Acme Steel Co. v. Comm'r

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

- 50 -

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

- 51 -

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.