AmBase Corp. v. United States
2013 U.S. App. LEXIS 18689
| 2d Cir. | 2013Background
- AmBase purchased Carteret Savings Bank (a thrift eligible for the reserve-method bad-debt deduction) and filed consolidated returns including Carteret for 1992 through Dec. 4, 1992, the date RTC seized Carteret. AmBase initially excluded Carteret’s post-seizure items because it lost control and lacked records.
- AmBase filed an amended consolidated 1992 return (Mar. 14, 2000) increasing Carteret’s reserve-method bad-debt deduction (Reasonable Addition) from ~$56M toward a new Maximum Addition of ~$125M, seeking an extra ~$69M deduction; it filed an amended 1989 return to carry back resulting NOLs and claim a refund.
- Approximately $24M of the $69M additional deduction derived from Carteret’s post-seizure income and post-seizure bad debts not included on the original return; the remaining ~$45M reflected AmBase’s prior voluntary under-addition relative to the original Maximum Addition.
- The IRS denied the refund; AmBase sued in district court. The district court allowed the requested increase only to the extent necessary to offset Carteret’s post-seizure additional income in 1992, and denied the remainder.
- On appeal, the Second Circuit affirmed jurisdiction based on a 1996 FDIC formal protective claim filed as Carteret’s receiver, affirmed allowance for deductions that offset Carteret’s post-seizure income, and held AmBase may also increase the Reasonable Addition to reflect Carteret’s post-seizure bad debts; it vacated and remanded for computation of amounts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether district court had jurisdiction over AmBase’s 2000 refund claim | AmBase: 2000 amended return relates back to earlier claims (attachment to original return, 1995 notes, 1995 protective claim, 1996 FDIC protective claim) and falls within the statute periods (including 7-year rule for bad debts) | United States: earlier claims were not germane to the 2000 claim; statute of limitations bars the claim | Court: Jurisdiction exists; 1996 FDIC formal protective claim (filed as receiver) gave sufficient notice so the 2000 claim relates back; district court had jurisdiction |
| Whether AmBase may increase its Reasonable Addition to offset Carteret’s post-seizure additional income in 1992 | AmBase: inclusion of Carteret post-seizure items on amended return permits increasing deduction to offset the omitted post-seizure income | U.S.: (not disputed on this ground) | Court: Affirmed — taxpayer may increase Reasonable Addition to offset post-seizure additional income under established exceptions to non-retroactivity of reserve increases |
| Whether AmBase may increase its Reasonable Addition to account for Carteret’s post-seizure bad debts (charge-offs that occurred after seizure) | AmBase: inability to include post-seizure bad debts was due to RTC/FDIC withholding records; should be allowed to charge off those bad debts and increase the reserve for 1992 | U.S.: district court denied this part; argued limits on retroactive enlarging of reserves and requirement that reserves be earmarked during the year | Court: Reversed district court on this point — reserve-method taxpayers may increase Reasonable Addition to reflect specific bad debts charged off in the tax year when they became worthless, including post-seizure bad debts omitted from the original return |
| Whether AmBase may retroactively claim the ~$45M it voluntarily did not take (the gap between original Maximum Addition and Reasonable Addition) | AmBase: should be allowed to claim the full increase now that circumstances and records permit | U.S.: opposes retroactive enlargement of reserves for prior elected under-additions | Court: Denied — taxpayer cannot retroactively enlarge reserve to capture amounts it voluntarily left out on the original return |
Key Cases Cited
- Nash v. United States, 398 U.S. 1 (U.S. 1970) (reserve charge-off mechanism explained for reserve-method taxpayers)
- Boehm v. Commissioner, 326 U.S. 287 (U.S. 1945) (difficulty in pinpointing year a debt becomes worthless informs reserve use)
- Smith Elec. Co. v. United States, 461 F.2d 790 (Ct. Cl. 1972) (court discusses retroactivity limits and treatment of specific charge-offs against reserves)
- Calavo, Inc. v. Commissioner, 304 F.2d 650 (9th Cir. 1962) (requirement that bad debts be accounted for in year they become worthless)
- Young v. Commissioner, 123 F.2d 597 (2d Cir. 1941) (timing of worthlessness issues)
- Roth Steel Tube Co. v. Commissioner, 620 F.2d 1176 (6th Cir. 1980) (reserve additions need not mirror past loss history)
- West Seattle Nat. Bank v. Commissioner, 288 F.2d 47 (9th Cir. 1961) (unused reserves included in income upon liquidation)
- United States v. Commercial Nat. Bank of Peoria, 874 F.2d 1165 (7th Cir. 1989) (reading protective claims in context informs relation-back and notice analysis)