ITT Educational trustee, IRS reach deal on return adjustment appeals

By Caroline Salls

Pittsburgh, Aug. 1 – ITT Educational Services, Inc. Chapter 7 trustee Deborah J. Caruso is asking the U.S. Bankruptcy Court for the Southern District of Indiana to approve a settlement regarding appeals associated with audits of the ITT affiliated debtors’ consolidated federal income tax returns for 2010, 2011 and 2012, according to a motion filed Thursday.

Caruso said ITT entered into agreements in January 2010 with PEAKS Trust-2009 to create the PEAKS Loan Program. Under this program, the trust raised $300 million from institutional investors in exchange for 10-year notes and used the proceeds to purchase loans made by an originating bank to ITT students to pay tuition and fees.

The trustee said ITT was required under the loan program to return 28% of proceeds to the trust in exchange for a subordinated promissory note due 2026.

According to the motion, ITT discounted the subordinated note to present value using a 9% interest rate and claimed $58.34 million in deductions for the discount on the affiliated debtors’ consolidated federal income tax returns for 2010 and 2011. ITT also reported interest income in 2010, 2011 and 2012 from amortization of the $58.34 million amount as original issue discount over the term of the subordinated note.

Caruso said the IRS audited the affiliated debtors’ returns for 2010, 2011 and 2012 and proposed in 2013 to disallow the deductions claimed on the subordinated note in 2010 and 2011, as well as a property tax deduction of $1.08 million for 2011. The IRS also proposed a decrease in ITT’s taxable income for 2010, 2011 and 2012 by the original issue discount the company reported as interest income for those years.

“The net results of all these proposed adjustments would have been a net increase in total tax liability for 2010 through 2012 of approximately $18,292,065, exclusive of interest and penalties,” the motion said.

ITT appealed the proposed adjustments. Caruso said the appeal was still pending when the company filed bankruptcy.

Under the proposed settlement, the trustee, on behalf of the affiliated debtors, will agree to all of the adjustments to taxable income originally proposed in 2013 by the IRS for 2010, 2011 and 2012, and the IRS will agree, subject to approval by the IRS Commissioner, to allow a $49.59 million bad debt deduction for 2012 in connection with the subordinated note and a net operating loss deduction in 2012 of $52.06 million for carryback of a net operating loss from 2014.

If the settlement is approved, Caruso said the affiliated debtors will owe $936,028 of additional tax for 2010, 2011 and 2012, plus interest and penalties, compared to the extra $18.29 million of additional tax alone that would have been owed under the adjustments originally proposed by the IRS in 2013.

ITT Educational Services provided postsecondary degree programs and is based in Carmel, Ind. The company filed for bankruptcy on Sept. 16, 2016 under Chapter 7 case number 16-07207.

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