Sealy Corp. v. Comm'r of Internal Revenue, s. 18761–92
| Decision Date | 21 October 1996 |
| Docket Number | Nos. 18761–92,6266–93 to 6269–93.,3028–93 to 3030–93,s. 18761–92 |
| Citation | 107 T.C. No. 11,107 T.C. 177 |
| Parties | SEALY CORPORATION and Subsidiaries, f.k.a. The Ohio Mattress Company and Subsidiaries, et al.,1 Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Stephen P. Kresnye and Joseph A. Castrodale, Cleveland, OH, for petitioners.
Elsie Hall, Washington, DC, for respondent.
Ps had net operating losses for tax years 1989 to 1992 from deductible expenses they incurred to comply with various requirements of Federal law; i.e., the Internal Revenue Code, the 1934 Securities and Exchange Act, and the Employee Retirement Income Security Act of 1974.
Net operating losses generally may be carried back 3 years. Sec. 172(b)(1)(A), I.R.C. However, specified liability losses may be carried back 10 years. Sec. 172(b)(1)(C), (f)(1)(B), I.R.C. Ps treated their losses as specified liability losses and carried them back to their tax year ending Nov. 30, 1985.
Held, Ps' regulatory compliance costs are not specified liability losses.
This case is before the Court on petitioners' motions for partial summary judgment.
Respondent determined the following deficiencies in petitioners' Federal income tax:
+---------------------------------------------+
¦Petitioner ¦Year Ending ¦Deficiency ¦
+-----------------+-------------+-------------¦
¦Sealy Corp. ¦Nov. 30, 1983¦$225,754.00 ¦
+-----------------+-------------+-------------¦
¦Sealy Corp. ¦Nov. 30, 1984¦648,717.48 ¦
+-----------------+-------------+-------------¦
¦Ohio Mattress Co.¦Dec. 30, 1984¦3,630,737.24 ¦
+-----------------+-------------+-------------¦
¦Sealy Corp. ¦Nov. 30, 1985¦64,678.74 ¦
+-----------------+-------------+-------------¦
¦Ohio Mattress Co.¦Dec. 31, 1985¦49,863.34 ¦
+-----------------+-------------+-------------¦
¦Sealy Corp. ¦Nov. 30, 1986¦6,816,632.00 ¦
+-----------------+-------------+-------------¦
¦Ohio Mattress Co.¦Dec. 30, 1986¦447,617.00 ¦
+-----------------+-------------+-------------¦
¦Sealy Corp. ¦Nov. 30, 1988¦13,115,655.00¦
+---------------------------------------------+
Petitioners seek a partial summary judgment relating to their net operating loss carrybacks. They contend that $2,447,933 of expenses they incurred from 1989 to 1992 is specified liability losses under section 172(f)(1)(B) and thus may be carried back 10 years. This is the first case in which we, or, to the best of our knowledge, any court, has decided the scope of section 172(f)(1)(B). As discussed below, we hold that petitioners' compliance expenses at issue here are not specified liability losses, and we deny petitioners' motion for partial summary judgment.
A motion for summary judgment or partial summary judgment may be granted if there is no genuine issue of material fact and the decision can be rendered as a matter of law. Rule 121; Shiosaki v. Commissioner, 61 T.C. 861, 862–863 (1974). The parties agree that there is no material fact in dispute relating to the motion. The parties have settled all of the other issues in this case.
Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years at issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioners are corporations the principal places of business of which were in Seattle, Washington, when the petitions were filed.
Petitioners used the accrual method of accounting and reported their income on fiscal years ending November 30.
Petitioners were privately owned before 1970 and thus were not subject to the reporting requirements of the Securities and Exchange Act of 1934 (the 1934 Act), ch. 404, 48 Stat. 881 (). The Ohio Mattress Co. first offered its stock for public sale in February 1970. The reporting requirements of the 1934 Act have applied to petitioners since 1970.
The 1934 Act requires petitioners to file quarterly and annual financial reports with the Securities and Exchange Commission (SEC). Petitioners incurred expenses of $1,808,309 in taxable years 1989 to 1992 for professional services to comply with reporting, filing, and disclosure requirements imposed by the 1934 Act. Petitioners paid auditing and professional fees to KPMG Peat Marwick, Ernst & Whinney, and Ernst & Young to represent petitioners before the SEC's chief accountant's office and to prepare SEC registration statements S–1 and S–4 relating to public securities offerings. Petitioners incurred these expenses to comply with section 13(a)(2) of the 1934 Act, 15 U.S.C. sec. 78m, which requires petitioners to file quarterly and annual reports with the SEC and to have the annual reports audited by an independent public auditor.
Before 1985, petitioners adopted various employee benefit plans for their employees. As employee benefit plan administrators, petitioners are subject to the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93–406, sec. 103(a)(1)(A), 88 Stat. 841, 29 U.S.C. sec. 1023(a)(1)(A) (1994). ERISA requires administrators of employee benefit plans to use independent qualified public accountants to publish various reports relating to the plan. Id. As a result, petitioners paid auditing and professional fees of $100,650 to KPMG Peat Marwick, Ernst & Whinney, and Ernst & Young from 1989 to 1992 to examine and prepare financial statements for petitioners and their employee benefit plans.
In December 1986, Sealy Mattress Co., formerly known as Ohio–Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co. of Albany, Inc., Sealy Mattress Co. of Illinois, Inc., Sealy of Minnesota, Inc., Sealy of Connecticut, Inc., the Maryland Bedding Co., Sealy of Maryland and Virginia, Inc., the Metcalfe Brothers, Inc., and Sealy Mattress Co. of Kansas City, Inc. Sealy Mattress Co. bought Sealy of Michigan, Inc., in April 1987.
Each of these companies (the acquired companies) had license agreements with Sealy, Inc., which is now known as the Ohio Mattress Co. Licensing & Components Group. All but two of the acquired companies owned voting stock in Sealy, Inc. After the 1986 acquisitions, the Ohio Mattress Co. indirectly owned 77.49 percent of Sealy, Inc. In December 1986, Sealy Mattress Co. bought 4.37 percent of Sealy, Inc. from individual shareholders. Thereafter, the Ohio Mattress Co. indirectly owned 81.86 percent of Sealy, Inc.'s voting stock.
On September 15, 1987, petitioners timely elected to treat the stock purchases (except Sealy, Inc., and Sealy of Michigan) as asset acquisitions under section 338.
The Internal Revenue Service (IRS) audited petitioners' tax returns for the years ending November 30, 1987, November 30, 1988, April 24, 1989, November 30, 1989, November 30, 1990, November 30, 1991, and November 30, 1992. The IRS examined petitioners' books, records, and tax filings relating to the acquisitions. Petitioners paid Ernst & Young, American Appraisal Associates, and other accounting and law firms for services relating to the 1991 and 1992 IRS audits of petitioners' 1987, 1988, and 1989 tax years.
Most of petitioners' IRS examination expenses related to the IRS audit of the acquisitions, the section 338 elections, and petitioners' return for the tax year ending November 30, 1987.
Petitioners paid $567,974 in 1991 and 1992 for accounting and legal services relating to IRS audits of petitioners' 1987 tax year. Petitioners incurred the expenses to comply with section 7602, which allows the IRS to examine taxpayers' books and records to ascertain whether a return is correct.
Petitioners reported that they had losses of $26,441,402 for 1989, $60,447,014 for 1990, $35,262,161 for 1991, and $11,772,384 for 1992 before taking into account net operating loss carrybacks or carryforwards.
On April 29, 1994, petitioners filed amended returns for their tax years ending November 30, 1989, 1990, 1991, and 1992. Petitioners filed an amended return for their tax year ending November 30, 1985, on April 29, 1994. On it, petitioners claimed a carryback of $6,484,484 for specified liability losses under section 172(f)(1)(B). Specified liability losses reported on petitioners' 1989, 1990, 1991, and 1992 amended returns do not exceed the amount of net operating losses reported on those returns.
Respondent determined that petitioners may deduct $4,007,551 as specified liability losses and $2,476,933 2 as a loss subject to the general 3–year carryback and 15–year carryforward under section 172.
The following losses are in dispute:
+---------------------------------------------------------+
¦ ¦Acctg fees re: ¦Acctg fees re: ¦Prof. ¦
+--------+------------------+-----------------+-----------¦
¦Tax ¦audited financial ¦employee benefits¦fees ¦
+--------+------------------+-----------------+-----------¦
¦year ¦statements and SEC¦financial ¦Re: IRS ¦
+--------+------------------+-----------------+-----------¦
¦ending ¦regis. statements ¦statements ¦audit ¦
+--------+------------------+-----------------+-----------¦
¦11/30/89¦$631,109 ¦$34,450 ¦— ¦
+--------+------------------+-----------------+-----------¦
¦11/30/90¦552,000 ¦24,500 ¦— ¦
+--------+------------------+-----------------+-----------¦
¦11/30/91¦337,700 ¦24,500 ¦$140,186.50¦
+--------+------------------+-----------------+-----------¦
¦11/30/92¦287,500 ¦17,200 ¦427,787.50 ¦
+---------------------------------------------------------+
Petitioners reported that they had losses on their 1989, 1990, 1991, and 1992 returns, part of which petitioners carried back as specified liability losses...
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