Washington Mutual, Inc. v. United States
2017 U.S. App. LEXIS 8451
9th Cir.2017Background
- Home Savings (later part of Washington Mutual) agreed to a 1981 supervisory merger to acquire three failing thrifts and received non-cash incentives: interstate Branching Rights (Missouri, Florida) and RAP (supervisory goodwill/amortization) rights.
- Home sold its Missouri branches in 1992–1993; Washington Mutual (successor) filed amended returns in 2005 claiming missed RAP amortization and a 1993 abandonment loss for the Missouri Branching Right.
- District court initially held Home had no cost basis; Ninth Circuit reversed in WAMU I, remanding to determine cost basis allocated from the excess of liabilities over assets (the Purchase Price).
- On remand, after an eight-day bench trial, the district court rejected the taxpayer’s valuation expert (Grabowski) as fundamentally flawed and found plaintiff failed to prove fair market value or cost basis; it also denied the abandonment loss because Home retained rights/ability to re-enter Missouri.
- The Ninth Circuit on appeal affirmed: plaintiff bore the burden to prove its refund and cost basis; the Grabowski model’s systemic flaws made valuation unreliable; and the sale agreements/non-competes showed no permanent abandonment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiff proved a cost basis for the Branching and RAP rights so as to claim amortization/refund | Grabowski’s DCF/excess-earnings valuation (mid-case) reasonably estimated fair market value; any imperfections should not defeat an estimate | Grabowski model had fundamental, cumulative flaws (deposit growth, market-share, spread, license-value assumptions) making valuation unreliable | No cost basis established; taxpayer failed burden to prove value and refund entitlement |
| Whether district court applied an improper or heightened burden of proof | Court demanded undue precision; should have allowed reasonable estimation rather than “exact” proof | Plaintiff must prove entitlement and amount; if evidence insufficient, Commissioner’s determination stands | Court applied correct standard (refund claimant bears burden); no reversible error in demanding reliable evidence |
| Whether district court erred by not sua sponte assigning a value despite flaws in taxpayer’s model | If valuation inputs are imperfect, court should still estimate a value rather than deny relief | Court cannot invent or reliably adjust a fundamentally flawed model; cannot relieve taxpayer of burden | Court not required to make an estimate where evidence is not reasonably ascertainable; refusal to estimate affirmed |
| Whether Home abandoned the Missouri Branching Right and is entitled to a §165 abandonment loss | Closing Missouri branches and public statements showed abandonment; non-compete terms were de facto relinquishment | Covenants had significant exceptions; Home retained ability/intent to re-enter or use the Right in national business or a future transaction | No abandonment: Home did not show intent to permanently discontinue business in which Right used; deduction denied |
Key Cases Cited
- United States v. Winstar Corp., 518 U.S. 839 (context: supervisory merger incentives and RAP treatment)
- Washington Mutual, Inc. v. United States, 636 F.3d 1207 (9th Cir. 2011) (prior remand holding Home had some cost basis in rights)
- Capital Blue Cross v. Commissioner, 431 F.3d 117 (3d Cir. 2005) (taxpayer bears burden to show intangible assets are separately valu able; court must value if reasonably ascertainable)
- Norgaard v. Commissioner, 939 F.2d 874 (9th Cir. 1991) (court may decline to apply Cohan estimates where evidence insufficient)
- Commissioner v. Duberstein, 363 U.S. 278 (bench findings reviewed for clear error)
- Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) (court may estimate where evidence permits, but not where absent)
- A.J. Industries, Inc. v. United States, 503 F.2d 660 (9th Cir. 1974) (elements for abandonment deduction)