Hotel Chain Entitled to $22 Million in Specified Loss Carrybacks

A district court in Maryland has ruled that Host Marriott Corporation is entitled to specified liability loss carrybacks for workers' compensation payments and Federal income tax deficiency interest, resulting in a $22 million tax reduction. The district court granted summary judgment in the taxpayer's favor in Host Marriott Corp., 113 F Supp2d 790 (DC Md 2000).

The loss carryback issue has been a contentious one in recent years, with the Service consistently denying attempts by taxpayers to claim the Sec. 172(f) 10-year carryback. Host Marriott reported a net operating loss (NOL) of over $139 million, including $60 million in specified liability losses, for its 1991 tax year. The specified liability losses were $7 million in workers' compensation payments (from injuries sustained prior to Host Marriott's 1988 tax year) and $46 million in Federal income tax deficiency interest (from returns for fiscal years 1977–1979).

Host Marriott argued it was entitled under Sec. 172(f) to carry back both types of losses to its 1984 and 1985 tax years, resulting in a reduction in its tax liability of over $22 million. The Service disagreed, limiting the availability of loss carrybacks to include only those with an element of inherent delay.

The district court rejected the IRS's interpretation of Sec. 172(f), concluding that Host Marriott's claimed deductions meet the statute's two requirements. Namely, the losses arose out of Federal or state law and the claims arose out of acts (or failures to act) that occurred more than three years earlier. The district court specifically rejected the inherent delay argument.

The district court noted that, in Sealy, 107 TC 177 (1996), the Tax Court relied on the legislative history of Sec. 172(f)(1)(B) and imposed an additional requirement that the NOL be a liability for which a deduction was deferred by economic performance rules. However, the district court reasoned that "[s]uch a diversion into the legislative history was unnecessary and inappropriate given the...plain language of the statute," and specifically rejected the Tax Court's holding that the class of items qualifying for specified liability loss treatment be limited to those deferred by the economic performance rules.

From Diane Herndon, Washington, DC