Intermet Corporation & Subsidiaries v. Commissioner of Internal Revenue

*The Honorable Robert Holmes Bell, United States District Judge for
the Western District of Michigan, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0140P (6th Cir.)
File Name: 00a0140p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
INTERMET C ORPORATION &
S UBSIDIARIES,
Petitioner-Appellant,
v.
C OMMISSIONER OF INTERNAL
R EVENUE ,
Respondent-Appellee.
;>

1
No. 99-1046
On Appeal from the United States Tax Court.
No. 8246-97—Thomas B. Wells, Tax Court Judge.
Argued: December 6, 1999
Decided and Filed: April 20, 2000
Before: RYAN and SUHRHEINRICH, Circuit Judges;
BELL, District Judge.*

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2 Intermet Corp. v. Commissioner No. 99-1046
_________________
COUNSEL
ARGUED: Eric R. Fox, IVINS, PHILLIPS & BARKER,
Washington, D.C., for Appellant. Edward T. Perelmuter,
U.S. DEPARTMENT OF JUSTICE, APPELLATE SECTION
TAX DIVISION, Washington, D.C., for Appellee.
ON BRIEF: Eric R. Fox, IVINS, PHILLIPS & BARKER,
Washington, D.C., for Appellant. Edward T. Perelmuter,
Richard Farber, U.S. DEPARTMENT OF JUSTICE,
APPELLATE SECTION TAX DIVISION, Washington, D.C.,
for Appellee.
_________________
OPINION
_________________
RYAN, Circuit Judge. This case requires us to decide
whether an affiliated group of corporations filing a
consolidated federal income tax return is entitled to a 10-year
carryback for certain “specified liability” expenses incurred
by a member corporation with positive separate taxable
income. We conclude that the 10-year carryback is applicable
under this scenario. Therefore, we will REVERSE the
judgment of the United States Tax Court and REMAND to
that court for further proceedings consistent with this opinion.
I.
The relevant facts are undisputed. Intermet Corporation is
the common parent of an affiliated group of corporations that
manufactures precision iron castings for automotive and
industrial equipment producers. The group filed consolidated
federal income tax returns for calendar years 1984 through
1992. The group’s members used the accrual method of
accounting for both financial accounting and federal income
tax purposes during this time period.

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14 Intermet Corp. v. Commissioner No. 99-1046
In closing, we note the lack of any controlling judicial
authority on the issue we decide here. Apart from the Fourth
Circuit’s recent opinion in United Dominion, which we have
already discussed, the parties and the Tax Court identified
two published opinions addressing arguably analogous issues:
Amtel, Inc. v. United States, 31 Fed. Cl. 598 (1994), aff’d,
1995 WL 364366 (Fed. Cir. June 19, 1995) (unpublished
disposition), and Norwest Corp. and Subsidiaries v.
Commissioner, 111 T.C. 105 (1998). We find these cases to
be distinguishable, however. Explicit statutory or regulatory
provisions supported the separate member approach that the
courts adopted in Amtel and Norwest, rendering inapplicable
the default rule in Treas. Reg. § 1.1502-80(a) that guides our
analysis here. In summary, we conclude that the IRS’s
interpretation of the SLL carryback, in conjunction with the
consolidated return regulations, is unreasonable. Intermet is
entitled to the SLL carryback for Lynchburg’s claimed SL
expenses provided that those expenses qualify as a specified
liability loss under I.R.C. § 172(f)(1)(B).
IV.
For the foregoing reasons, we REVERSE the judgment of
the United States Tax Court and REMAND to that court for
further proceedings consistent with this opinion.
No. 99-1046 Intermet Corp. v. Commissioner 3
Intermet claimed that in 1992 it incurred certain “specified
liability” (SL) expenses attributable to several member
corporations. At issue in this appeal are certain claimed SL
expenses incurred by Lynchburg Foundry Co., a member of
the group between 1984 and 1992. Lynchburg’s claimed SL
expenses in 1992 consisted of: (1) $717,617 (plus
$299,412.63 in interest) to cover its Michigan Single Business
Tax liability for 1986, 1987, and 1988; and (2) interest on its
1987 federal income tax liability in the amount of $2,175.60.
In 1992, Lynchburg had a positive “separate taxable
income” (STI), as defined under the Treasury Regulations, of
$3,940,085. The STI was positive because Lynchburg’s gross
income exceeded its deductions. Lynchburg deducted its
claimed SL expenses in calculating its 1992 STI. On the
other hand, Intermet had a $25,701,038 “consolidated net
operating loss” (CNOL) under the Treasury Regulations in
1992, far exceeding Lynchburg’s claimed SL expenses.
In 1994, Intermet filed an amended income tax return to
carry back to 1984 the claimed SL expenses incurred by
Lynchburg during 1992. Intermet claimed this carryback on
the ground that the expenses qualified for the 10-year
carryback provision for “specified liability loss” (SLL)
deductions under the Internal Revenue Code. On March 14,
1997, the IRS issued a notice of deficiency for calendar year
1984, disallowing the carryback. Intermet filed a petition in
the United States Tax Court contesting the deficiency
determination.
The case was submitted to the Tax Court on a fully
stipulated record, presenting the following issues: (1)
whether the claimed SL expenses fit the statutory definition
of a SLL under I.R.C. § 172(f)(1)(B) (1994) (amended in
1998); and (2) whether Intermet could take advantage of the
SLL 10-year carryback where the group had a CNOL but the
member that incurred the SL expenses had a positive STI.
The Tax Court held in favor of the IRS on issue two, and did
not reach the first issue. Intermet Corp. & Subsidiaries v.
Commissioner, 111 T.C. 294 (1998).

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4 Intermet Corp. v. Commissioner No. 99-1046
The Tax Court reasoned that Lynchburg’s SL expenses did
not qualify for the SLL carryback because they were not
“taken into account” in computing Intermet’s net operating
loss (NOL) for 1992, as required by the Internal Revenue
Code. Id. at 304-05. The court first noted that Lynchburg had
no separate or individual NOL in 1992 because its gross
income exceeded allowable deductions. Id. at 300. The Tax
Court then proceeded to determine whether Lynchburg’s SL
expenses were “taken into account” in computing Intermet’s
CNOL. Relying on the Treasury Regulations, the court
concluded that they were not. Id. at 301-03.
The court correctly noted that the consolidated return
regulations do not treat members’ SL expenses on a
consolidated basis for purposes of calculating a group’s
CNOL. Instead, SL expenses are netted against a member’s
income in computing a member’s STI, which is then used to
calculate the group’s CNOL. Based upon these regulations,
the Tax Court reasoned an SL expense is “absorbed” by a
group member’s current income in computing the member’s
positive STI, and the “exhausted” expenses cannot be used by
the group or parent for purposes of the 10-year SLL
carryback. Id. at 302.
Intermet timely appealed the Tax Court’s judgment,
maintaining that it satisfied the statutory requirements for the
SLL carryback. Specifically, Intermet contends that
Lynchburg’s SL expenses were “taken into account” in
calculating Intermet’s CNOL because the expenses were used
in calculating Lynchburg’s STI which, in turn, was used to
calculate Intermet’s CNOL. It makes no difference, Intermet
agrees, whether Lynchburg’s STI was positive or negative
because Lynchburg’s SL expenses would have a direct,
dollar-for-dollar impact on both Lynchburg’s STI and
Intermet’s CNOL in either event.
II.
Since the facts are undisputed and this case presents a pure
question of law, we review the Tax Court’s judgment de
novo. Estate of Mueller v. Commissioner, 153 F.3d 302, 304
No. 99-1046 Intermet Corp. v. Commissioner 13
do not exclude such application, actually supports its position.
Tech. Adv. Mem. 9715002. The IRS reasoned that the
Code’s SLL provision applies on a separate member basis,
rather than a consolidated basis, because the provision refers
to “the taxpayer,” and such language generally means
individual members in the consolidated return context. Id. In
contrast, the IRS in the instant cases ignores the section
1.1502-80 default rule. More importantly, the IRS has
consistently and correctly referred to Intermet—not
Lynchburg—as the “taxpayer” in this appeal.
We recognize that a Technical Advice Memorandum is not
binding upon either the IRS or this court. See I.R.C.
§ 6110(j)(3) (1994). But the Memorandum illustrates the
IRS’s application of the SLL carryback in the consolidated
return context—history that we may consider in determining
whether the IRS’s current position is reasonable. See Wolpaw
v. Commissioner, 47 F.3d 787, 792 (6th Cir. 1995). We also
understand that the IRS’s basic position—that a consolidated
group cannot invoke the SLL carryback if the SL expenses are
incurred by a member with a positive STI—has remained
unchanged. However, the IRS’s shifting and incongruous
reasoning in reaching this result highlights the fundamental
flaw: its position does not comport with the current purpose
and language of the Code and regulations. It is trying to fit a
square peg into a round hole.
We also reject the IRS’s contention that Intermet will reap
a “double tax benefit” if it uses SL expenses both to offset
Lynchburg’s positive STI and to extend the carryback period
from three years to 10 years. Again, the IRS errs by
attributing independent significance to the STI that does not
exist. By offsetting part of Lynchburg’s positive STI, the SL
expenses produced no tax benefit whatsoever. Intermet—not
Lynchburg—was the taxpayer for 1992. Intermet derived no
tax benefit from the SL expenses in 1992 because Intermet
had a CNOL exceeding $25 million and incurred no tax
liability whatsoever in that year. Thus, the SL expense
deductions produced only a single tax benefit—the ability to
carry back those expenses to prior tax years.

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12 Intermet Corp. v. Commissioner No. 99-1046
method may also apply in cases such as this one that involve
carrybacks to a consolidated return year, pointing out that
section 1.1502-79(a)(3) does not explicitly limit its
application to separate return years. Tech. Adv. Mem.
9715002.
The IRS’s interpretation ignores a “fundamental rule of
statutory construction that statutory language is to be read in
pertinent context rather than in isolation.” Oates v. Oates,
866 F.2d 203, 206 (6th Cir. 1989). When reading section
1.1502-79A(a) as a whole, there is no question that it applies
only to the separate return scenario. Section 1.1502-79A is
entitled “separate return years”; subsection (a) is entitled
“carryover and carryback of consolidated net operating losses
to separate return years”; and subsection (a), including its
illustrative examples, addresses only situations involving
separate return years. Indeed, the IRS has recognized in the
past that “although the [CNOL] is apportioned to individual
members for purposes of carry backs to separate return years,
the apportioned amounts are not separate NOLs of each
member.” 49 Fed. Reg. 30528, 30530 (1984) (preamble to
Prop. Treas. Reg. § 1.1502-21(g)). We note that the Fourth
Circuit recently held that a consolidated taxpayer is entitled to
a “product liability loss” carryback—comparable to the SLL
carryback—for that portion of an individual member’s
product liability expenses that does not exceed the member’s
“separate net operating loss” as calculated under section
1.1502-79A(a)(3). United Dominion Indus., Inc. v. United
States, __F.3d __, 2000 WL 305134, at *8-9 (4th Cir. March
24, 2000). The court offered no analysis to support its
conclusion that Treas. Reg. § 1.1502-79A(a)(3) dictates a
method for calculating a member’s “separate net operating
loss” outside of the separate return context. Id. at *8, n.17.
For the reasons outlined above, we are unpersuaded by the
Fourth Circuit’s approach.
A second inconsistency also arises out of the 1997
Technical Advice Memorandum. The IRS maintained in the
Memorandum that Treas. Reg. § 1.1502-80, which applies the
Code provisions to the group to the extent that the regulations
No. 99-1046 Intermet Corp. v. Commissioner 5
(6th Cir. 1998), cert. denied, 525 U.S. 1140 (1999). Statutory
“provisions granting a [tax] deduction . . . are matters of
legislative ‘grace’ and are construed strictly (in favor of the
government).” Weingarden v. Commissioner, 825 F.2d 1027,
1029 (6th Cir. 1987). The taxpayer bears the burden of
pointing to a clear provision entitling it to a claimed
deduction. Indopco, Inc. v. Commissioner, 503 U.S. 79, 84
(1992).
Where an agency regulation interprets an ambiguous
statutory provision, we limit our review to whether the
regulation is a reasonable, but not necessarily the best,
interpretation. Atlantic Mut. Ins. Co. v. Commissioner, 523
U.S. 382, ___, 118 S. Ct. 1413, 1418 (1998). An agency’s
interpretation of its own ambiguous regulation also deserves
substantial deference if the interpretation is reasonable insofar
as it “‘sensibly conforms to the purpose and wording of the
regulations.’” Martin v. Occupational Safety and Health
Review Comm’n, 499 U.S. 144, 151 (1991) (quoting Northern
Indiana Pub. Serv. Co. v. Porter Cty. Chapter of Izaak
Walton League of Am., Inc., 423 U.S. 12, 15 (1975)). See
also Martin v. American Cyanamid Co., 5 F.3d 140, 144 (6th
Cir. 1993).
III.
This case presents a straightforward issue, but one that
arises in the context of a complex regulatory framework. We
therefore proceed to summarize that framework as it existed
in 1992, the relevant year here.
The Internal Revenue Code permits a taxpayer to carry an
NOL forward to future taxable years or back to preceding
taxable years to offset taxable income generated in those
years, yielding a tax refund. I.R.C. § 172(b) (1994). This
provision “‘permit[s] a taxpayer to set off its lean years
against its lush years, and to strike something like an average
taxable income computed over a period longer than one
year.’” Six Seam Co. v. United States, 524 F.2d 347, 351 (6th
Cir. 1975) (quoting Libson Shops, Inc. v. Koehler, 353 U.S.
382, 386 (1957)). In 1992, the general carryback period was

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6 Intermet Corp. v. Commissioner No. 99-1046
three years preceding the year in which the NOL was
incurred. I.R.C. § 172(b)(1)(A)(i) (1994) (amended in 1997).
In 1997, the three-year carryback was reduced to two years.
The Code extends the carryback period to 10 years for
certain “specified liability losses.” Id. § 172(b)(1)(C) (1994).
A transition rule enacted in 1990 prohibits the SLL carryback
to years preceding 1984. Omnibus Budget Reconciliation Act
of 1990, Pub. L. No. 101-508, § 11811(b)(2)(B), 104 Stat.
1388 (1990).
As of 1992, the Code defined SLL as follows:
(1) In general.—The term “specified liability loss”
means the sum of the following amounts to the extent
taken into account in computing the net operating loss for
the taxable year:
. . . .
(B) Any amount . . . allowable as a deduction under
this chapter with respect to a liability which arises
under a Federal or State law . . . if –
(i) In the case of a liability arising out of a
Federal or State law, the act (or failure to act) giving
rise to such liability occurs at least 3 years before the
beginning of the taxable year . . . .
A liability shall not be taken into account under
subparagraph (B) unless the taxpayer used an accrual
method of accounting throughout the period or periods
during which the acts or failures to act giving rise to such
liability occurred.
(2) Limitation.—The amount of the specified liability
loss for any taxable year shall not exceed the amount of
the net operating loss for such taxable year.
I.R.C. § 172(f) (1994) (amended in 1998). Thus, a taxpayer
is entitled to the SLL carryback if, among other things: (1) SL
No. 99-1046 Intermet Corp. v. Commissioner 11
a positive STI but remain when the member has a negative
STI, we find that the IRS’s interpretation is unreasonable.
Our conclusion is fortified by the IRS’s history of adopting
or applying differing interpretations of the SLL carryback in
the consolidated return context. Such inconsistency, while
not determinative, is a factor we consider in assessing
whether an agency interpretation of its regulations is
“reasonable.” See Martin, 499 U.S. at 157-58; Martin, 5 F.3d
at 146. We have identified at least two inconsistencies that
undermine the IRS’s analysis.
First, in a 1997 Technical Advice Memorandum, the IRS
adopted an interpretation of the consolidated return
regulations that differs from its analysis in this case. Tech.
Adv. Mem. 9715002 (Apr. 11 1997). The Memorandum
addressed the precise issue presented here—i.e., “[w]hether
specified liability expenses incurred by a member of a
consolidated group may be carried back when that member
has positive taxable income for the year in which the
expenses are incurred.” Id. While the IRS answered that
question in the negative, as it does in this case, it offered
different reasoning. Specifically, the IRS reasoned that a
group is entitled to the SLL carryback only to the extent that
the SL expenses do not exceed the “portion of the [CNOL]
attributable to a member” that incurred the SL expenses. Id.
According to the IRS, the “portion of the [CNOL] attributable
to a member” must be calculated under the formula prescribed
by Treas. Reg. § 1.1502-79(a)(3) (as amended in 1996). Id.
Even if we assume the Memorandum is reconcilable with
the IRS’s position in this case because a portion of the CNOL
cannot be attributed to a member with a positive STI under
Treas. Reg. § 1.1502-79(a)(3), the Memorandum’s reliance on
this regulation is entirely misplaced. Section 1.1502-79(a)
(redesignated as Treas. Reg. § 1.1502-79A(a) by T.D. 8677)
establishes a method for allocating CNOL to an individual
member if a member seeks to carry back a loss to a “separate
return year,” i.e., a year in which the member was not part of
the consolidated group. The IRS contends that this allocation

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10 Intermet Corp. v. Commissioner No. 99-1046
preclude Intermet from taking advantage of the SLL
carryback. Like the Tax Court, the IRS points out that the
regulations require group members to deduct SL expenses in
calculating their STI, since SL expenses do not appear on the
list of “consolidated” items for purposes of calculating the
group’s taxable income. According to the IRS, in a case
where the member incurring SL expenses also has a positive
STI, the SL expenses “cannot give rise to any [CNOL] for the
consolidated group, since those [expenses] are entirely
absorbed by the income of the member before any
consolidated item for the group is even computed.” In other
words, the IRS takes the position that Lynchburg’s SL
expenses were not “taken into account” in calculating
Intermet’s CNOL because Lynchburg’s positive STI
“eliminated” the SL expenses. On the other hand, the IRS
asserts that a member’s SL expenses are taken into account in
a CNOL if the member has a negative STI because the
expenses are “not entirely absorbed at the member level.”
While we agree with the IRS’s overall description of the
consolidated return regulations, we reject its analysis. A
member’s STI is simply a step along the way to calculating
the group’s taxable income or CNOL. An STI has no other
purpose. More to the point, the regulations prescribing the
calculation of STI and CNOL do not govern the determination
of CNOL carrybacks. That issue is governed by Treas. Reg.
§ 1.1502-21A(b), which applies the carryback principles of
section 172 to the consolidated NOL of the group, rather than
separate member “NOLs” or STIs, in situations such as this
one, which do not involve separate return years. In addition,
the IRS and the Tax Court perceive a distinction between
positive and negative STI that is unsupported by the
regulations. An STI’s character as positive or negative has no
independent significance—either for purposes of calculating
CNOL or otherwise. A member’s SL expenses affect the
group’s CNOL dollar-for-dollar, and it makes no difference
whether the member has a positive or negative STI. Because
neither the purpose nor the language of the consolidated
return regulations provide a basis for concluding that the
member’s SL expenses are “exhausted” when the member has
No. 99-1046 Intermet Corp. v. Commissioner 7
expenses as defined under section 172(f)(1)(B) exist; (2) the
taxpayer has an NOL for the year; (3) the SL expenses are
“taken into account” in calculating the NOL; and (4) the SLL
carryback does not exceed the NOL for the year.
The Code permits an affiliated group of corporations to file
a consolidated return in lieu of separate income tax returns.
It does not address whether, or how, the SLL carryback
provision applies in the consolidated return context. Rather,
the Code delegates to the Secretary of the Treasury broad
authority to prescribe regulations
as he may deem necessary in order that the tax liability of
any affiliated group of corporations . . . may be returned,
determined, computed, assessed, collected, and adjusted,
in such manner as clearly to reflect the income-tax
liability and the various factors necessary for the
determination of such liability, and in order to prevent
avoidance of such tax liability.
Id. § 1502. To file a consolidated return, all member
organizations must agree to comply with the consolidated
return regulations. Id. § 1501. Among the advantages of
consolidated returns are the ability to offset gains and losses
of group members and “greater utilization of NOL . . .
carryovers.” Wolter Constr. Co. v. Commissioner, 634 F.2d
1029, 1031 n.1 (6th Cir. 1980).
The Treasury Regulations comprise “the bulk of the ‘law’”
addressing consolidated returns. Id. at 1032. Unfortunately,
the regulations do not specifically address the application of
the SLL carryback. They do establish a default rule that
“[t]he Internal Revenue Code, or other law, shall be
applicable to the group to the extent the regulations do not
exclude its application.” Treas. Reg. § 1.1502-80(a) (as
amended in 1997).
To determine the tax liability of an affiliated group under
the regulations, it is first necessary to determine the
consolidated taxable income for the group. Id. § 1.1502-2(a)
(as amended in 1996). Consolidated taxable income is

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8 Intermet Corp. v. Commissioner No. 99-1046
determined under Treas. Reg. § 1.1502-11(a) (as amended in
1997) by taking into account the following items:
1. The STI of each group member; and
2. The following “consolidated” items: (a) the
consolidated net operating loss deduction; (b) consolidated
capital gain net income; (c) consolidated section 1231 net
loss; (d) consolidated charitable contributions deduction;
(e) consolidated section 922 deduction; (f) consolidated
dividends received deduction; and (g) consolidated section
247 deduction.
A member’s STI—which encompasses cases in which
deductions exceed gross income (negative STI) and vice versa
(positive STI)—is calculated pursuant to Treas. Reg.
§ 1.1502-12 (as amended in 1996). Each member computes
its STI in a manner similar to a separate corporation
computing taxable income, but with a number of
modifications. For example, a member does not take into
account the consolidated items specified in Treas. Reg.
§ 1.1501-11. Id. § 1.1502-12(h)-(n).
Section 1.1502-21A defines the CNOL deduction, one of
the consolidated items to be taken into account in calculating
taxable income, as the aggregate of the CNOL carryovers and
carrybacks to the taxable year. Id. § 1.1502-21A(a) (as
redesignated and amended by T.D. 8677, 1996-30 I.R.B. 7,
1996-2 C.B. 119). The aggregate carryovers and carrybacks
consist of the group’s CNOLs that may be carried back or
over to the taxable year pursuant to I.R.C. § 172(b). Id.
§ 1.1502-21A(b)(1). The group’s CNOL is calculated in a
manner analogous to computing consolidated taxable income,
taking into account: (1) the STI of each group member; (2)
consolidated capital gain net income; (3) consolidated section
1231 net loss; (4) consolidated charitable contributions
deduction; (5) consolidated dividends received deduction; and
(6) consolidated section 247 deduction. Id. § 1.1502-21A(f).
No. 99-1046 Intermet Corp. v. Commissioner 9
To assess Intermet’s position, the consolidated return
regulations direct us first to determine whether the group, as
opposed to its individual members, satisfies the Code’s
requirements for the SLL carryback. See Treas. Reg.
§ 1.1502-80(a). We find that Intermet does satisfy these
requirements. First, for purposes of this appeal, we will
assume that Lynchburg’s claimed expenses satisfy the
definition of SL expenses under I.R.C. § 172(f)(1)(B) since
the Tax Court did not decide this issue. Second, there is no
dispute that the “taxpayer”—Intermet—had a CNOL in 1992.
Third, Lynchburg’s SL expenses were “taken into account” in
calculating Intermet’s CNOL because they directly affected
Lynchburg’s STI which, in turn, affected Intermet’s CNOL.
Indeed, Lynchburg’s SL expenses reduced Lynchburg’s STI
and increased Intermet’s CNOL dollar-for-dollar. Finally,
Intermet was entitled to carry back the full amount of
Lynchburg’s SL expenses because those expenses did not
exceed Intermet’s CNOL for the year.
The IRS argues that Intermet does not satisfy the Code’s
requirements because it is improper to equate the Code’s
references to “net operating loss” with Intermet’s CNOL. We
disagree. It is true that a group’s CNOL is calculated
somewhat differently than an individual corporation’s NOL.
But this is not dispositive. The consolidated return
regulations tell us to apply the IRC provisions to “the group,”
and the CNOL represents the group’s version of NOL.
Moreover, the IRS has consistently taken the position—both
in this case and otherwise—that the CNOL does have
significance in applying the SLL carryback in the
consolidated return context because only a group with a
CNOL may take advantage of the carryback. See Tech. Adv.
Mem. 9715002 (Apr. 11, 1997).
Having concluded that Intermet satisfies the statutory
requirements for the SLL carryback, we next consider
whether the consolidated return regulations somehow alter
this result. See Treas. Reg. § 1.1502-80(a). Although the
regulations do not explicitly address the SLL carryback, the
IRS insists that the overall structure of those regulations

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