The Internal Revenue Service just can’t catch a break in its quest to retrieve $700 million in tax refunds from defunct bond insurer Ambac Assurance Corp.
Judge William Johnston of the circuit court in Lafayette County, Wis., who earlier dismissed the case from state court, dismissed an appeal notice Thursday on grounds that Robert Kovacev, an attorney for the IRS, is not licensed to practice law in the state.
“Kovacev plainly did not qualify as an attorney of record with the authority to sign the notice of appeal,” the judge ruled. “Wisconsin’s procedures … did not prevent attorney Kovacev from carrying out his responsibilities; he simply failed to carry out his responsibilities according the applicable rules.”
The case centers on whether Ambac improperly received a tentative $708 million tax refund in 2008. If the IRS finds the refund was improper, it would seek to declare a “deficiency” and place a levy on the company’s liquid assets to satisfy the tax obligation.
However, the Wisconsin insurance commissioner last November demoted any potential tax claims to its walled-off account — where roughly $50 billion of frozen assets currently reside — and obtained approval from state court to give it exclusive jurisdiction over the matter.
The IRS complained to a federal court on Feb. 11 that the Wisconsin state court “lacked any jurisdiction, authority, or right” to rule on internal revenue laws. It said any ruling that prevents the agency from retrieving federal taxes was “null and void as a matter of federal law.”
But on Feb. 18, Federal District Court Judge Barbara Crabb dismissed the IRS case, for a second time, on grounds that her court “lacked jurisdiction to consider the legality of a state court’s order made in the context of an insurance rehabilitation proceeding.”
The dual rejection could mark the end of the IRS-Ambac dispute.
Johnston said his ruling was final. “This is a fundamental defect which cannot be corrected,” he said, calling the notice of appeal “fundamentally flawed.”
Crabb said her decision was “not reviewable on appeal,” but the appeals court allowed the IRS to file a memo explaining why its motion should not be dismissed. A decision on the matter is pending.
If the IRS decides the tentative tax refund given to Ambac was improper, it can make a claim in the rehabilitation proceedings.
Under the current plan, the IRS could receive 25% of its claims in cash once payments from the walled-off account begin, and the rest in surplus notes bearing a 5.1% coupon and maturing in 2020.
The walled-off account was supposed to be unfrozen this month, but insurance commissioner Ted Nickel released a statement last Monday saying he “is not satisfied that the conditions necessary for the plan to become effective have all been satisfied, and believes that this decision is in the best interest of the policyholders.”
No further comment was given.
