891 F.3d 1016
Fed. Cir.2018Background
- During the 1980s savings-and-loan crisis, FSLIC induced healthy thrifts to acquire failing thrifts via "supervisory mergers" by granting intangible benefits including interstate branching rights and RAP (regulatory accounting purposes) rights that allowed amortization of "supervisory goodwill."
- Home Savings of America (a predecessor of WMI) entered several supervisory mergers (1981–1985) and acquired Bowery Savings Bank in 1988; Home (through its parent Ahmanson) claimed tax deductions for abandonment (branching rights) and amortization (RAP rights).
- WMI sought more than $250 million in tax refunds for various years, relying on expert Roger Grabowski’s income-based valuations allocating lump-sum purchase prices among RAP and branching rights.
- The U.S. Court of Federal Claims dismissed WMI’s refund suit, finding WMI failed to prove, to a reasonable degree of certainty, cost basis allocations for each specific intangible asset; the Ninth Circuit and a district court reached similar conclusions on related claims.
- The Claims Court found major, systemic flaws in Grabowski’s assumptions: (1) mischaracterizing supervisory RAP rights as approvals to treat goodwill as an asset rather than guarantees against future regulatory change; and (2) using unrealistic deposit-growth and branch-expansion assumptions that ignored the high-interest, disintermediation environment and regulatory hurdles of the early 1980s.
- The Claims Court also held the 1988 Bowery assistance package was a materially different, realizable transaction from the 1985 package (not a like-kind exchange), so deductions must be based on the 1988 rights.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Burden and legal framework for tax-refund valuation | WMI: court should "do its best" to approximate correct basis when expert valuation has flaws (invoke Cohan/Capital Blue). | Gov: taxpayer bears burden to prove specific refund amount; court may not guess values without adequate evidence. | Court: taxpayer bears burden; Claims Court applied correct standard and need not make independent valuation where evidence is insufficient. |
| Valuation and nature of supervisory RAP rights | WMI: Grabowski valued RAP rights as contractual approvals enabling purchase accounting/amortization, supporting large basis. | Gov: RAP rights were guarantees against future regulatory change; Grabowski mischaracterized their nature, overvaluing them. | Court: Grabowski mischaracterized RAP rights; findings not clearly erroneous; valuation unreliable. |
| Valuation of branching rights (income-based model) | WMI: Grabowski’s cash-flow model, with sensitivity analyses, reasonably estimated value based on Home’s prior expansion. | Gov: Model used outdated/unrealistic assumptions (deposit growth, branch rollout, loan demand) inconsistent with early-1980s market/regulatory realities. | Court: Model’s assumptions were unreasonable and unsupported; sensitivity analyses insufficiently anchored; valuation unreliable. |
| Characterization of 1988 Bowery assistance (realization and like-kind exchange) | WMI: 1988 package did not materially change rights from 1985; deductions should relate back to 1985 rights or be treated as like-kind exchange. | Gov: 1988 assistance materially differed (income-maintenance, coverage, RAP mechanics, amortization period); realization occurred and not like-kind. | Court: 1988 package constituted a realization event and was not a like-kind exchange; Claims Court correctly characterized transaction. |
Key Cases Cited
- United States v. Winstar Corp., 518 U.S. 839 (describing supervisory goodwill and regulatory accounting context)
- United States v. Janis, 428 U.S. 433 (taxpayer must prove amount of refund; Commissioner’s determination presumed correct)
- Wash. Mut., Inc. v. United States, 856 F.3d 711 (9th Cir.) (affirming rejection of Grabowski valuation on similar facts)
- Bubble Room, Inc. v. United States, 159 F.3d 553 (Fed. Cir.) (presumption of correctness for IRS determinations in refund suits)
- Capital Blue Cross v. Commissioner, 431 F.3d 117 (3d Cir.) (court should not reject taxpayer valuation for only minor flaws; taxpayer still bears heavy burden)
- Cottage Sav. Ass’n v. Commissioner, 499 U.S. 554 (realization occurs when exchanged properties are materially different)