Recent Tax Court Decision Reflects Court’s Disallowance Of Duplicated Deductions In Duquense Light Holdings, Inc.

In last year's Tax Court decision in Duquesne Light Holdings, Inc.,TCM 2013-216, the Tax Court held, citing the Supreme Court's decision in Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934), that a subsisidiary was not permitted to report loss on the sale of its assets where such loss represented the same economic loss recognized in a prior sale of the subsidiary's stock.

The Facts, In General

Duquesne Light was the common parent of a consolidated group of corporations. Its business was to distribute electricity throughout Pennsylvania through wholly owned subsidiaries. In the 1990s, Aqua Source, Inc. was organized as an indirect wholly owned subsidiary of Duquesne for acquiring water, wastewater and water services companies. The parent corporation funded Aqua Source by contributing funds and its preferred stock. In 2001, Duquesne transferred 4% of its stock in Aqua Source to its investment banker, Lehman Brothers, in exchange for services to be rendered that had been valued at $4 million. Duquesne reported a $200 million capital loss on its 2001 consolidated group return for the Davis-Keenan loss on the taxable disposition of its subsidiary stock and shortly thereafter filed a quickie refund request on Form 1139 in which it carried back to 2000 approximately $135 million of the 2011 stock loss which yielded a tentative refund of close to $135 million.

In 2002, Aqua Source sold several of its water subsidiaries claiming capital losses of $59.5 million (2002 asset losses) which were deducted on the 2002 consolidated return filed by the Duquesne group. Again, a tentative refund carryback was filed for 2002 back to 2000 yielding another tentative refund of $12.67 million. In 2003, Aqua Source sold its remaining assets and Duquesne claimed a capital loss of $192.8 million (2003 asset losses). During 2004, Duquesne filed two additional tentative claims for refund which included the 2003 asset sale loss of $201.4 million back to the 2000 tax year. Again in 2004, Duquesne filed a second Form 1139, which it carried back from 2003, $16.5 million of long term capital losses back to 2000. A total of $201.4 million of long term capital losses were carried back from 2003 to 2000, of which $192.8 million was attributable to the 2003 asset sales. The service paid Duquesne tentative refunds of $40.3 million.

Overall, between 1997 and 2003, Duquesne contributed capital of $471,200,414 to AquaSource. There were operating profits in four years: $1,985,576 in 1999...