2006 Judge Ferguson - Opinions

Judge Kathryn C. Ferguson -- Opinions signed in 2006

Harvard 10/20/2006

CASE SUMMARY
PROCEDURAL POSTURE: The liquidating trust of bankruptcy debtors sought a tax refund based on a carryback of expenses related to workers' compensation insurance and products liability to a tax year when the debtors had substantial net income. The Internal Revenue Service (IRS) asserted that the debtors were not entitled to the claimed deductions and objected to the refund claim.

OVERVIEW: The IRS contended that the debtors did not actually pay the expenses in the relevant tax year, that amounts paid to an insurer to administer claims could not be carried back, and that the debtors already received an excessive refund based on the failure to allocate a portion of loss to an entity which was not a member of the debtors' tax group in the carryback tax year. The bankruptcy court first held that the debtors' retrospective insurance plans did not constitute the equivalent of an escrow or annuity, and thus the premium payments were made in the relevant tax year rather than at the time the insurer paid claims. However, the fact that state law required the debtors to maintain workers' compensation insurance did not establish that the expense of administering the plan was deductible as arising from state law, since the debtors were free to choose any insurer and state law did not dictate the debtors' expenses. Further, the debtors voluntarily elected to file consolidated tax returns, and any carryback losses were offset by the amounts the debtors were allowed to carry back on account of the losses of the non-member of the tax group.

OUTCOME: Judgment was entered to the effect that retrospective adjustments were classified as loss, administrative insurance expenses were not deductible, and any carryback losses were offset by prior excessive carryback losses.

CORE TERMS: refund, tax year, retrospective, premium, state law, workers' compensation, secretary, subsidiary, tax returns, insurance policy, economic performance, administrative expense, consolidated, policy year, summary judgment, compensation claims, compensation expenses, liability arising, taxable year, consolidated group, post-trial, insurer, offset, federal law, compensation insurance, products liability, insurance premium, excessive amounts, consolidated return, separate returns