Tax implications liquidating corporation

The plaintiffs' original motion was denied without prejudice in order to narrow the issues. We have already set forth some of these facts in Coast-to-Coast Financial Corp. of the Internal Revenue Code as that code existed at the time of these transactions, FSLIC's reimbursement of covered asset losses was not included in the plaintiffs' gross income. The next day, Centex representatives met with Leo Blaber, President of the Federal Home Loan Bank of Chicago and lead negotiator on the LAMB package. The parties therefore agree that they shall in good faith, and with their best efforts, cooperate with one another to carry out the purpose of this Agreement as described in this section. During the second round of briefing, the parties cross-moved for summary judgment. The parties discussed the availability of tax benefits, Centex's ability to utilize them, and the split of tax benefits between Centex and the FSLIC in any potential deal. Quinn's handwritten quantification of the tax benefits to the Director for the Southwest Plan. Blaber reported that Centex--unlike other potential acquirers--believed that it would be able to "utilize the existing tax benefits," and that Blaber's "major concern" was Awhether or not the tax sharing provision [was] satisfactory."In a document dated December 12, 1988, Centex again quantified for the FSLIC the FSLIC's share of tax benefits, specifically including an estimation of the covered asset loss deductions. The Assistance Agreement's execution date of December 29, 1998, was two days before the tax benefits available under the Internal Revenue Code were to be reduced by fifty percent. Consequently, defendant has failed to identify a genuine issue of material fact.****************On December 15, FHLBB and FSLIC representatives presented Centex a draft assistance agreement. if the Tax Benefit Items described in ╖ 9(a) had not been taken into account . Defendant disputes this proposed finding and characterizes the finding as proposed that ACentex management and advisors did not believe that their contract risks included a law change . ." Plaintiffs do not contend that their contract risks did not include the possibility of any law change but rather contend that their risks did not include the possibility of a targeted law change. However, this repeal was effective only with respect to transactions completed on or after May 10, 1989. ═ The extensive negotiations concerning the allocation of tax benefits would have led to a useless, unenforceable agreement. Consequently, even though Congress did not breach any express provision of the contract, passage of the Guarini legislation constituted a breach of the implied good faith promise that attached to the contract's express provisions. 1994) (citation omitted).****************Defendant contends that no breach of the implied covenant of good faith could have occurred here because the benefits were derived from a tax deduction and plaintiffs understood that the tax laws could change.

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I realize that the Congress has approved these tax provisions so as to benefit the FSLIC. Following these principles, I am reluctant to proceed with the LAMB package on its current terms, as presented by Leo Blaber. On December 22, Centex held a telephonic board meeting to approve the acquisition of the LAMB package. Hirsch's statements to the limited purposes of showing (1) that Mr. We do not use the statements as evidence (1) that the Bank Board had actually disapproved the deal, (2) that Mr. Consequently, because the statements are not being utilized to prove the truth of the matters they assert, they are not hearsay. Also on December 29, the FSLIC and Centex executed an assistance agreement ("Assistance Agreement"). in immediately available funds an amount equal to the net Debit balance" or (2) with certain restrictions not relevant here, Ato direct the net Debit balance . Section 9(a)(3) defined this tax benefit item: Fifty percent (50%) of the amount of any cost, expense or loss (i) which is incurred by the ACQUIRING ASSOCIATION, (ii) for which the CORPORATION has made or is obligated to make assistance payments to the ACQUIRING ASSOCIATION pursuant to ╖ 3(a) of this Agreement that is not includible in gross income by virtue of the provisions of ╖ 597 of the Code (or, with respect to tax liability, any state income tax law), and (iii) which is either deductible on the ACQUIRING ASSOCIATIONS's Federal or state income tax return or reduces the bad debt reserve balance of the ACQUIRING ASSOCIATION . Board Member White testified at this hearing regarding the taxability of capital losses: AWhat we have got are tax benefits stretched over 10 years of the contract. Defendant has not identified a genuine dispute in regard to this proposed finding.****************With the passage of FIRREA in August 1989, the FSLIC and the FHLBB were abolished and their functions transferred to the FDIC and three new Government agencies: the Resolution Trust Corporation (ARTC"), the Office of Thrift Supervision (AOTS"), and the Federal Housing Finance Board. Many former employees of the FHLBB were transferred to the new agencies. As we discuss below, the classification of the Guarini legislation as tax legislation does not shelter defendant from contractual liability. the implied covenant of good faith and fair dealing, that was contained in the contract from the moment of execution. The impact of the Guarini legislation, however, was quite different from that of our hypothetical. Such an object is not necessarily inconsistent with a public purpose, of course, and when we speak of governmental A self-interest," we simply mean to identify instances in which the Government seeks to shift the costs of meeting its legitimate public responsibilities to private parties. Hence, governmental action will not be held against the Government for purposes of the impossibility defense so long as the action's impact upon public contracts is . The greater the Government's self-interest, however, the more suspect becomes the claim that its private contracting partners ought to bear the financial burden of the Government's own improvidence, and where a substantial part of the impact of the Government's action rendering performance impossible falls on its own contractual obligations, the defense will be unavailable.. To find that tax legislation is immune from the Winstar plurality's general rule regarding the sovereign acts doctrine would be to place every government contract at the mercy of targeted taxation.

And they were worth fighting to preserve, because they do allow us to stretch our limited resources farther. The board package prepared for this meeting discussed the Asignificant tax benefits available to the Centex consolidated group from this acquisition." The package also included a spreadsheet quantifying the tax benefits Centex expected to receive, including the estimated value of the covered asset loss deductions. White explained that, unless Centex agreed to accept a smaller portion of the tax benefits, the deal would not be approved. Wall said that the Bank Board had disapproved the deal, (2) that Mr. White had actually voted against the deal, or (3) that Mr. The Assistance Agreement contained several provisions that are relevant to the issues currently before the court. [t]he amount of Covered Asset Losses." Under ╖ 6(a)(2), upon the submission by Centex of each Quarterly Report required by the contract, the FSLIC was required either (1) "to wire transfer to the [Special Reserve Account I] of the ACQUIRING ASSOCIATION . FIRREA required the RTC to Areview all means by which it [could] reduce costs under existing [FSLIC] agreements" and to Aevaluate costs under existing [FSLIC] agreements" with regard to Acapital loss coverage," Atax consequences," and Aany other relevant cost consideration." 12 U. In an October 1989 memorandum, Joan Spirtas and Bobby Hughes, both FDIC employees, recommended that the FDIC change its approach to tax benefits in regard to the filing of final receivership returns in connection with FSLIC-assisted transactions. This explains why defendant's reliance on our statement that A[i]f no promise is found, the plaintiff's claim fails[,]" Coast-to-Coast Fin. To acknowledge the presence of this implied covenant in the contract is not to create a new obligation. The uncontroverted evidence here demonstrates that the Guarini legislation was specifically intended to strip those taxpayers who had entered into contracts with the FSLIC and the FHLBB of the fruits of those contracts. Hence, while the Government might legitimately conclude that a given contractual commitment was no longer in the public interest, a government seeking relief from such commitments through legislation would obviously not be in a position comparable to that of the private contractor who willy-nilly was barred by law from performance. so that the Government should not have the benefit of the [sovereign acts] defense.. This would endanger, not only the Government's contracting partners, but also Athe Government's own long-run interest as a reliable contracting partner." Id. 130 (1982), in which there was no suggestion that the tax at issue in that case was targeted at the tribe's contracting partners.****************Contract law does not require government contractors to anticipate blatantly targeted legislation.

Defendant has failed to identify a genuine dispute.****************In reviewing the treatment of covered assets, however, we concluded that there is substantial doubt as to whether a widely held perception of the applicable tax law Bas allowing the realization of a tax loss when the holder of a covered asset is fully compensated for any shortfall between the amount received upon disposition and the asset's tax basis Bis consistent with the applicable statutory provisions and longstanding IRS published ruling positions. From the point of view of sound tax and financial policy, taking into account both the costs to the government and the appropriate economic incentives for assisted institutions, it is clear that assisted institutions should not be allowed a tax deduction for losses or expenses that are reimbursed by the FDIC. 1997) (emphasis added) (AThe Government-as-contractor cannot exercise the power of its twin, the Government-as-sovereign, for the purpose of altering, modifying, obstructing or violating the particular contracts into which it had entered with private parties.").

Defendant disputes this proposed finding Ato the extent that the finding suggests that Mr. Unfortunately, as a legal matter, the deductibility of covered losses and expenses under existing law is less clear. If the covenant did not impose this limitation upon the Government, every contract promise made by the Government would be illusory.

Plaintiffs' Renewed Motion for Summary Judgment was granted in part in that we found that a deduction for covered asset losses existed as a matter of law at the time the contract was entered into. Centex initially suggested a sharing arrangement whereby it would retain seventy-five percent of the value of the tax benefits and give twenty-five percent to the FSLIC. This document stated that it was "assumed that these [capital] losses would be realized equally over the ten year agreement period." Throughout the negotiations, both Centex and the FSLIC negotiators included covered asset loss deductions among the four enumerated categories of tax benefits. As contemplated by the Assistance Agreement and on the same day that the Assistance Agreement was executed, the IRS issued Centex a private letter ruling regarding certain tax consequences of the acquisitions. made by FSLIC pursuant to the terms of the Assistance Agreement w[ould] constitute money or other property received from FSLIC pursuant to Section 406(f) of the National Housing Act, and as such, w[ould] not be included in the gross income of [the acquirer] or any of the S&Ls[,]" (6) that, "[p]ursuant to section 597(b) of the [Internal Revenue] Code, no reduction in the basis of assets of [the acquirer would] be made on account of money or other property received from FSLIC pursuant to section 406(f) of the National Housing Association [sic] [,]" and (7) that, A[p]ursuant to section 904(c)(2)(B) of the Reform Act, section 265 [of the Internal Revenue Code] w[ould] not apply [to] deny any deduction by reason of such deduction being allocable to amounts excluded from gross income under section 597 of the [Internal Revenue] Code."With the Assistance Agreement in place and with the issuance of the private letter ruling, plaintiffs were in position to take advantage of the tax benefits, including the deduction for covered asset losses, available under the Internal Revenue Code. One of a government contractor's reasonable, legitimate expectations is that Congress will not, through targeted legislation, eliminate its opportunity to reap its share of the benefits it anticipates deriving from the contract.

However, because the pending motions require greater factual detail than these earlier opinions did, we set forth the relevant undisputed facts here in full.****************This case and the other four pending Atax benefit" cases arose out of efforts made during the 1980s by the Federal Savings and Loan Insurance Corporation (AFSLIC") and the Federal Home Loan Bank Board (AFHLBB" or ABank Board") to avoid some of the costs of liquidating failing savings and loan institutions. (i) by which the Book Value of a Covered Asset exceeds the Net Proceeds Received by the ACQUIRING ASSOCIATION upon the Liquidation of such Covered Asset, or (ii) of any write-down in Book Value of a Covered Asset approved by the CORPORATION pursuant to ╖ 4." These FSLIC-specific provisions were discussed in detail in our opinion in Centex , 48 Fed. 625.****************Throughout the 1980s, the FSLIC and the FHLBB repeatedly explained to Congress that the FSLIC-specific tax provisions of the Internal Revenue Code reduced the costs to the FSLIC and the FHLBB of selling insolvent thrifts. Defendant points out that certain of the statements relied upon by plaintiffs in support of their proposed findings in this regard do not specifically mention a deduction for covered asset losses. As we have held, the FSLIC-specific provisions put plaintiffs in a position to take advantage of the loss deductions allowed under ▒▒ 165, 166, and 593 of the Internal Revenue Code. Defendant has failed to identify a genuine issue.****************In 1988, the FHLBB urged Congress to extend the FSLIC-specific tax provisions beyond their intended sunset of December 31, 1988. Second section 382 of the Code generally will permit any net operating loss carryover of the acquired institution to be utilized by the acquiring institution to offset post-acquisition taxable income. at 706: A[I]f the parties contract for a provision that provides one party with unconditional discretion, the only reasonable expectations [sic] of the parties is that the party vested with such discretion will exercise that discretion at some point in time." This quotation makes clear, however, that the court's finding was dependent upon the parties having contracted Afor a provision that provide[d] one party with unconditional discretion." Defendant argues that the express cooperation clause contained in the contract at issue here is such a provision that limited the Government's duty to act in good faith. Here, however, as the Government concedes, the parties' express contract contained the implied covenant of good faith and fair dealing; and this covenant could be independently breached.****************Plaintiffs here legitimately expected that the covered asset loss deduction would not be eliminated through retroactive legislation targeted specifically at assistance agreements entered into by the FSLIC and the FHLBB.

Throughout its statement of genuine issues, defendant disputes plaintiffs' contention that the covered asset loss deduction was generally understood to be a tax benefit under the FSLIC-specific tax provisions. Plaintiffs do not claim that any of these entities or persons had the authority to bind the Government on tax matters. Because of this the tax basis of the assets of the acquired institution will carry over to the acquiror and permit the acquiror to recognize a tax loss upon the disposition of an acquired asset which has a tax basis greater than its fair market value. As we have stated, however, Congress could have eliminated the deduction without becoming liable for contract damages. Furthermore, Hercules is inapposite because that case concerned the question of whether an implied indemnification term or agreement even existed.

These experts included (a) the FSLIC and the FHLBB in formal statements; (b) the FHLBB'S outside law firms in privileged and non-privileged communications; (c) the technical staff of the Internal Revenue Service (AIRS"); (d) the Treasury Department's Tax Legislative Counsel and the Treasury Department's experts responsible for estimating the costs of tax legislation; (e) tax experts on the FSLIC's and the FHLBB's staffs; (f) tax experts within the Congressional Budget Office and the Comptroller General; (g) the staff of Congress's Joint Committee on Taxation; (h) Centex's own tax experts; and (i) tax experts unaffiliated with either party to the transaction. ═ In response to this proposed finding defendant states that A[n]either FHLBB, FSLIC, nor the outside counsel of such entities had authority to speak on behalf of the Government on the subject of the allowability of the covered asset loss deduction." This statement is non-responsive to the proposed finding. In November 1988, Congress enacted the Technical and Miscellaneous Revenue Act of 1988, Pub. First, most FSLIC-assisted acquisitions will qualify as a tax-free reorganization under section 368(a)(1)(G) of the Code. The targeted nature of the Guarini legislation is therefore critical to our finding of breach.

Susswein opined that the IRS position on the availability of the covered asset loss deduction was clear under the law." Defendant has not, however, disputed the fact that the memorandum contained the words plaintiffs have quoted. The Treasury Department has concluded that assisted institutions should not be allowed to deduct losses and expenses that are reimbursed by the FDIC.

Defendant has failed to identify a genuine dispute.****************As a way of removing this Asubstantial doubt," the Susswein and Buckley memorandum suggested that ACongress or the IRS might wish to review this area and consider clarifying the law." The memorandum concluded by noting that A[w]here the tax benefits from purported losses on covered assets are not expressly shared, acquirers may argue that the anticipated enjoyment of this tax benefit was part of their overall bargain, and that clarifying or modifying the law in this regard is unfair."An FDIC memorandum dated August 31, 1990, discussed the possibility of Congressional action regarding the covered asset loss deduction: It is generally known that acquirers, as well as the FSLIC, held the opinion that the excess of tax basis over fair market value on Covered Assets (ACovered Asset Losses") was a proper loss deduction on the tax returns of the acquiring association. Some of these institutions will argue that the decision is contrary to their expectations regarding the 1988/89 transactions.

Acquirers understood this and thus assumed in negotiations that there was a congruence of objectives between them and FSLIC to maximize benefits so that the only matter to be negotiated was the extent to which those benefits would be shared. An April 16 letter setting forth the Treasury Department's responses to several questions submitted by Representative Esteban E. Gonzalez, Chairman of the House Committee on Banking, Finance and Urban Affairs stated: The RTC has asked the Department of the Treasury to provide clarification on certain tax issues.

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