RESPONDENT: United States
LOCATION: Attorney General's Office of MA
DOCKET NO.: 00-157
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Fourth Circuit
CITATION: 532 US 822 (2001)
ARGUED: Mar 26, 2001
DECIDED: Jun 04, 2001
Eric R. Fox - Argued the cause for the petitioner
Kent L. Jones - Department of Justice, argued the cause for the respondent
Facts of the case
Under the Internal Revenue Code of 1954, a taxpayer may carry back its "product liability loss" up to 10 years in order to offset prior years' income. United Dominion Industries, Inc. predecessor in interest, AMCA International Corporation, was the parent of an affiliated group filing consolidated returns for the years 1983 through 1986. AMCA calculated its product liability loss (PPL) on a consolidated basis, or a "single-entity" approach. The government's "separate-member" approach would have prohibited 5 of AMCA's 26 members from contributing to the group's total PPL. In 1986 and 1987, AMCA petitioned the Internal Revenue Service for a refund based on its PPL calculations. Ultimately, the District Court applied AMCA's single-entity approach, concluding that if the affiliated group's consolidated return reflects consolidated net operating losses in excess of the group's aggregate product liability expenses, the total of those expenses is a PLL that may be carried back. In reversing, the Court of Appeals applied the separate-member approach.
Must an affiliated group of corporations' product liability loss be figured on a consolidated, single-entity basis?
Media for United Dominion Industries, Inc. v. United StatesAudio Transcription for Oral Argument - March 26, 2001 in United Dominion Industries, Inc. v. United States
Audio Transcription for Opinion Announcement - June 04, 2001 in United Dominion Industries, Inc. v. United States
The opinion of the Court in No. 00-157, United Dominion Industries Inc. versus United States will be announced by Justice Souter.
David H. Souter:
This case comes to us on a writ of certiorari to the United States Court of Appeals for the Fourth Circuit.
It is a tax case and I will make this mercifully brief.
Corporations sometimes have the bad luck to incur expenses as a result of liability for the products they sell.
In a year when their luck is really bad, they have not only product liability expenses, but a net loss from all operations for the year.
When that happens, the Tax Code gives them a break.
It lets them call their product liability expenses, what the Tax Code calls a liability loss, up to the amount of the net operating loss and it allows them to deduct the product liability loss, so as to reduce income in prior years for as far back as ten years.
They thus get some of their old taxes refunded to soften their current blow.
The Tax Code also allows a group of affiliated corporations to file one tax return together, a coordinated return and to pay only one tax bill for the group instead of separate bills for each separate corporation.
The issue in this case is how the consolidated return is supposed to figure any product liability loss to be carried back ten years.
There are two possibilities: the first is, that each separate corporation would determine whether it had a product liability loss, if it did it would give that loss to the group which could carry it back if the group had a net operating loss; the second is that each separate corporation could simply let the group have any product liability expenses without bothering to figure whether each separate corporation, with a product liability expense also had a net loss.
If the group had a net loss, the group could then add up the separate product liability expenses to figure its own product liability loss and then deduct it from prior year’s income going back ten years.
What difference does it make?
It can make this difference.
If each corporation has to figure its own product liability loss before giving it to the group, a separate company with product liability expenses, but no net operating loss won't have any way of giving its product liability expenses to the group.
If instead every corporation can give the group any product liability expense it has even in a profitable year, the group as a whole will have a larger product liability loss if the year is unprofitable for the group as a whole.
It will then have a bigger deduction against prior year’s income.
The government wants taxpayers filing coordinated returns like United Dominion here, to use the first method, which will give it a lower product liability loss to carry back.
United Dominion wants to use the second method which will give it a higher loss to carry back.
The Fourth Circuit decided in the government’s favor.
In an opinion filed with a Clerk today, we reverse the Fourth Circuit and decide in favor of the taxpayer, United Dominion.
You would not find a statement of our reasons entertaining who listen to and I will let it go by saying that any interested tax lawyers should have a look at our opinion along with a concurring opinion filed by Justice Thomas and a dissent filed by Justice Stevens.