The opinion
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0140P (6th Cir.)
File Name: 00a0140p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
;
INTERMET CORPORATION &
SUBSIDIARIES,
Petitioner-Appellant,
No. 99-1046
v. >
COMMISSIONER OF INTERNAL
Respondent-Appellee.
REVENUE,
1
On Appeal from the United States Tax Court.
No. 8246-97—Thomas B. Wells, Tax Court Judge.
Argued: December 6, 1999
Decided and Filed: April 20, 2000
Before: RYAN and SUHRHEINRICH, Circuit Judges;
BELL, District Judge.*
*
The Honorable Robert Holmes Bell, United States District Judge for
the Western District of Michigan, sitting by designation.
1
2 Intermet Corp. v. Commissioner No. 99-1046
_________________
COUNSEL
ARGUED: Eric R. Fox, IVINS, PHILLIPS & BARKER,
Washington, D.C., for Appellant. Edward T. Perelmuter,
U.S. DEPARTMENT OF JUSTICE, APPELLATE SECTION
TAX DIVISION, Washington, D.C., for Appellee.
ON BRIEF: Eric R. Fox, IVINS, PHILLIPS & BARKER,
Washington, D.C., for Appellant. Edward T. Perelmuter,
Richard Farber, U.S. DEPARTMENT OF JUSTICE,
APPELLATE SECTION TAX DIVISION, Washington, D.C.,
for Appellee.
_________________
OPINION
_________________
RYAN, Circuit Judge. This case requires us to decide
whether an affiliated group of corporations filing a
consolidated federal income tax return is entitled to a 10-year
carryback for certain “specified liability” expenses incurred
by a member corporation with positive separate taxable
income. We conclude that the 10-year carryback is applicable
under this scenario. Therefore, we will REVERSE the
judgment of the United States Tax Court and REMAND to
that court for further proceedings consistent with this opinion.
I.
The relevant facts are undisputed. Intermet Corporation is
the common parent of an affiliated group of corporations that
manufactures precision iron castings for automotive and
industrial equipment producers. The group filed consolidated
federal income tax returns for calendar years 1984 through
1992. The group’s members used the accrual method of
accounting for both financial accounting and federal income
tax purposes during this time period.
14 Intermet Corp. v. Commissioner No. 99-1046 No. 99-1046 Intermet Corp. v. Commissioner 3
In closing, we note the lack of any controlling judicial Intermet claimed that in 1992 it incurred certain “specified
authority on the issue we decide here. Apart from the Fourth liability” (SL) expenses attributable to several member
Circuit’s recent opinion in United Dominion, which we have corporations. At issue in this appeal are certain claimed SL
already discussed, the parties and the Tax Court identified expenses incurred by Lynchburg Foundry Co., a member of
two published opinions addressing arguably analogous issues: the group between 1984 and 1992. Lynchburg’s claimed SL
Amtel, Inc. v. United States, 31 Fed. Cl. 598 (1994), aff’d, expenses in 1992 consisted of: (1) $717,617 (plus
1995 WL 364366 (Fed. Cir. June 19, 1995) (unpublished $299,412.63 in interest) to cover its Michigan Single Business
disposition), and Norwest Corp. and Subsidiaries v. Tax liability for 1986, 1987, and 1988; and (2) interest on its
Commissioner, 111 T.C. 105 (1998). We find these cases to 1987 federal income tax liability in the amount of $2,175.60.
be distinguishable, however. Explicit statutory or regulatory
provisions supported the separate member approach that the In 1992, Lynchburg had a positive “separate taxable
courts adopted in Amtel and Norwest, rendering inapplicable income” (STI), as defined under the Treasury Regulations, of
the default rule in Treas. Reg. § 1.1502-80(a) that guides our $3,940,085. The STI was positive because Lynchburg’s gross
analysis here. In summary, we conclude that the IRS’s income exceeded its deductions. Lynchburg deducted its
interpretation of the SLL carryback, in conjunction with the claimed SL expenses in calculating its 1992 STI. On the
consolidated return regulations, is unreasonable. Intermet is other hand, Intermet had a $25,701,038 “consolidated net
entitled to the SLL carryback for Lynchburg’s claimed SL operating loss” (CNOL) under the Treasury Regulations in
expenses provided that those expenses qualify as a specified 1992, far exceeding Lynchburg’s claimed SL expenses.
liability loss under I.R.C. § 172(f)(1)(B).
In 1994, Intermet filed an amended income tax return to
IV. carry back to 1984 the claimed SL expenses incurred by
Lynchburg during 1992. Intermet claimed this carryback on
For the foregoing reasons, we REVERSE the judgment of the ground that the expenses qualified for the 10-year
the United States Tax Court and REMAND to that court for carryback provision for “specified liability loss” (SLL)
further proceedings consistent with this opinion. deductions under the Internal Revenue Code. On March 14,
1997, the IRS issued a notice of deficiency for calendar year
1984, disallowing the carryback. Intermet filed a petition in
the United States Tax Court contesting the deficiency
determination.
The case was submitted to the Tax Court on a fully
stipulated record, presenting the following issues: (1)
whether the claimed SL expenses fit the statutory definition
of a SLL under I.R.C. § 172(f)(1)(B) (1994) (amended in
1998); and (2) whether Intermet could take advantage of the
SLL 10-year carryback where the group had a CNOL but the
member that incurred the SL expenses had a positive STI.
The Tax Court held in favor of the IRS on issue two, and did
not reach the first issue. Intermet Corp. & Subsidiaries v.
Commissioner, 111 T.C. 294 (1998).
4 Intermet Corp. v. Commissioner No. 99-1046 No. 99-1046 Intermet Corp. v. Commissioner 13
The Tax Court reasoned that Lynchburg’s SL expenses did do not exclude such application, actually supports its position.
not qualify for the SLL carryback because they were not Tech. Adv. Mem. 9715002. The IRS reasoned that the
“taken into account” in computing Intermet’s net operating Code’s SLL provision applies on a separate member basis,
loss (NOL) for 1992, as required by the Internal Revenue rather than a consolidated basis, because the provision refers
Code. Id. at 304-05. The court first noted that Lynchburg had to “the taxpayer,” and such language generally means
no separate or individual NOL in 1992 because its gross individual members in the consolidated return context. Id. In
income exceeded allowable deductions. Id. at 300. The Tax contrast, the IRS in the instant cases ignores the section
Court then proceeded to determine whether Lynchburg’s SL 1.1502-80 default rule. More importantly, the IRS has
expenses were “taken into account” in computing Intermet’s consistently and correctly referred to Intermet—not
CNOL. Relying on the Treasury Regulations, the court Lynchburg—as the “taxpayer” in this appeal.
concluded that they were not. Id. at 301-03.
We recognize that a Technical Advice Memorandum is not
The court correctly noted that the consolidated return binding upon either the IRS or this court. See I.R.C.
regulations do not treat members’ SL expenses on a § 6110(j)(3) (1994). But the Memorandum illustrates the
consolidated basis for purposes of calculating a group’s IRS’s application of the SLL carryback in the consolidated
CNOL. Instead, SL expenses are netted against a member’s return context—history that we may consider in determining
income in computing a member’s STI, which is then used to whether the IRS’s current position is reasonable. See Wolpaw
calculate the group’s CNOL. Based upon these regulations, v. Commissioner, 47 F.3d 787, 792 (6th Cir. 1995). We also
the Tax Court reasoned an SL expense is “absorbed” by a understand that the IRS’s basic position—that a consolidated
group member’s current income in computing the member’s group cannot invoke the SLL carryback if the SL expenses are
positive STI, and the “exhausted” expenses cannot be used by incurred by a member with a positive STI—has remained
the group or parent for purposes of the 10-year SLL unchanged. However, the IRS’s shifting and incongruous
carryback. Id. at 302. reasoning in reaching this result highlights the fundamental
flaw: its position does not comport with the current purpose
Intermet timely appealed the Tax Court’s judgment, and language of the Code and regulations. It is trying to fit a
maintaining that it satisfied the statutory requirements for the square peg into a round hole.
SLL carryback. Specifically, Intermet contends that
Lynchburg’s SL expenses were “taken into account” in We also reject the IRS’s contention that Intermet will reap
calculating Intermet’s CNOL because the expenses were used a “double tax benefit” if it uses SL expenses both to offset
in calculating Lynchburg’s STI which, in turn, was used to Lynchburg’s positive STI and to extend the carryback period
calculate Intermet’s CNOL. It makes no difference, Intermet from three years to 10 years. Again, the IRS errs by
agrees, whether Lynchburg’s STI was positive or negative attributing independent significance to the STI that does not
because Lynchburg’s SL expenses would have a direct, exist. By offsetting part of Lynchburg’s positive STI, the SL
dollar-for-dollar impact on both Lynchburg’s STI and expenses produced no tax benefit whatsoever. Intermet—not
Intermet’s CNOL in either event. Lynchburg—was the taxpayer for 1992. Intermet derived no
tax benefit from the SL expenses in 1992 because Intermet
II. had a CNOL exceeding $25 million and incurred no tax
liability whatsoever in that year. Thus, the SL expense
Since the facts are undisputed and this case presents a pure deductions produced only a single tax benefit—the ability to
question of law, we review the Tax Court’s judgment de carry back those expenses to prior tax years.
novo. Estate of Mueller v. Commissioner, 153 F.3d 302, 304
12 Intermet Corp. v. Commissioner No. 99-1046 No. 99-1046 Intermet Corp. v. Commissioner 5
method may also apply in cases such as this one that involve (6th Cir. 1998), cert. denied, 525 U.S. 1140 (1999). Statutory
carrybacks to a consolidated return year, pointing out that “provisions granting a [tax] deduction . . . are matters of
section 1.1502-79(a)(3) does not explicitly limit its legislative ‘grace’ and are construed strictly (in favor of the
application to separate return years. Tech. Adv. Mem. government).” Weingarden v. Commissioner, 825 F.2d 1027,
9715002. 1029 (6th Cir. 1987). The taxpayer bears the burden of
pointing to a clear provision entitling it to a claimed
The IRS’s interpretation ignores a “fundamental rule of deduction. Indopco, Inc. v. Commissioner, 503 U.S. 79, 84
statutory construction that statutory language is to be read in (1992).
pertinent context rather than in isolation.” Oates v. Oates,
866 F.2d 203, 206 (6th Cir. 1989). When reading section Where an agency regulation interprets an ambiguous
1.1502-79A(a) as a whole, there is no question that it applies statutory provision, we limit our review to whether the
only to the separate return scenario. Section 1.1502-79A is regulation is a reasonable, but not necessarily the best,
entitled “separate return years”; subsection (a) is entitled interpretation. Atlantic Mut. Ins. Co. v. Commissioner, 523
“carryover and carryback of consolidated net operating losses U.S. 382, ___, 118 S. Ct. 1413, 1418 (1998). An agency’s
to separate return years”; and subsection (a), including its interpretation of its own ambiguous regulation also deserves
illustrative examples, addresses only situations involving substantial deference if the interpretation is reasonable insofar
separate return years. Indeed, the IRS has recognized in the as it “‘sensibly conforms to the purpose and wording of the
past that “although the [CNOL] is apportioned to individual regulations.’” Martin v. Occupational Safety and Health
members for purposes of carry backs to separate return years, Review Comm’n, 499 U.S. 144, 151 (1991) (quoting Northern
the apportioned amounts are not separate NOLs of each Indiana Pub. Serv. Co. v. Porter Cty. Chapter of Izaak
member.” 49 Fed. Reg. 30528, 30530 (1984) (preamble to Walton League of Am., Inc., 423 U.S. 12, 15 (1975)). See
Prop. Treas. Reg. § 1.1502-21(g)). We note that the Fourth also Martin v. American Cyanamid Co., 5 F.3d 140, 144 (6th
Circuit recently held that a consolidated taxpayer is entitled to Cir. 1993).
a “product liability loss” carryback—comparable to the SLL
carryback—for that portion of an individual member’s III.
product liability expenses that does not exceed the member’s
“separate net operating loss” as calculated under section This case presents a straightforward issue, but one that
1.1502-79A(a)(3). United Dominion Indus., Inc. v. United arises in the context of a complex regulatory framework. We
States, __F.3d __, 2000 WL 305134, at *8-9 (4th Cir. March therefore proceed to summarize that framework as it existed
24, 2000). The court offered no analysis to support its in 1992, the relevant year here.
conclusion that Treas. Reg. § 1.1502-79A(a)(3) dictates a
method for calculating a member’s “separate net operating The Internal Revenue Code permits a taxpayer to carry an
loss” outside of the separate return context. Id. at *8, n.17. NOL forward to future taxable years or back to preceding
For the reasons outlined above, we are unpersuaded by the taxable years to offset taxable income generated in those
Fourth Circuit’s approach. years, yielding a tax refund. I.R.C. § 172(b) (1994). This
provision “‘permit[s] a taxpayer to set off its lean years
A second inconsistency also arises out of the 1997 against its lush years, and to strike something like an average
Technical Advice Memorandum. The IRS maintained in the taxable income computed over a period longer than one
Memorandum that Treas. Reg. § 1.1502-80, which applies the year.’” Six Seam Co. v. United States, 524 F.2d 347, 351 (6th
Code provisions to the group to the extent that the regulations Cir. 1975) (quoting Libson Shops, Inc. v. Koehler, 353 U.S.
382, 386 (1957)). In 1992, the general carryback period was
6 Intermet Corp. v. Commissioner No. 99-1046 No. 99-1046 Intermet Corp. v. Commissioner 11
three years preceding the year in which the NOL was a positive STI but remain when the member has a negative
incurred. I.R.C. § 172(b)(1)(A)(i) (1994) (amended in 1997). STI, we find that the IRS’s interpretation is unreasonable.
In 1997, the three-year carryback was reduced to two years.
Our conclusion is fortified by the IRS’s history of adopting
The Code extends the carryback period to 10 years for or applying differing interpretations of the SLL carryback in
certain “specified liability losses.” Id. § 172(b)(1)(C) (1994). the consolidated return context. Such inconsistency, while
A transition rule enacted in 1990 prohibits the SLL carryback not determinative, is a factor we consider in assessing
to years preceding 1984. Omnibus Budget Reconciliation Act whether an agency interpretation of its regulations is
of 1990, Pub. L. No. 101-508, § 11811(b)(2)(B), 104 Stat. “reasonable.” See Martin, 499 U.S. at 157-58; Martin, 5 F.3d
1388 (1990). at 146. We have identified at least two inconsistencies that
undermine the IRS’s analysis.
As of 1992, the Code defined SLL as follows:
First, in a 1997 Technical Advice Memorandum, the IRS
(1) In general.—The term “specified liability loss” adopted an interpretation of the consolidated return
means the sum of the following amounts to the extent regulations that differs from its analysis in this case. Tech.
taken into account in computing the net operating loss for Adv. Mem. 9715002 (Apr. 11 1997). The Memorandum
the taxable year: addressed the precise issue presented here—i.e., “[w]hether
specified liability expenses incurred by a member of a
.... consolidated group may be carried back when that member
has positive taxable income for the year in which the
(B) Any amount . . . allowable as a deduction under expenses are incurred.” Id. While the IRS answered that
this chapter with respect to a liability which arises question in the negative, as it does in this case, it offered
under a Federal or State law . . . if – different reasoning. Specifically, the IRS reasoned that a
group is entitled to the SLL carryback only to the extent that
(i) In the case of a liability arising out of a the SL expenses do not exceed the “portion of the [CNOL]
Federal or State law, the act (or failure to act) giving attributable to a member” that incurred the SL expenses. Id.
rise to such liability occurs at least 3 years before the According to the IRS, the “portion of the [CNOL] attributable
beginning of the taxable year . . . . to a member” must be calculated under the formula prescribed
A liability shall not be taken into account under by Treas. Reg. § 1.1502-79(a)(3) (as amended in 1996). Id.
subparagraph (B) unless the taxpayer used an accrual Even if we assume the Memorandum is reconcilable with
method of accounting throughout the period or periods the IRS’s position in this case because a portion of the CNOL
during which the acts or failures to act giving rise to such cannot be attributed to a member with a positive STI under
liability occurred. Treas. Reg. § 1.1502-79(a)(3), the Memorandum’s reliance on
(2) Limitation.—The amount of the specified liability this regulation is entirely misplaced. Section 1.1502-79(a)
loss for any taxable year shall not exceed the amount of (redesignated as Treas. Reg. § 1.1502-79A(a) by T.D. 8677)
the net operating loss for such taxable year. establishes a method for allocating CNOL to an individual
member if a member seeks to carry back a loss to a “separate
I.R.C. § 172(f) (1994) (amended in 1998). Thus, a taxpayer return year,” i.e., a year in which the member was not part of
is entitled to the SLL carryback if, among other things: (1) SL the consolidated group. The IRS contends that this allocation
10 Intermet Corp. v. Commissioner No. 99-1046 No. 99-1046 Intermet Corp. v. Commissioner 7
preclude Intermet from taking advantage of the SLL expenses as defined under section 172(f)(1)(B) exist; (2) the
carryback. Like the Tax Court, the IRS points out that the taxpayer has an NOL for the year; (3) the SL expenses are
regulations require group members to deduct SL expenses in “taken into account” in calculating the NOL; and (4) the SLL
calculating their STI, since SL expenses do not appear on the carryback does not exceed the NOL for the year.
list of “consolidated” items for purposes of calculating the
group’s taxable income. According to the IRS, in a case The Code permits an affiliated group of corporations to file
where the member incurring SL expenses also has a positive a consolidated return in lieu of separate income tax returns.
STI, the SL expenses “cannot give rise to any [CNOL] for the It does not address whether, or how, the SLL carryback
consolidated group, since those [expenses] are entirely provision applies in the consolidated return context. Rather,
absorbed by the income of the member before any the Code delegates to the Secretary of the Treasury broad
consolidated item for the group is even computed.” In other authority to prescribe regulations
words, the IRS takes the position that Lynchburg’s SL
expenses were not “taken into account” in calculating as he may deem necessary in order that the tax liability of
Intermet’s CNOL because Lynchburg’s positive STI any affiliated group of corporations . . . may be returned,
“eliminated” the SL expenses. On the other hand, the IRS determined, computed, assessed, collected, and adjusted,
asserts that a member’s SL expenses are taken into account in in such manner as clearly to reflect the income-tax
a CNOL if the member has a negative STI because the liability and the various factors necessary for the
expenses are “not entirely absorbed at the member level.” determination of such liability, and in order to prevent
avoidance of such tax liability.
While we agree with the IRS’s overall description of the
consolidated return regulations, we reject its analysis. A Id. § 1502. To file a consolidated return, all member
member’s STI is simply a step along the way to calculating organizations must agree to comply with the consolidated
the group’s taxable income or CNOL. An STI has no other return regulations. Id. § 1501. Among the advantages of
purpose. More to the point, the regulations prescribing the consolidated returns are the ability to offset gains and losses
calculation of STI and CNOL do not govern the determination of group members and “greater utilization of NOL . . .
of CNOL carrybacks. That issue is governed by Treas. Reg. carryovers.” Wolter Constr. Co. v. Commissioner, 634 F.2d
§ 1.1502-21A(b), which applies the carryback principles of 1029, 1031 n.1 (6th Cir. 1980).
section 172 to the consolidated NOL of the group, rather than
separate member “NOLs” or STIs, in situations such as this The Treasury Regulations comprise “the bulk of the ‘law’”
one, which do not involve separate return years. In addition, addressing consolidated returns. Id. at 1032. Unfortunately,
the IRS and the Tax Court perceive a distinction between the regulations do not specifically address the application of
positive and negative STI that is unsupported by the the SLL carryback. They do establish a default rule that
regulations. An STI’s character as positive or negative has no “[t]he Internal Revenue Code, or other law, shall be
independent significance—either for purposes of calculating applicable to the group to the extent the regulations do not
CNOL or otherwise. A member’s SL expenses affect the exclude its application.” Treas. Reg. § 1.1502-80(a) (as
group’s CNOL dollar-for-dollar, and it makes no difference amended in 1997).
whether the member has a positive or negative STI. Because
neither the purpose nor the language of the consolidated To determine the tax liability of an affiliated group under
return regulations provide a basis for concluding that the the regulations, it is first necessary to determine the
member’s SL expenses are “exhausted” when the member has consolidated taxable income for the group. Id. § 1.1502-2(a)
(as amended in 1996). Consolidated taxable income is
8 Intermet Corp. v. Commissioner No. 99-1046 No. 99-1046 Intermet Corp. v. Commissioner 9
determined under Treas. Reg. § 1.1502-11(a) (as amended in To assess Intermet’s position, the consolidated return
1997) by taking into account the following items: regulations direct us first to determine whether the group, as
opposed to its individual members, satisfies the Code’s
1. The STI of each group member; and requirements for the SLL carryback. See Treas. Reg.
§ 1.1502-80(a). We find that Intermet does satisfy these
2. The following “consolidated” items: (a) the requirements. First, for purposes of this appeal, we will
consolidated net operating loss deduction; (b) consolidated assume that Lynchburg’s claimed expenses satisfy the
capital gain net income; (c) consolidated section 1231 net definition of SL expenses under I.R.C. § 172(f)(1)(B) since
loss; (d) consolidated charitable contributions deduction; the Tax Court did not decide this issue. Second, there is no
(e) consolidated section 922 deduction; (f) consolidated dispute that the “taxpayer”—Intermet—had a CNOL in 1992.
dividends received deduction; and (g) consolidated section Third, Lynchburg’s SL expenses were “taken into account” in
247 deduction. calculating Intermet’s CNOL because they directly affected
Lynchburg’s STI which, in turn, affected Intermet’s CNOL.
A member’s STI—which encompasses cases in which Indeed, Lynchburg’s SL expenses reduced Lynchburg’s STI
deductions exceed gross income (negative STI) and vice versa and increased Intermet’s CNOL dollar-for-dollar. Finally,
(positive STI)—is calculated pursuant to Treas. Reg. Intermet was entitled to carry back the full amount of
§ 1.1502-12 (as amended in 1996). Each member computes Lynchburg’s SL expenses because those expenses did not
its STI in a manner similar to a separate corporation exceed Intermet’s CNOL for the year.
computing taxable income, but with a number of
modifications. For example, a member does not take into The IRS argues that Intermet does not satisfy the Code’s
account the consolidated items specified in Treas. Reg. requirements because it is improper to equate the Code’s
§ 1.1501-11. Id. § 1.1502-12(h)-(n). references to “net operating loss” with Intermet’s CNOL. We
disagree. It is true that a group’s CNOL is calculated
Section 1.1502-21A defines the CNOL deduction, one of somewhat differently than an individual corporation’s NOL.
the consolidated items to be taken into account in calculating But this is not dispositive. The consolidated return
taxable income, as the aggregate of the CNOL carryovers and regulations tell us to apply the IRC provisions to “the group,”
carrybacks to the taxable year. Id. § 1.1502-21A(a) (as and the CNOL represents the group’s version of NOL.
redesignated and amended by T.D. 8677, 1996-30 I.R.B. 7, Moreover, the IRS has consistently taken the position—both
1996-2 C.B. 119). The aggregate carryovers and carrybacks in this case and otherwise—that the CNOL does have
consist of the group’s CNOLs that may be carried back or significance in applying the SLL carryback in the
over to the taxable year pursuant to I.R.C. § 172(b). Id. consolidated return context because only a group with a
§ 1.1502-21A(b)(1). The group’s CNOL is calculated in a CNOL may take advantage of the carryback. See Tech. Adv.
manner analogous to computing consolidated taxable income, Mem. 9715002 (Apr. 11, 1997).
taking into account: (1) the STI of each group member; (2)
consolidated capital gain net income; (3) consolidated section Having concluded that Intermet satisfies the statutory
1231 net loss; (4) consolidated charitable contributions requirements for the SLL carryback, we next consider
deduction; (5) consolidated dividends received deduction; and whether the consolidated return regulations somehow alter
(6) consolidated section 247 deduction. Id. § 1.1502-21A(f). this result. See Treas. Reg. § 1.1502-80(a). Although the
regulations do not explicitly address the SLL carryback, the
IRS insists that the overall structure of those regulations