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Court denies feds’ appeal in insurance case (UPDATE)

By TODD RICHMOND
Associated Press

MADISON, Wis. (AP) – The Wisconsin Supreme Court refused Thursday to allow the federal government to appeal an order barring the Internal Revenue Service from pursuing claims against a special account the state created to protect a struggling insurance company’s policyholders.

The U.S. Justice Department forfeited its state appellate rights because it failed to challenge the prohibition at the circuit court level, the court ruled.

“Our case law is clear and consistent – failure to preserve issues means that they are waived,” Justice Patrick Crooks wrote.

The case revolves around a $60 billion account the state Office of the Commissioner of Insurance created to protect Ambac Assurance Corp. policyholders.

The state office feared the company, which insures risky transactions such as mortgage securities, might collapse as the recession dragged on. Two years ago, the office moved to take over some of the company’s most potentially damaging policies and put them in separate account. The office has been working on a plan to pay account policyholders’ claims but hasn’t authorized any payouts yet, said Tom Becker, a spokesman for the office.

In November, Ambac’s parent company, Ambac Financial, filed for bankruptcy. The IRS is seeking to reclaim at least a portion $700 million in tax refunds it issued to the company and wants to examine the special account as part of that process.

But Dane County Circuit Judge William D. Johnston’s draft order creating the special account blocked the IRS and other parties from pursuing claims against it. The IRS was notified of the injunction but made no move to challenge it. Instead, the IRS tried to move the case into federal court in Madison but failed, and Johnston entered the final order in January 2011.

The IRS filed appeals with the U.S. Seventh District Court of Appeals and the Wisconsin 4th District Court of Appeals. The federal appeals are still pending, but the state appeals court rebuffed the agency in May, saying the attorney who filed the appeal wasn’t licensed to practice law in Wisconsin.

The IRS argued to the Supreme Court that the appeals court should exercise its power to overlook procedural errors and take up the case in the interest of justice. The state commissioner’s office countered that the agency should have raised its objections with Johnston when it had the chance. The Supreme Court agreed.

“The United States never appeared in the circuit court proceedings. It has acknowledged its strategic decision not to litigate in state courts. A party is entitled to make such a decision, but it is not entitled to reversal when its strategy has ‘proved ineffective,'” Crooks wrote. “The IRS is essentially seeking a way out of a corner it chose to put itself in.”

Charles Miller, a spokesman for the U.S. DOJ’s tax division, said the agency was reviewing the ruling. Becker declined to comment, and Ambac attorney Daniel Stolper didn’t immediately return a message Thursday morning.

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