WASHINGTON - American Deposit Corp. asked a federal appeals court Friday to prevent the Internal Revenue Service from stripping the Retirement CD of its tax-deferred status, a move that would destroy the annuity-like product.
American Deposit wants the U.S. Court of Appeals for the District of Columbia to reverse a June decision by a lower court preventing the company from challenging an IRS proposal before it is finalized.
The IRS in April proposed taxing the interest earned on Retirement CDs; American Deposit is fighting for the tax deferral so the product can compete with insurance company-issued annuities.
The U.S. District Court said June 28 that American Deposit cannot challenge the IRS ruling until it is completed. Comments on the plan are due July 18, and the IRS has scheduled a public hearing on the plan for Aug. 8.
The appeals court ruled June 21 - in a separate case involving labor law - that companies can challenge regulations before they become effective. That gave American Deposit general counsel Dennis Gingold hope Friday.
The judges should apply that same logic here and reinstate American Deposit's request for a temporary injunction, Mr. Gingold said.
Mr. Gingold said he expects to win if the case is reinstated because the IRS violated numerous provisions of the Administrative Procedures Act, which prescribes how agencies must adopt rules.
"They can't satisfy the APA because they already have violated it," Mr. Gingold said.
The lower-court judge did acknowledge in his decision to make American Deposit wait until the government finishes its regulation that the company may have a claim once the rule becomes final, he said.
But tax experts said American Deposit was reading too much into the decision. Willard Taylor, a partner at Sullivan & Cromwell, said the judge never looked at the merits of the case. He merely said the company could sue again when the rule becomes final.
"Big deal," Mr. Willard said. "I think they are grasping for straws to try to see some silver lining. To read anything into this is wishful thinking."
IRS officials declined to comment.
But, attorneys watching the case said the product's legal problems makes it tough to sell to bankers.
American Deposit is a start-up company that only offers the Retirement CD. It likely can't survive for long without any sales, said David Roderer, a partner at Winston & Strawn.
"The Retirement CD product has been stopped dead in its tracks," Mr. Roderer said.
The Retirement CD has irked the insurance industry because the product receives Federal Deposit Insurance Corp. coverage, giving it a competitive advantage over traditional annuities.
A number of small banks, including Blackfeet National Bank of Montana and First National Bank of Santa Fe, have seized the product as an easy vehicle to capture long-term deposits.
Both banks have suspended Retirement CD sales until the tax deferral question is resolved.