Intermet Corp. & Subsidiaries v. Comm'r of Internal Revenue, 8246–97.
| Decision Date | 08 December 1998 |
| Docket Number | No. 8246–97.,8246–97. |
| Citation | 111 T.C. No. 16,98 USTC P 48309,111 T.C. 294 |
| Parties | INTERMET CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Eric R. Fox, Hamish P.M. Hume, and Clifton B. Cates III, for petitioner.
Wilton A. Baker, Alfred C. Bishop, Jr., Steven J. Jankin and Teri A. Culberton, for respondent.
Respondent determined a deficiency in petitioner Intermet Corporation's (Intermet) Federal income tax in the amount of $615,019 for 1984. The deficiency arose out of respondent's disallowance of Intermet's specified liability loss carryback from 1992 to 1984. After concessions by petitioner, the issues to be decided are: (1) Whether, for purposes of the 10–year carryback provided in section 172(b)(1)(C), certain expenditures incurred by Lynchburg Foundry Co. (Lynchburg), a member of the Intermet consolidated group, qualify as “specified liability loss” within the meaning of section 172(f), and, if so, (2) to what extent the specified liability losses may be carried back by the consolidated group. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue.
The parties submitted the instant case on the basis of fully stipulated facts and certain stipulated exhibits. The parties' stipulation of facts is incorporated in this opinion by reference and found accordingly.
Intermet, a Georgia corporation, had its principal office in Troy, Michigan, when it filed the petition in the instant case. Intermet is the common parent of an affiliated group of corporations (the group) that manufactures precision iron castings for automotive and industrial equipment producers. For calendar years 1984 through 1993, the group filed consolidated Federal income tax returns. During those years, all members of the group used the accrual method of accounting for both financial accounting and Federal income tax purposes. Lynchburg was a member of the group during each year from 1984 through 1993.
On its 1992 consolidated Federal income tax return, the group reported a consolidated net operating loss (CNOL) in the amount of $25,701,038. During October 1994, the group filed Form 1120X, Amended U.S. Corporation Income Tax Return, claiming a carryback to 1984 for specified liability losses incurred during 1992, in the amount of $1,227,973. During 1992, the group's CNOL exceeded the sum of the claimed specified liability losses.
Members of the group that claimed specified liability losses reported separate taxable income, as defined in section 1.1502–12, Income Tax Regs., and specified liability loss deductions as follows:
+-------------------------------------------------------+
¦¦ ¦ ¦Specified ¦
++------------------------+--------------+--------------¦
¦¦ ¦Separate ¦Liability Loss¦
++------------------------+--------------+--------------¦
¦¦Member ¦Taxable Income¦Deductions ¦
++------------------------+--------------+--------------¦
¦¦ ¦ ¦ ¦
++------------------------+--------------+--------------¦
¦¦Lynchburg Foundry Co. ¦$3,940,085 ¦$1,126,467 ¦
++------------------------+--------------+--------------¦
¦¦Intermet Corp. ¦1,879,425 ¦71,643 ¦
++------------------------+--------------+--------------¦
¦¦Columbus Foundries, Inc.¦6,720,377 ¦30,045 ¦
++------------------------+--------------+--------------¦
¦¦Commercial & Precision ¦ ¦ ¦
++------------------------+--------------+--------------¦
¦¦Machining, Inc. ¦(3,123,021) ¦49,818 ¦
+-------------------------------------------------------+
In the notice of deficiency, issued on March 14, 1997, respondent disallowed the group's claimed carryback, except to the extent of $49,818, which was the amount of the specified liability loss deductions reported by Commercial & Precision Machining, Inc. Petitioner conceded the group's claimed carryback to the extent of $208,949.77, and the parties have stipulated that the remainder of the carryback, $1,019,205.23, is attributable solely to specified liability loss deductions claimed by Lynchburg during 1992.
The disallowed specified liability losses in issue consist of the following amounts paid by Lynchburg, during 1992, for State tax deficiencies, interest on those deficiencies, and interest on a Federal income tax deficiency:
+--------------------------------------------------------+
¦¦Disallowed Specified Liability Losses ¦Amount ¦
++-------------------------------------------+-----------¦
¦¦ ¦ ¦
++-------------------------------------------+-----------¦
¦¦State tax deficiencies ¦$717,617.00¦
++-------------------------------------------+-----------¦
¦¦Interest on State tax liabilities ¦299,412.63 ¦
++-------------------------------------------+-----------¦
¦¦Interest on a Federal income tax deficiency¦2,175.60 ¦
+--------------------------------------------------------+
The aforementioned State taxes and interest arose out of the State of Michigan's audit of Lynchburg's 1986, 1987, and 1988 Michigan Single Business Tax returns. During 1992, Lynchburg paid the Michigan Single Business Tax deficiencies and the related interest. The aforementioned interest on a Federal income tax deficiency arose out of an audit by the Internal Revenue Service (the Service) of the group's consolidated Federal income tax returns for 1987 and the resulting adjustment to Lynchburg's separate taxable income for that year. During 1992, Lynchburg and the Service resolved their differences, and Lynchburg paid interest on its agreed upon 1987 Federal income tax deficiency. During 1992, Lynchburg properly deducted the additional State taxes and interest it paid during that year.
OPINIONSection 172(a) allows a “net operating loss deduction” for the aggregate of net operating loss carrybacks and carryovers to the taxable year. The term “net operating loss” (NOL) is defined in section 172(c) to mean the excess of deductions allowed by chapter 1 over gross income. Section 172(b) provides the carryback and carryover periods for NOL's. Section 172(b)(1)(A) generally provides that the carryback period for an NOL is 3 years and that the carryover period is 15 years.1 Section 172(b)(1)(C)' provides a special rule that extends the carryback period from 3 years to 10 years for specified liability losses. The term “specified liability loss” (hereinafter SLL) is defined in section 172(f) 2, which states in part:
SEC. 172(f). Rules Relating to Specified Liability Loss.—For purposes of this section—
(1) In General.—The term “specified liability loss” means the sum of the following amounts to the extent taken into account in computing the net operating loss for the taxable year:
* * * (B) Any amount (not described in subparagraph (A)) allowable as a deduction under this chapter with respect to a liability which arises under a Federal or State law or out of any tort of the taxpayer if—
(i) in the case of a liability arising out of a Federal or State law, the act (or failure to act) giving rise to such liability occurs at least 3 years before the beginning of the taxable year
* * *
A liability shall not be taken into account under subparagraph (B) unless the taxpayer used an accrual method of accounting throughout the period or periods during which the acts or failures to act giving rise to such liability occurred.
(2) Limitation.—The amount of the specified liability loss for any taxable year shall not exceed the amount of the net operating loss for such taxable year.
The consolidated return regulations provide rules concerning the determination and use of NOL's in the consolidated return context. Section 1.1502–11(a), Income Tax Regs., prescribes that consolidated taxable income is to be determined by taking into account the separate taxable income of each member of the group and, among other things, “Any consolidated net operating loss deduction”. Id. Section 1.1502–21A(a), Income Tax Regs.,3 provides that the CNOL deduction is equal to the aggregate of the CNOL carryovers and carrybacks to the taxable year. In pertinent part, section 1.1502–21A(b)(1), Income Tax Regs., provides that the CNOL carryovers and carrybacks to the taxable year shall consist of any of the group's CNOL's that may be carried back or over to the taxable year under the provisions of section 172(b). Section 1.1502–21A(f), Income Tax Regs., provides that the CNOL shall be determined by taking into account the separate taxable income, “as determined under 1.1502–12”, of each member of the group and certain enumerated consolidated items.4 Finally, section 1.1502–12, Income Tax Regs., provides that the separate taxable income of a member, “including a case in which deductions exceed gross income”, is determined, with certain modifications, as if the member were not a member of the group.
In the instant case, petitioner contends that the group properly carried back, to 1984,5 the taxes and interest paid by Lynchburg during 1992. Petitioner argues that the taxes and interest in issue constitute SLL's within the meaning of section 172(f)(1)(B) because (1) the liabilities arose out of State and Federal law, (2) the act (or failure to act) giving rise to the liabilities occurred more than 3 years before 1992,6 and (3) all members of the group used the accrual method of accounting throughout the period during which the acts or failures to act giving rise to the liabilities occurred. Additionally, petitioner contends that, pursuant to section 172(f)(2), the entire amount of the SLL's in issue may be carried back to 1984 because the amount claimed as SLL's for 1992 does not exceed the amount of the CNOL reported by the group for 1992. Section 172(f)(2) does not...
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