William G. Ohlhausen of Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., for appellant; Richard A. Ahrens, St. Louis, Mo., on the brief.

Gerald A. Rimmel of Susman, Schermer, Willer & Rimmel, St. Louis, Mo., for appellees; Barry S. Schermer, St. Louis, Mo., on the brief.

Richard D. Shewmaker of Thompson, Walther, Shewmaker & Gaebe, St. Louis, Mo., filed brief for amicus curiae Pioneer Bank & Trust Co.

Before LAY and ROSS, Circuit Judges, and HANSON,* Senior District Judge.

HANSON, Senior District Judge.

The appeal in this diversity action presents a single, discrete issue for our review: whether an insolvent subsidiary of an affiliated corporate group is entitled to share in a group consolidated federal income tax refund generated largely by the subsidiary's losses, in an amount larger than the subsidiary's own income tax payments. The district court,1 in ruling on cross motions for summary judgment, permitted the subsidiary to recover a portion of the refund up to the amount of its tax payments for the years in question, but would not allow it to claim any additional portion of the refund of tax dollars paid by other members of the affiliated group. Jump v. Manchester Life & Casualty Management Corp., 438 F. Supp. 185, 188-190 (E.D.Mo.1977). Appellant Jump, Superintendent of Insurance for the State of Ohio (the Superintendent) and conservator and liquidator of the insolvent subsidiary appeals insofar as the district court's judgment denied allocation to the subsidiary of the entire refund. We affirm.I.

Manchester Life and Casualty Management Corporation (Management Corporation), a Missouri corporation, owns substantially all of the stock of Manchester Insurance and Indemnity Company (MI&I) and Manchester Premium Budget Corporation (Premium). MI&I, in turn, owns approximately 85% Of the Pioneer Bank and Trust Company (Pioneer). The five individual defendant-appellees are or were directors of both Management Corporation and MI&I.

The pertinent facts are simple and uncontested.2 Management Corporation is the parent for an affiliated corporate group consisting of Management Corporation, MI&I, Pioneer and Premium. On behalf of the group, and as permitted by 26 U.S.C. §§ 1501, 1504, Management Corporation filed consolidated federal income tax returns for 1970, 1971, 1972, 1973, and 1974. Each subsidiary would calculate its separate federal income tax liability and pay that amount to Management Corporation. During the years 1970, 1971, and 1972, MI&I paid Management Corporation a total of $733,505.00 as its contribution to the consolidated tax liability of the group for those years. In 1973 and 1974 MI&I suffered substantial losses and made no payments.

The 1973 calendar year was a net operating loss year for the entire affiliated group, including MI&I. Consequently, in the return for calendar year 1973, Management Corporation claimed a refund which included a net operating loss carryback for taxes paid in 1970, 1971, and 1972. See 26 U.S.C. § 172(b). In early 1974, the Internal Revenue Service (IRS) refunded $703,255.00 to Management Corporation as agent for the group, and Management Corporation in turn paid this amount over to MI&I. As a result of this refund, MI&I recovered all but $30,250.00 of the total it had paid for income taxes in 1970, 1971, and 1972.

The 1974 calendar year was apparently again a dismal one for MI&I. It suffered a net operating loss in excess of three million dollars and, as a direct result, the affiliated group sustained a net loss in similar amount. Because of its consolidated filing status, the affiliated group was again in a position to take advantage of MI&I's disproportionate losses to gain additional refunds of taxes paid in calendar years 1971 and 1972 by virtue of net operating loss carryback. Accordingly, on March 15, 1975, Management Corporation filed an application with the IRS for a tax refund. On May 8, 1975, Management Corporation received two checks from IRS: one check for $692,983.17 representing a refund for the calendar year 1972, and another check for $118,467.19 representing a refund for calendar year 1971, for a total refund in 1971 and 1972 tax dollars of $811,450.36 including interest. This second refund is the focus of the present dispute.

On September 23, 1975, the Court of Common Pleas of Franklin County, Ohio, with the consent of MI&I's Board of Directors, appointed appellant Superintendent as conservator of MI&I. On the Superintendent's motion, the same court subsequently adjudicated MI&I insolvent and ordered its liquidation on February 13, 1976.

On June 16, 1976, the Superintendent filed his complaint in the present action. The complaint, as amended, was in three counts. In Count I the Superintendent alleged that the Management Company, by not paying the $811,450.36 refund to MI&I, had converted MI&I's property in that amount. Count II was directed against the individual appellee directors and asserted a breach of fiduciary duties. Count III alleged that $943,167.36 was recorded as an account due MI&I for income tax refunds on Management Corporation's books. The Superintendent moved for summary judgment on Counts I and III. Management Corporation and the directors moved for summary judgment on Counts I, II, and III. The district court partially granted the Superintendent's motion on Count I and entered judgment for $30,250.00, a figure which represents the balance between MI&I's previously received refund of $703,255.00 for years 1970, 1971, and 1972 and the total sum of $733,505.00 MI&I paid to Management Corporation for income taxes in those years. However, on Counts II and III, the district court granted summary judgment for Management Corporation and the directors. As we understand the Superintendent's brief and argument before us, Counts II and III have been abandoned as independent claims, and the only question presented to us for resolution is whether the district court erred in ruling that Management Corporation did not convert MI&I's property by retaining most of the second carryback refund for 1971 and 1972.3 Management Corporation, for its part, does not appeal from the judgment against it for $30,250.00.

II.

Preliminarily, we note that what entity is entitled to ultimately receive the benefit of a consolidated tax refund is a matter which is not addressed in the Internal Revenue Code. See In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262, 265 (9th Cir.), Cert. denied sub nom. Western Dealer Management, Inc. v. England, 412 U.S. 919, 93 S. Ct. 2735, 37 L. Ed. 2d 145 (1973); M&M Transportation Co. v. U. S. Industries, Inc., 416 F. Supp. 865, 869 (S.D.N.Y.1976). Though IRS regulations provide that the parent corporation is the agent for each subsidiary in the affiliated group, Treas.Reg. § 1.502-77, this agency relationship is for the convenience and protection of IRS only and does not extend further. In the absence of controlling federal law, state law governs the rights and responsibilities as between a parent corporation and its subsidiaries.

Contrary to the Superintendent, we believe that Missouri law, not Ohio law, controls here. The trial court sitting in Missouri was required to apply the choice of law rules of Missouri. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496-97, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). In tort actions the Missouri courts have adopted the "most significant relationship" test found in Restatement (Second) of Conflicts of Laws § 145 (1971). See Byrn v. American Universal Insurance Co., 548 S.W.2d 186, 188-89 (Mo.Ct.App.1977). The application of that test here compels the conclusion that Missouri law applies. Management Corporation is incorporated in Missouri and headquartered there. The tax refund money was paid to Management Corporation in Missouri and was deposited in an account at the Pioneer Bank and Trust Company, a Missouri bank. Finally, MI&I's principal place of business was also in Missouri, with the result that this case involves primarily an adjudication of rights and responsibilities between two Missouri corporations. By contrast, the only connection Ohio has with the litigation is the fact that MI&I was incorporated there and, consequently, was subjected to the supervision of the appellant Superintendent.4

In the end, however, the question of which state's substantive law applies is largely problematical, for the Superintendent's position is fundamentally flawed in its basic premise.

The Superintendent's theory is that Management Corporation engaged in self-dealing with its subsidiary MI&I in breach of the fiduciary duty owed by a parent corporation to its subsidiary by converting a valuable asset of the subsidiary to its own use without compensation. The linchpin of this argument is the premise that MI&I's 1974 net operating loss generated a valuable asset because of its income tax consequences, the asset being the right to use the loss. In view of the fact that MI&I has, by voluntary payment and operation of the district court's judgment, received a refund of all the income tax dollars it paid to Management Corporation during the relevant tax years, Cf. In re Bob Richards, supra at 265, MI&I's right to use its 1974 net operating loss as an offset might be viewed as an asset of MI&I from only two possible perspectives. First, the use of the loss might have inherent value to MI&I to the extent it could be carried over to offset tax liability in future profit-making years. Second, to the extent MI&I could bargain with the other members of the affiliated group for the use of its loss to the advantage of the group, the benefit of such a bargain could potentially be viewed as an asset of MI&I. Whatever may be the merit in viewing an operating loss as an asset in other contexts, in the narrow circumstances of this case, we are unable to consider the right to use MI&I's net operating loss as an asset of MI&I from either perspective. The Superintendent's argument thus falls with the rejected premise.

The Superintendent asserts that the right to use MI&I's net operating loss has inherent value to MI&I because it might have been carried forward to offset MI& I's subsequent income. Instead, it was carried back to achieve a tax benefit for the affiliated group, a benefit in which MI&I did not share beyond the amount of tax dollars MI&I had previously paid to Management Corporation. The right to use the net operating loss as an offset could be considered an asset for carryover purposes only if MI&I was a going concern, likely to have taxable income in 1975 and subsequent years against which to offset the loss. See 26 U.S.C. § 63(a). However, MI&I was far from being a going concern at the end of 1975. In fact, it operated under the control of a conservator appointed September 23, 1975, and was subsequently adjudged insolvent and ordered liquidated by the Franklin County, Ohio Court of Common Pleas on February 13, 1976 four months before the Superintendent filed his complaint in this action. We conclude, therefore, that the right to use its net operating loss to gain carryover tax advantage was not an asset of MI&I because its value was conditioned on the existence of future income potential of MI&I.

If MI&I's net operating loss was of no value with respect to its own tax situation, the use of the loss was not without value to the other members of the affiliated corporate group for they realized a substantial tax savings as a result of MI&I's net operating loss. The Superintendent appears to argue by implication that MI&I could have bargained for the use of its net operating loss with other members of the affiliated group to whom the loss was valuable. In that event, the benefit of such a bargain to MI&I, rather than MI&I's own tax use of the loss, becomes the asset entitling it to compensation. As Justice Jackson once put it in a similar context: