United Dominion Industries, Inc. v. U.S. (06/04/2001)

By: Katherine Ritchey, Medill News Service

Questions presented

Whether, under the Treasury regulations that govern the year in which this case arose, the availability of the ""product liability loss"" carryback for affiliated entities that file a consolidated return is to be determined by (i) aggregating the income and expenses of the consolidated entities or, instead, (ii) separately calculating the income and expenses of each entity.

Brief

United Dominion Industries, a North Carolina corporation, makes pumps, valves and other machinery, and is affiliated with another 26 companies.

From 1983 through 1986, its affiliates collectively lost money. Yet five of its larger companies -- Jesco, Inc., the Cherry-Burrell Corp., Amtel, Inc. and Amtel's two subsidiaries, Litwin Corp. and Litwin Panamerican Corp. made money. Despite making money, those five had more than $1.6 million in product-liability losses; that is, payments made to settle claims of harm caused by the company's products.

When it came time to file its federal tax returns for those years, United Dominion calculated all its companies' product-liability costs together so it could offset tax payments from the past decade.

Federal tax law allows affiliated companies to file consolidated tax returns, as if they were a single company.

The law also lets companies in the red use the current year's product-liability costs to offset their taxes from a different year within the past decade.

But the Internal Revenue Service denied United Dominion's refund claims from 10 years earlier.

The IRS said the company, then known as AMCA, had positive ""separate taxable incomes"" for the five companies, so their expenses were not from product-liability loss.

The IRS said United Dominion had to determine each company's product-liability separately, thereby preventing United Dominion from using product-liability costs from a profitable company to reduce a previous year's taxes.

Amtel, Inc., one of United Dominion's companies, took the case to the U.S. Court of Federal Claims, contending it was entitled to carry back more than $32,000 of product-liability costs from its 1985 consolidated return to offset its 1975 tax return. Amtel argued that ""a consolidated group is treated as a single entity with respect to the product-liability provisions."" The Court of Federal Claims sided with the IRS.

""Since the consolidated return regulations specifically identify several deductions which are treated on a consolidated basis, and do not specifically identify a 'consolidated product liability loss deduction,' and in light of the general principle that deductions are construed narrowly ... the court must reject Amtel's approach,"" Judge Lawrence S. Margolis wrote in the courts 1994 decision.

United Dominion then filed another refund suit, this time with the U.S. District Court in Charlotte, N.C. United Dominion again asserted that losses from product-liability deductions claimed by its affiliate companies from 1983 to 1986 should be carried back 10 years. The company asked for a $1.6 million refund as well as interest.

This time, the IRS lost, with Chief Judge Graham C. Mullen ruling in 1998 that United Dominion could use its product liability losses to offset its previous years taxes.

On March 24, 2000, the 4th U.S. Circuit Court of Appeals reversed, deciding that ""product liability expenses are linked to the consolidated net operating loss only through their nexus to the group member."" and concluding that ""the parent's Ôproduct liability loss is calculated as the aggregate of the group members' Ôproduct liability loss.""

United Dominion appealed to the U.S. Supreme Court. The U.S. did not oppose a grant of certiorari, advising the Court that the question as noted above is pending in more than 100 cases at the administrative level.

On Nov. 27, 2000, the U.S. Supreme Court granted the petition for certiorari.

On June 4, 2001, the Court reversed and remanded, holding 8-1 against the IRS. The opinion was written by Justice David Souter. Justice John Paul Stevens was the lone dissenter.