Tax — income tax — insurance companies — bad-faith awards

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United States Court of Appeals For the Seventh Circuit

Civil

Tax — income tax — insurance companies — bad-faith awards

Punitive damages should be treated as regular business losses that are deductible when actually paid rather than deducted earlier as part of insurance loss reserves.

“In a prior phase of the same case, the Tax Court rejected the method by which State Farm wanted to recalculate its alternative minimum tax liability for tax years 2001 and 2002. 130 T.C. 263 (2008). State Farm’s newly proposed method for computing this liability used one number for Pre-adjustment Alternative Minimum Taxable Income in one calculation, and another number for Pre-adjustment Alternative Minimum Taxable Income in another calculation. State Farm effectively applied a statutory ‘loss limitation’ rule in one place but not in the other. The result of this new math would be the creation from thin air of a virtual tax loss some $4 billion larger than State Farm’s actual loss (which was itself a whopping $5.3 billion) in the 2001 tax year — and consequently more than $500 million in new retroactive tax credits. We affirm the Tax Court’s rejection of State Farm’s unreasonable new interpretation of the tax code. We find nothing in the text or purpose of the alternative minimum tax statutes and regulations to support math that uses two different values for the same variable in adjacent calculations.”

Affirmed in part, and Reversed in part.

11-3478 State Farm Mut. Auto. Ins. Co. v. CIR

Appeal from the United States Tax Court, Hamilton, J.