T.C. Memo. 2003-118
UNITED STATES TAX COURT
ACME STEEL COMPANY (formerly known as Interlake, Inc.,
and now known as Acme Metals, Inc.) AND CONSOLIDATED
SUBSIDIARIES, Petitioners v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 7885-94. Filed April 28, 2003.
P was the common parent of an affiliated group
that was restructured in 1986. In 1986, pursuant to
the restructuring plan, P formed a subsidiary, I.
Following the formation of I, P became a subsidiary of
I through an inversion. I then distributed, pro rata
to its shareholders in a spinoff, all the issued and
outstanding common shares of P, which continued to hold
all the shares of one pre-existing subsidiary of P.
Following the restructuring and spinoff, P filed a
consolidated Form 1120, U.S. Corporation Income Tax
Return, for a 27-week 1986 tax year claiming a
consolidated net operating loss (CNOL). P filed a Form
1139, Application for Tentative Refund under sec. 6411,
I.R.C., carrying back the CNOL to the affiliated
group’s 1981 and 1984 tax years and requesting
tentative refunds for 1981 and 1984. I filed a
consolidated U.S. corporation income tax return for a
52-week 1986 tax year claiming a CNOL. I also filed an
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application for tentative refund for 1984. The
Internal Revenue Service paid P and I the respective
tentative refunds for which they had applied.
Following an examination, R determined that P,
rather than I, was the continuing common parent of the
prespinoff affiliated group, revised P’s income on the
basis of a 52-week taxable year, and determined that P
did not sustain the CNOL claimed on its 1986 return. R
also revised I’s income on the basis of a 27-week short
1986 tax year. As a result of the foregoing
determinations, R determined that P was not entitled to
the tentative refunds paid to P for 1981 and 1984 and
issued a notice of deficiency to P to recover the
tentative refunds.
After P filed the petition in the case at hand, R
agreed to treat I as the successor common parent of the
prespinoff affiliated group and issued a duplicate
notice of deficiency to I, in exchange for P entering
into a stipulation of settled issues. The stipulation
of settled issues provides, in pertinent part, that P
will be liable to disgorge the tentative refunds it was
paid for 1981 and 1984 if those tentative refunds are
held not to be rebates as to I. In Interlake Corp. v.
Commissioner, 112 T.C. 103 (1999), the Court held the
tentative refunds paid to P were not rebates as to I.
P now contends the Court does not have
jurisdiction to enter decision on the stipulation of
settled issues because the tentative refunds P received
are nonrebate refunds not taken into account in
determining a taxpayer’s deficiency. According to P,
the tentative refunds are nonrebate refunds because P,
as the former common parent of the prespinoff group as
conceded by R, was not an “authorized recipient” of the
tentative refunds. P contends that when R paid the
tentative refunds to P, rather than I, R paid the wrong
taxpayer, giving rise to nonrebate refunds.
R contends that the tentative refunds are rebate
refunds over which the Court has jurisdiction and that
the Court may enter decision on the stipulation of
settled issues. According to R, nonrebate refunds are
issued because of clerical or computer errors and P has
not identified any clerical or computer error that
caused R to pay the tentative refunds to P. According
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to R, the tentative refunds were paid, after a limited
examination pursuant to sec. 6411(b), I.R.C., to the
correct taxpayer (P) because they were paid to P, the
taxpayer who applied for the tentative carryback
adjustments on the basis of the CNOL that P claimed it
had incurred.
Held: The tentative refunds in issue are rebate
refunds as to P giving rise to deficiencies over which
the Court has jurisdiction. Sec. 6411(b), I.R.C.
requires R to make only a “limited examination” of an
application for tentative carryback adjustment and pay
the tentative refund within 90 days. When R paid the
tentative refunds to P, R had not finally determined
which affiliated group was the continuation of the
prespinoff affiliated group, and R was not required to
make that determination prior to paying the tentative
refunds. The tentative refunds were not paid because
of any clerical or computer error requiring nonrebate
characterization. The tentative refunds paid to P are
recoverable through the deficiency procedures.
Accordingly, the Court has jurisdiction to enter
decision on the stipulation of settled issues and will
do so.
David J. Duez, Matthew P. Larvick, and Gregory G. Palmer,
for petitioners.
Lawrence G. Letkewicz and Dana E. Hundrieser, for
respondent.
CONTENTS
Background . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Restructuring and Spinoff . . . . . . . . . . . . . 5
Tax Indemnification Agreement Between Petitioner and
Interlake . . . . . . . . . . . . . . . . . . . . . . 6
Tax Filings by Interlake and Petitioner . . . . . . . . 10
Administrative Proceedings. . . . . . . . . . . . . . . 12
Notice of Deficiency and Stipulation of Settled
Issues. . . . . . . . . . . . . . . . . . . . . . . . 14
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Interlake v. Commissioner . . . . . . . . . . . . . . . 18
Summary Assessment of the 1985 Tentative Refund . . . . 20
The Bankruptcy Proceedings . . . . . . . . . . . . . . 21
Change of Petitioner’s Representatives in This
Proceeding . . . . . . . . . . . . . . . . . . . . . 24
Positions of the Parties . . . . . . . . . . . . . . . 25
Discussion . . . . . . . . . . . . . . . . . . . . . . . . 27
Rebate and Nonrebate Refunds . . . . . . . . . . . . . 27
Jurisdiction . . . . . . . . . . . . . . . . . . . . . 30
The Notice of Deficiency . . . . . . . . . . . . . . . 31
Respondent’s Determination . . . . . . . . . . . . . . 32
Collateral Estoppel. . . . . . . . . . . . . . . . . . 39
The “Injustice Exception” to Collateral Estoppel . . . 47
Tentative Refunds as Rebate Refunds. . . . . . . . . . 50
Rebate v. Nonrebate Refunds. . . . . . . . . . . . . . 61
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . 66
MEMORANDUM OPINION
BEGHE, Judge: This case is before the Court on respondent’s
motion for entry of decision on the parties’ stipulation of
settled issues. We shall grant respondent’s motion and enter
decision in accordance with the stipulation.
Background
Some of the facts have been stipulated and are incorporated
by this reference. Petitioner’s principal place of business was
in Riverdale, Illinois, when it filed the petition. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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The Restructuring and Spinoff
Prior to summer 1986, petitioner had been the common parent
of an affiliated group of corporations (the affiliated group) on
whose behalf it filed consolidated Forms 1120, U.S. Corporation
Income Tax Return. In spring 1985, petitioner’s management
developed a plan to restructure the ownership of its businesses
through an inversion and spinoff.
Under the plan, petitioner would organize a wholly owned
subsidiary, the Interlake Corporation (Interlake); Interlake
would then organize a wholly owned subsidiary (Newco Sub 1),
followed by Newco Sub 1's organization of its own wholly owned
subsidiary (Newco Sub 2). Following the organizations of these
new corporations, petitioner would transfer its assets to
Interlake and merge with Newco Sub 2, with petitioner surviving
as a wholly owned subsidiary of Newco Sub 1. In connection with
the merger of Newco Sub 2 into petitioner, each outstanding share
of petitioner’s common stock would be converted into a share of
common stock of Interlake, and the shares of Interlake that
petitioner owned prior to the merger would be canceled.
Petitioner would next organize the Interlake Companies as a
wholly owned subsidiary and transfer to it all the shares of the
subsidiaries that were then owned by petitioner, with the
exception of Alabama Metallurgical Corporation (AMC), which
remained a subsidiary of petitioner, in exchange for shares of
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the Interlake Companies and assumption by the Interlake Companies
of certain liabilities of petitioner. Petitioner would then
distribute all the shares of the Interlake Companies to Newco Sub
1. Newco Sub 1 would distribute all its assets, including the
shares of the Interlake Companies and petitioner, to Interlake
and then dissolve.
On May 29, 1986, the restructuring plan was carried out, and
the directors of Interlake met for the first time. At the
meeting, the Interlake directors approved the spinoff by which
Interlake would distribute all of petitioner’s shares pro rata to
Interlake’s shareholders. The directors also changed the name of
petitioner from Interlake, Inc., to Acme. On June 23, 1986,
pursuant to the plan, Interlake carried out the spinoff by
distributing, pro rata to its shareholders, all the issued and
outstanding shares of petitioner.
Tax Indemnification Agreement Between Petitioner and
Interlake
On May 30, 1986, petitioner and Interlake entered into a tax
indemnification agreement to memorialize their understanding
regarding certain Federal income tax matters for the years ending
on or before the effective date of the agreement. The agreement
defines the effective date as the date on which all outstanding
shares of petitioner’s common stock are distributed by Interlake
to its shareholders. Petitioner and Interlake were represented
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by the same law firm during the negotiation and signing of the
tax indemnification agreement.
The agreement begins by setting forth the premise that prior
to the restructuring, petitioner was the common parent of the
affiliated group of which Interlake and its subsidiaries were
members. The agreement states that, after the restructuring,
Interlake succeeded petitioner as the common parent of the
affiliated group of which Interlake, petitioner, and their
subsidiaries were members.
Paragraph 4 of the agreement, entitled “Responsibility for
Federal Corporate Income Tax Examination and Proceedings Relating
Thereto”, grants Interlake sole responsibility and authority to
handle all Federal income tax matters for all tax years or
periods of petitioner or of any subsidiary of petitioner ending
on or before the restructuring. Paragraph 4 identifies Interlake
as the common parent of the affiliated group under section
1.1502-77, Income Tax Regs.
Paragraph 5 of the agreement, entitled “Responsibility for
Federal Corporate Income Taxes Attributable to Taxable Years or
Periods Ending After the Effective Date”, provides that Interlake
shall be solely responsible for all corporate income taxes with
respect to the businesses carried on by Interlake and its
subsidiaries and, subject to paragraph 6(b), be entitled to all
refunds attributable thereto. Paragraph 5 goes on to provide
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that petitioner shall be responsible for all corporate income
taxes due with respect to the businesses carried on by petitioner
and its subsidiaries and, subject to paragraph 6(c), be entitled
to all refunds attributable thereto.
Paragraph 6 of the agreement, entitled “Refunds of Federal
Corporate Income Tax Resulting from Carrybacks of Net Operating
Losses and Other Items”, provides under subparagraph (a) that if
for any period ending after the effective date, petitioner
realizes a net operating loss or credits that may be carried back
to taxable years ending before December 31, 1986, Interlake, to
the extent it receives any refund from the Internal Revenue
Service (IRS), shall within 10 days of receiving the refund pay
petitioner the amount of the refund, plus interest. All matters
relating to the filing of a claim for refund shall be determined
and handled solely by petitioner, provided that petitioner
furnishes Interlake a copy of any claim for refund within 14 days
of filing the claim.
Subparagraph 6(b) provides that if the IRS (A) disallows any
portion of the net operating loss or excess credits carried back
to a taxable year ending prior to December 31, 1986, or (B)
proposes to adjust the Federal corporate income tax liability of
petitioner, or of any member of the affiliated group of which
petitioner previously was the common parent, and seeks to recover
from Interlake all or any portion of the Federal corporate income
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tax refunded, petitioner shall pay Interlake the lesser of (i)
the amount of Federal corporate income taxes at issue, or (ii)
the amount Interlake paid to petitioner pursuant to subparagraph
6(a). All matters relating to acceptance or challenge of any
disallowance or adjustment to the Federal corporate income tax
liability of the carryback year or period shall be handled by
petitioner, in its sole discretion and at petitioner’s sole cost.
If the IRS proposes to adjust the Federal corporate income tax
liability of the year to which the loss or credit is carried
back, and if the period of limitations for assessment is open,
then Interlake shall be solely responsible for handling all
matters relating to the IRS’s adjustments or proposed
adjustments.
Subparagraph 6(c) provides that if Interlake realizes a
consolidated net operating loss or credit carryback for any
taxable year of Interlake ending after the effective date that
Interlake is unable to carry back to 1 or more taxable years
ending on or before the effective date, as a result of
petitioner's having filed one or more claims for refund, and
Interlake's having received and paid petitioner all or a portion
of the refund, then petitioner shall repay Interlake a portion of
the amount that Interlake paid petitioner on account of the claim
or claims for refund.
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Under paragraph 11 of the agreement, petitioner agrees that
if the IRS should determine that petitioner was the continuing
common parent, it would grant Interlake an unqualified power of
attorney to represent petitioner in connection with all matters
involving Federal income tax for the years ending before the
effective date.
Tax Filings by Interlake and Petitioner
On August 7, 1987, Interlake filed Form 1120, Consolidated
U.S. Corporation Income Tax Return, for a 52/53-week 1986 tax
year ended December 28, 1986. Interlake’s 1986 return reported a
$8,461,369 consolidated net operating loss (CNOL) and $1,496,693
of excess consolidated general business credits.
On August 11, 1987, Interlake filed Form 1139, Corporation
Application for Tentative Refund, with respect to the 1986 tax
year. The application requested a tentative carryback adjustment
of $5,346,097, attributable to the carryback of the 1986 CNOL and
excess consolidated business credits to the group’s 1984 tax
year. On September 14, 1987, not much more than 1 month later,
respondent paid a $5,346,097 tentative refund to Interlake.
On August 28, 1987, petitioner and its wholly owned
subsidiary, AMC, filed a consolidated U.S. Corporation Income Tax
Return for a 27-week 1986 short tax year, which commenced with
the date of the spinoff, June 23, 1986, and ended December 28,
1986. Petitioner’s 1986 return reported a $29,286,968 CNOL, all
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of which was attributable to petitioner. The CNOL was the result
of a commodities contract with LTV Steel Company that petitioner
claimed was worthless, shares of Olga Coal that petitioner
claimed were worthless, and a debt owed to petitioner by Olga
Coal that petitioner claimed was a bad debt.
On September 17, 1987, petitioner and AMC filed two Forms
1139 with respect to their 1986 tax year. On the first Form
1139, petitioner requested an $11,298,371 tentative carryback
adjustment attributable to the carryback of petitioner’s 1986
CNOL to petitioner’s (i.e., the affiliated group’s) 1984 and 1985
tax years. Petitioner attached to the application an application
for electronic funds transfer and a deposit ticket for a bank
account maintained by petitioner. Petitioner also included in
the application a copy of an amended consolidated return for 1984
filed by Interlake, which indicated that Interlake was the
successor in interest to the affiliated group. On the second
Form 1139, petitioner requested a $148,692 tentative carryback
adjustment attributable to the carryback of $174,931 of
investment tax credits and credits for increasing research
activity from petitioner’s (i.e., the group’s) 1984 year to
petitioner’s (i.e., the group’s) 1981 year. The credits were
freed up as a result of the carryback of the CNOL to 1984.
After reviewing petitioner’s requests, respondent informed
petitioner that it would not process the first Form 1139 because
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it did not take into account the tentative refund that had been
paid to Interlake with respect to the 1984 tax year. On October
26, 1987, petitioner filed a revised Form 1139 that took into
account the earlier tentative refund paid to Interlake. On the
revised Form 1139, petitioner requested tentative refund
allowances of $3,109,029 and $3,542,388 for 1984 and 1985,
respectively.
On November 1, 1987, 45 days after petitioner had filed its
original Form 1139 with respondent and less than a week after
petitioner filed the revised Form 1139, respondent paid tentative
refunds to petitioner of $148,692 for 1981, $3,109,029 for 1984,
and $3,524,388 for 1985. Neither Interlake nor any member of its
affiliated group received any portion of the tentative refunds
paid to petitioner.
Administrative Proceedings
Sometime after the tentative refunds were paid, respondent
determined to reverse the tentative refunds made to petitioner
and Interlake pending a determination whether petitioner or
Interlake continued as the common parent of the affiliated group
as a result of the 1986 restructuring and spinoff. Respondent
informed petitioner of his determination in a February 1, 1988,
letter and requested repayment within 10 days.
Petitioner responded in a February 26, 1988, letter stating
that it was entitled to the refunds, and that any issues
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regarding the refunds could be handled through regular audit
procedures. Petitioner refused to repay the refunds but recited
its understanding that collection activities would be stayed
pending the resolution of a technical advice request by
respondent’s revenue agent to the IRS National Office.
On July 31, 1989, respondent issued technical advice
memoranda in the form of private letter rulings (PLR), PLR
8946007 to petitioner and PLR 8946006 to Interlake. Both PLR’s
recite the steps taken in the restructuring of the affiliated
group and the spinoff, and state “both [petitioner] and
[Interlake] claim to be the continuation of the original group.”
The PLR’s conclude that the affiliated group of which petitioner
had been the common parent continued, with petitioner remaining
the common parent. The PLR’s relied on the general rule of
section 1.1502-75(d)(1), Income Tax Regs., which provides that an
affiliated group shall be considered as remaining in existence if
the common parent remains the common parent of at least one
subsidiary, whether or not the subsidiary was a member of the
affiliated group in the prior year. Since petitioner was the
common parent of an affiliated group that consisted of petitioner
and AMC, PLR 8946007 concluded that petitioner and AMC
represented the continuation of the affiliated group. PLR
8946006 concluded that Interlake and its subsidiaries composed a
new affiliated group. The immediate significance of respondent’s
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conclusion that petitioner was the continuing common parent of
the affiliated group was that Interlake’s postspinoff losses were
subject to the separate return limitations (SRLY) rules of
section 1.1502-21(c), Income Tax Regs., which, among other
things, provide limits on net operating loss carrybacks. See
Sec. 1.1502-21(c)(2), Income Tax Regs.
Notice of Deficiency and Stipulation of Settled Issues
On March 15, 1994, respondent issued petitioner a notice of
deficiency reflecting the positions taken in the PLR’s.
Respondent determined that petitioner was the continuing common
parent of the affiliated group and revised petitioner’s income on
the basis of a 52-week 1986 tax year rather than a 27-week tax
year as reported on petitioner’s 1986 return. Respondent
disallowed the carrybacks to 1981 and 1984, determining that
petitioner did not sustain a CNOL in 1986 as claimed by
petitioner in its applications for tentative carryback
adjustments. The 1986 CNOL was disallowed in full.
In addition to 1981 and 1984, the notice of deficiency
included deficiencies for 1974 through 1978, 1980, and 1983.
Respondent disallowed consolidated investment credit carrybacks
from 1978 to 1975 and 1974. Respondent disallowed a consolidated
investment credit carryback from 1979 to 1976, a consolidated
foreign tax credit carryback from 1979 to 1977, a consolidated
foreign tax credit carryback from 1980 to 1978, a consolidated
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net operating loss carryback from 1983 to 1980, a consolidated
investment credit carryover from 1979 to 1980, and consolidated
investment, jobs, qualified research, and energy credit
carrybacks from 1983 to 1980. For 1981, respondent determined a
deficiency resulting from the disallowance of consolidated net
operating loss carrybacks from 1982, consolidated qualified
research credit carrybacks from 1984, consolidated investment
credit carrybacks from 1982 and 1983, and consolidated general
business credit carrybacks from 1984. Respondent made several
determinations for 1983, including disallowing a claimed section
162 expense, ordinary losses realized on the liquidation and
dissolution of Erie Mining Company, a subsidiary, disallowing a
consolidated net operating loss carryback from Interlake’s 1986
tax year, and disallowing other carrybacks and carryovers. With
respect to 1984, respondent disallowed a trade or business
expense, charitable contributions, the net operating loss carried
back from 1986, and disallowed other credits and carrybacks.
On May 16, 1994, petitioner filed a petition in which it
disputed all of respondent’s determinations. Paragraph 5v of the
petition alleges that respondent “erroneously determined that
* * * [petitioner] is the common parent of the affiliated group”.
Additionally, the petition alleges that the notice of deficiency
issued to petitioner was not issued to the appropriate
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representative of the affiliated group, depriving the Court of
jurisdiction.
Petitioner was represented by John M. Newman, Jr., and
Kenneth E. Updegraft, Jr. when it filed the petition. The
signatures of Messrs. Newman and Updegraft appear on the
petition. Messrs. Newman and Updegraft are partners in the same
law firm that represented petitioner and Interlake in the
preparation of the tax indemnification agreement.
After settlement discussions in which respondent agreed,
subject to the execution of a closing agreement, to treat
Interlake as the common parent of the affiliated group,
respondent issued a duplicate notice of deficiency to Interlake
on February 8, 1996. Interlake filed a petition on May 1, 1996,
and the case was assigned docket No. 8258-96. Interlake was
represented by Messrs. Newman and Updegraft when it filed that
petition. The signatures of Messrs. Newman and Updegraft appear
on Interlake’s petition.
On December 4, 1997, respondent entered into a stipulation
of settled issues with petitioner. Paragraph 1 states that
Interlake is the continuing common parent of the affiliated
group; paragraphs 2 through 8 provide that petitioner is allowed
an investment tax credit carryback from 1982 to 1981 which
resulted in an increased deficiency for 1980, deductions for
capital loss carrybacks from 1986 to 1984 and 1983, a net
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operating loss carryback from Interlake’s 1986 year to 1983, a
deduction for a net operating loss carryback from petitioner’s
1986 year to 1984, general business credit carrybacks from
Interlake’s 1986 year to 1984 and 1983; a general business
carryback from petitioner’s 1986 year to 1984, a foreign tax
credit carryback from Interlake’s 1986 tax year to 1984.
Paragraph 9 provides that all other issues raised by the
petition, including the contention in the petition “relating to
jurisdiction”, are conceded by petitioner.
Paragraph 10 provides that petitioner would be liable for
“deficiencies in income tax in the amount of $1,709,109 for the
taxable year ended December 27, 1981, and $3,109,029 for the
taxable year ended December 30, 1984," if the tentative refunds
petitioner received on November 1, 1987, “do not represent a
rebate to Interlake.”
Petitioner continued to be represented by Messrs. Newman and
Updegraft when it entered into the stipulation of settled issues.
Mr. Newman’s signature appears on the stipulation of settled
issues.
On September 28, 1998, petitioner filed a chapter 11
petition with the United States Bankruptcy Court. On January 11,
1999, the proceedings in the Tax Court were stayed pursuant to 11
U.S.C. section 362 (2002).
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Interlake v. Commissioner
On March 18, 1999, the Court decided Interlake Corp. v.
Commissioner, 112 T.C. 103 (1999), on cross-motions for summary
judgment. In the stipulation of facts and stipulation of settled
issues in that case, the parties thereto, namely, Interlake and
respondent, agreed that Interlake was the common parent of the
affiliated group after the restructuring. Respondent also
conceded that a refund paid to the “wrong taxpayer, or to an
unauthorized recipient of the taxpayer”, is a nonrebate refund
that may not be taken into account in computing a deficiency.
Respondent having made the foregoing concessions, the only issue
for decision was whether the tentative refunds paid to petitioner
were rebates or nonrebates to Interlake for purposes of computing
the affiliated group’s deficiencies, if any, for 1981 and 1984
under section 6211. Section 1.1502-6(a), Income Tax Regs.,
provides that each member of an affiliated group is severally
liable for any taxes computed on the basis of a consolidated
return. The significance of the rebate/nonrebate distinction is
that if the refunds were held to be nonrebate refunds as to
Interlake, they could not be taken into account in computing the
affiliated group’s deficiencies and could not be recovered from
Interlake through the deficiency procedures.
The rebate/nonrebate character of the tentative refunds
turned on whether petitioner was “authorized” to receive the
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tentative refunds on behalf of the Interlake group. In deciding
whether the refunds were rebate or nonrebate, the Court examined
section 1.1502-78(b)(1), Income Tax Regs., which provides:
Any refund allowable under an application referred to
in paragraph (a) of this section shall be made directly
to and in the name of the corporation filing the
application, except that in all cases where a loss is
deducted from the consolidated taxable income or a
credit is allowed in computing the consolidated tax
liability for a consolidated return year, any refund
shall be made directly to and in the name of the common
parent corporation. The payment of any such refund
shall discharge any liability of the Government with
respect to such refund.
The Court determined that, for purposes of section 1.1502-
78(b)(1), Income Tax Regs., “the common parent” is the
corporation that has authority to act as an agent for the
affiliated group.
The Court held that petitioner did not have authority to act
for the group and receive the tentative refunds because, as the
parties–-Interlake and respondent–-had agreed in their
stipulation of settled issues, petitioner was no longer
affiliated with the group; therefore petitioner’s authority to
act for the group ceased when its affiliation was terminated.
The tentative refunds made to petitioner were “nonrebate refunds
with respect to * * * [Interlake] and the group for purposes of
computing the group’s deficiencies for 1981 and 1984.” Interlake
Corp. v. Commissioner, supra at 115. Therefore, the Court held
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that respondent could not recover the tentative refunds from
Interlake through the deficiency procedures.1
Interlake was represented by Messrs. Newman and Updegraft
during all phases of the proceedings before the Court in
Interlake v. Commissioner, supra.
Summary Assessment of the 1985 Tentative Refund
In March 2000, respondent made a “summary assessment” under
section 6213(b)(3) of the $3,542,388 tentative refund respondent
had paid petitioner for 1985. Section 6213(b)(3) provides that
1
On Sept. 26, 2000, respondent issued proposed regulations
that purport to clarify and supplement the rules under sec.
1.1502-77, Income Tax Regs., concerning the agent for an
affiliated group and the designation of a new agent for the
group. The proposed regulations also purport to clarify and
modify the rules concerning the proper party to apply for and
receive a refund attributable to a tentative carryback adjustment
under sec. 1.1502-78, Income Tax Regs. See secs. 1.1502-77 and
1.1502-78, Proposed Income Tax Regs., 65 Fed. Reg. 57755-57763
(Sept. 26, 2000). The preamble to the proposed regulations cites
the difficulties in applying the existing regulations to
situations in which an affiliated group continues following a
restructuring, as highlighted by Interlake Corp. v. Commissioner,
112 T.C. 103 (1999). The proposed amendments to sec. 1.1502-
77(a), Income Tax Regs., provide that the common parent for a
consolidated return year remains the agent for the group for that
year as long the common parent continues to exist. This rule is
to apply even if the common parent, for whatever reason, ceases
to be the common parent. The proposed regulations amend sec.
1.1502-78(a), Income Tax Regs., to provide that the common parent
for the carryback year should file an application under sec. 6411
for a tentative carryback adjustment with respect to a loss or
credit arising in a separate return year that may be carried back
to a consolidated return year, and any tentative refund must be
paid to the corporation that was the common parent for the
carryback year.
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the Commissioner may assess amounts refunded under section 6411
that are in excess of the overassessment attributable to the
carryback. The assessment is made as a deficiency as if it were
due to a mathematical or clerical error appearing on the return
and is not subject to the restrictions of section 6213(b)(2).
The tentative refund paid to petitioner for 1985 was the
subject of the bankruptcy proceedings, discussed infra, and is
not before the Court.
The Bankruptcy Proceedings
In the bankruptcy proceedings, respondent filed an unsecured
priority claim for taxes, interest, and penalties assessed
against petitioner from 1974 through 1980, 1982, 1983, and 1985
through 1991. With respect to 1981 and 1984, respondent sought
to have the bankruptcy court enforce the stipulation of settled
issues or, in the alternative, lift the stay with respect to
those years so respondent could enforce the stipulation in the
Tax Court. Petitioner objected to respondent’s claim with
respect to 1981, 1984, and 1985.
Petitioner was represented in the bankruptcy proceedings by,
among others, David J. Duez, who is not a partner of Messrs.
Newman and Updegraft. Petitioner argued in the bankruptcy
proceeding that the 1981, 1984, and 1985 tentative refunds were
nonrebate refunds that do not fall within the definition of a
“deficiency” under section 6211. Accordingly, petitioner argued,
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the only way respondent could recover the tentative refunds was
to bring an erroneous refund suit under section 7405, for which
the period of limitations had expired. Petitioner argued that
respondent’s failure to bring an erroneous refund suit under
section 7405 rendered the tentative refunds uncollectible as a
matter of law.
On December 7, 2001, the bankruptcy court issued an opinion
and order that granted respondent’s request for relief from stay
as to 1981 and 1984. The court recited section 362 of the
Bankruptcy Code, which provides that the bankruptcy court shall
grant relief from the automatic stay only for “cause”. In
deciding whether cause existed, the bankruptcy court weighed
three factors: (1) The prejudice that would result if the stay
were lifted; (2) the balance of hardships; and (3) the probable
success on the merits.
The bankruptcy court found that petitioner would not be
prejudiced because it submitted to the jurisdiction of the Tax
Court when it filed the petition and because, but for the
bankruptcy petition, a final decision would have already been
entered by the Tax Court for 1981 and 1984. The court also held
that the balance of hardships weighed in favor of respondent,
emphasizing that to deny the relief from the automatic stay would
be to deny respondent the benefit of his bargain with petitioner
in the stipulation of settled issues. The bankruptcy court
- 23 -
predicted that respondent would prevail in the Tax Court because
of the “great importance placed by the Tax Court upon enforcing
stipulations entered into in deficiency proceedings.” According
to the bankruptcy court, allowing the parties to conclude
litigation with respect to 1981 and 1984 tax years in the Tax
Court would “provide finality as to those years.”
With respect to 1985, the bankruptcy court opined that the
refund paid in that year was not collectible by summary
assessment. The court relied on Interlake Corp. v. Commissioner,
112 T.C. 103 (1999), to hold that the refund paid to petitioner
was a nonrebate refund. As a nonrebate refund, there was no
“deficiency” within the meaning of section 6213(b)(3). According
to the bankruptcy court, because the nonrebate refund did not
fall within the section 6213(b) assessment procedures or the
section 6212 notice of deficiency procedures, the only recourse
for respondent would have been an action to recover an erroneous
refund under section 7405, for which the period of limitations
had expired.
On January 4, 2002, the United States filed a motion in the
bankruptcy court pursuant to Fed. R. Civ. P. 54(b), requesting
the bankruptcy court to certify for appeal its decision with
respect to the 1985 tentative refund. The motion explains that
district courts have jurisdiction to hear appeals from bankruptcy
court “final judgments, orders and decrees” pursuant to 28 U.S.C.
- 24 -
section 158. Under rule 54, a decision that resolves less than
all claims presented lacks finality as to each claim unless the
court directs the entry of final judgment as to one or more
claim. The motion requests the bankruptcy court to enter a final
judgment and certify for appeal its decision sustaining
petitioner’s objection as to the 1985 tentative refund. The
bankruptcy court has not acted on the motion.
In response to the bankruptcy court’s lifting of the stay
with respect to 1981 and 1984, respondent, on March 8, 2002,
filed a motion for entry of decision by this Court. Respondent’s
motion requests the Court to enter a decision in accordance with
the stipulation of settled issues in which petitioner agreed to
assume liability for the 1981 and 1984 tentative refunds in the
event the refunds were nonrebate refunds as to Interlake.
Change of Petitioner’s Representatives in This Proceeding
On December 17, 2001, Mr. Duez and his partners, Matthew P.
Larvick and Gregory G. Palmer, entered appearances on behalf of
petitioner in the case at hand. On January 16 and February 13,
2002, respectively, Messrs. Newman and Updegraft filed motions
for leave to withdraw as counsel for petitioner. On January 31
and February 13, 2002, the Court granted the motions to withdraw.
- 25 -
Positions of the Parties
Petitioner concedes it was liable to repay respondent the
tentative refunds but contends respondent is barred from
recovering the tentative refunds through the deficiency
procedures. According to petitioner, both the bankruptcy court
and this Court in Interlake Corp. v. Commissioner, supra, held
petitioner was not an authorized recipient of the tentative
refunds. Therefore, petitioner argues, the tentative refunds
were nonrebate refunds, and respondent’s resort to the deficiency
procedures to recover them is unavailing.
With respect to the stipulation of settled issues,
petitioner argues that an agreement of the parties may not confer
jurisdiction on the Court to address and order the payment of
items outside the Court’s jurisdiction. Inasmuch as nonrebate
refunds do not enter into the computation of a “deficiency”, and
our jurisdiction is limited to redetermination of deficiencies,2
petitioner contends we have no jurisdiction to enter a decision
on the stipulation of settled issues.
Petitioner also contends respondent is collaterally estopped
by the bankruptcy court’s opinion with respect to 1985 from
arguing that the tentative refunds with respect to 1981 and 1984
were not nonrebate refunds.
2
Of course, our jurisdiction includes other issues not
germane to the case at hand. See, e.g., sec. 6330(d).
- 26 -
Respondent contends respondent paid the tentative refunds to
the correct taxpayer pursuant to the procedures under section
6411. Respondent argues that when the tentative refunds were
subsequently disallowed, he could have recovered them through the
deficiency procedures, by filing a civil action to recover
erroneous refunds under section 7405, or by summarily assessing
the deficiencies under section 6213(b)(3).
Respondent argues he is not collaterally estopped from
arguing that the 1981 and 1984 refunds are not nonrebate refunds.
According to respondent, the issue litigated in the bankruptcy
court with respect to 1985 is not identical to the issue in the
case at hand. The issue in the bankruptcy court was whether a
nonrebate refund was subject to the summary assessment procedures
of section 6213(b)(3).
Respondent also contends collateral estoppel does not apply
because the bankruptcy court has not yet issued a final
appealable order. Respondent contends that final resolution in
the bankruptcy proceeding of petitioner’s tax liabilities for
1981, 1984, and 1985 depends on this Court’s entry of a decision
on the stipulation of settled issues.
The issue for decision in the case at hand is whether
respondent can use the deficiency procedures of sections 6211-
6215 to recover the tentative refunds respondent paid petitioner.
Petitioner argues the Court lacks jurisdiction to enter a
- 27 -
decision for respondent on the stipulation of settled issues.
According to petitioner, the tentative refunds were “nonrebate”
refunds that do not figure in the section 6211(a) definition of
“deficiency”, which includes only “rebate” refunds. Because the
refunds did not create a deficiency, petitioner’s argument goes,
the Court cannot enter decision on a stipulation of a matter over
which the Court lacks jurisdiction. The issue is complicated, so
we provide a brief overview before addressing it in detail.
Discussion
Rebate and Nonrebate Refunds
The Internal Revenue Code recognizes two types of refunds:
Rebate and nonrebate. O’Bryant v. United States, 49 F.3d 340,
342 (7th Cir. 1995). Rebate refunds are issued on the basis of a
substantive recalculation of a taxpayer’s tax liability, e.g.,
the amount of tax due is less than the tax shown on the return.
Sec. 6211(b)(2); O’Bryant v. United States, supra. If the
recalculation of tax liability is correct, the taxpayer may, of
course, retain the refund. However, sometimes the recalculation
of tax liability is incorrect, and the Commissioner must recover
the erroneous refund. Rebate refunds issued in error may be
recovered through the deficiency procedures of sections 6211-6215
or an action for recovery of an erroneous refund under section
7405.
- 28 -
Nonrebate refunds, on the other hand, are issued to
taxpayers because of clerical or computer errors, and they bear
no relation to a recalculation of tax liability. See O’Bryant v.
United States, supra; Clayton v. Commissioner, T.C. Memo. 1997-
327. A hallmark of nonrebate refunds is that, unlike rebate
refunds, nonrebate refunds are always erroneous. Examples of
nonrebate refunds are refunds issued because the Commissioner
credited a taxpayer’s payment twice or the Commissioner applied a
payment to the wrong tax year. The Commissioner is limited to
erroneous refund actions under section 7405 to recover nonrebate
refunds. The deficiency procedures are not available to the
Commissioner to recover nonrebate refunds because of the
definition of “deficiency” in section 6211(a): A “deficiency” is
the amount by which the tax actually imposed exceeds--
(1) the sum of
(A) the amount shown as the tax by the
taxpayer upon his return, if a return was
made by the taxpayer and an amount was shown
as the tax by the taxpayer thereon, plus
(B) the amounts previously assessed (or
collected without assessment) as a
deficiency, over--
(2) the amount of rebates, as defined in
subsection (b)(2), made. [Emphasis added.]
In Lesinski v. Commissioner, T.C. Memo. 1997-234, we held we do
not have jurisdiction over nonrebate refunds.
- 29 -
Petitioner contends the tentative refunds it received as the
result of the tentative carryback adjustments for 1981 and 1984
are nonrebate refunds that respondent cannot recover through the
deficiency proceedings. Petitioner argues the nonrebate
character of the tentative refunds because, on the basis of
Interlake Corp. v. Commissioner, 112 T.C. 103 (1999), and the
consolidated return regulation in effect when the tentative
refunds were paid in 1987, section 1.1502-78(b)(2), Income Tax
Regs., the former common parent of an affiliated group is not
authorized to receive the tentative refunds on the group’s
behalf.
What petitioner is trying to do in the case at hand is
litigate the merits of an issue the parties have already settled.
Despite petitioner’s entry into the stipulation, petitioner
apparently views our opinion in Interlake as providing an
argument too good to pass up. In any event, petitioner’s
argument is wrapped in a jurisdictional challenge, so we must
consider jurisdiction. After we explain why we have jurisdiction
to enter a decision based on the stipulation, we shall explain
why the tentative refunds were rebates insofar as petitioner is
concerned.
- 30 -
Jurisdiction
All Federal courts are courts of limited jurisdiction.
Willy v. Coastal Corp., 503 U.S. 131, 136-137, 117 (1992); Bender
v. Williamsport Area School Dist., 475 U.S. 534, 541 (1986).
The jurisdiction of this Court may be exercised only pursuant to
a specific statutory authorization that encompasses the
redetermination of deficiencies pursuant to section 6214(a).
Belloff v. Commissioner, 996 F.2d 607, 611 (2d Cir. 1993), affg.
T.C. Memo. 1991-350; Pen Coal Corp. v. Commissioner, 107 T.C.
249, 254 (1996).
Petitioner’s entry into a stipulation of settled issues
agreeing to a liability does not, standing alone, provide a
sufficient basis for the Court’s jurisdiction. We cannot enter a
decision pursuant to a stipulation to a matter over which we have
no jurisdiction. See United States v. Orr Constr. Co., 560 F.2d
765, 769 (7th Cir. 1977). Nor can our jurisdiction be enlarged
by agreement of the parties. Romann v. Commissioner, 111 T.C
273, 281 (1988); Freedman v. Commissioner, 71 T.C. 564 (1979);
see, e.g., Loftus v. Commissioner, 90 T.C. 845, 861 (1988), affd.
without published opinion 872 F.2d 1021 (2d Cir. 1989). This is
true of Federal courts generally, not just the Tax Court. Romann
v. Commissioner, supra (citing Bender v. Williamsport Area School
Dist., supra at 541). Before the Court can enter decision on the
- 31 -
stipulation of settled issues, we must determine that we have
jurisdiction over the matter to which the parties stipulated.
The Notice of Deficiency
The Court’s jurisdiction to redetermine a deficiency depends
upon the issuance of a valid notice of deficiency and a timely
filed petition. Rule 13(a),(c); Monge v. Commissioner, 93 T.C.
22, 27 (1989); Normac, Inc. v. Commissioner, 90 T.C. 142, 147
(1988). In the usual case, the Court will not look behind the
notice of deficiency to examine the evidence used by respondent
or the circumstances surrounding the determination.3 See
Petzoldt v. Commissioner, 92 T.C. 661, 687-688 (1989). This is
because a trial before the Tax Court is a proceeding de novo; our
redetermination of a taxpayer’s tax liability must be based on
the merits of the case and not on any previous record developed
at the administrative level. See Greenberg’s Express, Inc. v.
Commissioner, 62 T.C. 324, 327-328 (1974). Moreover, even where
a taxpayer has made a showing that casts doubt on the validity of
respondent’s determination, the notice is generally not rendered
void, and it remains sufficient to vest this Court with
jurisdiction. See Suarez v. Commissioner, 58 T.C. 792, 814
(1972). Once vested, our jurisdiction is not affected by
subsequent events and remains unimpaired until we decide the
3
An exception to the rule, not here at issue, is when the
Commissioner alleges that the taxpayer has received unreported
income. See Johnston v. Commissioner, T.C. Memo. 2000-315.
- 32 -
case. See GAF Corp. v. Commissioner, 114 T.C. 519, 525 (2000);
Duggan v. Commissioner, 21 B.T.A. 740 (1930).
In the case at hand, petitioner contends that the notice of
deficiency is invalid because “respondent cannot recover
nonrebate refunds through the deficiency procedures; that is, by
issuing a notice of deficiency.” Petitioner says the tentative
refunds it received were nonrebate refunds and then leaps to the
conclusion that we have no jurisdiction to enter a decision on
the basis of the stipulation because nonrebate refunds do not
enter the formula for deficiencies, and the stipulation speaks of
a “deficiency”. Petitioner points to our opinion in Interlake
Corp. v. Commissioner, supra, and the bankruptcy court’s opinion,
both of which said that petitioner, as the former common parent
of the affiliated group, was an “unauthorized recipient” of the
tentative refunds. The problem with petitioner’s theory is that
it assumes respondent never determined a deficiency with respect
to the tentative refunds.4 Petitioner’s assumption ignores the
factual and legal circumstances surrounding the identification of
the common parent and the issuance of the notice of deficiency.
Respondent’s Determination
Section 6212(a) provides that if the Commissioner
“determines” a deficiency, he is authorized to send notice of the
4
Respondent also determined deficiencies against petitioner
for 1974-78, 1980, and 1983.
- 33 -
deficiency to the taxpayer. Under section 6213(a), the taxpayer
may then file a petition with the Court, within a specified time,
for a “redetermination” of the deficiency. Thus, “it is not the
existence of a deficiency but the Commissioner’s determination of
a deficiency that provides a predicate for Tax Court
jurisdiction.” Hannan v. Commissioner, 52 T.C. 787, 791 (1969)
(citing H. Milgrim & Bros., Inc. v. Commissioner, 24 B.T.A. 853
(1931); O'Meara v. Commissioner, 11 B.T.A. 101, 109 (1928),
reversed on other issues 34 F.2d 390 (10th Cir. 1929)). “Indeed,
were this not true, then the absurd result would be that in every
case in which this Court determined that no deficiency existed,
our jurisdiction would be lost.” Id.
In the case at hand, when respondent issued the notice of
deficiency to petitioner, he made several determinations.
Prerequisite to the notice was the determination that petitioner
was the continuing common parent of the affiliated group, which,
after the restructuring, consisted of petitioner and AMC.
A central feature of the consolidated return regulations is
the role of the common parent as the exclusive agent of the group
with respect to all procedural matters.5 See S. Pac. Co. v.
Commissioner, 84 T.C. 395, 401 (1985). Section 1.1502-77(a),
5
The unique treatment of the common parent is not limited to
procedural matters. For example, the common parent’s taxable
year determines the taxable year of the other members of the
group under sec. 1.1502-76, Income Tax Regs.; the common parent
is not subject to the basis adjustment rules under sec. 1.1502-
32, Income Tax Regs., and the common parent is not subject to the
separate return limitation year rules under sec. 1.1502-
1(f)(2)(i), Income Tax Regs.
- 34 -
Income Tax Regs., provides that “the common parent * * * shall be
the sole agent for each subsidiary in the group, duly authorized
to act in its own name in all matters relating to the tax
liability for the consolidated return year.” In S. Pac. Co. v.
Commissioner, supra at 401, we held that the regulation
contemplates that the common parent’s authority to act as the
agent for an affiliated group arises on a year-by-year basis.
For any year for which a consolidated return is filed, the common
parent for that year is the exclusive agent with respect to any
procedural matters that may arise in connection with the group’s
tax liability for that year. Id.; see also Union Oil Co. v.
Commissioner, 101 T.C. 130 (1993).
Because of the importance of the identity of the common
parent, the continuation of the common parent is critical to the
continuation of the affiliated group. The rules for determining
when an affiliated group continues to exist are set forth in
section 1.1502-75(d), Income Tax Regs. Section 1.1502-75(d)(1),
Income Tax Regs., provides the general rule that a group shall
continue if the common parent remains as the common parent and at
least one subsidiary remains affiliated with it, whether or not
the subsidiary was a member of the group in a prior year, and
whether or not one or more corporations have ceased to be
subsidiaries at any time after the group was formed.
Sections 1.1502-75(d)(2) and (3), Income Tax Regs., provide
exceptions to the general rule. Under section 1.1502-
- 35 -
75(d)(2)(ii), Income Tax Regs., a group continues if its common
parent transfers substantially all its assets to a subsidiary
after which the common parent goes out of existence and there
remain one or more chains of includable corporations with a
common parent that was a member of the group prior to the date
the former common parent ceased to exist.
The reverse acquisition rules of section 1.1502-75(d)(3),
Income Tax Regs., provide that an affiliated group will not
terminate where the stock or assets of the common parent are
acquired by another corporation in exchange for the stock of that
other corporation, provided the shareholders of the acquired
common parent, after the acquisition, own more than 50 percent of
the value of the acquiring corporation’s stock. Sec. 1.1502-
75(d)(3)(i), Income Tax Regs. If the acquiring corporation,
before the acquisition, is a common parent of an affiliated
group, that group is deemed to terminate even though the
acquiring corporation/common parent continues to exist for all
purposes except those of the consolidated return provisions.
Section 1.1502-75(d)(3)(i), Income Tax Regs., further provides
that, after the acquisition, the acquiring corporation is to be
treated as the common parent of the group that is deemed to
survive the reverse acquisition. S. Pac. Co. v. Commissioner,
supra at 403.
- 36 -
In the case at hand, the restructuring and spinoff do not
fit either exception to the general rule. Section 1.1502-
2(d)(2)(ii), Income Tax Regs., requires that the common parent
cease to exist following the restructuring and petitioner’s
existence has, of course, continued. Nor did the restructuring
constitute a reverse acquisition within the meaning of section
1.1502-75(d)(3), Income Tax Regs., which contemplates situations
in which the acquiring and acquired corporations were not
affiliated prior to the restructuring. The restructuring in the
case at hand was an intra-group transaction, rather than an
inter-group transaction. See Rev. Rul. 85-152, 1985-2 C.B. 261.
Respondent, in the statutory notice to petitioner,
recharacterized the restructuring and spinoff and applied the
general rule of section 1.1502-75(d)(1), Income Tax Regs., to
determine that the affiliated group continued with petitioner as
the common parent, with AMC as its only subsidiary. Pursuant to
the determination that petitioner was the continuing common
parent of the group, respondent determined that petitioner’s 1986
tax year was 52 weeks, not 27 weeks as claimed by petitioner.
Respondent determined that Interlake was the common parent of a
new affiliated group that consisted of all of the former
subsidiaries of petitioner, except AMC, and that Interlake and
the continuing members of its new affiliated group had 2 short
taxable years in 1986. Respondent also determined that the
- 37 -
commodities contract with LTV, the shares in Olga Coal, and the
debt owed to petitioner by Olga Coal were not worthless as
petitioner claimed on its 1986 return. On the basis of the
foregoing determinations, respondent determined that petitioner
did not sustain a CNOL in 1986 as claimed on its 1986 return.
Accordingly, respondent disallowed the carrybacks to 1981 and
1984 and issued a notice of deficiency to recover the tentative
refunds.
Respondent’s treatment of petitioner as the continuing
common parent of the affiliated group and disallowance of the
claimed CNOL were “determinations” under section 6212(a) in the
same sense that respondent’s disallowance of the various credit
carrybacks, trade or business expenses, and charitable
contributions for 1974-78, 1980-81, and 1983-84 were
determinations. See supra pp. 14-15. Thus, the Court was vested
with jurisdiction when petitioner filed the timely petition, and
our jurisdiction has not been adversely affected by the
subsequent litigation in Interlake Corp. v. Commissioner, 112
T.C. 103 (1999), and the bankruptcy proceeding. Once we have
jurisdiction, it remains unimpaired until we decide the
controversy. GAF Corp. v. Commissioner, 114 T.C. 519 (2000). We
hold we have jurisdiction to enter a decision based on the
stipulation of settled issues.
- 38 -
Despite the foregoing, petitioner insists that the
bankruptcy court’s conclusion that the 1985 tentative refund was
a nonrebate refund has somehow stripped the Court of
jurisdiction. Ignoring Hannan v. Commissioner, 52 T.C. 787
(1969), petitioner is essentially asserting that we have no
jurisdiction because there is no deficiency. According to
petitioner, there is no deficiency because the bankruptcy court’s
opinion that the 1985 tentative refund is a nonrebate refund
should be extended to the 1981 and 1984 tentative refunds.
Petitioner further contends that, under the collateral estoppel
doctrine, respondent is precluded from litigating whether the
tentative refunds for 1981 and 1984 are nonrebate refunds.
We disagree with petitioner: we hold that petitioner may not
rely on the doctrine of collateral estoppel to preclude
respondent from litigating whether the tentative refunds
petitioner was paid are nonrebate refunds. Not only have the
technical requirements of collateral estoppel not been satisfied,
but–-even if they had been satisfied-–petitioner’s change of
position would invoke the “injustice” exception to collateral
estoppel. Having concluded that petitioner’s collateral estoppel
argument does not preclude us from considering the merits of
petitioner’s claim, we also disagree with petitioner that the
tentative refunds it applied for and received are nonrebate
- 39 -
refunds. We shall therefore enter decision in accordance with
the stipulation of settled issues that petitioner agreed to.
Collateral Estoppel
Petitioner argues that respondent is collaterally estopped
by the bankruptcy court’s opinion for the taxable year 1985 from
litigating whether the tentative refunds for taxable years 1981
and 1984 were “rebates” within the meaning of section 6211(b).6
We disagree. In the discussion of estoppel issues that follows,
we will have primary recourse to opinions of the Court of Appeals
for the Seventh Circuit, to which an appeal in the case at hand
would ordinarily lie.
“Collateral estoppel, also called ‘issue preclusion’, refers
to the simple principle that later courts should honor the first
actual decision of a matter that has been actually litigated.”
Chicago Truck Drivers v. Century Motor Freight, Inc., 125 F.3d
526, 530 (7th Cir. 1997) (citing 18 Wright et al., Fed. Prac. P.,
sec. 4416, at 136 (1981 & Supp. 1997)). The doctrine ensures
that the determination of an issue by a court of competent
jurisdiction will be conclusive in subsequent suits. Id.
Collateral estoppel applies when (1) the issue sought to be
precluded is the same as in the prior action; (2) that issue was
actually litigated; (3) the determination of the issue was
6
Petitioner does not argue the preclusive effect of
Interlake Corp. v. Commissioner, 112 T.C. 103 (1999).
- 40 -
essential to the final judgment; (4) the party against whom
estoppel is invoked was fully represented in the prior action.
La Preferida, Inc. v. Cerveceria Modelo, 914 F.2d 900, 906 (7th
Cir. 1990). The application of collateral estoppel in the case
at hand is not justified because prerequisites (1), (2), and (3)
are not satisfied.
Collateral estoppel does not apply to the case at hand
because we are deciding an issue that was not litigated in and
decided by the bankruptcy court. According to petitioner, the
issue decided by the bankruptcy court was whether tentative
refunds paid to petitioner “after it left the group were
nonrebate refunds”. Petitioner contends that the issue in the
case at hand is “precisely identical” to the issue decided by the
bankruptcy court and that “the facts relating to [petitioner’s]
authority to receive the refunds have now been conclusively
established.” We disagree.
The issue the bankruptcy court was asked to decide was
whether the 1981, 1984, and 1985 tentative refunds were
collectible. The bankruptcy court found that the 1985 tentative
refund was not collectible because, under Interlake Corp. v.
Commissioner, supra, it was a nonrebate refund that respondent
could recover only in an erroneous refund action under section
7405, for which the period of limitations had expired. The
linchpin of the bankruptcy court’s nonrebate conclusion was that
- 41 -
petitioner was the former common parent of the prespinoff
affiliated group when it was paid the tentative refunds. Under
the bankruptcy court’s interpretation of Interlake Corp. v.
Commissioner, 112 T.C. 103 (1999), a tentative refund paid to the
former common parent of an affiliated group is a nonrebate refund
as to the former common parent.
The problem with petitioner’s theory is that it fails to
acknowledge that the bankruptcy court’s nonrebate conclusion is
premised on respondent’s stipulation that Interlake was the
common parent of the affiliated group at the time the tentative
refunds were paid to petitioner. This is neither a fact nor a
legal conclusion we are bound to accept. It is well settled that
collateral estoppel does not apply where the issue sought to be
precluded was determined in a stipulation. Levinson v. United
States, 969 F. 2d 260, 264 (7th Cir. 1992). The rationale behind
the rule is that stipulated matters have not been adjudicated on
the merits. Id.; see also In re Cassidy, 892 F.2d 637, 640 n.1
(7th Cir. 1990) (citing United States v. Intl. Bldg. Co., 345
U.S. 502, 506 (1953) (observing that judgments based on
stipulated facts have no collateral estoppel effect, especially
in tax cases, because facts so determined are not actually
litigated as the doctrine requires)). In the case at hand,
petitioner’s status at the time the tentative refunds were paid
has not been adjudicated. We therefore disagree with
- 42 -
petitioner’s contention that “the facts relating to
[petitioner’s] authority to receive the refunds have now been
conclusively established.”
We do not give collateral estoppel effect to the bankruptcy
court’s opinion because the issue we are being asked to decide is
not whether tentative refunds paid to the “former common parent”
of an affiliated group are rebate or nonrebate refunds. Instead,
the issue we are being asked to decide is whether we have
jurisdiction over tentative refunds paid to a corporation when
the affiliated group, of which the corporation had been the
common parent, underwent a restructuring and the identity of the
common parent of the prerestructured group was not determined at
the time the tentative refunds were paid. This is not the issue
that was litigated in and decided by the bankruptcy court. While
we agree with petitioner, as we stated in Lesinski v.
Commissioner, T.C. Memo. 1997-234, that the Court does not have
jurisdiction over nonrebate refunds, and we also agree that
Interlake Corp. v. Commissioner, supra, is precedent for
analyzing tentative refunds in the rebate/nonrebate framework, we
disagree with petitioner that the bankruptcy court’s nonrebate
conclusion necessarily forecloses the Court’s jurisdiction in the
case at hand.
To decide whether we have jurisdiction, we must consider the
payment of the tentative refunds to petitioner in light of the
- 43 -
facts as they actually existed when the tentative refunds were
paid, rather than how they were assumed to exist by the
bankruptcy court. Only when we consider the facts as they
existed at the time of payment can we conclusively and reliably
characterize the tentative refunds as either rebate or nonrebate
refunds. For the same reason, we do not believe that Interlake
Corp. v. Commissioner, supra, is dispositive of the case at hand.
In Interlake Corp., we held that respondent could not
recover from Interlake the tentative refunds paid to petitioner.
Respondent conceded that refunds paid to the “wrong taxpayer” or
an “unauthorized representative of the taxpayer” were nonrebate
refunds and that Interlake was the continuing common parent of
the prespinoff affiliated group. We reasoned that petitioner, as
the former common parent of the prespinoff affiliated group as
conceded by respondent, was not an “authorized recipient” of the
tentative refunds under section 1.1502-78(b), Income Tax Regs.
Accordingly, the tentative refunds were nonrebate refunds as to
Interlake which could not be included in the computation of a
deficiency as to Interlake. Id. at 115. Our reasoning was based
on two assumptions premised on respondent’s concession of the
common parent issue: (1) That Interlake was the continuing
common parent of the prespinoff affiliated group (and petitioner
was the common parent of a new postsplit affiliated group), and
(2) that Interlake’s status as the common parent of the
- 44 -
prespinoff group was settled at the time the tentative refunds
were issued. Having assumed that petitioner was the former
common parent of the group, we held it no longer had “authority
to act for the group” and receive the tentative refunds on the
group’s behalf. Id. When respondent paid the tentative refunds
to the former common parent, he paid the wrong taxpayer. Id.
In the case at hand, respondent is not attempting to recover
the tentative refunds from a taxpayer who never received them,
actually or constructively. We are therefore not willing to make
the same assumptions we made in Interlake Corp. v. Commissioner,
supra. Rather than assume the identity of the group that was the
continuation of the prespinoff group was clear when the tentative
refunds were paid because of respondent’s concession 10 years
later, we examine the issue in light of the facts as they
actually existed when the tentative refunds were paid.
Consistent with this premise, we accordingly decide whether the
tentative refunds issued to petitioner were rebates when it was
unclear to respondent whether petitioner or Interlake was the
continuing common parent of the prespinoff affiliated group.
We are thus presented with an issue different from the one that
was opined on by the bankruptcy court.
The bankruptcy court’s treatment of the tentative refunds
paid for 1981 and 1984 confirms our conclusion that the
bankruptcy court did not decide the issue we are being asked to
- 45 -
decide in the case at hand. Collateral estoppel applies only to
issues actually decided in a prior proceeding. Petitioner asked
the bankruptcy court to find that the tentative refunds for 1981,
1984, and 1985 were uncollectible nonrebate refunds. The
bankruptcy court opined the tentative refund for 1985 was
uncollectible but specifically excluded the 1981 and 1984
tentative refunds from its conclusion, leaving the final
determination with respect to the 1981 and 1984 tentative refunds
to this Court. According to the bankruptcy court, litigation in
this Court with respect to 1981 and 1984 would “provide finality
as to those years”. The bankruptcy court clearly assumed the
Court has jurisdiction to enter a decision based on the
stipulation of settled issues and did not intend that its opinion
on the 1985 tentative refund would be accorded preclusive effect
as to the 1981 and 1984 tentative refunds, or that it would be
turned into an argument about jurisdiction that, according to
petitioner, respondent is collaterally estopped from challenging.
The application of collateral estoppel to the case at hand
is also inappropriate because the bankruptcy court’s decision
lacks finality. “To be ‘final’ for purposes of collateral
estoppel the decision need only be immune, as a practical matter,
to reversal or amendment.” Miller Brewing Co. v. Jos. Schlitz
Brewing Co., 605 F.2d 990, 996 (7th. Cir. 1979). “Whether a
judgment * * * [is] ‘final’ in the sense of precluding further
- 46 -
litigation of the same issue, turns upon such factors as the
nature of the decision (i.e., that it was not avowedly
tentative), the adequacy of the hearing, and the opportunity for
review.” Id. (quoting Lummus Co. v. Commonwealth Oil Refining
Co., 297 F.2d 80, 89 (2d Cir. 1961)).
The bankruptcy court’s opinion is not final because it is
avowedly tentative and interlocutory. The bankruptcy court’s
opinion is avowedly tentative because it refused to rule on the
1981 and 1984 tentative refunds, allowing the parties to conclude
litigation with respect to 1981 and 1984 in this Court to
“provide finality as to those years”. In addition, the
bankruptcy court’s opinion is interlocutory, not final, because
it has not issued an appealable order. On January 4, 2002, the
United States filed a motion in the bankruptcy court to certify
its opinion for appeal under Fed. R. Civ. P. 54(b). The
bankruptcy court has yet to act on the motion. We recognize that
finality for collateral estoppel purposes does not necessarily
require a final decision. See Coleman v. Commissioner 16 F.3d
821 (7th Cir. 1994), affg. T.C. Memo. 1990-99. However, we do
not believe the bankruptcy court’s opinion is sufficiently final
because respondent has not even had the opportunity to appeal the
decision with respect to 1985; the bankruptcy court has not acted
on respondent’s rule 54(b) motion. The lack of an opportunity
for review and the avowedly tentative nature of the bankruptcy
- 47 -
court’s opinion, two of the three factors articulated in Lummus
in determining finality, are missing. We conclude the bankruptcy
court’s opinion is not sufficiently final to be accorded
preclusive effect.
The “Injustice Exception” to Collateral Estoppel
Even if the technical requirements of collateral estoppel
had been satisfied in the case at hand--they were not–-we would
not give preclusive effect to the bankruptcy court’s opinion
because of concerns for justice and fair dealing. In the case at
hand, to give credence to petitioner’s contentions would
implicate the “manifest injustice” exception to collateral
estoppel.
We acknowledge that the exception to collateral estoppel for
“manifest injustice” is applied by courts with “great caution” to
ensure that collateral estoppel’s goals of assuring finality and
conserving judicial resources are not frustrated. 18 Wright
et al., Fed. Practice and Procedure, sec. 4426; see also
RecoverEdge v. Pentecost, 44 F.3d 1284, 1290-1291 n. 12 (5th Cir.
1995). Nevertheless, this is an appropriate case for the
“injustice” exception because the issue of the Court’s
jurisdiction has not been decided, despite petitioner’s
assertions to the contrary.
- 48 -
Collateral estoppel should not be applied where to do so
would work a “manifest injustice”. See Grantham v. McGraw-Edison
Co., 444 F.2d 210, 217 (7th Cir. 1971); see also 18 Wright
et al., Fed. Prac. P., secs. 4424, 4426 (2002). The
determination of “‘whether or not application of collateral
estoppel is fair depends upon a case by case analysis,’ and * * *
courts should be sensitive to the ‘practical realities which
surround the parties’.” Chicago Truck Drivers v. Century Motor
Freight, Inc., 125 F.3d at 531 (quoting Butler v. Stover Bros.
Trucking Co. 546 F.2d 544, 551 (7th Cir. 1977)). A situation in
which the application of collateral estoppel produces an unjust
result is when the party sought to be precluded did not have an
adequate incentive to obtain a full and fair adjudication in the
initial action. See Ferrell v. Pierce, 785 F.2d 1372, 1384-1385
(7th Cir. 1985); see also Restatement, Judgments 2d, sec. 28(5)
(subsection (c)) (1980).
In Ferrell v. Pierce, supra, a District Court in a class
action interpreted a decree controlling HUD mortgage default
relief practices to require the use of a particular rule when
calculating the date of default in all pending and future cases;
no appeal was taken. In a subsequent contempt proceeding, the
same issue arose with respect to retroactive rather than future
application of the same rule. The Court of Appeals for the
Seventh Circuit ruled that issue preclusion did not foreclose
- 49 -
reconsideration of the earlier rulings. Id. at 1385. The court
found that the stakes were much higher with respect to
retroactive relief and that in the prior cases, HUD did not have
much incentive to appeal the District Court determinations. Id.
The significance of the earlier determinations was not
sufficiently foreseeable to justify the application of collateral
estoppel. Id. The court concluded that it would have been
inequitable to bar HUD from litigating the issue. Id.
Considering the practical realities of the case at hand,
application of collateral estoppel would produce an unjust result
because it would enable petitioner to employ its change of
position to prevent respondent from ever litigating the Court’s
jurisdiction. In paragraph 9 of the stipulation of settled
issues, petitioner expressly conceded the jurisdictional issue it
now raises; until this proceeding petitioner never indicated that
it was changing its mind. Respondent clearly did not have the
opportunity or the inclination to litigate this Court’s
jurisdiction in the bankruptcy court. Based on the stipulation,
respondent reasonably believed any challenge to the Court’s
jurisdiction was settled and had no reason to foresee
petitioner’s change of position and raise the issue in the
bankruptcy court. Yet petitioner now contends respondent is
collaterally estopped from litigating the nonrebate issue, the
centerpiece of petitioner’s jurisdictional argument. Since the
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nonrebate issue is off limits under petitioner’s theory,
respondent and the Court would be effectively precluded from ever
considering the Court’s own jurisdiction.
Precluding any consideration of the Court’s jurisdiction
would produce an unjust result. Even though petitioner
represented in the stipulation of settled issues that it would
not raise the jurisdictional issue, petitioner’s change of
position is not necessarily the source of the injustice. The
source of the injustice is petitioner’s attempt to use the
opinion of the bankruptcy court, which quite clearly was never
presented with the issue of how its nonrebate finding might
affect this Court’s jurisdiction, to prevent any adjudication on
the merits of petitioner’s jurisdictional argument. Even if all
the requirements for collateral estoppel were satisfied in the
case at hand, it would not be in the interests of justice to
apply the doctrine because respondent did not have a full and
fair opportunity to litigate the issue in the bankruptcy court.
We conclude that petitioner may not use the doctrine of
collateral estoppel to prevent the Court from considering
whether the 1981 and 1984 tentative refunds paid to petitioner
were nonrebate refunds.
Tentative Refunds as Rebate Refunds
Petitioner contends the tentative carryback adjustments it
received from respondent are nonrebate refunds because, as the
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former common parent of the affiliated group, it was an
“unauthorized recipient” of the tentative refunds. We recall
that nonrebate refunds are paid to taxpayers because of clerical
or computer errors by the Commissioner and are unrelated to the
recalculation of tax liability, whereas rebate refunds are paid
because of a recalculation of tax. See O’Bryant v. United
States, 49 F.3d at 342; Clayton v. Commissioner, T.C. Memo. 1997-
327. To the extent that tentative carryback adjustments are even
susceptible to a rebate/nonrebate analysis, they are the essence
of rebate refunds; they are paid because the taxpayer’s
substantive recalculation of an earlier year’s tax liability when
a later year’s tax attribute is carried back. As the following
discussion demonstrates, respondent paid the tentative refunds to
petitioner on the basis of petitioner’s recalculation of the
group’s 1981 and 1984 tax years, and not because of any clerical
or computer error.
Under section 6411(a), a taxpayer who incurs an NOL may
apply for a tentative refund based on a tentative carryback
adjustment of the taxes for the taxable years prior to the NOL
year that are affected by the carryback of the NOL. The
application must contain specific information and be filed within
12 months from the end of the year in which the NOL was
sustained. Id. Although obtaining a cash infusion by way of a
refund is the objective, an application for a tentative carryback
- 52 -
adjustment does not constitute a claim for a refund; if the
tentative refund is disallowed, no action to obtain it may be
commenced in any court. Secs. 1.6411-1(b)(2), 1.6411-3(c),
Income Tax Regs. Following denial of a tentative carryback
adjustment, the taxpayer’s only recourse is to file a formal
claim for refund, sec. 1.6411-3(c), Income Tax Regs., with the
delay attending its likely denial by the Commissioner, which can
be vindicated only through a refund suit in the United States
Court of Federal Claims or a Federal District Court.
Upon receiving an application for a tentative refund, the
Commissioner is required within a 90-day period to undertake a
“limited examination” of the application to discover omissions
and errors of computation, determine the amount of the decrease
in the tax occasioned by the carryback, and make the appropriate
credit or refund. See sec. 6411(b); sec. 1.6411-3, Income Tax
Regs.
The tentative refund provisions were designed to give
financially ailing taxpayers a quick infusion of cash without
subjecting the claim to the delay attending a formal examination,
see Pesch v. Commissioner, 78 T.C. 100, 115 (1982), as well as to
provide relief from the strict application of the annual
accounting period. Because of the limited time within which
respondent must act, if he is to act at all, on an application
for tentative carryback adjustment, the formal examination of
- 53 -
whether the taxpayer is entitled to retain the tentative refund
necessarily happens after the refund payment has been made. See
sec. 6501(k) (extending the period of limitations for the
carryback year where amounts have been refunded under section
6411).
When it turns out (or respondent determines after a more
leisurely examination) that a taxpayer is not entitled to retain
a tentative refund, respondent has three remedies to recover the
tentative refund. “Any one or more of the three available
methods may be used to recover any amount which was improperly
applied, credited, or refunded in respect of an application for a
tentative carryback adjustment.” Sec. 301.6213-1(b)(2)(ii),
Proced. & Admin. Regs.; see Baldwin v. Commissioner, 97 T.C. 704,
710 (1991); Pesch v. Commissioner, supra at 117; Midland
Mortgage Co. v. Commissioner, 73 T.C. 902, 905-906 (1980); Fine
v. Commissioner, 70 T.C. 684, 687-688 (1978). These three
methods are: (1) Assessment of the deficiency attributable to a
tentative carryback adjustment as if due to a mathematical error
under section 6213(b)(1); (2) civil action under section 7405; or
(3) notice of deficiency under section 6212. See Baldwin v.
Commissioner, supra at 710. The selection of the particular
remedy is within respondent’s discretion. Pesch v. Commissioner,
supra at 118.
- 54 -
In the case at hand, petitioner contends the deficiency
procedures are not available to respondent to recover the
tentative refunds on the ground that they are nonrebate refunds
because petitioner, as the former common parent, was an
“unauthorized recipient”.
Contrary to petitioner’s suggestion otherwise, respondent
was not sure who the “authorized representative” of the
affiliated group was when he paid the tentative refunds and was
not required to undertake to decide that question prior to paying
the tentative refunds. We therefore disagree that the tentative
refunds were paid to petitioner because of any mistake by
respondent that would give rise to petitioner’s receipt of a
nonrebate refund.
When the Commissioner receives an application for tentative
carryback adjustment, he is required within a 90-day period to
undertake a “limited examination” of the application. Sec.
6411(b). During the limited examination, the Commissioner is
expected to uncover ministerial and computational errors and
omissions. The limited examination is not designed to provide a
thorough review of all of the facts and statutory and regulatory
provisions pertaining to the taxpayer’s right to the refund.
Polachek v. Commissioner, 22 T.C. 858, 863-865 (1954). The
review of the facts and relevant statutory and regulatory
- 55 -
provisions happens after the tentative refund has been paid, when
the Commissioner conducts a formal examination.
Section 1.1502-78(b)(1), Income Tax Regs., provides that if
a member of an affiliated group applies for a tentative refund,
the refund “shall be made directly to and in the name of the
common parent corporation”. If the identity of the common parent
had been settled at the time the tentative refunds were issued,
we might agree with petitioner that a mistaken payment of the
tentative refunds to any other taxpayer would be a nonrebate
refund, not recoverable through the deficiency procedures. See
Interlake Corp. v. Commissioner, 112 T.C. at 114-115. Those are
not the facts of this case.
When respondent paid petitioner the tentative refunds,
respondent was not sure which group was the continuation of the
prespinoff affiliated group. That affiliated group had been
restructured so that petitioner, the common parent, became a
subsidiary and was spun off less than one month thereafter.
After the spinoff, both petitioner and Interlake were parents of
two different affiliated groups that both originated from the
prespinoff group. Respondent received applications for tentative
carryback adjustments from both petitioner and Interlake relating
to the 1986 tax year. Respondent paid both petitioner and
Interlake tentative refunds on the basis of the applications they
each submitted. Respondent was not required, during the 90-day
- 56 -
“limited examination” period, to try to determine which group
continued as the prespinoff affiliated group. That determination
required an application of the relevant regulations to the facts
of the restructuring and was appropriately left for the regular
examination. Respondent followed the requirements of the statute
and paid the tentative refunds to petitioner and Interlake well
within the 90-day period provided for in section 6411(b).
Respondent examined petitioner’s 1986 tax year after he paid
the tentative refunds and determined that petitioner did not
sustain the CNOL claimed on its 1986 return, and that petitioner
was the continuing common parent of the prespinoff affiliated
group. Respondent issued the notice of deficiency to petitioner
on the basis of the foregoing determinations. See sec. 1.1502-
77(a), Income Tax Regs. (providing that the notice of deficiency
shall be mailed only to the common parent).
We cannot identify any error, clerical or otherwise, made by
respondent in paying the tentative refunds to petitioner and then
attempting to recover them through a notice of deficiency when he
determined petitioner was not entitled to them. We have
consistently upheld the Commissioner’s right to proceed in this
manner.
In Pesch v. Commissioner, 78 T.C. 100 (1982), the taxpayers
contended that a tentative refund issued more than 90 days after
the application could not be recovered through the deficiency
- 57 -
procedures and that the Commissioner’s exclusive remedy was an
erroneous refund action under section 7405, for which the period
of limitation had expired. We held that a tentative refund paid
pursuant to section 6411 is a “rebate” because it is made on the
ground that the tax imposed is less than the amount of tax shown
on the taxpayer’s return. Pesch v. Commissioner, supra at 111.
We rejected the taxpayer’s contention that the Commissioner’s
remedies to recover tentative refunds issued after the 90-day
period provided in section 6411 are somehow limited. We noted
that section 6411 does not penalize the Commissioner for failure
to act on an application within 90 days and held that we would
not supply a penalty in the form of a bar against the
Commissioner determining a deficiency. Pesch v. Commissioner,
supra at 115. In so holding, we stressed the tentative nature of
refunds paid pursuant to section 6411 and concluded that any
action the Commissioner may take is not final. Accordingly, we
concluded that when the Commissioner allows and pays a tentative
carryback adjustment that he later determines was made in error,
the selection of the remedy to correct the error is within the
Commissioner’s discretion. Id. at 118.
In Baldwin v. Commissioner, 97 T.C. 704 (1991), the
taxpayers claimed an NOL for 1987 that they carried back to 1985
on an application for tentative carryback adjustment. The
taxpayers had not paid any tax in 1985 and requested that the
- 58 -
refund be applied against the unpaid tax liability. After paying
the tentative refund, the Commissioner determined that the
taxpayers did not sustain the NOL and issued a notice of
deficiency for 1985. The taxpayers filed a petition and then
filed a motion to dismiss for lack of jurisdiction because there
was no “deficiency”. The taxpayers argued that a credit
resulting from a tentative carryback adjustment is not a rebate
because it did not result from the return showing more tax than
was imposed. Baldwin v. Commissioner, supra at 708. We rejected
petitioner’s argument and held that the credit was made against
the taxpayer’s 1985 tax liability because the amount of tax
imposed after the NOL was carried back was less than the amount
shown on the return. We therefore concluded that the credit was
a rebate under section 6211(b)(2).
In Neri v. Commissioner, 54 T.C. 767 (1970), the
Commissioner issued tentative refunds on the basis of taxpayers’
applications for tentative carryback adjustments carrying back
NOLs sustained in 1963, 1964, and 1965 to 1959, 1961, and 1962,
respectively. The Commissioner subsequently issued a notice of
deficiency for 1959, 1961, and 1962 because the taxpayers, as
shareholders of an S corporation, were required first to apply
the NOLs to their gross income in each of the taxable years in
which the NOLs were sustained. Id. at 769. We rejected the
taxpayers’ contention that the summary assessment procedures were
- 59 -
the exclusive means by which respondent could recover tentative
refunds issued in error. We cited the committee report
accompanying the predecessor to section 6411, which stated that
in recovering erroneous tentative refunds, “the Commissioner will
usually proceed by way of a deficiency notice in the ordinary
manner, and the taxpayer may litigate any disputed issues before
the Tax Court.” Id. at 771 (citing H. Rept. 849, 79th Cong., 1st
Sess. (1945), 1945 C.B. at 583).
In Collegiate Cap & Gown v. Commissioner, 59 T.C. 449, 455
(1972), we found that the purposes of section 6411 are better
served when the remedies available to the Commissioner to recover
tentative refunds issued in error are construed broadly. We
observed that if the Commissioner were unable to use the
deficiency procedure to recover refunds issued pursuant to
section 6411, there would be a “real danger that he would feel
compelled to act more cautiously in allowing tentative carryback
adjustments.” Id. When an application is denied, the taxpayer’s
only recourse is to file the more time-consuming ordinary claim
for refund, denying a financially troubled taxpayer the quick
infusion of cash contemplated by section 6411.
The foregoing cases confirm our conclusion that respondent
properly resorted to the deficiency procedures in the case at
hand. We shall not allow petitioner to penalize respondent by
erecting a bar against the determination of a deficiency; we
- 60 -
cannot identify any error committed by respondent in paying the
tentative carryback adjustments and later determining
deficiencies with respect to them, much less a clerical or
computer error. See Pesch v. Commissioner, 78 T.C. at 115.
Petitioner repeats ad nauseam that it was an unauthorized
recipient of the tentative refunds because it was the former
common parent of the affiliated group. However, the record
indicates respondent treated petitioner as the common parent of
the affiliated group for 10 years following the payment of the
tentative refunds. In fact, respondent’s current concession on
this score in the stipulations of settled issues he signed with
Interlake and petitioner is a stipulation of a legal conclusion
that, had we been called upon to consider it, we would ignore.
See Rose Ann Coates Trust v. Commissioner, 55 T.C. 501, 511
(1970) (stipulation of legal conclusions may be disregarded),
affd. 480 F.2d 468 (9th Cir. 1973). Section 1.1502-75(d)(1),
Income Tax Regs., provides the general rule that a group shall
continue if the common parent remains as the common parent and at
least one subsidiary remains affiliated with it, whether or not
the subsidiary was a member of the group in a prior year, and
whether or not one or more corporations have ceased to be
subsidiaries at any time after the group was formed. Since
petitioner was the common parent of an affiliated group that
consisted of petitioner and AMC, petitioner’s group represents
- 61 -
the continuation of the prespinoff affiliated group; Interlake,
as a result of the restructuring and spinoff, became the common
parent of a new affiliated group.
Even if respondent’s concession that Interlake was the
common parent were correct as a matter of law, which we doubt,
the treatment of petitioner as the common parent was based on the
regulations as they applied to the facts of the restructuring.
See supra pp. 33-37. In other words, any error of respondent was
an error in his interpretation of the consolidated return
regulations, not an error in performing his clerical
responsibilities that would give rise to nonrebate refunds.
Rebate v. Nonrebate Refunds
Other cases applying the rebate/nonrebate distinction
provide further support for the result we arrive at. The cases
addressing the rebate/nonrebate distinction illustrate that, even
though respondent’s payment of the tentative refunds may have
been erroneous, it was not the sort of error that leads to a
nonrebate characterization. As we have said, rebate refunds are
refunds paid because of a substantive recalculation by the
taxpayer or Commissioner that the tax due is less than the amount
shown on the return. O’Bryant v. United States, 49 F.3d at 342.
Nonrebate refunds, on the other hand, are issued because of
mistakes, typically clerical or computer error, that are
invariably made by the Commissioner. Id.
- 62 -
In O’Bryant v. United States, supra, the Commissioner
determined that the taxpayers had not properly computed their tax
for 1984. After some discussion, the parties agreed on an
additional amount due, and the Commissioner made an assessment of
that amount. In August 1987, the taxpayers paid $27,999 in full
payment of all amounts due for 1984. The taxpayers did not
request a refund, but they received a check from respondent dated
January 1, 1988, for $28,925. Id. at 342. Notations on the
check indicated that it was a refund of the amount paid in August
1987, plus interest. The refund was caused by the Commissioner’s
crediting the August 1987 payment twice to the taxpayer’s 1984
account. O’Bryant v. United States, 839 F. Supp. 1321, 1323
(C.D. Ill. 1993). The Commissioner attempted to collect the
$28,925 through the summary collection procedures under section
6502(a)(1), which requires an assessment of liability.
The Court of Appeals for the Seventh Circuit found that the
refund was a nonrebate refund because it was paid by reason of an
accounting error by the IRS. O’Bryant v. United States, 49 F.3d
at 342. The court emphasized the fundamental difference in
character between rebate and nonrebate refunds: Nonrebate
refunds are issued by the Commissioner by accident, while rebate
refunds are issued because of the taxpayer’s tax liability. Id.
at 346; see also Clark v. United States, 63 F.3d 83 (1st Cir.
1995). Accordingly, the Commissioner was limited to an erroneous
- 63 -
refund action under section 7405. The Court of Appeals agreed
with cases holding that the payment of tax extinguishes the
assessment and that the assessment is not somehow revived when
the Commissioner mistakenly issues a refund. In Clayton v.
Commissioner, T.C. Memo. 1997-327, the Court observed that
whether the refund is a rebate or nonrebate refund depends on
what it represents: If the refund reflects a recalculation of
the taxpayers’ tax liability, it is a rebate refund; if the
refund is unrelated to a recalculation of tax liability, it is a
nonrebate refund.
In the case at hand, the tentative refunds were not issued
by accident, see O’Bryant v. United States, supra at 342, or
because of an error unrelated to the recalculation of tax
liability, see Clayton v. Commissioner, supra. The tentative
refunds were issued on the basis of petitioner’s recalculation of
the tax owed by the group for 1981 and 1984. In 1987, petitioner
decided that it had sustained a $29,286,968 CNOL, which could be
carried back to, and deducted from, the affiliated group’s 1984
tax year income, which in turn freed credits claimed in 1984 to
be carried back to 1981. See sec. 172; sec. 1.1502-21, Income
Tax Regs. To give effect to its calculations, petitioner applied
for and received a tentative carryback and refund adjustment
pursuant to section 6411. Thus, when petitioner filed the
application for tentative carryback adjustment, it substantively
- 64 -
recomputed the group’s tax liability for 1981 and 1984. Had
petitioner’s recomputation of tax liability been correct, i.e.,
had it actually sustained the CNOL claimed on its 1986 return and
properly carried it back to 1984 and 1981, it would have been
entitled to retain the tentative refunds.7
Petitioner contends that, even though it recomputed the
group’s tax liability on the applications for tentative carryback
adjustments, the tentative refunds were paid to the “wrong
taxpayer” by accident and that any refund paid to the wrong
taxpayer is a nonrebate refund. Petitioner’s conclusory argument
is premised on the finding that, at the time the tentative
refunds were paid, it was settled that Interlake was the
continuing common parent of the prespinoff group and that
respondent paid petitioner by mistake.
7
The tax indemnification agreement would not alter this
result. Par. 6(a) provides that if petitioner realizes a net
operating loss or credits that may be carried back to taxable
years ending before Dec. 31, 1986, Interlake, to the extent it
receives any refund from respondent, shall within 10 days of
receiving the refund pay petitioner the amount of the refund,
plus interest.
The foregoing language of the tax indemnification agreement
makes it clear that, as a matter of contract law, petitioner was
entitled to the tentative refund that it applied for and that was
paid to it. Even if respondent never took the position that
petitioner was the common parent and issued the refund to
Interlake, Interlake would have been obligated to pay the refund
over to petitioner within 10 days, in which case petitioner would
have occupied the exact same economic position it is in today.
- 65 -
We reject petitioner’s argument because it is based on false
premises. As previously discussed, respondent paid petitioner
the tentative refunds pursuant to petitioner’s application for
tentative carryback adjustment at a time when respondent had not
finally determined which affiliated group was the continuation of
the prespinoff affiliated group. Respondent paid the tentative
refunds by depositing the funds in an account maintained by
petitioner pursuant to the attached application for electronic
funds transfer, and within the time prescribed by section
6411(b). Respondent later determined that petitioner did not
sustain the CNOL it claimed on its 1986 return and that
petitioner was the continuing common parent of the prespinoff
affiliated group. Even if the latter determination had been
erroneous, which we doubt, it was an erroneous application of the
relevant regulations to the restructuring and spinoff, not a
clerical or computer error.
The tentative refunds paid to petitioner were rebate refunds
to petitioner because they arose from and were attributable to
petitioner’s recalculation of the group’s 1981 and 1984 tax
liabilities. Respondent’s payment of the tentative refunds was
consistent with the requirements of section 6411, and his later
determination of a deficiency was consistent with section 6213.
- 66 -
Conclusion
Petitioner applied for tentative refunds based on CNOLs it
claimed for 1986. Respondent followed the letter of section 6411
and paid the tentative refunds exactly as petitioner requested
within 90 days of receiving the applications for tentative
carryback adjustments. Given the complexity of the restructuring
and spinoff, followed by the two sets of claims for tentative
refunds filed by two different taxpayers seeking to carry losses
back to the same tax years of the same affiliated group,
respondent might well have properly denied petitioner’s
application outright. Instead, respondent embraced the spirit of
section 6411 and provided petitioner with the quick infusion of
cash petitioner requested. After respondent determined that
petitioner was not entitled to retain the tentative refunds,
petitioner agreed to repay the tentative refunds to respondent,
depending on the outcome of Interlake Corp. v. Commissioner, 112
T.C. 103 (1999). But before the Court issued an opinion in
Interlake Corp. that Interlake was not required to repay them,
petitioner filed a petition in bankruptcy, preventing this Court
from entering a decision on the stipulation of settled issues.
Petitioner concocted a litigation strategy to avoid repaying the
tentative refunds it admitted it was not entitled to retain and
had agreed to repay. Petitioner went so far as to retain new
counsel to make the argument its old counsel had made in
- 67 -
Interlake Corp. v. Commissioner, supra, and which petitioner
through its old counsel had waived in entering into the
stipulation of settled issues that respondent asks us to enforce
by entering a decision thereon. Petitioner’s strategy appeared
to succeed when the bankruptcy court opined that the 1985
tentative refund was uncollectible by summary assessment because
it was a nonrebate refund. Petitioner then tried to get even
more mileage out of its nonrebate argument with respect to the
1981 and 1984 tentative refunds in this Court. However,
petitioner had to phrase its argument as a jurisdictional
challenge, because it had agreed in the stipulation of settled
issues to repay the tentative refunds. We have rejected that
challenge and shall enforce the stipulation of settled issues in
accordance with its terms.
In light of the foregoing,
Respondent’s motion for
entry of decision will be
granted, and decision will be
entered in accordance with the
stipulation of settled issues.