In re Pt-1 Communications, Inc.

• Decision Date: 31 March 2009
• Docket Number: No. 01-12658-CEC.,No. 01-12660-CEC.,No. 01-12655-CEC.,01-12655-CEC.,01-12658-CEC.,01-12660-CEC.
• Parties: In re PT-1 COMMUNICATIONS, INC.; PT-1 Long Distance, Inc.; and PT-1 Technologies, Inc., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

403 B.R. 250

In re PT-1 COMMUNICATIONS, INC.; PT-1 Long Distance, Inc.; and PT-1 Technologies, Inc., Debtors.

No. 01-12655-CEC.

No. 01-12658-CEC.

No. 01-12660-CEC.

United States Bankruptcy Court, E.D. New York.

March 31, 2009.

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Laurence May, Esq., Cole, Schotz, Meisel, Forman & Leonard, P.A., New York, NY, Attorney for Edward P. Bond, Liquidating Trustee of the Liquidating Trust U/A/W PT-1 Communications, Inc., PT-1 Long Distance, Inc., and PT-1 Technologies, Inc.

Thomas P. Cole, Esq., United States Department of Justice, Tax Division, Washington, D.C., Attorney for the Internal Revenue Service.

DECISION

CARLA E. CRAIG, Chief Judge.

This matter comes before the Court on the second motion of the Liquidating Trustee (the "Trustee") of the Liquidating Trust U/A/W PT-1 Communications, Inc., PT-1 Long Distance, Inc., and PT-1 Technologies, Inc. (the "Liquidating Trust") for summary judgment on his request for declaratory relief authorizing PT-1 to file a tax return for the period of January 1, 2001-March 8, 2001 (the "Stub Period") and for a tax refund of $2,178,891 for the tax period that ended June 30, 1998 (the "1998 Tax Refund") and a refund of $6,913,228.53 plus interest (the "2001 Tax Refund"), which was paid with the tax return for the period of March 9, 2001-December 31, 2001 (the "Short Period"). These refund requests are based on the carryforwards and carrybacks of net operating losses incurred during the Stub Period and the 1999, 2000, and 2002 tax years (collectively, the "NOLs").

The Trustee also seeks the disallowance of the IRS's administrative expense payment request for $581,040 for taxes and interest for the Short Period. For the reasons set forth below, the Trustee's motion for summary judgment is granted to the extent set forth below.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157 and 1334, 11 U.S.C. § 1142, and the Eastern District of New York standing order of reference dated August 28, 1986, and the order dated November 23, 2004 confirming the plan of reorganization in this case (the "Confirmation Order"). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

Facts

The following facts were undisputed with respect to this motion, or were found to be undisputed in prior decisions of this Court.

In February 1999, a merger took place whereby the shareholders of PT-1 Communications, Inc. ("PT-1 Communications," and collectively with PT-1 Long Distance, Inc. and PT-1 Technologies, Inc., "PT-1" or the "Debtors") sold their common stock to STAR Telecommunications ("STAR"), making PT-1 Communications a wholly owned subsidiary of STAR, and making the subsidiaries of PT-1 Communications (together with PT-1, and affiliates of PT-1, the "PT-1 Group") indirect wholly owned subsidiaries of STAR. The PT-1 Group was consolidated with STAR and other affiliated corporations (the "Star Group") for tax reporting purposes and could not file any tax returns on its own behalf.

STAR was indebted to WorldCom Communications Corp. ("WorldCom"). PT-1 guaranteed STAR's obligations, which was secured by certain of PT-1's assets. STAR also pledged its stock interest in PT-1 to WorldCom and granted WorldCom the right to vote STAR's shares in PT-1 to elect a new board of directors in the event STAR defaulted on its obligations to WorldCom. STAR defaulted, and WorldCom exercised its right to vote STAR's PT-1 shares to elect a new board of directors, but the shares were not transferred from STAR to WorldCom.

On March 9, 2001, immediately after PT-1's new board was elected, these bankruptcy cases were commenced by the filing of voluntary petitions for relief under chapter 11 of the Bankruptcy Code. No chapter 11 trustee was ever appointed. PT-1, as debtors and debtors in possession, continued in possession of their assets and in the management of their businesses until the Debtors' Second Amended Joint Plan of Reorganization dated as of August 31, 2004 ("Plan") was confirmed on November 23, 2004. At that time, as provided in Article 5 of the Plan, certain of the Debtors' assets, rights, and powers were transferred to the Liquidating Trust.

On or about March 15, 2002, STAR filed a request with the IRS for an extension of time to file a consolidated federal tax return for itself and its subsidiaries, including the PT-1 Group. Pursuant to the extension, the tax return for the group was due by September 16, 2002. However, a few days before the consolidated tax return was due, STAR informed PT-1 that the PT-1 Group would not be included in the consolidated tax return. STAR's purported reason for refusing to include the PT-1 Group in its consolidated return was that it did not control PT-1, even though STAR owned PT-1's shares. STAR contended that WorldCom should include the PT-1 Group on its tax return because WorldCom had controlled PT-1 ever since PT-1's new board of directors was elected. However, WorldCom took the position that PT-1 belonged on STAR's consolidated tax return. With both companies refusing to include the PT-1 Group on their respective consolidated tax returns, the PT-1 Group filed its own tax return for the period March 9, 2001 through December 31, 2001 (the "Short Period"), paying approximately $6.7 million in taxes and $207,000.00 in interest. The IRS accepted PT-1's tax return and the tax payment. Subsequently, STAR filed for bankruptcy, never filed a consolidated tax return for 2001, and was liquidated.

In February 2004, the PT-1 Group sent a protest letter to the IRS disputing the IRS's disallowance of net operating losses from 1999 that the PT-1 Group sought to carryback to reduce its tax liability for the tax year ending December 31, 1998.

On February 6, 2004, the IRS filed a request for an administrative expense payment seeking $2,064,860.08 in penalties and interest for the Short Period, $25,900,740.77 in taxes, penalties, and interest for the Stub Period, and $7,189,664.92 for taxes, penalties, and interest for the tax year ending December 31, 2002 (the "2002 tax year").

On August 13, 2004, the IRS filed an amended request seeking interest and penalties for the Short Period totaling $2,064,860.08, and again requested $7,189,664.92 for taxes, penalties, and interest for the 2002 tax year. It withdrew its request for payment of any taxes, interest, or penalties for the Stub Period.

On March 14, 2005, the Trustee filed a motion to expunge the IRS's request for an administrative expense payment. The Trustee also sought a declaration that the PT-1 Group was permitted to file a tax return for the Stub Period and carry forward and carry back net operating losses against the taxable income for the Short Period, and sought to recover the 1998 Tax Refund, plus interest, and the 2001 Tax Refund, plus interest.

On March 18, 2005, the IRS filed another amended request seeking taxes, penalties and interest for Short Period totaling $643,298.99, an additional request of $778,623.06 for penalties and interest for the Short Period, and $13,048,272.67 for taxes, interest and penalties for the 2002 tax year.

On August 1, 2006, the IRS filed yet another amended request seeking taxes and interest for the Short Period in the amount of $581,040 arising from the IRS's disallowance of loss carryforwards from the STAR consolidated tax return for the tax year ending December 31, 2000 and loss carrybacks from the 2002 tax year. It also sought penalties and interest totaling $470,086.54 for PT-1's failure to timely pay its taxes and failure to pay estimated taxes for the Short Period, and $7,863,701.84 for estimated taxes for the 2002 tax year. The IRS withdrew its previous request for penalties for PT-1's failure to timely file a tax return.

Also on August 1, 2006, the Trustee filed his first motion for summary judgment to disallow the IRS's request for administrative payment of taxes, interest and penalties for the Short Period and the 2002 tax year. The Trustee also sought summary judgment on his counterclaims seeking authorization for the PT-1 Group to file a tax return for the Stub Period and seeking an award of the 2001 Tax Refund and the 1998 Tax Refund.

On December 7, 2006, this Court granted the Trustee's first motion, in part, and disallowed the IRS's request for administrative payment relating to the 2002 tax year. In re PT-1 Commc'ns, Inc., 357 B.R. 217 (Bankr.E.D.N.Y.2006).

On March 26, 2007, this Court disallowed the IRS's request for administrative payment of penalties and interest for PT-1's failure to timely pay its taxes for the Short Period. The Court also disallowed the IRS's request for penalties based on PT-1's failure to pay estimated taxes, interest and penalties for the tax year ending December 31, 2001 (the "2001 tax year"), on the basis that the request was time barred. Lastly, the Court denied the Trustee's motion for summary judgment on the counterclaims for declaratory relief and to recover tax refunds, without prejudice to renewal upon a more complete record. In re PT-1 Commc'ns, Inc., 386 B.R. 402 (Bankr.E.D.N.Y.2007).

On or about April 13, 2007, the PT-Group requested that the IRS designate PT-1 Communications as the agent for the group so that it could file a tax return for the Stub Period. (Tr.¹ 11/13/07 at 5.; Buschel Aff. Ex. B.) PT-1, and its subsidiaries, are the only remaining members of the STAR Group. (Tr. 11/13/07 at 5.) The IRS did not grant PT-1's request. (U.S. Mem. in Opp'n to Second Mot. For Summ. J. at 5.)

On September 21, 2007, the Trustee filed his second motion for summary judgment seeking to expunge the IRS's request for administrative payment of $581,040 for taxes and interest for the Short Period. The Trustee also renewed his request for summary judgment seeking a declaratory judgment directing the IRS to...