Thrifty Oil Co. & Subsidiaries v. Commissioner
| Decision Date | 30 August 2012 |
| Docket Number | 139 T.C. No. 6,Docket No. 1376-10 |
| Parties | THRIFTY OIL CO. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
P filed consolidated Federal income tax returns for the years at issue (TYE Sept. 30, 2000, 2001, and 2002) on which it claimed environmental remediation expense deductions. R disallowed the claimed deductions after determining that they were each the second tax deduction P had claimed for a single economic loss. The first deduction had been reported as a capital loss on P's Federal income tax return for TYE Sept. 30, 1996, and carried forward, with the last portion claimed on P's Federal income tax return for TYE Sept. 30, 2001.
Held: P is not entitled to the environmental remediation expense deductions claimed on its Federal income tax returns for TYE Sept. 30, 2000, 2001, and 2002.
Gary S. Colton, Jr., Daniel A. Dumezich, and Richard E. Kurkowski, for petitioner.
Kevin G. Croke, Davis G. Yee, and Matthew A. Williams, for respondent.
WHERRY, Judge: This case is before the Court on a petition for redetermination of income tax deficiencies determined by respondent for petitioner's taxable years ended (TYE) September 30, 2000, 2001, and 2002. In its simplest form, the issue is whether, given Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934), and its progeny, petitioner is entitled to environmental remediation expense deductions claimed for the years at issue when, economically, those same losses were claimed as capital loss deductions for years not before the Court.
This case was submitted fully stipulated pursuant to Rule 122.1 The parties' stipulations of issues and stipulations of facts, with accompanying exhibits, areincorporated herein by this reference. Petitioner is a California corporation and its subsidiaries with its principal place of business in Santa Fe Springs, California.
Thrifty Oil Co. (Thrifty) is the common parent of an affiliated group of corporations that for 1995 through 2002 (relevant years) filed consolidated Federal income tax returns using a September 30 yearend and the accrual method of accounting. During the relevant years Thrifty's direct and indirect subsidiaries included: (1) Earth Management Co. (Earth Management); (2) Golden West Refining Co. (Golden West); (3) Golden West Distribution Co. (Distribution Co.); and (4) Benzin Supply Co. (Benzin).
Ted Orden was the president and controlling shareholder of petitioner during the relevant years. Moshe Sassover, Barry Berkett, and Robert Flesh are sons-in-law of Ted Orden. Mr. Sassover and Mr. Berkett were employees of Thrifty and Mr. Flesh worked for Thrifty and the Thrifty consolidated group as an independent contractor during the relevant years.
In 1983 Thrifty, through Golden West, acquired property in Santa Fe Springs, California, on which an oil refinery was located (Golden West Refineryproperty).2 The oil refinery proved unprofitable, and in February 1992 refining operations were suspended. As a result of refining operations, the Golden West Refinery property had suffered environmental contamination, leaving Thrifty and Golden West with the responsibility for remediating the environmental problems.
On July 31, 1992, Thrifty and certain of its subsidiaries including Golden West filed for bankruptcy protection under chapter 11 of the Bankruptcy Code. See Bankruptcy Petition In re Thirfty Oil, No. 92-09132-LA11 (Bankr. S.D. Cal.). On February 16, 1995, the bankruptcy court confirmed the plan of reorganization. Petitioner's environmental remediation liabilities, which had a major impact on the chapter 11 reorganization, were not discharged.
In 1996 petitioner, on the advice of individuals at Deloitte & Touche LLP (Deloitte), including Robert Wenger, petitioner's long-time adviser, decided to enter into a strategy to consolidate the contingent environmental remediationliabilities into one entity (environmental remediation strategy).3 As of September 1996, the contingent environmental remediation liabilities with respect to the Golden West Refinery property totaled $29,070,000.
In an interoffice memorandum dated August 1, 1996, detailing the environmental remediation strategy, Mr. Sassover stated:
As a result of the strategy, Thrifty may be able to generate a capital loss of approximately $60 million. The basic concept is to contribute Thrifty and Golden West Refining's environmental liabilities to a subsidiary of Thrifty while also contributing intercompany receivables. * * * Due to an IRS published ruling and the consolidated return regulations, the transaction with the subsidiary generates a capital loss immediately. When the consolidated group expends funds on the environmental remediation, the consolidated group is entitled to a deduction.
On September 27, 1996, Golden West and Earth Management engaged in a section 351 transaction. For 90 shares of Earth Management stock, Golden West transferred a $29,100,000 promissory note executed by Benzin (Benzin note), infavor of Golden West to Earth Management and Earth Management assumed Golden West's $29,070,000 contingent environmental remediation liabilities.
The Benzin note required Benzin to pay Golden West principal of $29,100,000 together with interest at a rate of 11.5% per annum calculated from September 20, 1996, until the principal sum was paid in full. The Benzin note was a balloon note and specified a maturity date of September 30, 2006. As of May 16, 2011, no payments of principal or interest had been made on the Benzin note. The Benzin note was intended to provide Earth Management with additional collateral to facilitate borrowing any funds needed to pay the environmental remediation liabilities as they came due, but it was never pledged as collateral on any borrowing by Earth Management.
Golden West claimed a tax basis in its 90 shares of Earth Management stock equal to the face value of the Benzin note ($29,100,000) without adjusting for the $29,070,000 of contingent environmental remediation liabilities Earth Management assumed. See secs. 358(a), (d), 357 (c)(3).4 Petitioner filed a statement with itsTYE September 30, 1996, Federal income tax return, disclosing the tax treatment of the transaction (disclosure statement). The disclosure statement reported that Golden West had transferred a promissory note with a fair market value (FMV) and tax basis of $29,100,000 and environmental remediation liabilities with an FMV of $29,070,000 and tax basis of zero to Earth Management for total property transferred with an FMV of $30,000 and a tax basis of $29,100,000. The disclosure statement also reported that the 90 shares of Earth Management stock Golden West received had an FMV of $400 per share.5
On September 30, 1996, Golden West sold its Earth Management stock in equal amounts to Mr. Sassover, Mr. Berkett, and Mr. Flesh for $8,400 each (total of 90 shares sold for $25,200 or $280 per share).6 Petitioner reported a capital loss of $29,074,800 on its TYE September 30, 1996, Federal income tax return from the sale (amount realized of $25,200 less basis of $29,100,000). Petitioner deducted $2,882,469 of the capital loss on its TYE September 30, 1996, Federal income tax return, and carried the remainder forward.
Petitioner deducted a total of $18,347,205 of the capital loss on its TYE September 30, 1996, 1997, 1998, and 1999, Federal income tax returns.7 Each of these four years was closed to adjustment by the statute of limitations at the time ofthis dispute. Petitioner claimed deductions for the remaining $10,727,595 of the capital loss on its TYE September 30, 2000 and 2001, Federal income tax returns. As discussed infra, the capital loss carryforwards petitioner claimed on its TYE September 30, 2000 and 2001, Federal income tax returns were disallowed by respondent in his notice of deficiency.
Earth Management made expenditures during the relevant years for the actual cleanup of the Golden West Refinery property. Thrifty provided the funds Earth Management used to pay for the costs related to the environmental cleanup. For these expenditures, petitioner claimed environmental remediation expense deductions of $339,435, $1,854,405, and $14,505,358 on its TYE September 30, 1997, 1998, and 1999, Federal income tax returns. These years are closed to adjustment by the statute of limitations. Petitioner claimed environmental remediation expense deductions for the years at issue in the following amounts:
+------------------------+
¦TYE Sept. 30 ¦Amount ¦
+-------------+----------¦
¦2000 ¦$3,109,962¦
+-------------+----------¦
¦2001 ¦4,108,429 ¦
+-------------+----------¦
¦2002 ¦3,891,571 ¦
+-------------+----------¦
¦Total ¦11,109,962¦
+------------------------+
V. Respondent's Determination
Respondent issued a notice of deficiency dated October 22, 2009, in which he disallowed capital loss carryovers claimed for TYE September 30, 2000 and 2001, of $1,426,576 and $9,301,019, respectively,8 and environmental expense deductions claimed for TYE September 30, 2000, 2001, and 2002, of $4,370,802, $4,108,429, and $3,891,571, respectively.9 The stated reasons for disallowing both the capital loss carryovers and the environmental remediation expense deductions included that they "duplicate tax benefits already claimed for a single economic loss." Respondent determined the following deficiencies and penalties:
+-----------------------------------------------------+
¦ ¦Penalties ¦
+-----------------------+-----------------------------¦
¦TYE Sept. 30¦Deficiency¦Sec. 6662(a)¦Sec. 6662(h) 1 ¦
+------------+----------+------------+----------------¦
¦2000 ¦$1,552,450¦$310,490 ¦--- ¦
+------------+----------+------------+----------------¦
¦2001...To continue reading
Request your trial