A lert
TAX LAW
JUNE 2001
Proposed T
ax Legislation W
ould Provide Major T
ax Breaks
Tax
Would
Tax
(As W
ell As Uncertainty) for Asbestos Defendants
Well
by J. Stephen Barge
Representative Michael (Mac) Collins recently
sponsored H.R. 1412, which would amend the Internal
Revenue Code (the “Code”) in two ways potentially
favorable to taxpayers who are, or may become,
responsible to asbestos plaintiffs. Senator Michael
DeWine also introduced S. 1048, which is identical to
H.R. 1412. These bills are essentially a reintroduction
of two similar bills sponsored last year that died. If
enacted, the bills would provide substantial
governmental assistance for the payment of asbestosrelated claims and associated expenses. This alert first
summarizes the benefits that asbestos defendants may
realize from the bills. The alert next outlines two areas
of ambiguity that may be of concern to asbestos
defendants if the bills were enacted in their current
form.
THE BENEFITS
The bills would exempt from federal income tax the
earnings derived from amounts contributed to so-called
“designated settlement funds” that are established for
the principal purpose of resolving and satisfying
present and future claims relating to asbestos. Under
current law, a designated settlement fund pays income
tax on its earnings. Through this exemption, all of the
fund’s earnings (after expenses) would be available for
payment to claimants. Accordingly, a taxpayer creating
a designated settlement fund may be able to satisfy the
ultimate payment obligations of the fund by
contributing less to the fund. The bills, if enacted,
would therefore increase the attractiveness of using
designated settlement funds.
Second, the bills would modify current tax law
relating to taxpayers that incur “specified liability
losses” (which include product liability losses).
Under current tax law, taxpayers may carry such losses
back 10 years and claim tax refunds for income taxes
paid in those prior years. This special 10-year carryback
period for specified liability losses extends the normal 2year carryback period. The bills would allow taxpayers
to elect, with respect to the portion of an operating loss
that is attributable to asbestos-related losses, to extend
the carryback period to the first taxable year in which
the taxpayer (or a predecessor taxpayer) manufactured
or distributed the product at issue. In many cases, this
could mean taxpayers could obtain refunds for taxes
paid fifty years ago or more.
This provision could greatly enhance the ability of
taxpayers to claim refunds of tax associated with
deductible asbestos-related liabilities. Importantly, the
bills would not alter the rules relating to when an
asbestos-related liability may be deducted. Instead, the
bills simply provide that when a taxpayer incurs an
asbestos-related operating tax loss, it may carry that
loss back farther than would normally be the case.
To the extent that a taxpayer claims a refund greater
than it would have been entitled to under the 10-year
carryback period, the refund must be devoted solely
to claimant compensation and “related costs.” The
bills are not clear, of course, as to several key points.
What types of related costs would be considered
appropriate? Would this be limited to expenses
associated with administering the claimant funds?
Could the taxpayer use the excess tax refunds to pay
legal costs associated with defending its liability?
How would the taxpayer satisfy the “solely”
requirement in terms of not commingling the funds
with other funds?
Kirkpatrick & Lockhart LLP
AREAS OF AMBIGUITY
There are at least two additional significant areas in
which the bills are unclear as to the manner in which
they would apply to asbestos defendants.
First, many asbestos defendants neither distributed
nor produced asbestos-related products, but instead
are sought to be held responsible under other
theories of liability. The bills are not clear whether
such taxpayers could utilize the favorable carryback
period. The bills provide that taxpayers may carry
back asbestos-related losses to the first year in
which the taxpayer was engaged in the “production
or distribution” of products containing asbestos.
Accordingly, there is a substantial question whether
taxpayers who neither produced nor distributed
products can take advantage of the extended
carryback period.
contrast, it is more likely that the U.S. tax benefit
conferred on the non-payor taxpayer would be offset
with the elimination of a U.S. tax benefit to the payor
taxpayer. Accordingly, taxpayers who are held
responsible for products that their affiliates
manufactured or distributed should be wary about
the tax effect of this provision.
In addition, the provision applies to “related parties,”
but the bills do not define what relationships are
necessary for parties to be treated as “related.”
Other sections of the Code define related parties
differently for certain narrow purposes. See, e.g.,
Section 267(b); Section 707(b); Section 197(f)(9);
Section 1313(c). It is not clear whether the draftsmen
intended a broad or a narrow interpretation of
“related” for these purposes.
CONCLUSION
Second, unlike last year’s bills, this year’s bills
contain a new provision that reads as follows:
In determining its specified liability losses attributable
to asbestos, the taxpayer may elect to take into account
payments of related parties attributable to asbestosrelated products produced or distributed by the taxpayer.
As drafted, the provision makes no sense. It is not
clear what the provision is intended to achieve,
which taxpayers it would apply to, and what it in fact
would accomplish.1
The bills do not define what it would mean for a
taxpayer to “take into account” payments from
related parties. Similarly, the bills are silent as to the
effect (if any) on the tax position of the payor that
such an election by a related party would have.
However, it is unlikely that the payor taxpayer would
receive any U.S. tax benefit from this provision. In
It is difficult to project whether the bills will be
enacted and, if so, in what form. Reported
supporters of the bills include the National
Association of Manufacturers, U.S. Chamber of
Commerce, Owens Corning, W.R. Grace, U.S.
Gypsum, and Armstrong. Reported opponents
include the American Public Health Association. The
possibility of further tax legislation this year remains
uncertain and, thus, it is particularly difficult to
handicap the ultimate likelihood of passage this year.
If enacted in their current form, however, many
asbestos defendants will face significant uncertainty
as they attempt to implement the bills’ provisions as
part of their overall tax planning.
J. STEPHEN BARGE
412.355.8330
sbarge@kl.com
1 The provision, of course, may have been inserted at the urging of a specific taxpayer whose asbestos-related
losses were funded by an affiliate (such as an offshore captive insurance company). If so, the provision may
be intentionally vague.
Kirkpatrick & Lockhart LLP
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.
© 2001 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.