Opinion ID: 3044762
Heading Depth: 2
Heading Rank: 2

Heading: PBGC Payments

Text: A taxpayer may also claim a specified liability loss if the deduction “arises under a Federal or State law” if “the act (or failure to act) giving rise to such liability occurs at least 3 years before the beginning of the taxable year” and “the taxpayer used an accrual method of accounting throughout the period or 36 periods during which the acts or failures to act giving rise to such liability occurred.” 11 I.R.C. § 172(f)(1)(B). As explained above, Harvard made $6 million in payments to its various pension plans in the 1996 tax year pursuant to the settlement agreement with the PBGC. The Trust argues that these payments “arose under” the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et. seq. (“ERISA”). ERISA sets minimum standards for most voluntarily established pension and health plans in private industry. The Trust maintains that the underfunding of Harvard’s pension plans in 1992 and 1993 created ERISA liability and that the liability therefore arose under ERISA and was partially discharged through the 1996 PBGC payments. 11 The government does not dispute that Harvard used an accrual method of accounting throughout the relevant period. 37 Thus, according to the Trust, those payments meet the statute’s requirements because they constitute a liability that arose under federal law and accrued at least three years before the loss. The government argues that these payments are not a specialized liability loss for two reasons. First, the PBGC payments are not rooted in federal law; rather, they resulted from choices made by Harvard. Second, the relevant act was the choice to enter into a settlement agreement with the PBGC in 1994 - an act which occurred less than three years before the payments. However, we are persuaded by the bankruptcy court’s insightful analysis of this issue. We therefore adopt the bankruptcy court’s cogent and persuasive discussion of this issue: In arguing that the payments did not arise under federal law, the IRS focuses on the fact that Harvard had satisfied its minimum funding 38 requirements under section 412 of the IRC. That argument ignores the fact that those are not the only payment obligations under ERISA. Additional funding requirements may be triggered by a plan's unfunded current liability. []. That was the case here because the PBGC had determined that Harvard had unfunded current liabilities in the tax years 1992 and 1993. It is certainly true that Harvard’s settlement with the PBGC on that issue was motivated by its desire to issue senior notes to fund its plan of reorganization without objection from the PBGC, but that does not change the ultimate fact that the plans had unfunded liabilities in 1992 and 1993. Thus, to maintain its qualified status Harvard was required by law to make those payments. That, of course, leads to the IRS's other argument: that the need for additional contributions to the pension plans arose out of a choice made by Harvard to maintain qualified pension plans for its employees. In a recent decision on this issue the Federal Circuit Court of Appeals stated that “the nature and amount of the liability must be traceable to a specific law and cannot be the result of choices made by the taxpayer or others.” Major Paint Co. v. United States, 334 F.3d 1042 (Fed. Cir.2003). While that decision is interesting, it does not instruct a court on where it must draw the line regarding what constitutes a choice made by a taxpayer. At some level everything involves a choice. It is frequently recognized that liability for workers’ compensation claims may qualify for specified liability loss status, Host Marriott v. United States, 113 F. Supp. 2d 790 (D. Md. 2000), 39 aff’d 267 F.3d 363 (4th Cir.2001), yet that liability only arises because an employer makes the decision to hire workers who are covered by that law. A similarly slippery slope is apparent here. While it is certainly true that offering an ERISA qualified pension plan to its employees was a voluntary business decision by Harvard, the court finds that the more prudent interpretation would be to find that once a decision like that is made then Harvard was bound by all of ERISA’s regulations. Thus, complying with ERISA’s funding requirements was not a voluntary decision on the part of Harvard, it was required by federal law. The next issue is whether the liability arose within three years prior to the beginning of the taxable year at issue. The IRS takes the position that the final act fixing Harvard's liability occurred on July 26, 1994, the date Harvard entered into its agreement with the PBGC. The court finds that argument to be misplaced. The agreement with the PBGC did nothing to create Harvard’s liability, it was merely the settlement of how that liability would be paid. The liability itself was created in tax years 1992 and 1993 due to Harvard’s reliance on inaccurate actuarial assumptions. []. Therefore, the court finds that the liability arose more than three years prior to the relevant tax year. Accordingly, the court will grant summary judgment in favor of Harvard on the issue of its pension plan payments qualifying as specified liability losses. 324 B.R. at 242-43. 40 As is evident from the portion of the bankruptcy court’s opinion set forth above, that court’s analysis was guided by the decision in Major Paint Co. v. United States, 334 F.3d 1042 (Fed. Cir. 2003). There, the court held that in order for a liability to “arise under” a federal law, “the nature and the amount of the liability must be traceable to a specific law and cannot be the result of choices made by the taxpayer and others.” Id., at 1046. Major Paint is the latest of only four cases that have addressed the meaning of “arising under” in § 172. In Sealy Corporation v. Commissioner, a taxpayer argued that professional fees the company paid to have filings required by the SEC and ERISA prepared, as well as costs incurred during an IRS audit, “arose under federal law” and should therefore qualify for the ten-year carry-back. 171 F.3d 655, 656 (9th Cir. 1999). The Court of Appeals rejected this argument, holding that “[t]he act giving rise to each of the liabilities in 41 question was the contractual act by which Sealy engaged lawyers or accountants” and that these acts “did not occur at least three years before [the tax year in question].” Id. at 657. In Host Marriott Corp v. United States, the Court of Appeals for the Fourth Circuit adopted the reasoning of the district court in holding that interest on a federal income tax deficiency was a specified liability loss. 267 F.3d 363, 365 (4th Cir. 2001). The district court had noted that “[t]he liability for federal income tax deficiency interest arises out of 26 U.S.C. § 6601(a) under a rate established by § 6621.” Host Marriott Corporation v. United States, 113 F. Supp. 2d 790, 793 (D. Md. 2000). The district court also distinguished Sealy, by noting that the taxpayer’s liability for tax deficiency interest is “set by federal . . . law, not by [taxpayer’s] choice.” Id. at 794. Finally, in Intermet Corporation v. Commissioner, the tax court held that state tax deficiencies and interest on federal and 42 state tax deficiencies are specified liability losses because federal law “expressly imposes” those liabilities.” 117 T.C. 133, 140 2001 WL 1164198 (2001). As the bankruptcy court mentioned, in Major Paint, the Court of Appeals for the Federal Circuit had to decide whether fees paid to various professionals employed to assist the taxpayer during bankruptcy proceedings “arose under federal law.” The taxpayer argued that the costs arose under the Bankruptcy Code and emphasized that a bankruptcy judge, rather than a contract, determines when and how outside professionals will be paid. Id. at 1046. The court conceded that “[t]he Bankruptcy Code does require the appointment of a committee of creditors holding unsecured claims” and the Code further provides that the committee “may select and authorize the employment . . . of one or more attorneys, accountants, or other agents, to represent or perform services for such 43 committee.” However, the court in Major Paint reasoned that “to say that simply because an entity files for bankruptcy any costs for outside professionals “arise under” the bankruptcy code in the context of I.R.C. § 172(f) stretches the limits of the Tax Code.” Id. The court in Major Paint agreed with the Sealy court that it is the act that immediately gives rise to the liability that must arise out of federal law, and not a “chain of causes” that can be traced to a federal law no matter how attenuated or nuanced the link. Id. at 1047. Although specified liability losses must obviously “arise under” federal law rather than merely be “related to” it, we believe that formulation is, by itself, too simplistic to be determinative here because it merely states a conclusion based on reiterating the statutory text. That, without more, does not create a useful framework for analyzing a particular expense or the specific expenditure at issue here. We think the link 44 between payments made pursuant to a settlement agreement with a federal agency threatening enforcement action and the underlying federal obligation to comply with ERISA is sufficiently direct that it may be said to “arise under federal law” and therefore qualify for the ten-year carry-back. We also agree that the liability itself arose in 1992 and 1993, and the 1994 agreement was merely the mechanism for discharging that liability. Moreover, just as the payments under the settlement agreement are so directly related to the ERISA liability as to have arisen under ERISA, we also conclude that the payments must be treated as arising in 1992 and 1993 when the underlying liability arose, and not when the agreement enforcing that liability was executed. The date of the latter has nothing to do with the fact that the liabilities would have existed in 1992 and 1993 whether or not the 1994 agreement was ever 45 entered into. Accordingly, payments made pursuant to that 1994 agreement were entitled to the ten year carry-back under § 172.