12 Debtor counters FSA never received Federal financial assistance based on Ernest Fleischer's supplemental affidavit.13 Fleischer's affidavit is supported by FSA standalone tax returns and other IRS worksheets not quoted in the IRS affidavit.14 The controverted fact is over the narrow question of whether the $779,000 in Federal financial assistance reported for FFSA for fiscal year ending June 30, 1993, includes a prior year balance from the FSA conservatorship, which ended with the transfer of assets and liabilities to FFSA in July 1992.
IRC §1501 allows the parent of a corporate affiliated group to file a consolidated income tax return if the affiliated group is owned and controlled by at least 80 percent stock ownershipunder the parent corporation.15 The group's tax liability is based on its consolidated taxable income, which is determined by aggregating the separate income or loss of each member. The deductions and losses generated by one corporation in the group may be used to offset income generated by other members.
However, when a Federal regulatory agency assumes control over a financial institution, taxes are determined under IRC §597 and its implementing regulations. IRC §597(a) states taxes and surtaxes on "any transaction in which Federal financial assistance is provided with respect to a bank or domestic building and loan association shall be determined under regulations prescribed by the Secretary." Treas. Reg.§ 1.597-4(f) provides control of a financial institution by a Federal agency does not terminate the institution's membership in an affiliated group, regardless whether the institution received Federal financial assistance in any particular year.16 The examples in Treas. Reg. § 1.597-4(h) illustrate membership continues for institutions placed into conservatorship.17 The only exception is an affirmative election under Treas. Reg.§ 1.597-4(g) to terminate affiliate group status, which adjusts tax liabilities and imposes a toll charge to reflect the amount of Federal financial assistance necessary to restore the troubled financial institution's solvency at the time of the election. Congress intended Federal financial assistance be included in the affiliated group's income to the extent the affiliated group benefitted from use of the troubled institution's losses - even if the losses occurred in years preceding the receipt of Federal financial assistance.18
Under normal IRC §1501 consolidated return rules, if the parent does not satisfy the 80 percent stock ownership requirement, a subsidiary may not be included in the consolidated return. However, if the parent loses its stock ownership by Federal intervention, IRC §597 determines tax liability - even if Federal financial assistance is not immediately received by the troubled institution. The implementing regulations provide institutions in conservatorship and bridge banks remain members of the affiliated group unless the parent elects otherwise. The regulations further Congressional intent to insure the eventual receipt of Federal financial assistance offsets the losses claimed by other affiliated group members. Thus, failed institutionsare taxed on assisted acquisitions, and neither former owners nor new acquirers obtain tax benefits for costs borne by the taxpayer or insurance systems. The legislative history notes:
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