Sealy Corp. v. C.I.R.
| Decision Date | 26 March 1999 |
| Docket Number | 98-70372,99-70108,98-70907,98-70370,98-71345,99-70107,99-70111,Nos. 98-70369,s. 98-70369 |
| Citation | 171 F.3d 655 |
| Parties | -1377, 99-1 USTC P 50,402, 99 Cal. Daily Op. Serv. 2200, 1999 Daily Journal D.A.R. 2897 SEALY CORPORATION, and Subsidiaries, F.K.A. the Ohio Mattress Company and Subsidiaries, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Sealy Corporation, and Subsidiaries, F.K.A. the Ohio Mattress Company and Subsidiaries, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. Sealy Corporation, and Subsidiaries, F.K.A. THE Ohio Mattress Company and Subsidiaries, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. The Ohio Mattress Company Licensing and Components Group and Subsidiaries, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. Sealy Corporation, and Subsidiaries, F.K.A. the Ohio Mattress Company and Subsidiaries, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. Sealy Mattress Co., and Subsidiaries, F.K.A. Ohio-Sealy Mattress Manufacturing Company and Subsidiaries, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. The Ohio Mattress Company Licensing and Components Group and Subsidiaries, F.K.A., Sealy, Incorporated and Subsidiaries, Petitioner-Appellant, v. Commissioner Of Internal Revenue, Respondent-Appellee. Sealy Mattress Co., and Subsidiaries, F.K.A. Ohio-Sealy Mattress Manufacturing Co. and Subsidiaries, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Joseph A. Castrodale, Calfee, Halter & Griswold, Cleveland, OH, for the petitioner-appellant.
Stuart L. Brown, Thomas J. Clark, United States Department of Justice, Washington, D.C., for the respondent-appellee.
Appeals from a Decision of the United States Tax Court. Tax Ct. Nos. 6266-93, 18761-92, 3028-93, 6268-93, 6267-93, 3030-93, 3029-93, 6269-93.
Before: NOONAN, and TASHIMA, Circuit Judges, and RESTANI, 1 Judge.
Sealy Corporation and its subsidiaries, formerly known as The Ohio Mattress Company and subsidiaries (Sealy) appeal the judgment of the tax court in favor of the Commissioner of Internal Revenue (the Commissioner). The tax court held that the professional expenses incurred by Sealy in complying with the Securities and Exchange Act of 1934 (the 1934 Act), the Employee Retirement Income Security Act of 1974 (ERISA) and an Internal Revenue Service (IRS) audit were not specified liability losses eligible for a ten year carryback under the Internal Revenue Code § 172(f)(1)(B) (1996). In this case of first impression, we affirm the judgment of the tax court.
Prior to 1970 Sealy was privately owned and not subject to the reporting requirements of the 1934 Act; in 1970 it offered its stock for public sale and became subject to the 1934 Act's requirements of filing quarterly and annual financial reports. See 15 U.S.C. § 78m. In the taxable years 1989-1992 Sealy incurred expenses of $1,808,309 in obtaining professional services to comply with these requirements. Prior to 1985, Sealy implemented employee benefit plans subject to ERISA, which required Sealy to use independent qualified public accountants to publish reports related to the benefit plan, see 29 U.S.C. § 1023; in the taxable years 1989-1992 Sealy paid professional fees of $100,650 to accountants for these reports. In 1991 and 1992 the IRS audited Sealy for the tax years 1987-1992. Sealy spent $567,974 on lawyers' and accountants' fees in complying with the 1991 and 1992 audits. On April 24, 1994 Sealy filed amended returns for 1989, 1990, 1991, and 1992, reporting operating losses for these tax years and claiming a carryback to 1985 for these and other specified liability losses under § 172(f)(1)(B). The Commissioner disallowed the carryback as to the SEC, ERISA and audit expenses. Sealy petitioned the tax court to allow the carryback to 1985 with the result that it would be entitled to a refund for that year.
On October 21, 1996 the tax court issued an opinion upholding the Commissioner. Sealy Corp. v. Commissioner, 107 T.C. 177, 1996 WL 599766 (1996). It held that Sealy's liability to pay for professional services Accordingly, the liabilities did not meet the requirements of § 172(f)(1)(B) of arising under federal law or of occurring at least Sealy appeals.
three years before the beginning of the taxable year. The tax court also held that routine costs were not of the same general type as the product liability expenses, tort losses and nuclear powerplant decommissioning costs which constitute the other specified liability losses under § 172(f). Nor were these expenses subject to the economic performance rules of 26 U.S.C. § 461(h)(2)(A)(i). For all these reasons the tax court held that Sealy was not entitled to the ten year carryback.
Section 172(f) sets out "Rules relating to specified liability loss." Sealy's losses met several of the criteria of the statute: they are losses deductible under 26 U.S.C. § 162 or 165; Sealy uses an accrual method of accounting; the amount of the specified liability loss does not exceed the amount of the net operating loss for the taxable year. 26 U.S.C. § 172(f)(1)(A) & (f)(2). At issue is whether Sealy meets the requirements of § 172(f)(1)(B), which reads as follows:
(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, or
(ii) in the case of a liability arising out of a tort, such liability arises out of a series of actions (or failures to act) over an extended period of time a substantial portion of which occurs at least 3...
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