Mutual Omaha Ins. Co. v. U.S. (I.R.S.), No. 8:02CV162.
| Decision Date | 23 March 2004 |
| Docket Number | No. 8:02CV162. |
| Citation | 317 F.Supp.2d 1117 |
| Parties | MUTUAL OF OMAHA INSURANCE CO. and Consolidated Subsidiaries, Plaintiffs, v. UNITED STATES of America (Internal Revenue Service), Defendant. |
| Court | U.S. District Court — District of Nebraska |
Jeffrey J. Pirruccello, Vicki Colwell, McGrath, North Law Firm, Omaha, NE, for Plaintiff.
Gerald B. Leedom, U.S. Department of Justice, Washington, DC, for Defendant.
This matter is before the court on the parties' motions for summary judgment (Filing Nos. 29 and 33). For the reasons stated herein, the court grants in part and denies in part the Plaintiff's motion for summary judgment (Filing No. 29); likewise, the court grants in part and denies in part the Defendant's cross-motion for summary judgment (Filing No. 33).
The Plaintiff's consolidated taxable group realized taxable capital gains from 1990-1992. The Plaintiff claims that these gains are subject to tax at the rate of 31.6%, on the other hand, the United States contends that the capital gains are correctly subject to tax at the rate of 34%. Most of the gains (78.45%) occurred when notes or bonds were "called" by the issuer — at the issuer's discretion — prior to the explicit maturity date specified by the issuer in the debt instruments (hereinafter, these securities are "Category A Securities"). A smaller percentage of the gains (21.55%) resulted when a fraction of the principal on a note or bond was prepaid by the issuer, or when a portion of a bond issue was prepaid by the issuer, in accordance with a schedule of serial prepayments specified in the instruments (hereinafter these securities are "Category B Securities").
Critical to the outcome of this case is the construction of the Tax Reform Act of 1986 ("TRA") § 1011(d) and the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") § 1010(a), which set forth favorable tax rates for certain capital gains realized by a qualified life insurance company, such as Mutual of Omaha. In order to qualify for the favorable tax rate (31.6%), the securities must be market discount bonds and must have been redeemed at maturity. Mutual of Omaha argues that both the Category A and B Securities were redeemed at maturity. The United States contends, however, that the normal 34%-gains rate applies (1) to "called" securities, because the prematurity call of a note or bond is not a "redemption at maturity," and (2) to the "pre-maturity" partial prepayments of principal on so-called "scheduled" or "serial" securities, because the pre-maturity prepayment of principal is not a redemption "at maturity," and, even if it were, a partial prepayment that does not liquidate or retire the entire bond or note is not a redemption of "any market discount bond."
1. Before Congress enacted the Deficit Reduction Act of 1984 ("DEFRA"), a taxpayer was permitted to recognize capital gain or loss (as opposed to ordinary income) on the difference between the amount such taxpayer received upon a sale or other taxable disposition of a security (including a market discount security that was held for investment) and the security's basis. This was favorable to corporate taxpayers because capital gain was taxed at an income tax rate of twenty-eight percent (28%) compared to the income tax rate of thirty-four percent (34%) imposed on the ordinary income of corporate taxpayers at such time.
2. A market discount security is a security which has been purchased after its issuance at a discount loan from its stated redemption price, where the discount is created by the market place (i.e., market discount).
3. Section 1276 of the Internal Revenue Code ("I.R.C.") (added by DEFRA) changed that treatment for market discount securities by requiring that any gain recognized on the disposition of such securities was to be treated as ordinary income to the extent of the accrued market discount. However, a "grandfather" provision allowed corporations to continue to receive capital gain treatment for gains recognized on the disposition of accrued market discount securities, if such securities were issued before July 19, 1984 (the date of DEFRA's enactment).
4. The Tax Reform Act of 1986 ("TRA") § 311 eliminated the income tax rate advantage for capital gain by raising the income tax for corporate capital gain from twenty-eight percent (28%) to the new highest corporate tax rate imposed on ordinary income, thirty-four percent (34%). This tax rate increase was generally effective for tax years beginning in 1986.
5. However, TRA § 1011(d) provided a transitional rule for certain life insurance companies. TRA § 1011(d) provided that the gain recognized by a "qualified life insurance company" on the "redemption at maturity" of any "bond (meaning, any bond, debenture, note certificate or other evidence of indebtedness under I.R.C. of 1986 § 1278) issued before July 19, 1984, and acquired by such life insurance company on or before September 25, 1986 (the date of TRA's enactment), would be subject to tax at the rate of twenty-eight percent (28%)" 6. TRA § 1011(d)(2) defined "qualified life insurance company" to mean any of fifteen specifically-named companies, one of which was Mutual of Omaha Insurance Company.
7. Section 1010(a)(2) of the Technical and Miscellaneous Revenue Act of 1988. ("TAMRA") amended TRA § 1011(d) to provide as follows:
In general. Notwithstanding the amendments made by subtitle B of title III [of TRA § 1011(d)], any gain recognized by a qualified life insurance company on the redemption at maturity of any market discount bond [as defined in Section 1278 of the Internal Revenue Code of 1986] which was issued before July 19, 1984, and acquired by such company on or before September 25, 1985, shall be subject to tax at the rate of 31.6 percent.
8. Under the I.R.C. of 1986 § 1278, the term "bond" was defined to mean "any bond, debenture, note, certificate or other evidence of indebtedness."
9. The term "redemption at maturity" is not defined in TRA, TAMRA, committee reports, the I.R.C. or the Department of Treasury Regulations.
10. Mutual of Omaha-Insurance Company is a Nebraska corporation with its principal place of business at Mutual of Omaha Plaza, Omaha, Nebraska 68175.
11. Mutual of Omaha Insurance Company timely filed a consolidated income tax return with its subsidiaries, including United of Omaha Life Insurance Company, United World Life Insurance Company, and Companion Life Insurance Company, for each of the calendar years 1990 through 1992. Such income tax returns are collectively referred to herein as "the Returns."
12. Defendant is the United States of America (Internal Revenue Service).
13. This is an income tax refund suit filed by the Plaintiff to recover internal revenue income taxes and interest assessed against and collected from the Plaintiff for the taxable years ended December 31, 1990, December 31, 1991, and December 31, 1992, plus interest on any overpayment determined by the court.
14. Jurisdiction is conferred by 28 U.S.C. § 1346(a)(1).
15. The Plaintiff's claims for refund and this refund suit arose as follows: After an Audit by the IRS of the Returns, the IRS assessed an income tax deficiency of $950,398, plus interest for calendar years 1990 through 1992 ("Taxes"), against the Plaintiff.
16. Plaintiff paid the Taxes in full on or about April 21, 1998.
17. On December 8, 1998, the Plaintiff timely filed Forms 1120X, Amended U.S. Corporation Income Tax Returns with adjusted Forms 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Returns, serving as claims of refund for the Taxes and other then disputed amounts for calendar years 1990 through 1992.
18. On May 18, 2000, the Plaintiff signed Form 2297, Waiver of Statutory Notification of Claim Disallowance, with respect to the Defendant's disallowance of the claims for refund for the Taxes.
19. Plaintiff timely filed the Complaint in this action on April 3, 2002.
20. On the Returns Plaintiff reported certain taxable capital gains attributable to scheduled principal payments or the call for redemption of the Securities, at the transitional capital gain tax rate of 31.6% under TRA § 1011(d) and TAMRA § 1010(a).
21. All of the Securities were issued prior to July 19, 1984 by various issuers in accordance with TRA § 1011(d) and TAMRA § 1010(a).
22. All of the Securities were acquired by the Plaintiff before September 25, 1985 in accordance with TRA § 1011(d) and TAMRA § 1010(a).
23. All of the disputed capital gain was recognized by a "qualified life insurance company" in accordance with § 1011(d) and TAMRA § 1010(a).
24. The Securities were "market discount bonds" within the terms of TAMRA § 1010(a) and the I.R.C. of 1986 § 1278.
25. All of the Securities were either "redeemed" upon the exercise of a call provision by the applicable issuer or "paid" (in whole or part) by the applicable issuer in accordance with the serial principal payment schedule set forth in the applicable Security in calendar years 1990 through 1992.
These "redemptions" or "payments", therefore, occurred either
(A) on "call dates" as set forth in the Securities' express terms and conditions (i.e., the Category A Securities) (representing 78.45% of the capital gain in dispute in this lawsuit), or
(B) on scheduled, serial payment dates as set forth in the Securities' express terms and conditions (i.e., the Category B Securities) (representing 21.55% of the capital gain in dispute in this lawsuit).
26. The capital gains arising from Category A Securities for the years 1990-1992 was $31,344,623. The capital gains arising from Category B Securities for the years 1990-1992 was $8,611,231. The grand sum total of both of these gains is $39,955,854.
27. A summary of excerpts from 15 representative examples of Category A Securities are contained in Plaintiff's Exhibit 4H.
28. A summary of excerpts from 15 representative examples of...
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