12 -35 63

AmB ase C orp v. Un it ed St at es of America

UNITED STATES COURT OF APPEALS FOR THE SECON D C IRCUIT

____________________ August Term, 2012 (Argued: June 10, 2013 Decided: S eptember 9, 2013) Docket No. 12-3563- cv

____________________ AMBASE CORP., Plaintiff-Appellant,

v. UNITED STATES OF AMERICA, Defendant-Appellee

.

____________________ Before : POOLER, CARNEY, Circuit Judges , and KORMAN, District Judge

. * Appeal from United States District Court for the District of Connec ticut (Warre n W. Eginton, J .), granting in part and denying in part Plaintiff AmBase Corp .’s claimfor a re fund for the 1989 tax ye ar. Plainti ff’s re fund claimis based

The Honor able Edward R. Korman, United States District Court for the * Eastern D istrict of New York, sitti ng by designation.on a propos ed amendment to its consolidat ed re turn for the 1992 tax ye ar, for

which it seeks to increase the bad deb t deduction clai med on behalf of its affili ate, Carter et Savings Bank F.A. Car teret, a thrift which calcul ates its bad debt deduction under the r eser ve method, was seized b y the Resolution Trust Corp oration in 1992. The district cou rt, through its November 28, 2011 memorandum of decision, May 23, 2012 m emorandum of decision, and July 5, 2012 final j udgment and order, gr anted AmBase’s claim t o the exte nt that the claim ed deduction offset C artere t’s post-seizure additional income in tax year 1992 but denied the claim in all other r espe cts. On appeal, we agre e that the district court had subject-matt er jurisdiction and affirm i ts grant of AmBase’s claim ed deduction to the extent that it offsets Car teret’s pos t-seizure income for the 1992 tax year. We further h old that the district court should grant AmBase’s claim ed deduction to the extent that it derives from Car teret’s pos t-seizure bad debts for the 1992 tax year. Ac cordingly, we AFFIRM in part and VACATE in part the judgment of the district court and REMAND the case for further procee dings consistent with thi s opinion.

____________________

2PETER H. WINSLOW (Samuel A. Mi tchell, G regor y K. Oyler, on the brief

), Scribne r, Hall & Thompson, LLP, Washington, DC, for Plaintiff-Appellant

. JENNIFER M. RUBIN, Att orney, Tax D ivi sion (David Fein, United States Attorney for the District of Conne cticut

, Kathryn Keneally, Assistant At torney General, Tax Division, Jonathan S. Coh en, Attorney, Tax Division), Department of Justice, Washington, DC , for Defendant-Appellee

. POOLER, Circuit Judge : Plaintiff-Appellant

AmBase Cor p. (“AmBase”) br ought a refund claim for tax year 1989 b ased on a car ryback gener ated from a propos ed amendment to its 1 consolidated federal income tax return for the 1992 tax year. The propose d amendment seeks to incre ase the b ad debt deduction claim ed on the r eturn by AmBase’s affili ate, Carte ret Savings Bank F.A (“C artere t”). Carter et, a “thrift” 2 which calcul ates its bad debt deduction under the res erve method, see I.R.C. §§ 585, 593, was seized by the Resolution T rust Cor poration (“RTC”) on

“Carr ybacks” re fer to whenthe taxpayer applies net operating losses for a 1 tax year to pr eceding tax year s. See I.R.C. § 172(b). “Thrifts” are defined as “any mutualsavings bank not having capital 2 stock repr esen ted by shar es, any domestic buildi ng and loan association, and any cooperative ban k without capitalstock organized and ope rated for mutual purpose s and without profit.” T reas. Re g. § 1.593-4. 3Dece mber 4, 1992. The Un ited States District Court for the D istrict of Connecticut

(Warre n W. Eginton, J. ), through its November 30, 2011 memorandum of decision, AmBase Corp. v. United States , 834 F. Supp. 2d 71 (D. C onn. 2011), May 23, 2012 memorandum of decision, AmBase Corp. v. United States , No. 3:08-cv-651- WWE, 2012 WL 1884874 (D. C onn. May 23, 2013), and July 5, 2012 finaljudgment and order , granted AmBase’s c lai m to the extent that the bad deb t deduction offset Car teret’s additional post-seizure income in tax year 1992 but denied the claimin allother r espe cts. On appeal, we hold that the district court had subjectmatter jurisdi ction and affirm i ts grant of AmBase’s claimed deduction to the extent that it offsets Car teret’s pos t-seizure income for the 1992 tax ye ar. We further h old that the district court should grant AmBase’s claim ed deduction to the exten t that i t derives fro m Cartere t’s post-seizure b ad debts for the 1992 tax year. Accor dingly, w e AFFIRM in part and VAC ATE in part the judgm ent of the district court and REMAND the case for further p rocee dings consistent with thi s opinion. BACKGROUND I. Factual Background In August 1988, Am Base, the s uccessor corpor ation to The Home Group, Inc., purchased C artere t, a federally chartere d stock savings bank or thrift. After 4acqui siti on, AmBase filed consolidat ed fede ral income tax returns with Car teret.

On De cember 4, 1992, the Office of Thrift Super vision seized Carter et and put it into the conservator ship of the RTC due to Car teret’s failure to satisfy capital requirements under the Financial Instituti ons Refor m, Recovery, and Enforce ment Act. In 1996, the RTC transferr ed re ceivership to the Fede ral Depos it I nsurance Company (“FDIC”). The dispute in this appeal relates to AmBase’s 1992 consolidated federal income tax return, filed on August 30, 1993. On its return, AmBase r eported Carter et’s tax items from January 1, 1992 through D ecember 4, 1992. It di d not, however , include Cartere t’s post-seizure tax items, as AmBase did not control Carter et post-seizure, an d the RTC had not pr ovided AmBase with the relevant

recor ds. At the tim e of fili ng, propos ed re gulati ons under I.R.C. § 597 all owed a

3 consolidated group to elect irrevocably to disaffil iate from an insti tuti on in its affili ated group that had bee n placed in receiver ship. See Treatment of Acqui siti on of Ce rtain FinancialInstitutions; Certain Tax Con sequences o f Feder al Fi nancial Assistance to Financi al Insti tuti ons, 57 Fed. Reg. 14,804, 14,812- 814 (propose d April 23, 1992). However, suchan election could not become Both parties have s tipul ated that the RTC and FDIC failed to provide 3 AmBase with the relevant recor ds until at least May 31, 1996. 5binding unti l the regulati ons had be en finalized, see id. at 14,817-818, which did

not occur until December 1995, T.D . 8641, 1996-6 I.R.B. 4, 60 Fed. Reg. 66,091; see also Treas. Reg. § 1.597-4 (the final regulat ion). On its origi nal 1992 return, AmBase included a statement electi ng to disaffil iate from Carter et. On April 28, 1997, after having re ceived an exte nsion of time, Am Base timely noti fied the Commissioner of Internal Revenue (the “Commissioner”) of its decision to

reve rse its pre vious decision to di saffili ate from Car teret. On March 14, 2000, AmBase filed an amended con solidated federal return for 1992 in which it sought t o amend its 1992 consolidated fede ral income tax return to incre ase C artere t’s claim ed bad de bt deduction, calcul ated under the

rese rve method, and ge nerate a n et operating loss. On that same date, AmBase also fil ed an amended co nsolidated federal income tax return for 1989, on which it sought t o apply the 1992 net oper ating l oss and cr eate a re fund. The IRS denied the re fund claim, and, on April 29, 2008, AmBase fil ed a complaint in the district court agai nst the United States (the “Gover nment”). Consider ation of AmBase’s refund claim requi res anunders tanding of the

rese rve method for calcul ating bad debt deductions. We turn now to a descr ipti on of the applicable law.

6II. Bad Debt Deductions and the Reserve Method

The Internal Revenue C ode allows taxpayers to take a deduction relating to worthless or “bad” deb ts. I.R.C. §§ 166, 585, 593. Two methods exist for calcul ating thi s deduction: the specific charge-of f method and the re serve method. The specific charge-off method allows taxpayers to deduct the basis of a bad deb t in the year in which the debt be comes worthless. I.R.C. § 166. The

rese rve method allows taxpayers to cr eate a “re serve ” of funds in anticipat ion of bad deb ts, and deduct, instead of the bas is in a particul ar bad de bt, a “reas onable additi on to the res erve ” for the year (the “Reasonab le Additi on”). I.R.C. §§ 585(a), 593(a). A bad deb t must be accounted for in the year in which i t becomes wor thless. See I.R.C. § 166(a)(1) (specific charge-off method); Calavo, Inc. v. Comm’r

, 304 F.2d 650, 654 (9th Cir. 1962) (the r eser ve method). However , it can be difficult

for a taxpayer to determine the year in which a particul ar deb t becomes wor thless. See, e.g. , Boehm v. Comm’r , 326 U.S. 287, 292 (1945); Young v. Comm’r , 123 F.2d 597, 600 (2d Cir. 1941). The advantage of the rese rve method over the s pecific charge-off method is that, under the for mer, the taxpayer ’s baddebt deduction is not tied to a determinat ion of worthlessnes s of any particular debt. It all ows the taxpayer to make a reasonab le prediction of the amount of

7debt that wil l become worthless in a given year without having to i dentify

specific worthless loans, and claim a deducti on base d on that amount. Specific bad debts ar e stillrelevant to the re serve method. In the year in which a bad debt be comes worthless, the taxpayer, instead of a taking another deduction, charges off the debt by r educing the amount of the rese rve. Nash v. United States , 398 U.S. 1, 3-4 (1970). This increase s the Reason able Additi on otherwise allowable for the year

. See Smith Elec. Co. v. United States , 461 F.2d 790, 791 (Ct. Cl. 1972). Simil arly, in any year in which a bad debt is rec overe d, specific charge-of f method taxpayers include the recover y in gross income, while reser ve method taxpayers instead incr ease the amount of the rese rve, de creas ing the Reasonable Addition otherwise allowable for the year. See United States v. Bank of Am. Trust & Sav. Ass’n , 303 F.2d 304, 306 (9th Cir. 1962); see also 1 Mertens, Law of Federal Income Taxation § 7:35 (2013). Upon liquidati on, the taxpayer ’s unused bad deb t rese rve is included in gross income. W. Seattle Nat. Bank of Seattle v. Comm’r , 288 F.2d 47, 48-50 (9th Cir. 1961). But see Nash , 398 U.S. at 3-4 (declining to apply thi s “tax ben efit rule” when accounts re ceivable net of re serve s were transfer red b y partner ship during li qui dation).

8Use of the r eser ve method was former ly avai lable to a broader gr oup of

taxpayers , but in 1987 it s use was r estricted. See Pub. L. No. 99-514, § 805, 100 Stat. 2085, 2361 (1986) (repe ali ng I.R.C. § 166 (c)); see also Staff of J. Comm. on Taxation, 99th Cong., Tax Reform Proposals: Accounting Issues, 68 (C omm. P rint 1985). However , certain financial instituti ons are stil l al lowed to use the res erve method. I.R.C. §§ 581, 585(a)(1), 593(a)(1). AmBase’s affili ate, Carte ret, is a thrift eligible to use the r eser ve method under I.R.C. § 593 and Tr easury Regulation § 1.593-4. Thrifts are r equired to establish two separate re serve s, one for “nonquali fying loans” and one for “quali fying real proper ty loans.” Treas. Reg. 4 § 1.593-7(a)(1); see also Treas. Reg. § 1.593-11 (de fining terms). The res erve method gives the taxpayer a co nsiderable de gree o f discretion to determine the amount of its bad debt deduction and reduce tax li abili ty. This discretion is restricted by s ever al requi rements. First, the taxp ayer must earmark the amounts of the res erve s, which “are not to be used for an y purpose other than to apply agai nst bad deb ts as they occur.” Levelland Sav. & Loan Ass’n v. United States , 421 F.2d 243, 246 (5th Cir. 1970) (citing Rio Grande Bldg. & Loan Ass’n v. United States , 36 T.C. 657 (1961)). Some thrifts are also r equired to establish a third “supplementalrese rve 4 for losses on loans,” Treas Re g. § 1.593-7(a), additi ons to which do not lead to a deduction, seeI.R.C. § 593(b); Treas . Reg. § 1.593-5. 9Second, the Reasonable Addition must be “reasonab le,” as defined by the

Internal Revenue C ode and Tre asury Regulations, which describe se veral methods for calculati ng the Reasonab le Additi on. Relevant to this appeal i s the 5 “expe rience method,” also called the “six-year moving average” fo rmula, see I.R.C. §§ 585(b)(2), 593(b)(3), which “se eks to ascer tain a ‘reasonable’ addition to a bad-deb t rese rve in light of the taxpayer’s r ecent char geoff history.” Thor Power Tool Co. v. Comm’r, 439 U.S. 522, 547 (1979) (citing Black Motor Co. v. Comm’r, 41 B.T.A. 300, 302 (1940)). The expe rience method star ts with the balance of the

rese rve at the close of the taxable year an d then calculates a maxim um al lowable value for the re serve , based ona ratio which l ooks to total bad debts and total loans for the curr ent and five pre ceding taxable years . I.R.C. § 585(b)(2). The difference betweenthe maximumall owable value and curren t balance is the maxim um addi tion to the re serve that is permitt ed (the “Maximum Addi tion”). The taxpayer may clai m as a deduction a Reasonable Additi on up to, but not

exce eding, the MaximumAdditi on. I.R.C. § 585(b)(2). “Becaus e a bad de bt

rese rve is an es tim ate of future losses, the taxp ayer will not invariably increase

The word “method” is used twice in this section. First, there is the 5 “method” for taking the deduction, either the spec ific charge-off method or the rese rve method. Se cond, under the res erve method, there is the “method” for determining the amount of the deduction (i .e., the Reaso nable Addition). 10the res erve ” based onits past history of bad debts. Roth Steel Tube Co. v. Comm’r , 620 F.2d 1176, 1179 (6th Cir. 1980) (emphasis added) . The taxpayer ’s Reasonab le Additi on is calcul ated and cre dited at the close of the tax year. Tre as. Reg. § 1.593-5(b)(1). As a third qual ification, “a taxpayer is not to be pe rmitt ed to enlarge its

rese rve account r etroactively.” Rio Grande, 36 T.C. at 664; see also Rogan v. Commercial Disc. Co. , 149 F.2d 585, 588 (9th Cir. 1945); Wengel, Inc. v. United States , 306 F. Supp. 121, 123-24 (E.D. Mich. 1969); Tre as. Reg. § 1.166-4(b)(2). This rule follows from the purpose of the b ad debt re serve as an estimate of future losses for which the taxpayer free zes funds. A r etrospe ctive enlargement would al low the taxpayer to clai m a deduction based on funds that it did not have to freeze on its books. This appeal asks us to consider e xceptions to the rule of non

retroactivity. 6 The regulations provide one e xception: 6 If an adjustm ent with respec t to the income tax return for a taxab le year is made, and if such adjustment (whether initi ated by the taxpaye r or the Commissioner) has the e ffect of per mit ting an increase, or r equiri ng a reduction, in the amount cl aimed on such return as an additi on to the rese rve for losses on no nqual ifyi ng loans or to the re serve for losses on qual ifyi ng real prope rty loans, then the amount init ial ly credited to such rese rve for such year pursuant to subpar agraph (1) of this paragr aph may have to be incr eased or decre ased, as the case may be, to the e xtent neces sary to re flect such adjustment. 11III. AmBase’s Refund Claim

AmBase’s re fund claimturns on a pr oposed amendment to its consolidated federal income tax return for the 1992 tax year. O n its ini tialreturn, AmBase calculat ed a MaximumAdditi on of approx imately $101 mi ll ion but only claim ed as a deduction a Reasonab le Additi on of approx imat ely $56 mi ll ion. On 7 its amended return, AmBase s eeks (1) to incre ase its MaximumAdditi on to approximately $125 mi ll ion and (2) to increase its claim ed Reasonab le Additi on deduction from approximately $56 m il li on to the new maximum v alue. In other words, AmBase is claiming an additionaldeduction of approximately $69 mil li on. Approx imat ely $24 mi ll ion of that $69 mi ll ion relates directly to Carter et’s post-se izure activi ties. The remaining $45 mi ll ion is the amount by which AmBase could have, but chose not to, increas e the re serve on its original return, b ased on its initi al calcu lati on of the Maximum Addi tion. AmBase 8 Treas. Reg. § 1.593-5(b )(2). We discuss this exce ption further be low. See infra Discussion II.A. As mentioned above, thr ifts mu st keep two sep arate re serve s. The values 7 of the Reasonab le Additi on and MaximumAdditi on discussed in this opinion were c alcul ated by sep arately determining the values for each r eser ve and then adding the values together. For s impl icity’s sake, we r efer to the two rese rves as one. In other words , the $45 mil li on is the differen ce be tween the $101 mill ion

8 MaximumAdditi on and the $56 mill ion clai med Reasonable Addition from the init ial1992 return. 12argues that it is entit led to the entirety of this additi onal deduction based on its

decision to incl ude Car teret, post-se izure, on its 1992 consolidated federal income tax return. The IRS denied AmBase’s r efund claim, and, on April 29, 2008 , AmBase filed a compl aint i n the district court against the Government. Before the district court, the Government moved to dismiss for lack of subject-matt er jurisdiction. On March 31, 2010, the d istrict court conditionall y dismi ssed AmBase’s claim, but granted AmBase a limi ted discovery pe riod in which to seek evidence establishing subject-matt er jurisdiction. On February 28, 2011, onAmBase’s moti on, the district court set aside its previous dismi ssal. In respons e to two partial m otions for summary judgm ent by AmBase, the district court issued a November 28, 2011 memorandum of decision, AmBase Corp. , 834 F. Supp. 2d 71, and a May 23, 2013 memorandum of decision, AmBase Corp. , 2012 WL 1884874, which granted in part and den ied in part AmBase’s refund claim. AmBase’s claimwas granted to the e xtent that it offset the additi onal income of Cartere t during the post-seizure p eriod of tax year 1992, from Dece mber 5 to De cember 31, which was not inclu ded on AmBase’s or igi nal return. In all other resp ects, the district court denied AmBase’s claim . The district court issued a July 5, 2012 final j udgment and order c onsistent with it s prior memoranda.
13AmBase now appeals, arguing that the district court should have all owed

its amendment and refund claimin it s entirety. On appe al, the Government

rene ws its argument that the distri ct court did not have subject-matter jurisdict ion. DISCUSSION We re view appeals from moti ons for s umm ary judgment de novo. Sotomayor v. City of New York , 713 F.3d 163, 164 (2d Cir. 2013). “In reviewing a district court’s determinati on of whether it has subject matt er jurisdiction, we review factual findi ngs for clear err or and legal conclusions de novo.” Gualandi v. Adams , 385 F.3d 236, 240 (2d Cir. 2004). On appeal, we hold that the district court did have subject-matt er jurisdict ion to hear AmBase’s claim. We agree with the district court that AmBase may amend it s 1992 returnto increase its bad deb t deduction based on Carter et’s post-se izure income in 1992, and further hold that AmBase may amend to increase its bad deb t deduction based on C artere t’s post-seizure b ad debts. Accordingly, we affirm the distri ct court in part and vacate in part, remanding for furthe r proc eedings cons istent with this opinion.

14I. Subject-Matter Jurisdiction

“[T]he United States, as so vere ign, is i mmu ne from suit save as it consents to be sued[,] an d the terms of its consen t to be sued in any court define that court’s jurisdicti on to entertain the suit.” United States v. Testan , 424 U.S. 392, 399 (1976) (internal quot ation marks omi tted). “Congre ss has b roadly consented to suits against the United States in the district courts for the r efund of any fede ral taxes alleged to have be en er roneous ly or il legall y asses sed or collected, or any sum all eged to have b een e xcess ive or in any manner wro ngfull y collected under the internal-reve nue laws.” United States v. Forma , 42 F.3d 759, 763 (2d Cir. 1994) (quoting 28 U.S.C. § 1346( a)(1)) (internal quotation marks and alterations omit ted). However , Congr ess has placed sever al conditi ons on a taxpaye r’s r ight to mai ntain a refund suit, incl uding a requi rement that the taxpayer satisfy the applicable statu te of lim itat ions by filing a tim ely admi nistrative clai m. Id. at 763 & n.8. Under Section 6511(a) of the Internal Reven ue Code , a taxpayer must file an admini strative refund claim “wi thin 3 years from the time the returnwas filed or 2 year s from the time the tax was paid, whichever of suchperiods ex pires the later.” I.R.C. § 6511(a). However , the three -year limi tati ons per iod is replaced with a seven-year period if the refund c lai m relates to the deductibil ity of a bad debt. I.R.C. § 6511(d)(1). 15While taxpayers may file a formalclaimfor a re fund, seeTreas. Reg.

§ 301.6402-3 (listing requirements for for mal refund clai m), “[i]nformalclaim s have long bee n recogn ized as valid cl aims.” New Eng. Elec. Sys. v. United States , 32 Fed. Cl. 636, 641 (1995). As a type of informal clai m, taxpayers may file “protective claim s,” which “pres erve the taxpayer s’ right to clai m a refund when the taxpayer ’s right to the refund is contingent on future e vents and may not be determinable untilafter the s tatute of l imi tati ons ex pires.” C hief Counse l Advisory 200848045, 2008 WL 5030125 (2008); see also United States v. Kales , 314 U.S. 186, 196 (1941). Informal clai ms have three components: (1) they must provide the IRS notice of the taxpayer ’s claimto a refund; (2) they must “descr ibe the legal and factualbasis for the refund;” and ( 3) they must have a written component. New Eng. Elec. Sys. , 32 Fed. Cl. at 641. After having timel y fil ed an init ialclaim, a taxpayer may make an amendment that relates back to the pr ior claim, provided that “the facts upon which the amendment is base d would

neces sarily have bee n ascer tained by the commi ssioner in deter mining the merits of the original cl aim.” St. Joseph Lead Co. v. United States , 299 F.2d 348, 350 (2d Cir. 1962); see also Treas. Reg. § 301.6402-2(b )(1). A “claimseeking re fund upon one

asser ted fact situati on may not be amended out of time so as to require an
16investigati on of matters not germane to the original cl aim.” Weisbart v. Dep’t of

Treasury, 222 F.3d 93, 98 (2d Cir. 2000) (internal quotati on marks omitt ed), abrogation on other grounds recognized by In re WorldCom, Inc. , No. 12-803, 2013 WL 3779354, at *9 (2d Cir. July 22, 2013). Here , the parties agre e that, under S ection 6511(a), AmBase had until March 31, 1998 to file it s claim . AmBase filed i ts amended re turn on March 14, 2000, after that date. Befor e the district court, the Government moved to dismi ss the refund claimfor lack of subject-matter jurisdicti on, but AmBase put forth

sever al arguments as to why its cl aim w as timel y. First, it argued that the re serve method regulations required an amended re turn. Secon d, it argued that, under the three -year limi tati ons per iod, the 2000 clai m was ti mely, because it related back to four ear li er claims: (1) an attachment to Am Base’s or igi nal 1992 return, (2) a June 30, 1995 note made during a se parate Govern ment audit , (3) a June 1995 protective claim, and (4) a Sep tember 1996 pr otective clai m fil ed by the FDIC on b ehalf of Car teret. Third, AmBase argue d that the seven- year li mit ations period, under which the 2000 claim woul d be timely, appl ied to it s refund claim. The district court rejected the se arguments an d conditional ly dismi ssed the refund claim. Wi th resp ect to AmBase’s argument relying on the

171996 FDIC claim, the court’s dismissal rested on the fact that the document was

not befor e the court, and the court granted AmBase a limi ted discovery pe riod in which to acqu ire the FDIC claim. After AmBase produced the 1996 FDIC claim, the district court held that i t had subject-matter jurisdict ion and set aside the order of dismi ssal. On appeal, the Govern ment rene ws its argument that the distri ct court lacked subject-matter jurisdict ion to consider the re fund claim, while Am Base argues that “[t]he Gover nment has not appealed th[e ] jurisdicti onal holding.” Appellant’s Br. at 2. Whil e the Governmen t has not cross -appealed, “we have an independen t obligation to consider the pre sence or abs ence of s ubject matter jurisdict ion sua sponte .” Joseph v. Leavitt, 465 F.3d 87, 89 (2d Cir. 2006). We theref ore r eview the basis on which the district court found subject-matter jurisdict ion and hold that the distri ct court proper ly found that j urisdicti on exists. The district court held that i t had subject-matter jurisdict ion based on a 1996 formal protective clai m, for tax years 1982 to 1992, fil ed by the FD IC when it was Car teret’s r eceiver. See Treas. Reg. § 301.6402-7 (allowing agencies to fil e returns on beh alf of banks in rece ivership). We re produce the relevant portions

18of the claimin a footnote. The Government argue s that AmBase’s 2000 claim 9

In an attachment to the pr otective clai m, the FDIC stated, in relevant part, 9 the followi ng: The amended r eturn that is being filed here, itself may be amended whe n additi onal relevant information i s discovere d. An increase /decr ease in total deductions and/or total income and a decre ase in taxes due are due to the fo ll owing:

. . . 3) Savings institu tions that fai l the “60% asset test” of IRC 7701(a)(19) ar e not eligible to use the r eser ve method of accounting for bad deb ts under IRC 593. Such an institut ion is treated as a bank and the refor e must compute it s[] bad de bts under IRC 585. If the insti tuti on is treated as a “large bank”, as de fined in IRC 585(c), it must comput e its bad debts using the specific charge- off method under IRC 166. Ne t operating losses attributable to bad debts treated in this manner ar e eligibl e for a 10 ye ar carryb ack under IRC 172(b )(1)(D), instead of the usual 3. Thi s refund claim includes the carryb ack of the 1992 losses e li gible for a 10 year car ryback under IRC 172(b )(1)(D) to the taxab le year of the r efund as a r esult of any required use of the s pecific charge-off method of accounting for bad de bts. 4) Under ce rtain conditi ons, (such as the occurr ence of a c hange in underlying facts under Tre as. Reg. 1.446-1(e)(2)(ii)(b)), banks using the rese rve method for deducting bad debts under IRC 585(b) can switch to the specific charge-off method unde r IRC 166. Net ope rating losses attributable to bad debts treated in this manner ar e eligibl e for a 10 ye ar carryb ack, as allowed under IRC 172(b)(1)(D ), instead of the usual 3. This refund claim repres ents the car ryback of the 1992 losses to the taxab le year of the re fund to the exten t such losses ar e eligibl e [for] a 10 ye ar carr yback period under IRC 172(b)(1)(D) as a result of switching to the spe cific charge-of f method of accounting for bad deb ts. 19was “not germane” to the 1996 FD IC claimbecause the two clai ms have differen t

factual bases. We disagree . The 1996 FDIC claim addressed C artere t’s bad debts and its method of calcul ating the bad debt deduction, and it specifical ly noted potential net operating losses and carr ybacks. Espe ciall y in li ght of AmBase’s communi cations with the IRS regar ding it s decision to disaffil iate, we hold that the facts re lating to AmBase’s 2000 refund claim“would necessar il y have be en

ascer tained” upon consideration of the 1996 FDIC claim. We decline to gi ve the FDIC claim “a crabbed or literal reading, ignoring allthe surr ounding circumstances which give itbody and conten t.” United States v. Commercial Nat. Bank of Peoria , 874 F.2d 1165, 1171 (7th Cir. 1989) (internal quotati on marks omit ted). “The focus is on the claim as a whole, not merely the written component.” Id. (internal quot ation marks omi tted).

5) Under IRC 5511(d) a taxp ayer has 7 years to de termine whether a debt or a se curity has become worthless . In the case of a failing fi nancial institution, m anagement typicall y refr ains from charging off their bad debts in orde r to artifici all y retain capitaland keep gove rnment re gulators at bay. This amended returnreflects adjustments to deduct debts or securities in the taxable year in which such de bts actuall y became worthless. J.A. 840-41.
20Because we agree with the district court’s holding that i t had subjectmatter jurisdi ction, we do not consider the othe r purpor ted bases for jurisdicti on. II. AmBase’s Claim on the Merits We nex t turn to the merits of AmBase’s claim . AmBase see ks to amend its return an d claiman additi onal $69 mi ll ion Reasonable Addition deducti on. Approximately $24 mi ll ion of that $69 mi ll ion derives from C artere t’s postseizure activiti es, while the remaining $45 mi ll ion is the difference b etween AmBase’s original Maxi mumAdditi on and Reason able Additi on. AmBase argues that it is entit led to the entirety of this additi onal deduction based on its decision to incl ude Car teret, post-se izure, on its 1992 consolidated federal income tax return. As discussed b elow, we hold, as the district court did, that AmBase may increase its deducti on to the exten t that i t offsets Car teret’s pos t-seizure additi onal income for the 1992 tax year. We further h old that Am Base may also increase its deducti on to the exten t itderives fr om Carter et’s post-se izure additi onal bad debts for the 1992 tax year. In all other re spects, we h old that the

21district court properly denied AmBase’s claim. 10

A. Carteret’s Post-Seizure Income The district court held that Am Base could increase its bad debt deduction in the amount necessar y to offset Car teret’s pos t-seizure additionalincome for tax year 1992. AmBase Corp. , 834 F. Supp. 2d at 75-77. We agre e and affirm the district court. The Government, whil e contesting subject-matter jurisdicti on, does not dispute AmBase’s r efund claimto the extent that it rests on this ground. We pause to br iefly explain the pr incipl e under which the district court all owed AmBase to claiman additi onal deduction. As discussed above, a taxpayer using the r eser ve method is gener all y “not to be per mit ted to enlarge its

rese rve account r etroactively.” Rio Grande, 36 T.C. at 664. However , the Commissioner recogn izes two related exce ptions to this rule. Fi rst, if the taxpayer in a tax year has taken a Reas onable Addition equ al to the Maxim um Additi on, and if an adjustment to the taxpayer ’s income tax return (“whe ther init iated by the taxpayer or the Commissioner”) per mit s an increas e in the MaximumAdditi on, the taxpayer may i ncreas e its Reasonable Addition to tak e

We leave for the district court on remand the deter minat ion of the actual 1 0 amount of the increased de duction and the amount of Am Base’s r efund. 22into account the new Maximum

. AmBase, 834 F. Supp. 2d at 76; Treas. Reg.

§ 1.593-5(b)(2). The secon d exce ption, a “liber al interpr etation” of Treasury 11 Regulati on § 1.593-5(b)(2), applies to taxpayer s who have takena Reasonable Additi on for a tax ye ar that is less than the MaximumAdditi on. I.R.S. Gen. Couns. Mem. (“GCM”) 33,820, 1968 WL 16122 (May 10, 1968). The Commissioner allows such taxpayers, if a subse quent adjustm ent increase s the taxpayer’s taxable income for the tax year , to increase the Reasonable Addition deduction (capped by the Max imu m Addition) in order to offse t the additi onal taxable income. Rev. Rul. 70-5, 1970-1 C.B. 142; GCM 33,820. This exception 12 stems from a policy of al lowi ng a “taxpayer [ who] has manifested an intent to The regulation is reproduced at supra note 4. 1 1 We have de scribed Re venue Rulings as “the officialI.R.S. positi on on 1 2 applicati on of tax law to specific facts,” Weisbart, 222 F.3d at 98 (internal quotation marks omi tted). Although not enti tled to Chevron defer ence, “particular revenue r uli ngs may be given defe rence to the extent that they are pers uasive.” In re WorldCom, Inc. , 2013 WL 3779354, at *9 (citing United States v. Mead, 533 U.S. 218, 234-35 (2001); Skidmore v. Swift & Co. , 323 U.S. 134, 139-40 (1944)). General Couns el Memoranda “are infor mal docum ents written by the I.R.S. Chief Couns el’s office.” Nathel v. Comm’r , 615 F.3d 83, 93 (2d Cir. 2010). They are also not en tit led to Chevron defer ence. Id. We have s tated in di cta that General Couns el Memoranda may also, l ike Revenue Rulings, be entitled to Skidmoredefer ence. Id. We nee d not here determine if General Counse l Memoranda are entitl ed to such defe rence because the relevant e xception is provided in both the Reve nue Ruli ng and the Memorandum. 23claima bad deb t rese rve sufficient to offset its entire taxable income” to do so in

the face of additional income that it had previously not anti cipated. GCM 33,820. For the r easons descr ibed by both the district court and the cited Revenue Ruling and Gener al Counsel Memorandum, we hold that thi s secon d exce ption is an appropr iate exception to the rule that rese rve method taxpaye rs cann ot retroactively clai m an increased de duction. Based on this exception, the district court allowed Am Base to increas e its Reasonable Addition i n an amount

neces sary to offse t Carter et’s post-se izure additi onal income, whi ch was not included on AmBase’s initialreturn. AmBase, 834 F. Supp. 2d at 75-77. We affirm the district court on this ground. B. Carteret’s Post-Seizure Bad Debts The district court denied AmBase’s refund claimin allother r espe cts. AmBase, 2012 WL 1884874, at *4; AmBase, 834 F. Supp. 2d at 77. We disagree in

one re spect and hold that AmBase’s claimshould be grante d to the extent that it seeks to increase its deduction to account for Car teret’s pos t-seizure bad de bts. Our holding comes from the rule, discussed ab ove, that bad deb ts must be accounted for in the year in which they become worthless. Calavo , 304 F.2d at 654. With respect to re serve method taxpayers, this r equires the taxpayer to
24charge offa specific bad debt against the re serve in the year such de bt goes bad.

Id. ; Smith Elec. , 461 F.2d at 793. By reducing the amount of the rese rve, the b ad debts incre ase the othe rwise allowable Reasonable Additi on. Smith Elec. , 461 F.2d at 791. We hold that reser ve method taxpayer s must also be allowed to increase the Reasonab le Additi on to account for such an incr ease. Our holding is gui ded by the for mer Cour t of Claim s’ reas oning in Smith Electric . The Smith Electric Court, in discussing retroactive change s made by

rese rve method taxpaye rs, gave the following example: T charges a s pecific debt against the rese rve in year 2. In year 5 the Commissioner challenges the addition to the reser ve on the gr ound that this specific debt actuall y became worthless in year 1. If the Commissioner prevails, T’s additi on to the res erve for year 2 would be decre ased. Since the charge s against the res erve for the b ad debts would also be decr eased by the same amount, the re serve balance would remain the same [for year 2.] The re gular statute of l imi tati ons would bar a claim for refund with resp ect to year 1. D efendan t argues that T could not util ize the special seven -year statute and sho uld therefore increase the additi on to his rese rve in year 5, a year totall y unrelated to the debt b ecoming worthless. We cannot subs cribe to such a r ule of law. 461 F.2d at 793. The question in Smith Electricwas whether the taxpayer was permitted to account for an increase in the Reasonable Addition. In the above example, with respect to year 2, both the char ge offs and the Reasonable Additi on decr ease, leaving the taxpayer ’s res erve unchanged. With res pect to 25year 1, the ch arge offs increase, due to the rede terminati on of when the debt

became worthless . The Commissioner argued that the taxpaye r should not be permitted to also i ncreas e the Reaso nable Addition. The case differs fr om this appeal in that the Court of Claims did not l ook to the merits of the refund c lai m, but rather c onsidere d the applicabil ity t o res erve method taxpayers o f the

seven -year limi tati ons per iod—a period which appli es, under I.R.C. § 6511(d), to refund claims on account of the deductibil ity of bad debts. Id. The Cour t of Claims held thatthe seve n-year limi tati ons per iod was appli cable to rese rve method taxpayers. Id . However , it woul d be illogi cal for the court to apply the

seven -year statue of limi tati ons if such taxpayer s could never claim a refund based onthe retr oactive charge off of a b ad debt. Exten ding Smith Electric ’s

reaso ning, we hold that reser ve method taxpayer s may clai m such a deduction. Our holding is al so guided by the ex ceptions to the rule of nonretroactivity di scussed ab ove. Under the first exce ption discussed, a taxpayer in a tax year who h as taken a Reason able Additi on equal to the Maximum Addi tion may i ncreas e its Reasonable Addition upon an adjustm ent to the taxpayer ’s return which incre ases the permissible MaximumAdditi on. AmBase, 834 F. Supp. 2d at 76; Treas. Reg. § 1.593-5(b )(2). With respec t to the example in Smith

26Electric, where a specific bad debt is deemed to be worthless in year 1 an d not

year 2, this exc eption would m ean that the taxpayer may i ncreas e his Reasonab le Additi on in year 1 only if he pre viously t ook the MaximumAdditi on. We se e no

reaso n why this exception should be s o lim ited. The fact that the Commi ssioner has adopted a “more liber al” reading of the rule in another con text further supports our reaso ning here. See Rev. Rul. 70-5; G CM 33,820. The instant appeal differs from the e xample discussed in one re spect. AmBase’s additionalbad deb ts arise, not from a re determination of the year in which a debt has be come worthless, but due to the pos t-seizure activity of Carter et which AmBase previously did not i nclude on its return. AmBase was unable to proper ly cal culate the Maximum Addi tion because, due to RTC’s

rece ivership and the RTC’s f ail ure to provide AmBase with the re levant records , AmBase was unable to account for C artere t’s post-seizure b ad debts. We see n o

reaso n why this circumstance should mandate a di ffere nt result. Indeed, this situati on, in which AmBase has not accounted for the bad deb t at al l—i n either the prope r year or another year—str engthens our re asoning that, in order to proper ly account for the bad deb t, AmBase must be able to both charge off debts and increase the res erve .
27Finall y, the reas oning of Wengel , 306 F. Supp. 121, cited by the

Government, does n ot lead to a di ffere nt result. Wengel relates to the deductibil ity of partiallyworthless deb ts, which require both a partiallyworthless debt and “that the taxpayer ascer tained [the worthlessne ss of the de bt] and made the accounting entry within the taxable year.” Smith Elec. , 461 F.2d at 793 n.3. As “[t]hese latt er cr iteria are not nece ssary with res pect to wholly w orthless debts” unde r either the specific charge-off method or the res erve method, id. , partiall y worthless deb ts provide an ex ception to the rule that bad debts must be accounted for in the year in which they become worthless, an d theref ore Wengel does not conflict with our re asoning. C. Additional Increase in Deduction In allother r espe cts we affirm the judgment of the district court. In particular, we find no authority that supports the p roposition that Am Base, which chose on its initi al 1992 tax return to make a Reasonab le Additi on of $45 mil li on less than the Maximum Addi tion, should be all owed to retro actively claimthe $45 mil li on as a deduction. In gener al, “a taxpayer is not to be permitted to enlarge its reser ve account retr oactively.” Rio Grande, 36 T.C. at 664. The taxpayer must earmark the amounts in the rese rves, wh ich “are not to be

28used for an y purpose other than to apply against bad debts as they occur.”

Levelland, 421 F.2d at 246. AmBase is not permitt ed to enjoy the use ofits funds and then r etroactively decide to place them i n the re serve . We reject AmBase’s argument that coll ateral estoppel applies to this case due to prior liti gation involving Am Base’s pr edece ssor c orpor ation, Home Group, Inc., Home Group, Inc. v. Comm’r , 91 T.C. 265 (1988), aff’d on other grounds , 875 F.2d 377 (2d Cir. 1989). We use a three- part test to determine if collat eral estoppel applies: (1) whether the issues pr esen ted in the two proceedings “ar e in substance the same;” (2) “whether controlli ng facts or legal principles have changed significantlysince” the first pro ceeding; and (3) “whethe r other special circumstances warran t an excep tion to the nor mal rul es of pr eclusion.” ITT Corp. v. United States , 963 F.2d 561, 564 (2d Cir. 1992). Co ll ateral estoppel is inappli cable her e bec ause the Home Group li tigat ion invol ved the interpr etation of Treasury Re gulati on § 1.593-6(a), a provision applicable for “taxable year [s] beginning befor e July 12, 1969.” That provision i s not at issue her e, and ther efore the two procee dings are not in substance the same.

29CONCLUSION

For the for egoing reason s, the judgment of the district court i s AFFIRMED in part and VACATED in par t, and the case is REMANDED to the district court for furthe r proc eedings cons istent with this opinion.

30