Jump v. Manchester Life & Cas. Management Corp.

• Decision Date: 17 July 1978
• Docket Number: No. 77-1825,77-1825
• Parties: 78-2 USTC P 9557 Harry V. JUMP, Superintendent of Insurance, State of Ohio, Conservator of Manchester Insurance and Indemnity Corporation, Appellant, v. MANCHESTER LIFE & CASUALTY MANAGEMENT CORP., Ralph B. Hutchings, Samuel J. Goldenhersh, James B. Hutchings, Robert R. Hutchings and Carl Miller, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 449

579 F.2d 449

78-2 USTC P 9557

Harry V. JUMP, Superintendent of Insurance, State of Ohio Conservator of Manchester Insurance and Indemnity Corporation, Appellant, v. MANCHESTER LIFE & CASUALTY MANAGEMENT CORP., Ralph B Hutchings, Samuel J. Goldenhersh, James B Hutchings, Robert R. Hutchings and Carl Miller, Appellees.

No. 77-1825.

United States Court of Appeals Eighth Circuit.

Submitted March 17, 1978.

Decided June 21, 1978.

Rehearing and Rehearing En Banc Denied July 17, 1978.

William G. Ohlhausen of Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., for appellant; Richard A. Ahrens, St. Louis, Mo., on the brief.

Gerald A. Rimmel of Susman, Schermer, Willer & Rimmel, St. Louis, Mo., for appellees; Barry S. Schermer, St. Louis, Mo., on the brief.

Richard D. Shewmaker of Thompson, Walther, Shewmaker & Gaebe, St. Louis, Mo., filed brief for amicus curiae Pioneer Bank & Trust Co.

Before LAY and ROSS, Circuit Judges, and HANSON, ^* Senior District Judge.

HANSON, Senior District Judge.

The appeal in this diversity action presents a single, discrete issue for our review: whether an insolvent subsidiary of an affiliated corporate group is entitled to share in a group consolidated federal income tax refund generated largely by the subsidiary's losses, in an amount larger than the subsidiary's own income tax payments. The district court, ¹ in ruling on cross motions for summary judgment, permitted the subsidiary to recover a portion of the refund up to the amount of its tax payments for the years in question, but would not allow it to claim any additional portion of the refund of tax dollars paid by other members of the affiliated group. Jump v. Manchester Life & Casualty Management Corp., 438 F.Supp. 185, 188-190 (E.D.Mo.1977). Appellant Jump, Superintendent of Insurance for the State of Ohio (the Superintendent) and conservator and liquidator of the insolvent subsidiary appeals insofar as the district court's judgment denied allocation to the subsidiary of the entire refund. We affirm.

I.

Manchester Life and Casualty Management Corporation (Management Corporation), a Missouri corporation, owns substantially all of the stock of Manchester Insurance and Indemnity Company (MI&I) and Manchester Premium Budget Corporation (Premium). MI&I, in turn, owns approximately 85% Of the Pioneer Bank and Trust Company (Pioneer). The five individual defendant-appellees are or were directors of both Management Corporation and MI&I.

The pertinent facts are simple and uncontested. ² Management Corporation is the parent for an affiliated corporate group consisting of Management Corporation, MI&I, Pioneer and Premium. On behalf of the group, and as permitted by 26 U.S.C. §§ 1501, 1504, Management Corporation filed consolidated federal income tax returns for 1970, 1971, 1972, 1973, and 1974. Each subsidiary would calculate its separate federal income tax liability and pay that amount to Management Corporation. During the years 1970, 1971, and 1972, MI&I paid Management Corporation a total of $733,505.00 as its contribution to the consolidated tax liability of the group for those years. In 1973 and 1974 MI&I suffered substantial losses and made no payments.

The 1973 calendar year was a net operating loss year for the entire affiliated group, including MI&I. Consequently, in the return for calendar year 1973, Management Corporation claimed a refund which included a net operating loss carryback for taxes paid in 1970, 1971, and 1972. See 26 U.S.C. § 172(b). In early 1974, the Internal Revenue Service (IRS) refunded $703,255.00 to Management Corporation as agent for the group, and Management Corporation in turn paid this amount over to MI&I. As a result of this refund, MI&I recovered all but $30,250.00 of the total it had paid for income taxes in 1970, 1971, and 1972.

The 1974 calendar year was apparently again a dismal one for MI&I. It suffered a net operating loss in excess of three million dollars and, as a direct result, the affiliated group sustained a net loss in similar amount. Because of its consolidated filing status, the affiliated group was again in a position to take advantage of MI&I's disproportionate losses to gain additional refunds of taxes paid in calendar years 1971 and 1972 by virtue of net operating loss carryback. Accordingly, on March 15, 1975, Management Corporation filed an application with the IRS for a tax refund. On May 8, 1975, Management Corporation received two checks from IRS: one check for $692,983.17 representing a refund for the calendar year 1972, and another check for $118,467.19 representing a refund for calendar year 1971, for a total refund in 1971 and 1972 tax dollars of $811,450.36 including interest. This second refund is the focus of the present dispute.

On September 23, 1975, the Court of Common Pleas of Franklin County, Ohio, with the consent of MI&I's Board of Directors, appointed appellant Superintendent as conservator of MI&I. On the Superintendent's motion, the same court subsequently adjudicated MI&I insolvent and ordered its liquidation on February 13, 1976.

On June 16, 1976, the Superintendent filed his complaint in the present action. The complaint, as amended, was in three counts. In Count I the Superintendent alleged that the Management Company, by not paying the $811,450.36 refund to MI&I, had converted MI&I's property in that amount. Count II was directed against the individual appellee directors and asserted a breach of fiduciary duties. Count III alleged that $943,167.36 was recorded as an account due MI&I for income tax refunds on Management Corporation's books. The Superintendent moved for summary judgment on Counts I and III. Management Corporation and the directors moved for summary judgment on Counts I, II, and III. The district court partially granted the Superintendent's motion on Count I and entered judgment for $30,250.00, a figure which represents the balance between MI&I's previously received refund of $703,255.00 for years 1970, 1971, and 1972 and the total sum of $733,505.00 MI&I paid to Management Corporation for income taxes in those years. However, on Counts II and III, the district court granted summary judgment for Management Corporation and the directors. As we understand the Superintendent's brief and argument before us, Counts II and III have been abandoned as independent claims, and the only question presented to us for resolution is whether the district court erred in ruling that Management Corporation did not convert MI&I's property by retaining most of the second carryback refund for 1971 and 1972. ³ Management Corporation, for its part, does not appeal from the judgment against it for $30,250.00.

II.

Preliminarily, we note that what entity is entitled to ultimately receive the benefit of a consolidated tax refund is a matter which is not addressed in the Internal Revenue Code. See In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262, 265 (9th Cir.), Cert. denied sub nom. Western Dealer Management, Inc. v. England, 412 U.S. 919, 93 S.Ct. 2735, 37 L.Ed.2d 145 (1973); M&M Transportation Co. v. U. S. Industries, Inc., 416 F.Supp. 865, 869 (S.D.N.Y.1976). Though IRS regulations provide that the parent corporation is the agent for each subsidiary in the affiliated group, Treas.Reg. § 1.502-77, this agency relationship is for the convenience and protection of IRS only and does not extend further. In the absence of controlling federal law, state law governs the rights and responsibilities as between a parent corporation and its subsidiaries.

Contrary to the Superintendent, we believe that Missouri law, not Ohio law, controls here. The trial court sitting in Missouri was required to apply the choice of law rules of Missouri. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). In tort actions the Missouri courts have adopted the "most significant relationship" test found in Restatement (Second) of Conflicts of Laws § 145 (1971). See Byrn v. American Universal Insurance Co., 548 S.W.2d 186, 188-89 (Mo.Ct.App.1977). The application of that test here compels the conclusion that Missouri law applies. Management Corporation is incorporated in Missouri and headquartered there. The tax refund money was paid to Management Corporation in Missouri and was deposited in an account at the Pioneer Bank and Trust Company, a Missouri bank. Finally, MI&I's principal place of business was also in Missouri, with the result that this case involves primarily an adjudication of rights and responsibilities between two Missouri corporations. By contrast, the only connection Ohio has with the litigation is the fact that MI&I was incorporated there and, consequently, was subjected to the supervision of the appellant Superintendent. ⁴

In the end, however, the question of which state's substantive law applies is largely problematical, for the Superintendent's position is fundamentally flawed in its basic premise.

The Superintendent's theory is that Management Corporation engaged in self-dealing with its subsidiary MI&I in breach of the fiduciary duty owed by a parent corporation to its subsidiary by converting a valuable asset of the subsidiary to its own use without compensation. The linchpin of this argument is the premise that MI&I's 1974 net operating loss generated a valuable asset because of its income tax consequences, the asset being the right to use the loss. In view of the fact that MI&I has, by voluntary payment and operation of the district court's judgment, received a refund of all the income tax dollars it paid to Management Corporation during the relevant tax years, Cf. In re Bob Richards, supra at 265, MI&I's right to use its 1974 net operating loss as an offset might be viewed as an asset of MI&I from only two possible perspectives. First, the use of the loss might have inherent value to MI&I to the extent it could be carried over to offset tax liability in future...