Homebuilder Loss Claim Crumbles

A homebuilder's assertion that its losses are related to "product liability" had no foundation in existing law, says the IRS.

1 Section 13 of the Worker, Home Ownership, and Business Assistance Act of 2009, Public Law 111-92, amended Section 172(b)(1)(H) to allow taxpayers to carry back an applicable NOL for a period of three, four, or five years. An applicable NOL is the taxpayer’s NOL for a taxable year ending after December 31, 2007, and beginning before January 1, 2010. Section 172(b)(1)(H)(iv) limits the amount of an NOL that a taxpayer elects to carry back to the fifth taxable year preceding the taxable year of the loss to 50% of the taxpayer’s taxable income for the carryback year. Moreover, Section 172(b)(1)(H) does not apply to any taxpayer (or member of its affiliated group) that received certain benefits (even though repaid) under the Emergency Economic Stabilization Act of 2008.
2 See CCA 201006028, November 5, 2009.
3 See Heller v. Cadral Corporation, 406 N.E. 2d 88 (Ill. App. Ct. 1980).
4 See Harvard Secured Creditors Liquidation Trust v. I.R.S., 568 F.3d 444 (3rd Cir. 2009). A division of Harvard Industries (HI) manufactured “lock-nuts” for use in commercial and military aircraft. HI sold the lock-nuts to distributors who then sold them to manufacturers for incorporation into the aircraft. It was discovered that certain lock-nuts sold by HI to the distributors were defective. HI’s largest customer, H, filed suit against HI based on the sale of defective lock-nuts. The suit was settled; HI paid H $820,000. In addition, HI entered into settlement agreements with several other distributors to which it had sold lock-nuts. In these settlements, HI forgave a total of $3,009,807 in accounts receivable arising from the sale of lock-nuts. At issue was whether the damages HI sustained were product liabilities. The answer was no. The Third Circuit noted that product liabilities encompass liabilities for damages resulting from damage to or loss of the use of property on account of any defect in any product manufactured by the taxpayer. The question, therefore, was whether the distributors’ inability to resell the defective product qualifies as damage to or loss of the use of property. The court concluded that such inability did not qualify as damage to or loss of the use of the property. Where the only injury was to the product itself, the resulting loss is essentially the failure of the purchaser to receive the benefit of its bargain — typically the “core concern” of contract law. Citing East River Steamship Corporation with approval, the court concluded that “…a manufacturer…has no duty…under either a negligence or products liability theory to prevent a product from injuring itself….”




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