Court Rules ICA Might Face Taxes Up to $90 Million
Imperial Corp. of America, the financially troubled former parent company of Imperial Savings Assn., might owe as much as $90 million in taxes for the tax year that ended Sept. 30, according to a Monday ruling by a U.S. Bankruptcy Court judge.
The possible tax bill stunned ICA, which reported an operating loss for its fiscal year that ended Sept. 30, and did not expect to owe millions of dollars to the Internal Revenue Service, according to Patrick Shea, an attorney who represents the company. ICA filed for Chapter 7 bankruptcy protection earlier this year.
“I really don’t understand the ruling yet,” Shea said after the Monday hearing. “Our intention . . . however, is to have the court reexamine this issue.”
It was uncertain on Monday where the money would come from if ICA is forced to pay $90 million to the IRS. The company has few remaining assets because in February regulators seized Imperial Savings, ICA’s major business. ICA’s operations now are largely dependent upon service contracts with the S&L.;
Judge Louise Malugen has yet to rule on whether claim by the IRS should supersede claims from secured creditors. It was also uncertain on Monday if the IRS would try to collect the tax bill by suing former ICA officers or accounting firms that have worked for ICA.
Despite ICA’s loss last fiscal year, Malugen ruled in favor of the IRS, which argued that ICA’s tax liability should be based upon the operating loss as well as $709 million in “federal financial assistance payments” that regulators made to the S&L; during 1990.
IRS attorneys, during a recent two-day hearing in Malugen’s courtroom, argued that the payments should be treated as taxable income.
According to testimony, ICA reported a $445-million operating loss for the tax year that ended Sept. 30. However, Malugen ruled that the reported loss was computed without taking into account the $709 million in assistance payments. With the payments counted as taxable income, Malugen said, ICA’s tax burden for the year that ended Sept. 30 could be as high as $90 million.
The federal Office of Thrift Supervision made the assistance payments after regulators seized the S&L; in February and reopened it as Imperial Federal Savings Assn. Regulators typically use the payments to bolster the net worth of troubled S&Ls; that are seized but need additional capital in order to remain in operation under federal ownership.
But Shea, representing ICA, argued Monday that the payments, under federal law, are actually defined as “collateralized loans” that will be repaid in full when federal regulators receive cash from the eventual sale of Imperial Federal Savings’ assets and branch system. “The decision is at odds with the law because collateralized loans are not income,” Shea said.
Shea also suggested that if the assistance payments were determined to be taxable income, then the OTS, not ICA, should be held responsible for the taxes because the payments were made when Imperial was already owned by the federal government.
“The government gave those loans to itself,” Shea said. “And they’re going to essentially pay themselves back” through the sale of the S&L;’s assets, Shea said.
After the seizure of Imperial Savings by federal regulators, ICA was left with about $11 million in assets and cash that now sits in a trust awaiting distribution to ICA’s creditors. However, the $11 million would be wiped out should the $90 million tax bill survive a likely appeal by ICA’s creditors’ committee, Malugen said.
