                        107    T.C. No. 11



                     UNITED STATES TAX COURT



  SEALY CORPORATION AND SUBSIDIARIES, f.k.a. THE OHIO MATTRESS
COMPANY AND SUBSIDIARIES, ET AL.,1 Petitioners v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket Nos. 18761-92,   3028-93,        Filed October 21, 1996.
                  3029-93,   3030-93,
                  6266-93,   6267-93,
                  6268-93,   6269-93.


           Ps had net operating losses for tax years 1989 to
     1992 from deductible expenses they incurred to comply
     with various requirements of Federal law; i.e., the
     Internal Revenue Code, the 1934 Securities and Exchange
     Act, and the Employee Retirement Income Security Act of
     1974.


     1
       Cases of the following petitioners are consolidated
herewith: Sealy Corp. & Subsidiaries, f.k.a. The Ohio Mattress
Co. & Subsidiaries, docket nos. 3028-93 and 6266-93; The Ohio
Mattress Co. Licensing and Components Group & Subsidiaries,
f.k.a. Sealy, Inc. & Subsidiaries, docket nos. 3029-93, 6267-93,
and 6268-93; and Sealy Mattress Co. & Subsidiaries, f.k.a. Ohio-
Sealy Mattress Manufacturing Co. & Subsidiaries, docket nos.
3030-93 and 6269-93.
                                      2

          Net operating losses generally may be carried back
     3 years. Sec. 172(b)(1)(A), I.R.C. However, specified
     liability losses may be carried back 10 years. Sec.
     172(b)(1)(C), (f)(1)(B), I.R.C. Ps treated their
     losses as specified liability losses and carried them
     back to their tax year ending Nov. 30, 1985.

               Held, Ps' regulatory compliance costs are not
          specified liability losses.



     Stephen P. Kresnye and Joseph A. Castrodale, for

petitioners.

     Elsie Hall, for respondent.



                                OPINION

     COLVIN, Judge:   This case is before the Court on

petitioners’ motions for partial summary judgment.

     Respondent determined the following deficiencies in

petitioners' Federal income tax:

   Petitioner             Year Ending                     Deficiency

Sealy Corp.              Nov.   30,   1983                 $225,754.00
Sealy Corp.              Nov.   30,   1984                  648,717.48
Ohio Mattress Co.        Dec.   30,   1984                3,630,737.24
Sealy Corp.              Nov.   30,   1985                   64,678.74
Ohio Mattress Co.        Dec.   31,   1985                   49,863.34
Sealy Corp.              Nov.   30,   1986                6,816,632.00
Ohio Mattress Co.        Dec.   30,   1986                  447,617.00
Sealy Corp.              Nov.   30,   1988               13,115,655.00

     Petitioners seek a partial summary judgment relating to

their net operating loss carrybacks.         They contend that

$2,447,933 of expenses they incurred from 1989 to 1992 is

specified liability losses under section 172(f)(1)(B) and thus
                                  3

may be carried back 10 years.    This is the first case in which

we, or, to the best of our knowledge, any court, has decided the

scope of section 172(f)(1)(B).    As discussed below, we hold that

petitioners’ compliance expenses at issue here are not specified

liability losses, and we deny petitioners' motion for partial

summary judgment.

     A motion for summary judgment or partial summary judgment

may be granted if there is no genuine issue of material fact and

the decision can be rendered as a matter of law.    Rule 121;

Shiosaki v. Commissioner, 61 T.C. 861, 862-863 (1974).    The

parties agree that there is no material fact in dispute relating

to the motion.   The parties have settled all of the other issues

in this case.

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years at issue.    Rule

references are to the Tax Court Rules of Practice and Procedure.

                            Background

A. Petitioners

     Petitioners are corporations the principal places of

business of which were in Seattle, Washington, when the petitions

were filed.

     Petitioners used the accrual method of accounting and

reported their income on fiscal years ending November 30.
                                  4

B.   The 1970 Public Offering

     Petitioners were privately owned before 1970 and thus were

not subject to the reporting requirements of the Securities and

Exchange Act of 1934 (the 1934 Act), ch. 404, 48 Stat. 881

(current version at 15 U.S.C. secs. 78a-78lll (1994)).   The Ohio

Mattress Co. first offered its stock for public sale in February

1970.   The reporting requirements of the 1934 Act have applied to

petitioners since 1970.

     The 1934 Act requires petitioners to file quarterly and

annual financial reports with the Securities and Exchange

Commission (SEC).   Petitioners incurred expenses of $1,808,309 in

taxable years 1989 to 1992 for professional services to comply

with reporting, filing, and disclosure requirements imposed by

the 1934 Act.   Petitioners paid auditing and professional fees to

KPMG Peat Marwick, Ernst & Whinney, and Ernst & Young to

represent petitioners before the SEC’s chief accountant’s office

and to prepare SEC registration statements   S-1 and S-4 relating

to public securities offerings.   Petitioners incurred these

expenses to comply with section 13(a)(2) of the 1934 Act, 15

U.S.C. sec. 78m, which requires petitioners to file quarterly and

annual reports with the SEC and to have the annual reports

audited by an independent public auditor.

C.   Petitioners’ Employee Benefits Plans

     Before 1985, petitioners adopted various employee benefit

plans for their employees.   As employee benefit plan
                                  5

administrators, petitioners are subject to the Employee

Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406,

sec. 103(a)(1)(A), 88 Stat. 841, 29 U.S.C. sec. 1023(a)(1)(A)

(1994).    ERISA requires administrators of employee benefit plans

to use independent qualified public accountants to publish

various reports relating to the plan.    Id.   As a result,

petitioners paid auditing and professional fees of $100,650 to

KPMG Peat Marwick, Ernst & Whinney, and Ernst & Young from 1989

to 1992 to examine and prepare financial statements for

petitioners and their employee benefit plans.

D.     The 1986 Acquisitions and Section 338 Elections

       In December 1986, Sealy Mattress Co., formerly known as

Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio

Mattress Co., bought the stock of Slumber Products Corp., Sealy

Mattress Co. of Albany, Inc., Sealy Mattress Co. of Illinois,

Inc., Sealy of Minnesota, Inc., Sealy of Connecticut, Inc., the

Maryland Bedding Co., Sealy of Maryland and Virginia, Inc., the

Metcalfe Brothers, Inc., and Sealy Mattress Co. of Kansas City,

Inc.    Sealy Mattress Co. bought Sealy of Michigan, Inc., in April

1987.

       Each of these companies (the acquired companies) had license

agreements with Sealy, Inc., which is now known as the Ohio

Mattress Co. Licensing & Components Group.     All but two of the

acquired companies owned voting stock in Sealy, Inc.     After the

1986 acquisitions, the Ohio Mattress Co. indirectly owned 77.49
                                   6

percent of Sealy, Inc.   In December 1986, Sealy Mattress Co.

bought 4.37 percent of Sealy, Inc. from individual shareholders.

Thereafter, the Ohio Mattress Co. indirectly owned 81.86 percent

of Sealy, Inc.’s   voting stock.

     On September 15, 1987, petitioners timely elected to treat

the stock purchases (except Sealy, Inc., and Sealy of Michigan)

as asset acquisitions under section 338.

E.   Petitioners’ IRS Audits

     The Internal Revenue Service (IRS) audited petitioners’ tax

returns for the years ending November 30, 1987, November 30,

1988, April 24, 1989, November 30, 1989, November 30, 1990,

November 30, 1991, and November 30, 1992.   The IRS examined

petitioners’ books, records, and tax filings relating to the

acquisitions.   Petitioners paid Ernst & Young, American Appraisal

Associates, and other accounting and law firms for services

relating to the 1991 and 1992 IRS audits of petitioners’ 1987,

1988, and 1989 tax years.

     Most of petitioners’ IRS examination expenses related to the

IRS audit of the acquisitions, the section 338 elections, and

petitioners’ return for the tax year ending November 30, 1987.

     Petitioners paid $567,974 in 1991 and 1992 for accounting

and legal services relating to IRS audits of petitioners’ 1987

tax year.   Petitioners incurred the expenses to comply with
                                 7

section 7602, which allows the IRS to examine taxpayers’ books

and records to ascertain whether a return is correct.

     Petitioners reported that they had losses of $26,441,402 for

1989, $60,447,014 for 1990, $35,262,161 for 1991, and $11,772,384

for 1992 before taking into account net operating loss carrybacks

or carryforwards.

     On April 29, 1994, petitioners filed amended returns for

their tax years ending November 30, 1989, 1990, 1991, and 1992.

Petitioners filed an amended return for their tax year ending

November 30, 1985, on April 29, 1994.   On it, petitioners claimed

a carryback of $6,484,484 for specified liability losses under

section 172(f)(1)(B).   Specified liability losses reported on

petitioners’ 1989, 1990, 1991, and 1992 amended returns do not

exceed the amount of net operating losses reported on those

returns.

     Respondent determined that petitioners may deduct $4,007,551

as specified liability losses and $2,476,9332 as a loss subject

to the general 3-year carryback and 15-year carryforward under

section 172.


     2
       Petitioners concede that they may not deduct $29,000 of
this amount. Thus, the amount in dispute is $2,447,933.
                                  8

     The following losses are in dispute:

            Acctg fees re:           Acctg fees re:     Prof.
  Tax      audited financial       employee benefits    fees
  year     statements and SEC         financial         Re: IRS
 ending    regis. statements          statements        audit

11/30/89       $631,109                $34,450             --
11/30/90        552,000                 24,500             --
11/30/91        337,700                 24,500         $140,186.50
11/30/92        287,500                 17,200          427,787.50


     Petitioners reported that they had losses on their 1989,

1990, 1991, and 1992 returns, part of which petitioners carried

back as specified liability losses under section 172(b)(1)(C) to

the year ending November 30, 1985.    Petitioners reported taxable

income of more than $6,484,484 on the returns they originally

filed for 1985.    Petitioners' specified liability losses included

payments to their public auditors and to the SEC in connection

with petitioners’ compliance with the 1934 Act and ERISA and

payments for legal and accounting services in connection with the

IRS audits.

     The parties agree that the SEC and ERISA professional fees

and the IRS examination expenses described above are deductible

under chapter 1.

                             Discussion

     The parties have stipulated the amount of petitioners’ net

operating losses.   The only issue for us to decide is whether

petitioners may carry those losses back 10 years or 3 years.
                                       9

A.      Ten-Year Net Operating Loss Carryback for Specified
        Liability Losses

        1.     Ten-Year Net Operating Loss Carryback

        Generally, a taxpayer may carry a net operating loss back 3

years before the loss year and forward 15 years after the loss

year.        Sec. 172(b)(1)(A).   However, a taxpayer that has a

specified liability loss under section 172(f) may carry that loss

back to each of the 10 tax years preceding the loss year.           Sec.

172(b)(1)(C).

        This 10-year carryback includes product liability and tort

losses and nuclear decommissioning expenses.           Sec. 172(f)(1),

(3).        The 10-year carryback was enacted for product liability

losses in 1978.        Sec. 172(j); Revenue Act of 1978, Pub. L. 95-

600, sec. 371(b), 92 Stat. 2859.           It was extended to specified

liability and tort liability losses and costs of decommissioning

nuclear power plants (section 172(k)) in 1984.           Deficit Reduction

Act of 1984 (DEFRA), Pub. L. 98-369, sec. 91(d)(2), 98 Stat.

606.3




        3
      The Revenue Reconciliation Act of 1990, Pub. L. 101-508,
sec. 11811(b)(1), 104 Stat. 1388-532, combined sec. 172(j)
(relating to product liability losses) and sec. 172(k) (relating
to deferred statutory or tort liability losses and nuclear
decommissioning costs) and redesignated them as sec. 172(f)
(providing rules relating to specified liability losses),
effective for net operating losses for tax years beginning after
1990.
                                 10

     2. Specified Liability Losses

     Section 172(f) defines a specified liability loss in

pertinent part 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 (not described in subparagraph
          (A)) allowable as a deduction under this chapter
          with respect to a liability which arises under a
          Federal or State law * * * if--

                       (i) * * * 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.

     The 10-year carryback for specified liability losses

described in section 172(f)(1)(B) applies if:

     (1) The taxpayer took the specified liability loss into

account in computing its net operating loss for the taxable year;

     (2) the expense resulting in the specified liability loss is

deductible under chapter 1 of the Internal Revenue Code;
                                11

     (3) the liability with respect to which the taxpayer

incurred the expense arose under a Federal or State law;

     (4) the act or failure to act which gave rise to the

liability occurred at least 3 years before the taxable year at

issue;

     (5) the taxpayer used the accrual method of accounting

throughout the period in which the acts or failures to act giving

rise to the liability occurred; and

     (6) the specified liability loss for any taxable year does

not exceed the net operating loss for that year.   Sec.

172(f)(1)(B) and (2).

     The parties agree that petitioners meet requirements (1),

(2), (5), and (6).   To prevail, petitioners must also meet

requirements (3) and (4).

     Deductions are a matter of legislative grace, and

petitioners bear the burden of proving that they are entitled to

any deductions they claimed on their returns.   Rule 142(a);

Deputy v. DuPont, 308 U.S. 488, 493 (1940); New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, 290

U.S. 111, 115 (1933).

B.   Whether the Liability for Which Petitioners Incurred the
     Expense Arose Under a Federal or State Law

     1.   Petitioner’s Liability To Pay for Professional Services

     To be a specified liability loss, the liability with

respect to which petitioners incurred the expense must have
                                  12

arisen under a Federal or State law.    Sec. 172(f)(1)(B).

Petitioners argue that their liability to pay accounting and

professional fees and IRS examination expenses arose under

Federal law.

     We disagree.    It is true that the 1934 Act, ERISA, and the

Internal Revenue Code require petitioners to file financial

reports and disclosure statements, maintain and provide books and

records, and cooperate with IRS audits.    However, those

provisions do not establish petitioners’ liability to pay the

amounts at issue.    Petitioners’ liability to pay those amounts

did not arise until petitioners contracted for and received the

services.   Petitioners' choice of the means of compliance, and

not the regulatory provisions, determined the nature and amount

of their costs.     If, on the other hand, petitioners had failed to

comply with the auditing and reporting requirements or had not

obtained the particular services in issue here, their liability

would have been in amounts not measured by the value of services.

Thus, petitioners' liability did not arise under Federal law.

     2.   Enactment of the Specific Liability Loss Rule With the
          Economic Performance Rules

     Our interpretation is entirely consistent with the

legislative history which accompanied enactment of the

predecessor of the specified liability loss provision.      Before

1984, an accrual basis taxpayer generally could deduct an expense

for the tax year in which (a) all events had occurred which
                                   13

determined the fact of the liability and (b) the amount of the

liability could be determined with reasonable accuracy.        United

States v. Anderson, 269 U.S. 422, 437-438, 441 (1926).        DEFRA

sec. 91(a), 98 Stat. 606, provided that the all events test is

not met before economic performance occurs.        Sec. 461(h)(1).    In

the case of liability to pay a person who provides goods or

services to the taxpayer, economic performance occurs as that

person provides the goods or services to the taxpayer.        Sec.

461(h)(2)(A)(i).

     In the legislative history accompanying enactment of the

economic performance rules, Congress described the pre-DEFRA law,

gave an overview of the House bill, discussed the economic

performance rules added by DEFRA, and described the predecessor

of the specified liability loss rule.     The conference report for

DEFRA states in pertinent part:

                        G.   Accounting Changes

                        1.   Premature accruals

              *     *        *     *     *        *     *

          Economic Performance

              *     *        *     *     *        *     *

          Net operating loss carrybacks

               The House bill provides a 10-year carryback
          for net operating losses attributable to certain
          liabilities deferred under these provisions. The
          bill also provides a special carryback rule for
          losses incurred in connection with the
          decommissioning of a nuclear power plant. Such
                                   14

           losses may be carried back to each of the taxable
           years during the period beginning with the taxable
           year in which the plant was placed in service. No
           loss, however, may be carried back to a taxable
           year beginning before January 1, 1984, unless it
           may be carried back without regard to these rules.

                The provisions of the bill apply generally to
           expenses incurred (without regard to the economic
           performance requirement) after the date of
           enactment.


                *       *    *      *     *     *       *

     Conference Agreement


          The Conference Agreement generally follows the House
     bill, with modifications.

            *       *       *       *      *        *       *

H. Conf. Rept. 98-861, at 871-873 (1984), 1984-3 C.B. (Vol. 2) 1,

125-127.

     The conference report states that the 10-year carryback of

specified liability losses applies to "net operating losses

attributable to certain liabilities deferred under these

provisions."    "These” provisions are the limits on premature

accruals; i.e., the economic performance rules of section 461(h).

This suggests that Congress intended the 10-year carryback to

apply only to liabilities for which deduction is deferred by the

economic performance rules.      Petitioners' accrual of the

deduction for the expenses at issue was not deferred by the

economic performance rules.      Since the economic performance rules

do not limit petitioners' accrual of the deduction for the
                                   15

compliance expenses at issue, we conclude that Congress did not

intend those expenses to qualify as specified liability losses.

     3.    Categories of Property Eligible for a 10-Year Carryback

     Section 172(f) provides a 10-year carryback for product

liability expenses, tort losses, and nuclear power plant

decommissioning costs, among other specified liability losses.

We think Congress intended the 10-year carryback for liability

losses under section 172(f)(1)(B) to apply to a relatively narrow

class of liabilities similar to the others identified by the

statute.   Under the ejusdem generis rule of statutory

construction, general words that follow the enumeration of

specific classes are construed as applying only to things of the

same general class as those enumerated.     Kansas City S. Ry. Co.

v. McNamara, 817 F.2d 368, 372 (5th Cir. 1987); Coleman v.

Commissioner, 76 T.C. 580, 588 (1981) (applying the rule of

ejusdem generis to interpret “other casualty”); Estate of Short

v. Commissioner, 68 T.C. 184, 193 (1977).     We think that the

costs at issue here are routine costs and are not of the same

general type as those other categories.

     Petitioners argue that according to the plain language of

section 172(f)(1)(B), petitioners’ costs of compliance with the

1934 Act, ERISA, and the Internal Revenue Code are specified

liability losses.   We disagree.    There is nothing in the statute

that plainly, or at all, for that matter, establishes that

petitioners may carry their compliance costs back for 10 years.
                                   16

      We conclude that petitioners' compliance costs and other

accounting expenses were not liabilities that arose under Federal

or State law.

C.    Whether the Act or Failure To Act Which Gave Rise to the
      Liability Occurred at Least 3 Years Before the Taxable
      Years at Issue

      To be a specified liability loss under section 172(f)(1)(B),

the act giving rise to the liability under a Federal or State law

must have occurred at least 3 years before the start of the

taxable year.      Sec. 172(f)(1)(B)(i).   Petitioners’ contention

that they meet this requirement follows from their contention

that their liability to pay those costs arose under Federal law

to which they were made subject more than 3 years before the

years at issue.      We disagree for the reasons stated above at par.

B.   Petitioners make no other argument that the liability at

issue arose more than 3 years before the years at issue.       Thus,

we conclude that petitioners do not meet this requirement.

D.    Conclusion

      We hold that petitioners’ professional fees and IRS

examination expenses are not specified liability losses under

section 172(f)(1)(B), and thus are not eligible for the 10-year

carryback under section 172(b)(1)(C).

      To reflect the foregoing and concessions,

                                             Orders will be issued

                                        denying petitioners' motions

                                        for partial summary judgment.
