State Farm Mut. Auto. Ins. Co. v. Comm'r of Internal Revenue, 5426–05.
| Decision Date | 23 June 2008 |
| Docket Number | No. 5426–05.,5426–05. |
| Citation | 130 T.C. No. 16,130 T.C. 263 |
| Parties | STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY & Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P was the common parent of a life-nonlife consolidated group from 1996 through 2002. When making its alternative minimum tax (AMT) calculations for those years, it originally calculated its adjusted current earnings (ACE) adjustment separately for its life and nonlife subgroups. After R issued P a notice of deficiency for 1996 through 1999, P recalculated its AMT using a revised methodology.
P's revised methodology calculates ACE on a consolidated basis and does not apply the loss limitation rules of sec. 1503(c), I.R.C., to preadjustment alternative minimum taxable income (AMTI) for purposes of calculating ACE. P's revised methodology would reduce its ACE adjustment for 2001 and 2002, causing larger alternative tax net operating losses (ATNOLs) for its nonlife subgroup to be carried back to prior years. P's revised methodology would decrease P's deficiencies and cause overpayments for 1997 through 1999.
Held: P must calculate its ACE and ACE adjustment on a consolidated basis.
Held, further, P must use consistent preadjustment AMTIs when calculating its ACE and ACE adjustment.
Jerome B. Libin, James V. Heffernan, Mary E. Monahan, and Jeffrey N. Starkey, for petitioner.
Alan M. Jacobson and Jan E. Lamartine, for respondent.
Respondent determined deficiencies in petitioner's Federal income taxes of $12,830,522, $55,903,247, $25,981,117, and $14,249,973 for 1996, 1997, 1998, and 1999, respectively. Petitioner disputes $13,625 of the deficiency for 1996 and the entire deficiency for each of 1997, 1998, and 1999. Petitioner claims overpayments of $156,917,448, $214,471,611, and $138,570,516 for 1997, 1998, and 1999, respectively.
Petitioner raised seven issues in its petition, five of which have been settled. Of the two remaining issues this Opinion addresses solely the calculation of petitioner's adjusted current earnings (ACE) adjustment for purposes of computing its alternative minimum tax (AMT) (the AMT issue). Resolution of the AMT issue requires the Court to decide two questions:
(1) Whether a consolidated group consisting of at least one mutual casualty or life insurance company and one other corporation (a life-nonlife consolidated group) must calculate its ACE adjustment under section 56(g) 1 on a consolidated or subgroup basis. we hold that a liFE-NONLIFE consolidated group is entitled to and must calculate its ACE adjustment on a consolidated basis; and
(2) when a life-nonlife consolidated group calculates its ACE adjustment, whether application of the loss limitation rules of section 1503(c) and section 1.1502–47, Income Tax Regs. (loss limitation rules), allows it to use one method to calculate preadjustment alternative minimum taxable income (AMTI) for purposes of calculating ACE under section 56(g)(3) and a different method to calculate preadjustment AMTI for purposes of comparing preadjustment AMTI with ACE under section 56(g)(1). We hold that a life-nonlife consolidated group must use the same method to calculate preadjustment AMTI for both purposes.
The parties submitted this case fully stipulated under Rule 122. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. Petitioner is an Illinois mutual property and casualty insurance company taxed as a corporation. Its principal office is in Bloomington, Illinois.
During the years 1996 through 2002 petitioner was the common parent of an affiliated group of corporations that included two domestic life insurance companies taxable under section 801 (life subgroup) and a varying number of domestic nonlife insurance companies and other domestic corporations (nonlife subgroup, and together with the life subgroup, consolidated group).
Pursuant to an election made for 1984 under section 1504(c)(2), the consolidated group has filed life-nonlife consolidated Federal income tax returns (returns) for 1984 and all subsequent years. Petitioner timely filed returns for 1996 through 2002 on Forms 1120–PC, U.S. Property and Casualty Insurance Company Income Tax Return. The Forms 1120–PC for the consolidated group included both the life and nonlife subgroups. For 2001 and 2002 petitioner subsequently filed Forms 1120X, Amended U.S. Corporation Income Tax Return, for the consolidated group.
For 1996 through 1998 petitioner's returns reflected a liability for regular income tax which was reduced by AMT credits under section 53. For 1999 and 2000, petitioner's returns reflected a liability for AMT under section 55. For 2001 and 2002 petitioner's returns reflected a liability for regular income tax that was reduced by AMT credits under section 53. Petitioner paid the taxes shown on its returns for each year.
For each of the years 1996 through 2002 petitioner made its AMT calculations on Form 4626, Alternative Minimum Tax—Corporations. For purposes of calculating the consolidated group's AMT for 1996 through 2002, petitioner prepared supporting schedules reflecting figures for the separate companies and for the life and nonlife subgroups.
The Forms 4626 filed for taxable years 1996 through 1999 show that petitioner had positive regular taxable income and AMTI 2 for both subgroups. For that reason, petitioner claims that the amounts shown on the Forms 4626 for 1996 through 1999 represented an aggregate of the amounts computed for both subgroups.
On the Form 4626 for 2000, petitioner reflected the AMT computations shown on a supporting schedule that included an ACE adjustment. Although the supporting schedule showed a negative regular taxable income for the nonlife subgroup and a positive amount of regular taxable income for the life subgroup, the schedule showed positive AMTI for both subgroups as a result of the ACE adjustment. Because both subgroups had positive AMT income, petitioner did not apply the loss limitation rules, which generally require a taxpayer to calculate its consolidated taxable income by aggregating the taxable income of both subgroups only if the taxable income of both subgroups is positive. Therefore, the amounts shown on the Form 4626 for 2002 were an aggregate of the amounts computed for both subgroups.
On the Form 4626 for 2001 petitioner reflected the AMT computations shown on the supporting schedules that included an ACE adjustment. The supporting schedules showed negative regular taxable income and AMT income for the nonlife subgroup and positive regular taxable income and AMT income for the life subgroup. The respective nonlife consolidated net operating losses (NOLs) for regular taxable income and AMT purposes were carried back and deducted in the determination of nonlife consolidated regular taxable income and AMT income in prior years. The respective nonlife consolidated net operating losses for regular taxable income and AMT purposes for 2001 thus could not be set off against the respective positive life subgroup regular taxable income and AMT income for 2001. Because the nonlife subgroup's AMT income was negative, petitioner applied the loss limitation rules, and the amounts shown on the Form 4626 for 2001 represented solely the amounts computed for the life subgroup.
On the Form 4626 for 2002 petitioner reflected the AMT computations shown on the supporting schedules that included an ACE adjustment for the year. The supporting schedules showed negative regular taxable income and AMT income for the nonlife subgroup and positive regular taxable income and AMT income for the life subgroup. For regular tax purposes, a portion of the nonlife consolidated NOL for 2002 was carried back and deducted in the determination of nonlife consolidated regular taxable income in prior years, and another portion of the nonlife consolidated NOL for the year was set off against life subgroup regular taxable income for 2002, subject to the percentage limitations of section 1503(c). For AMT purposes the entire amount of the nonlife consolidated NOL for 2002 was carried back and deducted in the determination of nonlife consolidated AMT income in prior years. Because the nonlife subgroup's AMT income was negative, petitioner applied the loss limitation rules, and the amounts shown on the Form 4626 for 2002 represented solely the amounts computed for the life subgroup. The allowable regular tax setoff of nonlife subgroup loss against life subgroup income was not reflected on Form 4626 for 2002.
Respondent audited petitioner's returns for 1996 through 1999 and issued a notice of deficiency with respect to those years on December 22, 2004. The notice of deficiency did not contain any adjustments with respect to the AMT issue.
Petitioner originally calculated its AMT by making separate calculations for ACE and the ACE adjustments for each subgroup. An illustration of petitioner's original methodology for 2001 and 2002 is provided in the appendix to this Opinion.3 Petitioner first calculated post-ACE adjustment AMTIs (before the alternative tax net operating loss (ATNOL) deduction) for both the life and nonlife subgroups. For years 1996 through 2000 both subgroups had positive post-ACE adjustment AMTIs. Therefore, the post-ACE adjustment AMTI of the consolidated group was the sum of the post-ACE adjustment AMTIs of the two subgroups. For 2001 and 2002 the nonlife subgroup had negative post-ACE adjustment AMTIs. Therefore, petitioner applied the loss limitation rules and treated the post-ACE adjustment AMTI of the life subgroup as the post-ACE adjustment AMTI of the entire consolidated group. Accordingly, in the illustrations of petitioner's original calculations in the appendix, the “Consolidated” column is identical to the “Life Subgroup” column for 2001 and 2002. Petitioner used the ATNOL of the nonlife subgroup to offset nonlife subgroup income in prior years...
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