Vail Resorts, Inc. v. United States
| Decision Date | 01 July 2011 |
| Docket Number | Civil Action No. 09-cv-02014-WYD-CBS |
| Parties | VAIL RESORTS, INC., a Delaware Corporation, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — District of Colorado |
ORDER
The matters before the Court are Plaintiff's Motion For Summary Judgment [ECF No. 33] and Defendant's Motion For Summary Judgment [ECF No. 32]. The Court has determined that the motions can be resolved on the parties' extensive briefing and that no oral argument is necessary.
This case involves Plaintiff Vail Resorts, Inc.'s (Vail) claims for income tax refunds allegedly overpaid to the Internal Revenue Service (IRS) in tax years 2000 and 2001. Vail amended its tax returns for those years in 2004 and 2005, but the IRS denied Vail's refund claims. Understanding the basis of Vail's refund requests requires review of the extensive audit history between the parties.
Beginning in approximately 1990, the IRS conducted multi-year audits of the consolidated group of companies known first as Gillette Holdings, Inc. (GHI) and, after 1997, Vail. The IRS audited three separate time periods: 1985 to 1990, 1992 to 1994, and 1995 to 1998.1
The first audit, covering 1985 to 1990, initially ended with a determination by the IRS that there would be no material change to Vail's tax liability for the audited time period and was terminated without any formal resolution.2
In 1991, GHI emerged from a bankruptcy reorganization, which constituted an "ownership change" under the loss limitation rules of 26 U.S.C. § 382.3 The second audit, covering 1992 to 1994, included several issues related to this bankruptcy.4
Five years into the second audit the IRS was continuing to raise new, technical tax issues.5 Given the audit's length, Vail asked the IRS to identify those specific issues that it either was pursuing or may pursue before the close of the audit.6 In response, the IRS prepared an initial list of items that it was pursuing or may pursue, andthereafter Vail and the IRS entered into a letter agreement that identified all issues for possible examination.7
Following the letter agreement, the parties negotiated a Closing Agreement executed July 10, 2002 (First Closing Agreement).8 The First Closing Agreement completed the audit with respect to the 1985-94 tax years.
After execution of the First Closing Agreement, the parties continued the ongoing examination of the 1995-1998 tax years. The remaining audit issues were resolved in a Closing Agreement executed on March 28, 2003 (Second Closing Agreement).9
Both Closing Agreements have the same form.10 The Agreements are split into four sections. The first section, which the parties refer to as the "whereas clauses," lists the "disputes, as identified during the Commissioner's examination of the tax years" at issue.11 The disputes between the parties are limited, by the explicit language of the Agreements, to those identified in the whereas clauses.12
In the First Closing Agreement, the following disputes are identified in the whereas clauses:
The second sections of the Closing Agreements are prefaced by the statement "NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposesthat . . . ."15 This section is referred to by the parties as the "determination clauses" and announces the resolution of each of the disputes previously identified in the whereas clauses.
In the First Closing Agreement, the following determinations were announced:
In the Second Closing Agreement, the following determinations were announced:
The third section of the Closing Agreements is prefaced by the statement "[a]s a result of the aforementioned agreement described in clauses 1 through [#], preceding, Taxpayer and Commissioner agree to the following:."18 This section is referred to by the parties as the "results clauses" and identifies the amount of tax attributes as of the end date of the tax years covered by each Agreement. The paragraphs in this section, numbered sequentially to the last numbered paragraphs in the determination clauses, do not directly relate back to either the whereas or determination clauses and generally uses language and terminology that is not defined or used elsewhere in the Agreements.
Notable are the paragraphs in these clauses that reference calculated consolidated NOL amounts. In the First Closing Agreement, these paragraphs provide:
In the Second Closing Agreement, a paragraph provides:
9. The consolidated Net Operating Loss ("NOL") equals $229,564,173 as of January 3, 1999, of which the restricted NOL equals $191,212,185 and the unrestricted NOL equals $38,351,988.20
The final section begins with the statement "THIS AGREEMENT IS FINAL AND CONCLUSIVE EXCEPT:."21 This section contains three clauses that describe the scope and effect of the closing agreement. It is undisputed that this language was taken directly from the IRS Form 906 template closing agreement.
Subsequent to the execution of the Second Closing Agreement, the IRS issued Notice 2003-65 announcing "safe harbor" rules a taxpayer may apply to determine the amount of NOLs that may be deducted from a company's income following a "change in ownership."22
For federal income tax purposes, an NOL occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year. A deduction is allowed for this loss, permitting an organization to apply that loss to taxable income by carrying the lossdeduction back three years and forward (NOL carryforward) fifteen years, which can result in a reduction of an organization's tax liability in these years.23
When a company experiences a recognized "ownership change," the acquiring company may apply only some of the acquired company's NOLs as deductions, subject to certain limitations (Section 382 limitation).24 Section 382(b)(1) provides the basic formula to calculate the annual limitation on the amount of NOLs that may be used after an ownership change. If the full annual limitation amount is not used in a given year, the annual limitation may be allowed to increase in subsequent years.25
Under Section 382(h), this annual limitation is increased if a corporation has net unrealized built-in gains at the time of the ownership change and such gains are recognized in any of the five taxable years following the ownership change. Thus, if a company actually or constructively disposes of an asset that it owned pre-change, at a gain and within this five year period, that built-in gain (BIG) may increase the Section 382 limitation. The rules in Section 382(h) are referred to as the RBIG (recognized built-in gain) rules.
In September 2003, the IRS issued Notice 2003-65 which provided guidance on how to apply the Section 382(h) RBIG rules. The Notice announces two alternative, "safe harbor" approaches for recognition of BIG following a change in ownership: the1374 Approach and the 338 Approach. Under the heading "Reliance on Notice," it is expressly stated that the Notice can be applied retroactively. Further, the Notice affirms that the IRS will not take a position contrary to that stated in the Notice if the taxpayer consistently applies one of the approaches contained within.
Prior to the issuance of the Notice, Vail added RBIG to its Section 382 limitation only when it sold an asset at a gain during the recognition period.26 However, the 338 Approach allowed Vail to treat assets as generating RBIG even if those assets were not actually sold but were instead constructively disposed of at a gain during the recognition period.27 For example, using the 338 Approach, Vail believed that it could deduct RBIG for an asset that it was "using up" through depreciation or amortization, rather than selling.28
Applying the 338 Approach to its 2000 and 2001 tax returns allowed Vail to increase the amount of BIG it could recognize in those tax years, which increased Vail's annual ...
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