DOJ brief seeks to limit sec. 172(f).

• Author: Zarzar, Robert
• Position: Workers' compensation claims and interest on federal income tax deficiencies as liability losses

A district court has ruled that workers' compensation claims and interest on Federal income tax deficiencies qualify under Sec. 172(f) as specified liability losses, eligible for a 10-year carryback (Host Marriott Corp., 113 FSupp 2d 790 (MD, 2000)). (For background information, see Tax Clinic, "Hotel Chain Entitled to $22 Million in Specified Loss Carrybacks," TTA, January 2001, p.20.)

In its brief on appeal to the Fourth Circuit, the Department of Justice (DOJ) has argued that the lower court erred in finding that the tax deficiency interest deduction claimed by Host Marriott gave rise to a specified liability loss. The U.S. has not appealed the lower court's holding that Host Marriott derived a specified liability loss from deductions it claimed on its 1991 Federal return for payments of workers' compensation claims.

Scope of Provision

The DOJ argued first in its brief that Sec. 172(f)(1)(B)(i) does not have the broad scope imparted to it by the district court, but rather is limited to a narrow class of liabilities for which deductions are deferred for accrual-basis taxpayers under the economic performance rules enacted in 1984. According to the DOJ, Sec. 172(f)(1)(B)(i) has its genesis in Section 91 of the Deficit Reduction Act of 1984 (DRA). It notes that Section 91 enacted economic performance rules, which modified the pre-existing rules on deductions of expenses under the accrual-basis method, and simultaneously enacted various provisions in response to those economic performance rules. Therefore, the DOJ argued:

[o]ne such provision--the predecessor of Sec. 172(f)(1)(B)(i)--was the "deferred statutory and tort liability" provision enacted in section 91(d). The name of that provision, as well as its location in a section of the DRA that enacted the economic performance rules, indicates that the extended carryback period was an outgrowth of, and response to, the contemporaneously enacted modifications to the accrual accounting rules. Specifically, Congress targeted liabilities that accrued, and therefore gave rise to deductions under, the prior law, but for which deductions were "deferred" for an extended period of time under the contemporaneously enacted economic performance rules. That is why the statute requires at least a three-year gap between the act (or failure to act) that gives rise to a statutory liability and the taxable year when the deduction is taken."

Further, the DOJ argued that the district court erred in adopting a...