12-3563
AmBase Corp v. United States of America


                                 UNITED STATES COURT OF APPEALS
                                     FOR THE SECOND CIRCUIT
                                       ____________________

                                                August Term, 2012

(Argued: June 10, 2013                                            Decided: September 9, 2013)

                                               Docket No. 12-3563-cv

                                              ____________________

AMBASE CORP.,

                                          Plaintiff-Appellant,

                              v.

UNITED STATES OF AMERICA,

                                          Defendant-Appellee.

                                              ____________________

Before: POOLER, CARNEY, Circuit Judges, and KORMAN,* District Judge.

          Appeal from United States District Court for the District of Connecticut

(Warren W. Eginton, J.), granting in part and denying in part Plaintiff AmBase

Corp.’s claim for a refund for the 1989 tax year. Plaintiff’s refund claim is based



          *
       The Honorable Edward R. Korman, United States District Court for the
Eastern District of New York, sitting by designation.
on a proposed amendment to its consolidated return for the 1992 tax year, for

which it seeks to increase the bad debt deduction claimed on behalf of its affiliate,

Carteret Savings Bank F.A. Carteret, a thrift which calculates its bad debt

deduction under the reserve method, was seized by the Resolution Trust

Corporation in 1992. The district court, through its November 28, 2011

memorandum of decision, May 23, 2012 memorandum of decision, and July 5,

2012 final judgment and order, granted AmBase’s claim to the extent that the

claimed deduction offset Carteret’s post-seizure additional income in tax year

1992 but denied the claim in all other respects. On appeal, we agree that the

district court had subject-matter jurisdiction and affirm its grant of AmBase’s

claimed deduction to the extent that it offsets Carteret’s post-seizure income for

the 1992 tax year. We further hold that the district court should grant AmBase’s

claimed deduction to the extent that it derives from Carteret’s post-seizure bad

debts for the 1992 tax year. Accordingly, we AFFIRM in part and VACATE in

part the judgment of the district court and REMAND the case for further

proceedings consistent with this opinion.

                              ____________________




                                          2
                         PETER H. WINSLOW (Samuel A. Mitchell, Gregory K.
                         Oyler, on the brief), Scribner, Hall & Thompson, LLP,
                         Washington, DC, for Plaintiff-Appellant.

                         JENNIFER M. RUBIN, Attorney, Tax Division (David
                         Fein, United States Attorney for the District of
                         Connecticut, Kathryn Keneally, Assistant Attorney
                         General, Tax Division, Jonathan S. Cohen, Attorney, Tax
                         Division), Department of Justice, Washington, DC, for
                         Defendant-Appellee.

POOLER, Circuit Judge:

      Plaintiff-Appellant AmBase Corp. (“AmBase”) brought a refund claim for

tax year 1989 based on a carryback1 generated from a proposed amendment to its

consolidated federal income tax return for the 1992 tax year. The proposed

amendment seeks to increase the bad debt deduction claimed on the return by

AmBase’s affiliate, Carteret Savings Bank F.A (“Carteret”). Carteret, a “thrift”2

which calculates its bad debt deduction under the reserve method, see I.R.C.

§§ 585, 593, was seized by the Resolution Trust Corporation (“RTC”) on




      1
       “Carrybacks” refer to when the taxpayer applies net operating losses for a
tax year to preceding tax years. See I.R.C. § 172(b).
      2
        “Thrifts” are defined as “any mutual savings bank not having capital
stock represented by shares, any domestic building and loan association, and any
cooperative bank without capital stock organized and operated for mutual
purposes and without profit.” Treas. Reg. § 1.593-4.

                                         3
December 4, 1992. The United States District Court for the District of Connecticut

(Warren W. Eginton, J.), through its November 30, 2011 memorandum of

decision, AmBase Corp. v. United States, 834 F. Supp. 2d 71 (D. Conn. 2011), May

23, 2012 memorandum of decision, AmBase Corp. v. United States, No. 3:08-cv-651-

WWE, 2012 WL 1884874 (D. Conn. May 23, 2013), and July 5, 2012 final judgment

and order, granted AmBase’s claim to the extent that the bad debt deduction

offset Carteret’s additional post-seizure income in tax year 1992 but denied the

claim in all other respects. On appeal, we hold that the district court had subject-

matter jurisdiction and affirm its grant of AmBase’s claimed deduction to the

extent that it offsets Carteret’s post-seizure income for the 1992 tax year. We

further hold that the district court should grant AmBase’s claimed deduction to

the extent that it derives from Carteret’s post-seizure bad debts for the 1992 tax

year. Accordingly, we AFFIRM in part and VACATE in part the judgment of the

district court and REMAND the case for further proceedings consistent with this

opinion.

                                 BACKGROUND

I. Factual Background

      In August 1988, AmBase, the successor corporation to The Home Group,

Inc., purchased Carteret, a federally chartered stock savings bank or thrift. After

                                         4
acquisition, AmBase filed consolidated federal income tax returns with Carteret.

On December 4, 1992, the Office of Thrift Supervision seized Carteret and put it

into the conservatorship of the RTC due to Carteret’s failure to satisfy capital

requirements under the Financial Institutions Reform, Recovery, and

Enforcement Act. In 1996, the RTC transferred receivership to the Federal

Deposit Insurance Company (“FDIC”).

      The dispute in this appeal relates to AmBase’s 1992 consolidated federal

income tax return, filed on August 30, 1993. On its return, AmBase reported

Carteret’s tax items from January 1, 1992 through December 4, 1992. It did not,

however, include Carteret’s post-seizure tax items, as AmBase did not control

Carteret post-seizure, and the RTC had not provided AmBase with the relevant

records.3 At the time of filing, proposed regulations under I.R.C. § 597 allowed a

consolidated group to elect irrevocably to disaffiliate from an institution in its

affiliated group that had been placed in receivership. See Treatment of

Acquisition of Certain Financial Institutions; Certain Tax Consequences of

Federal Financial Assistance to Financial Institutions, 57 Fed. Reg. 14,804, 14,812-

814 (proposed April 23, 1992). However, such an election could not become


      3
     Both parties have stipulated that the RTC and FDIC failed to provide
AmBase with the relevant records until at least May 31, 1996.

                                          5
binding until the regulations had been finalized, see id. at 14,817-818, which did

not occur until December 1995, T.D. 8641, 1996-6 I.R.B. 4, 60 Fed. Reg. 66,091; see

also Treas. Reg. § 1.597-4 (the final regulation). On its original 1992 return,

AmBase included a statement electing to disaffiliate from Carteret. On April 28,

1997, after having received an extension of time, AmBase timely notified the

Commissioner of Internal Revenue (the “Commissioner”) of its decision to

reverse its previous decision to disaffiliate from Carteret.

      On March 14, 2000, AmBase filed an amended consolidated federal return

for 1992 in which it sought to amend its 1992 consolidated federal income tax

return to increase Carteret’s claimed bad debt deduction, calculated under the

reserve method, and generate a net operating loss. On that same date, AmBase

also filed an amended consolidated federal income tax return for 1989, on which

it sought to apply the 1992 net operating loss and create a refund. The IRS

denied the refund claim, and, on April 29, 2008, AmBase filed a complaint in the

district court against the United States (the “Government”).

      Consideration of AmBase’s refund claim requires an understanding of the

reserve method for calculating bad debt deductions. We turn now to a

description of the applicable law.



                                          6
II. Bad Debt Deductions and the Reserve Method

      The Internal Revenue Code allows taxpayers to take a deduction relating to

worthless or “bad” debts. I.R.C. §§ 166, 585, 593. Two methods exist for

calculating this deduction: the specific charge-off method and the reserve

method. The specific charge-off method allows taxpayers to deduct the basis of a

bad debt in the year in which the debt becomes worthless. I.R.C. § 166. The

reserve method allows taxpayers to create a “reserve” of funds in anticipation of

bad debts, and deduct, instead of the basis in a particular bad debt, a “reasonable

addition to the reserve” for the year (the “Reasonable Addition”). I.R.C.

§§ 585(a), 593(a). A bad debt must be accounted for in the year in which it

becomes worthless. See I.R.C. § 166(a)(1) (specific charge-off method); Calavo, Inc.

v. Comm’r, 304 F.2d 650, 654 (9th Cir. 1962) (the reserve method). However, it can

be difficult for a taxpayer to determine the year in which a particular debt

becomes worthless. See, e.g., Boehm v. Comm’r, 326 U.S. 287, 292 (1945); Young v.

Comm’r, 123 F.2d 597, 600 (2d Cir. 1941). The advantage of the reserve method

over the specific charge-off method is that, under the former, the taxpayer’s bad-

debt deduction is not tied to a determination of worthlessness of any particular

debt. It allows the taxpayer to make a reasonable prediction of the amount of


                                         7
debt that will become worthless in a given year without having to identify

specific worthless loans, and claim a deduction based on that amount.

      Specific bad debts are still relevant to the reserve method. In the year in

which a bad debt becomes worthless, the taxpayer, instead of a taking another

deduction, charges off the debt by reducing the amount of the reserve. Nash v.

United States, 398 U.S. 1, 3-4 (1970). This increases the Reasonable Addition

otherwise allowable for the year. See Smith Elec. Co. v. United States, 461 F.2d 790,

791 (Ct. Cl. 1972). Similarly, in any year in which a bad debt is recovered, specific

charge-off method taxpayers include the recovery in gross income, while reserve

method taxpayers instead increase the amount of the reserve, decreasing the

Reasonable Addition otherwise allowable for the year. See United States v. Bank of

Am. Trust & Sav. Ass’n, 303 F.2d 304, 306 (9th Cir. 1962); see also 1 Mertens, Law of

Federal Income Taxation § 7:35 (2013). Upon liquidation, the taxpayer’s unused

bad debt reserve is included in gross income. W. Seattle Nat. Bank of Seattle v.

Comm’r, 288 F.2d 47, 48-50 (9th Cir. 1961). But see Nash, 398 U.S. at 3-4 (declining

to apply this “tax benefit rule” when accounts receivable net of reserves were

transferred by partnership during liquidation).




                                          8
      Use of the reserve method was formerly available to a broader group of

taxpayers, but in 1987 its use was restricted. See Pub. L. No. 99-514, § 805, 100

Stat. 2085, 2361 (1986) (repealing I.R.C. § 166 (c)); see also Staff of J. Comm. on

Taxation, 99th Cong., Tax Reform Proposals: Accounting Issues, 68 (Comm. Print

1985). However, certain financial institutions are still allowed to use the reserve

method. I.R.C. §§ 581, 585(a)(1), 593(a)(1). AmBase’s affiliate, Carteret, is a thrift

eligible to use the reserve method under I.R.C. § 593 and Treasury Regulation

§ 1.593-4. Thrifts are required to establish two separate reserves, one for

“nonqualifying loans” and one for “qualifying real property loans.”4 Treas. Reg.

§ 1.593-7(a)(1); see also Treas. Reg. § 1.593-11 (defining terms).

      The reserve method gives the taxpayer a considerable degree of discretion

to determine the amount of its bad debt deduction and reduce tax liability. This

discretion is restricted by several requirements. First, the taxpayer must earmark

the amounts of the reserves, which “are not to be used for any purpose other

than to apply against bad debts as they occur.” Levelland Sav. & Loan Ass’n v.

United States, 421 F.2d 243, 246 (5th Cir. 1970) (citing Rio Grande Bldg. & Loan

Ass’n v. United States, 36 T.C. 657 (1961)).


      4
        Some thrifts are also required to establish a third “supplemental reserve
for losses on loans,” Treas Reg. § 1.593-7(a), additions to which do not lead to a
deduction, see I.R.C. § 593(b); Treas. Reg. § 1.593-5.

                                           9
      Second, the Reasonable Addition must be “reasonable,” as defined by the

Internal Revenue Code and Treasury Regulations, which describe several

methods for calculating the Reasonable Addition.5 Relevant to this appeal is the

“experience method,” also called the “six-year moving average” formula, see

I.R.C. §§ 585(b)(2), 593(b)(3), which “seeks to ascertain a ‘reasonable’ addition to a

bad-debt reserve in light of the taxpayer’s recent chargeoff history.” Thor Power

Tool Co. v. Comm’r, 439 U.S. 522, 547 (1979) (citing Black Motor Co. v. Comm’r, 41

B.T.A. 300, 302 (1940)). The experience method starts with the balance of the

reserve at the close of the taxable year and then calculates a maximum allowable

value for the reserve, based on a ratio which looks to total bad debts and total

loans for the current and five preceding taxable years. I.R.C. § 585(b)(2). The

difference between the maximum allowable value and current balance is the

maximum addition to the reserve that is permitted (the “Maximum Addition”).

The taxpayer may claim as a deduction a Reasonable Addition up to, but not

exceeding, the Maximum Addition. I.R.C. § 585(b)(2). “Because a bad debt

reserve is an estimate of future losses, the taxpayer will not invariably increase



      5
       The word “method” is used twice in this section. First, there is the
“method” for taking the deduction, either the specific charge-off method or the
reserve method. Second, under the reserve method, there is the “method” for
determining the amount of the deduction (i.e., the Reasonable Addition).

                                         10
the reserve” based on its past history of bad debts. Roth Steel Tube Co. v. Comm’r,

620 F.2d 1176, 1179 (6th Cir. 1980) (emphasis added). The taxpayer’s Reasonable

Addition is calculated and credited at the close of the tax year. Treas. Reg. §

1.593-5(b)(1).

      As a third qualification, “a taxpayer is not to be permitted to enlarge its

reserve account retroactively.” Rio Grande, 36 T.C. at 664; see also Rogan v.

Commercial Disc. Co., 149 F.2d 585, 588 (9th Cir. 1945); Wengel, Inc. v. United States,

306 F. Supp. 121, 123-24 (E.D. Mich. 1969); Treas. Reg. § 1.166-4(b)(2). This rule

follows from the purpose of the bad debt reserve as an estimate of future losses

for which the taxpayer freezes funds. A retrospective enlargement would allow

the taxpayer to claim a deduction based on funds that it did not have to freeze on

its books. This appeal asks us to consider exceptions to the rule of non-

retroactivity.6


      6
          The regulations provide one exception:

      If an adjustment with respect to the income tax return for a taxable year is
      made, and if such adjustment (whether initiated by the taxpayer or the
      Commissioner) has the effect of permitting an increase, or requiring a
      reduction, in the amount claimed on such return as an addition to the
      reserve for losses on nonqualifying loans or to the reserve for losses on
      qualifying real property loans, then the amount initially credited to such
      reserve for such year pursuant to subparagraph (1) of this paragraph may
      have to be increased or decreased, as the case may be, to the extent
      necessary to reflect such adjustment.

                                          11
III. AmBase’s Refund Claim

      AmBase’s refund claim turns on a proposed amendment to its

consolidated federal income tax return for the 1992 tax year. On its initial return,

AmBase calculated a Maximum Addition of approximately $101 million but only

claimed as a deduction a Reasonable Addition of approximately $56 million.7 On

its amended return, AmBase seeks (1) to increase its Maximum Addition to

approximately $125 million and (2) to increase its claimed Reasonable Addition

deduction from approximately $56 million to the new maximum value. In other

words, AmBase is claiming an additional deduction of approximately $69

million. Approximately $24 million of that $69 million relates directly to

Carteret’s post-seizure activities. The remaining $45 million is the amount by

which AmBase could have, but chose not to, increase the reserve on its original

return, based on its initial calculation of the Maximum Addition.8 AmBase


Treas. Reg. § 1.593-5(b)(2). We discuss this exception further below. See infra
Discussion II.A.
      7
        As mentioned above, thrifts must keep two separate reserves. The values
of the Reasonable Addition and Maximum Addition discussed in this opinion
were calculated by separately determining the values for each reserve and then
adding the values together. For simplicity’s sake, we refer to the two reserves as
one.
      8
         In other words, the $45 million is the difference between the $101 million
Maximum Addition and the $56 million claimed Reasonable Addition from the
initial 1992 return.

                                         12
argues that it is entitled to the entirety of this additional deduction based on its

decision to include Carteret, post-seizure, on its 1992 consolidated federal income

tax return.

      The IRS denied AmBase’s refund claim, and, on April 29, 2008, AmBase

filed a complaint in the district court against the Government. Before the district

court, the Government moved to dismiss for lack of subject-matter jurisdiction.

On March 31, 2010, the district court conditionally dismissed AmBase’s claim, but

granted AmBase a limited discovery period in which to seek evidence

establishing subject-matter jurisdiction. On February 28, 2011, on AmBase’s

motion, the district court set aside its previous dismissal. In response to two

partial motions for summary judgment by AmBase, the district court issued a

November 28, 2011 memorandum of decision, AmBase Corp., 834 F. Supp. 2d 71,

and a May 23, 2013 memorandum of decision, AmBase Corp., 2012 WL 1884874,

which granted in part and denied in part AmBase’s refund claim. AmBase’s

claim was granted to the extent that it offset the additional income of Carteret

during the post-seizure period of tax year 1992, from December 5 to December

31, which was not included on AmBase’s original return. In all other respects,

the district court denied AmBase’s claim. The district court issued a July 5, 2012

final judgment and order consistent with its prior memoranda.


                                          13
      AmBase now appeals, arguing that the district court should have allowed

its amendment and refund claim in its entirety. On appeal, the Government

renews its argument that the district court did not have subject-matter

jurisdiction.

                                  DISCUSSION

      We review appeals from motions for summary judgment de novo.

Sotomayor v. City of New York, 713 F.3d 163, 164 (2d Cir. 2013). “In reviewing a

district court’s determination of whether it has subject matter jurisdiction, we

review factual findings for clear error and legal conclusions de novo.” Gualandi

v. Adams, 385 F.3d 236, 240 (2d Cir. 2004).

      On appeal, we hold that the district court did have subject-matter

jurisdiction to hear AmBase’s claim. We agree with the district court that

AmBase may amend its 1992 return to increase its bad debt deduction based on

Carteret’s post-seizure income in 1992, and further hold that AmBase may amend

to increase its bad debt deduction based on Carteret’s post-seizure bad debts.

Accordingly, we affirm the district court in part and vacate in part, remanding

for further proceedings consistent with this opinion.




                                         14
I.    Subject-Matter Jurisdiction

      “[T]he United States, as sovereign, is immune from suit save as it consents

to be sued[,] and the terms of its consent to be sued in any court define that

court’s jurisdiction to entertain the suit.” United States v. Testan, 424 U.S. 392, 399

(1976) (internal quotation marks omitted). “Congress has broadly consented to

suits against the United States in the district courts for the refund of any federal

taxes alleged to have been erroneously or illegally assessed or collected, or any

sum alleged to have been excessive or in any manner wrongfully collected under

the internal-revenue laws.” United States v. Forma, 42 F.3d 759, 763 (2d Cir. 1994)

(quoting 28 U.S.C. § 1346(a)(1)) (internal quotation marks and alterations

omitted). However, Congress has placed several conditions on a taxpayer’s right

to maintain a refund suit, including a requirement that the taxpayer satisfy the

applicable statute of limitations by filing a timely administrative claim. Id. at 763

& n.8. Under Section 6511(a) of the Internal Revenue Code, a taxpayer must file

an administrative refund claim “within 3 years from the time the return was filed

or 2 years from the time the tax was paid, whichever of such periods expires the

later.” I.R.C. § 6511(a). However, the three-year limitations period is replaced

with a seven-year period if the refund claim relates to the deductibility of a bad

debt. I.R.C. § 6511(d)(1).

                                          15
      While taxpayers may file a formal claim for a refund, see Treas. Reg.

§ 301.6402-3 (listing requirements for formal refund claim), “[i]nformal claims

have long been recognized as valid claims.” New Eng. Elec. Sys. v. United States,

32 Fed. Cl. 636, 641 (1995). As a type of informal claim, taxpayers may file

“protective claims,” which “preserve the taxpayers’ right to claim a refund when

the taxpayer’s right to the refund is contingent on future events and may not be

determinable until after the statute of limitations expires.” Chief Counsel

Advisory 200848045, 2008 WL 5030125 (2008); see also United States v. Kales, 314

U.S. 186, 196 (1941). Informal claims have three components: (1) they must

provide the IRS notice of the taxpayer’s claim to a refund; (2) they must “describe

the legal and factual basis for the refund;” and (3) they must have a written

component. New Eng. Elec. Sys., 32 Fed. Cl. at 641. After having timely filed an

initial claim, a taxpayer may make an amendment that relates back to the prior

claim, provided that “the facts upon which the amendment is based would

necessarily have been ascertained by the commissioner in determining the merits

of the original claim.” St. Joseph Lead Co. v. United States, 299 F.2d 348, 350 (2d Cir.

1962); see also Treas. Reg. § 301.6402-2(b)(1). A “claim seeking refund upon one

asserted fact situation may not be amended out of time so as to require an


                                          16
investigation of matters not germane to the original claim.” Weisbart v. Dep’t of

Treasury, 222 F.3d 93, 98 (2d Cir. 2000) (internal quotation marks omitted),

abrogation on other grounds recognized by In re WorldCom, Inc., No. 12-803, 2013 WL

3779354, at *9 (2d Cir. July 22, 2013).

      Here, the parties agree that, under Section 6511(a), AmBase had until

March 31, 1998 to file its claim. AmBase filed its amended return on March 14,

2000, after that date. Before the district court, the Government moved to dismiss

the refund claim for lack of subject-matter jurisdiction, but AmBase put forth

several arguments as to why its claim was timely. First, it argued that the reserve

method regulations required an amended return. Second, it argued that, under

the three-year limitations period, the 2000 claim was timely, because it related

back to four earlier claims: (1) an attachment to AmBase’s original 1992 return,

(2) a June 30, 1995 note made during a separate Government audit, (3) a June

1995 protective claim, and (4) a September 1996 protective claim filed by the

FDIC on behalf of Carteret. Third, AmBase argued that the seven-year

limitations period, under which the 2000 claim would be timely, applied to its

refund claim. The district court rejected these arguments and conditionally

dismissed the refund claim. With respect to AmBase’s argument relying on the


                                          17
1996 FDIC claim, the court’s dismissal rested on the fact that the document was

not before the court, and the court granted AmBase a limited discovery period in

which to acquire the FDIC claim. After AmBase produced the 1996 FDIC claim,

the district court held that it had subject-matter jurisdiction and set aside the

order of dismissal.

      On appeal, the Government renews its argument that the district court

lacked subject-matter jurisdiction to consider the refund claim, while AmBase

argues that “[t]he Government has not appealed th[e] jurisdictional holding.”

Appellant’s Br. at 2. While the Government has not cross-appealed, “we have an

independent obligation to consider the presence or absence of subject matter

jurisdiction sua sponte.” Joseph v. Leavitt, 465 F.3d 87, 89 (2d Cir. 2006). We

therefore review the basis on which the district court found subject-matter

jurisdiction and hold that the district court properly found that jurisdiction exists.

      The district court held that it had subject-matter jurisdiction based on a

1996 formal protective claim, for tax years 1982 to 1992, filed by the FDIC when it

was Carteret’s receiver. See Treas. Reg. § 301.6402-7 (allowing agencies to file

returns on behalf of banks in receivership). We reproduce the relevant portions




                                          18
of the claim in a footnote.9 The Government argues that AmBase’s 2000 claim


      9
        In an attachment to the protective claim, the FDIC stated, in relevant part,
the following:

      The amended return that is being filed here, itself may be amended when
      additional relevant information is discovered.

      An increase/decrease in total deductions and/or total income and a
      decrease in taxes due are due to the following:

      ...

      3) Savings institutions that fail the “60% asset test” of IRC 7701(a)(19) are
      not eligible to use the reserve method of accounting for bad debts under
      IRC 593. Such an institution is treated as a bank and therefore must
      compute its[] bad debts under IRC 585. If the institution is treated as a
      “large bank”, as defined in IRC 585(c), it must compute its bad debts using
      the specific charge-off method under IRC 166. Net operating losses
      attributable to bad debts treated in this manner are eligible for a 10 year
      carryback under IRC 172(b)(1)(D), instead of the usual 3. This refund claim
      includes the carryback of the 1992 losses eligible for a 10 year carryback
      under IRC 172(b)(1)(D) to the taxable year of the refund as a result of any
      required use of the specific charge-off method of accounting for bad debts.

      4) Under certain conditions, (such as the occurrence of a change in
      underlying facts under Treas. Reg. 1.446-1(e)(2)(ii)(b)), banks using the
      reserve method for deducting bad debts under IRC 585(b) can switch to the
      specific charge-off method under IRC 166. Net operating losses
      attributable to bad debts treated in this manner are eligible for a 10 year
      carryback, as allowed under IRC 172(b)(1)(D), instead of the usual 3. This
      refund claim represents the carryback of the 1992 losses to the taxable year
      of the refund to the extent such losses are eligible [for] a 10 year carryback
      period under IRC 172(b)(1)(D) as a result of switching to the specific
      charge-off method of accounting for bad debts.

                                         19
was “not germane” to the 1996 FDIC claim because the two claims have different

factual bases. We disagree. The 1996 FDIC claim addressed Carteret’s bad debts

and its method of calculating the bad debt deduction, and it specifically noted

potential net operating losses and carrybacks. Especially in light of AmBase’s

communications with the IRS regarding its decision to disaffiliate, we hold that

the facts relating to AmBase’s 2000 refund claim “would necessarily have been

ascertained” upon consideration of the 1996 FDIC claim. We decline to give the

FDIC claim “a crabbed or literal reading, ignoring all the surrounding

circumstances which give it body and content.” United States v. Commercial Nat.

Bank of Peoria, 874 F.2d 1165, 1171 (7th Cir. 1989) (internal quotation marks

omitted). “The focus is on the claim as a whole, not merely the written

component.” Id. (internal quotation marks omitted).




      5) Under IRC 5511(d) a taxpayer has 7 years to determine whether a debt
      or a security has become worthless. In the case of a failing financial
      institution, management typically refrains from charging off their bad
      debts in order to artificially retain capital and keep government regulators
      at bay. This amended return reflects adjustments to deduct debts or
      securities in the taxable year in which such debts actually became
      worthless.

J.A. 840-41.


                                         20
      Because we agree with the district court’s holding that it had subject-

matter jurisdiction, we do not consider the other purported bases for jurisdiction.

II.   AmBase’s Claim on the Merits

      We next turn to the merits of AmBase’s claim. AmBase seeks to amend its

return and claim an additional $69 million Reasonable Addition deduction.

Approximately $24 million of that $69 million derives from Carteret’s post-

seizure activities, while the remaining $45 million is the difference between

AmBase’s original Maximum Addition and Reasonable Addition. AmBase

argues that it is entitled to the entirety of this additional deduction based on its

decision to include Carteret, post-seizure, on its 1992 consolidated federal income

tax return.

      As discussed below, we hold, as the district court did, that AmBase may

increase its deduction to the extent that it offsets Carteret’s post-seizure

additional income for the 1992 tax year. We further hold that AmBase may also

increase its deduction to the extent it derives from Carteret’s post-seizure

additional bad debts for the 1992 tax year. In all other respects, we hold that the




                                          21
district court properly denied AmBase’s claim.10

      A. Carteret’s Post-Seizure Income

      The district court held that AmBase could increase its bad debt deduction

in the amount necessary to offset Carteret’s post-seizure additional income for

tax year 1992. AmBase Corp., 834 F. Supp. 2d at 75-77. We agree and affirm the

district court. The Government, while contesting subject-matter jurisdiction,

does not dispute AmBase’s refund claim to the extent that it rests on this ground.

      We pause to briefly explain the principle under which the district court

allowed AmBase to claim an additional deduction. As discussed above, a

taxpayer using the reserve method is generally “not to be permitted to enlarge its

reserve account retroactively.” Rio Grande, 36 T.C. at 664. However, the

Commissioner recognizes two related exceptions to this rule. First, if the

taxpayer in a tax year has taken a Reasonable Addition equal to the Maximum

Addition, and if an adjustment to the taxpayer’s income tax return (“whether

initiated by the taxpayer or the Commissioner”) permits an increase in the

Maximum Addition, the taxpayer may increase its Reasonable Addition to take



      10
       We leave for the district court on remand the determination of the actual
amount of the increased deduction and the amount of AmBase’s refund.

                                        22
into account the new Maximum. AmBase, 834 F. Supp. 2d at 76; Treas. Reg.

§ 1.593-5(b)(2).11 The second exception, a “liberal interpretation” of Treasury

Regulation § 1.593-5(b)(2), applies to taxpayers who have taken a Reasonable

Addition for a tax year that is less than the Maximum Addition. I.R.S. Gen.

Couns. Mem. (“GCM”) 33,820, 1968 WL 16122 (May 10, 1968). The

Commissioner allows such taxpayers, if a subsequent adjustment increases the

taxpayer’s taxable income for the tax year, to increase the Reasonable Addition

deduction (capped by the Maximum Addition) in order to offset the additional

taxable income. Rev. Rul. 70-5, 1970-1 C.B. 142; GCM 33,820.12 This exception

stems from a policy of allowing a “taxpayer [who] has manifested an intent to


      11
           The regulation is reproduced at supra note 4.
      12
         We have described Revenue Rulings as “the official I.R.S. position on
application of tax law to specific facts,” Weisbart, 222 F.3d at 98 (internal
quotation marks omitted). Although not entitled to Chevron deference,
“particular revenue rulings may be given deference to the extent that they are
persuasive.” In re WorldCom, Inc., 2013 WL 3779354, at *9 (citing United States v.
Mead, 533 U.S. 218, 234-35 (2001); Skidmore v. Swift & Co., 323 U.S. 134, 139-40
(1944)). General Counsel Memoranda “are informal documents written by the
I.R.S. Chief Counsel’s office.” Nathel v. Comm’r, 615 F.3d 83, 93 (2d Cir. 2010).
They are also not entitled to Chevron deference. Id. We have stated in dicta that
General Counsel Memoranda may also, like Revenue Rulings, be entitled to
Skidmore deference. Id. We need not here determine if General Counsel
Memoranda are entitled to such deference because the relevant exception is
provided in both the Revenue Ruling and the Memorandum.

                                           23
claim a bad debt reserve sufficient to offset its entire taxable income” to do so in

the face of additional income that it had previously not anticipated. GCM 33,820.

      For the reasons described by both the district court and the cited Revenue

Ruling and General Counsel Memorandum, we hold that this second exception is

an appropriate exception to the rule that reserve method taxpayers cannot

retroactively claim an increased deduction. Based on this exception, the district

court allowed AmBase to increase its Reasonable Addition in an amount

necessary to offset Carteret’s post-seizure additional income, which was not

included on AmBase’s initial return. AmBase, 834 F. Supp. 2d at 75-77. We affirm

the district court on this ground.

      B. Carteret’s Post-Seizure Bad Debts

      The district court denied AmBase’s refund claim in all other respects.

AmBase, 2012 WL 1884874, at *4; AmBase, 834 F. Supp. 2d at 77. We disagree in

one respect and hold that AmBase’s claim should be granted to the extent that it

seeks to increase its deduction to account for Carteret’s post-seizure bad debts.

       Our holding comes from the rule, discussed above, that bad debts must be

accounted for in the year in which they become worthless. Calavo, 304 F.2d at

654. With respect to reserve method taxpayers, this requires the taxpayer to


                                         24
charge off a specific bad debt against the reserve in the year such debt goes bad.

Id.; Smith Elec., 461 F.2d at 793. By reducing the amount of the reserve, the bad

debts increase the otherwise allowable Reasonable Addition. Smith Elec., 461

F.2d at 791. We hold that reserve method taxpayers must also be allowed to

increase the Reasonable Addition to account for such an increase.

      Our holding is guided by the former Court of Claims’ reasoning in Smith

Electric. The Smith Electric Court, in discussing retroactive changes made by

reserve method taxpayers, gave the following example:

      T charges a specific debt against the reserve in year 2. In year 5 the
      Commissioner challenges the addition to the reserve on the ground that
      this specific debt actually became worthless in year 1. If the Commissioner
      prevails, T’s addition to the reserve for year 2 would be decreased. Since
      the charges against the reserve for the bad debts would also be decreased
      by the same amount, the reserve balance would remain the same [for year
      2.] The regular statute of limitations would bar a claim for refund with
      respect to year 1. Defendant argues that T could not utilize the special
      seven-year statute and should therefore increase the addition to his reserve
      in year 5, a year totally unrelated to the debt becoming worthless.

      We cannot subscribe to such a rule of law.

461 F.2d at 793. The question in Smith Electric was whether the taxpayer was

permitted to account for an increase in the Reasonable Addition. In the above

example, with respect to year 2, both the charge offs and the Reasonable

Addition decrease, leaving the taxpayer’s reserve unchanged. With respect to

                                         25
year 1, the charge offs increase, due to the redetermination of when the debt

became worthless. The Commissioner argued that the taxpayer should not be

permitted to also increase the Reasonable Addition. The case differs from this

appeal in that the Court of Claims did not look to the merits of the refund claim,

but rather considered the applicability to reserve method taxpayers of the

seven-year limitations period—a period which applies, under I.R.C. § 6511(d), to

refund claims on account of the deductibility of bad debts. Id. The Court of

Claims held that the seven-year limitations period was applicable to reserve

method taxpayers. Id. However, it would be illogical for the court to apply the

seven-year statue of limitations if such taxpayers could never claim a refund

based on the retroactive charge off of a bad debt. Extending Smith Electric’s

reasoning, we hold that reserve method taxpayers may claim such a deduction.

      Our holding is also guided by the exceptions to the rule of non-

retroactivity discussed above. Under the first exception discussed, a taxpayer in

a tax year who has taken a Reasonable Addition equal to the Maximum Addition

may increase its Reasonable Addition upon an adjustment to the taxpayer’s

return which increases the permissible Maximum Addition. AmBase, 834 F.

Supp. 2d at 76; Treas. Reg. § 1.593-5(b)(2). With respect to the example in Smith


                                        26
Electric, where a specific bad debt is deemed to be worthless in year 1 and not

year 2, this exception would mean that the taxpayer may increase his Reasonable

Addition in year 1 only if he previously took the Maximum Addition. We see no

reason why this exception should be so limited. The fact that the Commissioner

has adopted a “more liberal” reading of the rule in another context further

supports our reasoning here. See Rev. Rul. 70-5; GCM 33,820.

      The instant appeal differs from the example discussed in one respect.

AmBase’s additional bad debts arise, not from a redetermination of the year in

which a debt has become worthless, but due to the post-seizure activity of

Carteret which AmBase previously did not include on its return. AmBase was

unable to properly calculate the Maximum Addition because, due to RTC’s

receivership and the RTC’s failure to provide AmBase with the relevant records,

AmBase was unable to account for Carteret’s post-seizure bad debts. We see no

reason why this circumstance should mandate a different result. Indeed, this

situation, in which AmBase has not accounted for the bad debt at all—in either

the proper year or another year—strengthens our reasoning that, in order to

properly account for the bad debt, AmBase must be able to both charge off debts

and increase the reserve.


                                        27
      Finally, the reasoning of Wengel, 306 F. Supp. 121, cited by the

Government, does not lead to a different result. Wengel relates to the

deductibility of partially worthless debts, which require both a partially worthless

debt and “that the taxpayer ascertained [the worthlessness of the debt] and made

the accounting entry within the taxable year.” Smith Elec., 461 F.2d at 793 n.3.

As “[t]hese latter criteria are not necessary with respect to wholly worthless

debts” under either the specific charge-off method or the reserve method, id.,

partially worthless debts provide an exception to the rule that bad debts must be

accounted for in the year in which they become worthless, and therefore Wengel

does not conflict with our reasoning.

      C. Additional Increase in Deduction

      In all other respects we affirm the judgment of the district court. In

particular, we find no authority that supports the proposition that AmBase,

which chose on its initial 1992 tax return to make a Reasonable Addition of $45

million less than the Maximum Addition, should be allowed to retroactively

claim the $45 million as a deduction. In general, “a taxpayer is not to be

permitted to enlarge its reserve account retroactively.” Rio Grande, 36 T.C. at 664.

The taxpayer must earmark the amounts in the reserves, which “are not to be


                                         28
used for any purpose other than to apply against bad debts as they occur.”

Levelland, 421 F.2d at 246. AmBase is not permitted to enjoy the use of its funds

and then retroactively decide to place them in the reserve.

      We reject AmBase’s argument that collateral estoppel applies to this case

due to prior litigation involving AmBase’s predecessor corporation, Home

Group, Inc., Home Group, Inc. v. Comm’r, 91 T.C. 265 (1988), aff’d on other grounds,

875 F.2d 377 (2d Cir. 1989). We use a three-part test to determine if collateral

estoppel applies: (1) whether the issues presented in the two proceedings “are in

substance the same;” (2) “whether controlling facts or legal principles have

changed significantly since” the first proceeding; and (3) “whether other special

circumstances warrant an exception to the normal rules of preclusion.” ITT Corp.

v. United States, 963 F.2d 561, 564 (2d Cir. 1992). Collateral estoppel is

inapplicable here because the Home Group litigation involved the interpretation of

Treasury Regulation § 1.593-6(a), a provision applicable for “taxable year[s]

beginning before July 12, 1969.” That provision is not at issue here, and therefore

the two proceedings are not in substance the same.




                                          29
                                 CONCLUSION

      For the foregoing reasons, the judgment of the district court is AFFIRMED

in part and VACATED in part, and the case is REMANDED to the district court

for further proceedings consistent with this opinion.




                                        30
