Louisiana Health Care Self Insurance Fund v. The United States of America

Filing 98

WRITTEN REASONS FOR DENIAL OF MOTION FOR PARTIAL SUMMARY JUDGMENT: For the reasons stated herein, the Court denies Louisiana Health Care Self Insurance Funds Motion for Partial Summary Judgment (See R.Doc. 44 and 87). Signed by Judge John W. deGravelles on 10/20/2014. (SMG) Modified to edit document type on 10/20/2014 (SMG).

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
CIVIL ACTION NO. 12-766

LOUISIANA HEALTH CARE SELF
INSURANCE FUND

JUDGE JOHN W. deGRAVELLES
VERSUS

MAG. JUDGE RICHARD L.
BOURGEOIS, JR.

THE UNITED STATES OF AMERICA

JURY TRIAL

WRITTEN REASONS FOR DENIAL OF
MOTION FOR PARTIAL SUMMARY JUDGMENT
This matter came before the Court on the Motion for Partial Summary Judgment (R. Doc.
44) filed by plaintiff, Louisiana Health Care Self Insurance Fund (“Taxpayer”). Defendant the
United States of America (“IRS”) opposed the motion. After the Court ordered supplemental
briefing,1 oral argument was heard on September 23, 2014.
On September 29, 2014, the Court denied Taxpayer’s motion and stated that written
reasons would follow. For reasons set forth below, Taxpayer’s motion was denied because a
genuine issue of material fact existed as to whether, for purposes of 26 U.S.C. § 832(c)(11), the
Taxpayer “paid or declared to policyholders … dividends and similar distributions.”
I.

Factual Background
The IRS “does not dispute the facts contained in [Taxpayer’s] statement of undisputed

facts with one exception.” (United States of America’s Response to Plaintiff’s Statement of
Undisputed Material Facts, R. Doc. 48-1, p. 1). The sole fact disputed is whether Taxpayer
“declared a dividend for each of the taxable years at issue.” (Id.). Thus, the parties agree to the
following.
1

In this supplemental briefing, the IRS conceded that the all-events test and economic performance rule
did not apply in this case. (R. Doc. 67).

1

This is a tax refund case. Taxpayer is a workers’ compensation self-insurers’ fund
formed under the laws of the state of Louisiana. (Taxpayer’s Local Rule 56.1 Statement of
Undisputed Material Facts, R.Doc. 44-2, p. 1). It is engaged, and at all times relevant to this
action was engaged, in the business of providing workers compensation coverage to its member
employers. (Id.).2
This case involves Taxpayer’s 2002, 2003, and 2004 tax returns.

In those years,

Taxpayer claimed certain deductions for “Dividends to Policyholders.” (Id. at p. 2). The IRS
later undertook an audit of those years and raised an issue with the deductibility of those
dividends under 26 U.S.C. § 832(c)(11). (Id.). The IRS issued a Notice of Proposed Assessment
(“30 Day Letter”) to Taxpayer proposing changes to Taxpayer’s tax liability for the years 2002
through 2004. (Id.). Along with the 30 Day Letter, the IRS issued Form 4549-A to Taxpayer
showing a proposed increase in taxable income equal to the amount of the dividends deducted on
Taxpayer’s tax returns. (Id.)
On June 9, 2010, Taxpayer filed a protest letter with the IRS Appeals Office in New
Orleans, Louisiana, protesting the amount of the proposed assessment of claimed income tax
liability set forth in the 30 Day Letter and Form 4549-A. (Id.).

The parties conducted

conferences and participated in discussions regarding these issues, but they were unable to come
to an agreement. (Id.).

2

At oral argument and in his brief, counsel for Taxpayer explained the many differences between selfinsurance funds (“SIFs”) like Taxpayer and ordinary property and casualty companies. SIFs are regulated
under Title 23, the Worker’s Compensation Statutes, while property and casualty insurers are regulated by
the Insurance Code of Title 22. Louisiana law also does not require SIFS to have minimum capital or
surplus as is required of insurance companies licensed under Title 22 of the Louisiana Revised Statutes.
Each member of the group also becomes jointly and severally liable for the workers’ compensation
liabilities of each other member of the group. (Taxpayer’s Statement of Uncontested Facts, R. Doc. 48-1,
p. 2). However, Taxpayer admits that “it is taxed as an insurance company under federal law” and “filed
Form 1120-PC, which is the tax form filed by property and casualty insurance companies.”

2

The IRS Appeals Office then issued a Notice of Deficiency (“Statutory Notice”) to
Taxpayer dated January 6, 2012 determining that Taxpayer had a deficiency in its tax account.
(Id.). The total amount of tax deficiencies and penalties owed was $2,751,668.40 (Id. at p. 4).
The alleged deficiencies related solely to deductions from Taxpayer’s income for member
employer dividends declared for the calendar years 2002 through 2004, and the deficiencies
arose as a result of the IRS’s recalculation of Taxpayer’s taxable income for those years. (Id.)
No other items shown on the 2002, 2003, and 2004 returns were disputed by the IRS. (Id.).
On March 30, 2012, Taxpayer made payment under protest to the IRS in the amount of
$2,751,668.40 for all alleged tax deficiencies and penalties assessed against it pursuant to the
January 6, 2012, Statutory Notice. (Id.)
On May 9, 2012, Taxpayer filed amended Forms 1120-PC for the tax years of 2002
through 2004 seeking a claim for refund of federal income tax pursuant to § 6402 of the Internal
Revenue Code for each of the above years in the total amount of $2,751,668.40. The IRS failed
to allow, or even take action on, this refund claim within six months of filing. Accordingly,
pursuant to § 6532 of the Internal Revenue Code, the IRS is deemed to have disallowed the
refund claim. The instant action ensued.
II.

Discussion
A. Summary Judgment Standard
A motion for summary judgment shall be granted if the [depositions, documents,

electronically stored information, affidavits, declarations, stipulations, admissions, interrogatory
answers, or other material] show that there is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56; Little v. Liquid Air
Corp., 37 F.3d 1069 (5th Cir.1994) (en banc).

3

Here, Taxpayer has the burden of proof at trial. See Battelstein v. Internal Revenue
Service, 631 F.2d 1182, 1185 (5th Cir. 1980) (citations omitted). When a party seeking summary
judgment bears the burden of proof at trial, it must come forward with evidence which would
entitle it to a directed verdict if such evidence were uncontroverted at trial. Celotex Corp. v.
Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the movant produces
such evidence, the burden shifts to the respondent to direct the attention of the Court to evidence
in the record sufficient to establish that there is a genuine issue of material fact requiring a trial.
Id. The responding party may not rest on mere allegations made in the pleadings as a means of
establishing a genuine issue worthy of trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 24849, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Little, 37 F.3d at 1075.
If no issue of fact is presented and if the mover is entitled to judgment as a matter of law,
the Court is required to render the judgment prayed for. Fed.R.Civ.P. 56(a); Celotex Corp., 477
U.S. at 322. Before it can find that there are no genuine issues of material fact, however, the
Court must be satisfied that no reasonable trier of fact could have found for the non-moving
party. Id.
B. Analysis
“[T]ax deductions are matters of legislative grace and must be narrowly construed. The
taxpayer bears the burden of proving his entitlement to a particular deduction. Equity cannot
supply a deduction when the Code does not grant one.” Battelstein v. Internal Revenue Service,
631 F.2d 1182, 1185 (5th Cir. 1980).
The sole issue remaining for this Court is whether Taxpayer “paid or declared to
policyholders … dividends and similar distributions” under 26 U.S.C. § 832(c)(11). There seems
to be no dispute between the parties as to what actions the Taxpayer took. The sole issue is

4

whether these actions constituted a “dividend” or “similar distribution.” Determining whether
something is a “dividend” or “similar distribution” appears to be a mixed question of law and
fact. See 9C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2589
(3d ed. 2014).
Here, the Court believes that the IRS has presented sufficient evidence to at least produce
a reasonable dispute as to the application of the facts to the law. As the Taxpayer conceded at
oral argument, determining what a dividend is is a difficult task. 26 U.S.C. § 832(c)(11)
provides no meaningful definition of “dividend and similar distribution.” 26 U.S.C. § 834,
which provides certain definitions for the part containing section 832, states in part:
(e) Definitions.--For purposes of this part [i.e., Part II, Other Insurance Companies”]—

(2) Dividends to policyholders.--The term “dividends to policyholders” means
dividends and similar distributions paid or declared to policyholders. For
purposes of the preceding sentence, the term “paid or declared” shall be construed
according to the method regularly employed in keeping the books of the insurance
company
(emphasis added).

Thus, “Dividends to policyholders” means “dividends and similar

distributions paid or declared to policyholders.” This definition is cryptic and circular.
Some treatises refer to a “dividend” as simply a transfer of funds to shareholders. For
instance, Louisiana doctrine explains that ““The term dividend is not defined by statute but is
ordinarily considered as a distribution of corporate earnings and profits to shareholders.” Glenn
G. Morris and Wendell H. Holmes, 7 La. Civ. L. Treatise, Business Organizations § 25.01 (June
2014).

Moreover, Fletcher Cyclopedia of the Law of Corporations confirms the same

information. This treatise provides:
“This division or distribution of corporate profits to the shareholders has been
called a “dividend.” State corporation statutes generally do not define the term
“dividend.” The Revised Model Business Corporation Act refers to dividends as a
5

type of distribution to shareholders. A “distribution” is defined as a direct or
indirect transfer of money or other property (except its own shares) or incurrence
of indebtedness by a corporation to or for the benefit of any of its shareholders in
respect of any of its shares, which may include a declaration or payment of a
dividend. Some state statutes contain specific dividend provisions but do not
otherwise define the term “dividend.”
11 Fletcher Cyclopedia of the Law of Corporations § 5318 (Sept. 2014). Thus, dividends seem
to merely be any sort of distribution to shareholders, without any of the distinctions that the IRS
would seem to want to impose.
Taxpayer has cited to case law suggesting that it did in fact declare dividends. For
instance, while the IRS is correct that, in Bituminous Casualty Corp. v. Comm’r, 57 T.C. 58
(1971), the issue was not whether a dividend had been declared, the Court did address the
regulations governing § 832(c)(11). The current version of such regulation is 26 C.F.R. § 1.822–
12(a), which provides that “dividends to policyholders” means “dividends and similar
distributions paid or declared to policyholders” and includes “amounts returned to policyholders
where the amount is not fixed in the insurance contract but depends upon the experience of the
company or the discretion of the management.” Thus, as Bituminous explains, deductions are
based on the declaration rather than the payment, and deductions can be made on “reasonably
accurate estimates.” Id. at 85. Further, in finding dividends properly declared, the Bituminous
court emphasized the fact that the obligation to pay the dividends was a “commitment … made
to policyholders at the time the policies were written and was expressed in advance resolutions
declaring such dividends.” Id. “Pursuant to the resolutions, a reasonable estimate of the amount
of such obligation was at all times reflected as a liability” on the taxpayer’s Annual Statement.
Id.
In Commercial Fishermen's Inter-Insurance Exchange v. C.I.R., 38 T.C. 915, 931 (T.C.
1962), the Court interpreted § 832(c)(11) and explained: “To constitute a valid declaration, the
6

resolution must by its terms create a binding and enforceable obligation on the part of the
corporation to pay.” Id. at 931 (citations omitted). In sustaining the petitioner with respect to
deductions of the dividends declared, the Court concluded, “upon declaration of the earnings as
dividends petitioner became indebted in the amount thereof, except as to the loss retentions, to
the subscribers … All indications are that both the subscriber and petitioner recognized the
amounts of the contributions as true obligations of petitioner to the individual prescriber.” Id. at
933.
The 1996 Field Service Advice Memorandum (February 20, 1996), 1996 FSA LEXIS
575,3 reviewed numerous cases and other tax sources and summarized as follows:
insurance companies are allowed a deduction for policyholder dividends; such
deduction is not subject to the all events test but is allowed for a ‘reasonably
accurate estimate’; the deduction is allowed in the year declared, even though
payment is to be made later; the declaration need not be for a specific
amount, as long as there is a fixed formula; and if state approval is required
[which, according to LHCSIF, it isn’t here], the deduction is not allowed until the
year of approval.”
The FSA Memorandum also references a number of private rulings from the IRS. In almost each
of these, dividends declared are deductible in the year declared “provided the dividend
declaration by its terms creates a binding and enforceable unconditional obligation.” See, e.g.,
PLR 8314019, December 23, 1982
Finally, the Taxpayer has pointed to case law showing that the timing of payment or even
the fact that under some set of circumstances payment might not be made at all, does not affect
the amount of the liability or of its deductibility upon declaration. E.g., United States v. Hughes
Prop., 476 U.S. 593 (1986).

3

“Courts have said that, while letter rulings have no precedential value, they do reveal the interpretation
of the statute by the agency charged with responsibility for administering the tax laws, and so provide
evidence of the proper construction of the statute.” 1 Casey Fed. Tax Prac. § 1:35.60 (citations omitted).

7

Bitumous, Commercial, the 1996 Field Service Advice Memorandum, the IRS private
rulings, and Hughes seem to stand for the proposition that dividends need not be in fixed
amounts as long as they are reasonably determinable, that dividends must be binding and
enforceable obligations,4 and that the dividends need not be paid in the year declared.
All of this seems to support the conclusion that the Taxpayer did in fact declare
dividends. Taxpayer’s by-laws require that, after the payment of claims and expenses, and after
provision has been made for open claims, the Board set aside excess funds for a surplus, and
“any remaining amount of such excess funds shall be distributed to members in such manner as
the BOARD shall deem equitable.” (R.Doc. 44-2, p.5). In each of the years at issue, the Board
passed a resolution “stating that revenues from all sources for the year ending December 31,
2002[, 2003, and 2004], in excess of the expenses of the Fund, claims, claim expenses, and a
provision for claims incurred but not reported shall be distributed to the eligible Members in
such manner as the Board shall deem equitable.” (Id.). The annual financial statements were
used to determine the actual dollar amount of revenues over expenses and the actual amount of
the dividend previously declared, and the dividends declared are recorded in the annual financial
statements as a liability. (Id. at p.5-6). All of this seems to coincide with the above case law.

4

Taxpayer is correct that dividends are in fact binding obligations on the Board under state law.
“Although [Louisiana law] contains no express provisions on the issue, a long line of jurisprudence has
recognized that the declaration of a dividend creates a debtor-creditor relationship between the
corporation and shareholder which may be enforced by suit. Accordingly, once declared the dividend may
not be subsequently revoked by the board.” Glenn G. Morris and Wendell H. Holmes, 7 La. Civ. L.
Treatise, Business Organizations § 25.03 (June 2014). See also James S. Holliday, Jr. and Rick J.
Norman, 1 La. Prac. Corp. § 11:9 (2013-2014 ed.)(“The declaration of a dividend creates a relation of
debtor and creditor between the corporation and its shareholders.”); 11 Fletcher Cyclopedia of the Law of
Corporations § 5322 (Sept. 2014) (“After a dividend has been declared by the directors, it becomes a
corporate debt owed to the shareholders in proportion to their share or interest in the corporation. If the
corporation refuses to pay a declared dividend, the shareholders may sue to recover the unpaid
dividend.”). But is this circular to the issue at hand? This merely means that a dividend, once declared, is
binding; it does not answer whether a dividend is in fact a dividend in the first place.

8

Against all of this, the IRS claims that, according to its expert, Taxpayer’s board
resolutions do not constitute “dividends” or “similar distributions.”

The IRS’s position is

supported by its expert, Edward W. Buttner, IV,5 who applies general accounting principles. He
urges that the amounts deemed as dividends were not reasonably accurate estimates but rather
contingent liabilities. In addition, the IRS complains that certain actions taken by the Board of
Directors after the declarations prove that the “dividends” were in fact a “surplus.” Those
actions include the Board’s payment of other external liabilities before paying the dividends.
According to the IRS’s expert, “If you declare it, you pay it.” The IRS then points to unpaid
balances for three years of dividends.
Further, the IRS made an issue of the fact that Taxpayer paid its dividends years after
they were declared.6

Finally, although not discussed at oral argument, Buttner’s expert report

also takes issue with the fact that policyholders were not notified of the nature, timing, or extent
of the dividend, as they should have been.
The Court finds that there are sufficient factual issues in this mixed question of law and
fact to make summary judgment inappropriate.

5

The Court has deferred ruling on the Taxpayer’s Motion in Limine to Exclude Testimony and Report of
Edward W. Buttner, IV (R.Doc. 45) until the time of trial. See R.Doc. 88.
6
The IRS vacillated somewhat on this issue at oral argument. At first, the IRS said this was definitive
proof that there were no dividends. Then, the IRS conceded that there was no statute, regulation, or case
law requiring payment in a certain time. Finally, the IRS argued that timeliness is an indicia that the
Board would use the money to take certain actions after the fact, thereby connecting timing argument
with its second argument about post-declaration actions. The IRS does not reconcile the timing issue with
the 1996 Field Service Advice Memorandum, the IRS private rulings, and Hughes.

9

III.

Conclusion
For the above reasons, the Court denies Louisiana Health Care Self Insurance Fund’s

Motion for Partial Summary Judgment (See R.Doc. 44 and 87).
Signed in Baton Rouge, Louisiana, this 20th day of October, 2014.

S

____________________________________
JOHN W. deGRAVELLES, JUDGE
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA

10