Bankamerica Corp. v. Comm'r of Internal Revenue

• Decision Date: 15 July 1997
• Docket Number: No. 5931–83.,5931–83.
• Citation: 109 T.C. 1,109 T.C. No. 1
• Parties: BANKAMERICA CORPORATION, as successor in interest to Continental Bank Corporation, as successor in interest to Continental Illinois Corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.*
• Court: U.S. Tax Court

109 T.C. 1

109 T.C. No. 1

BANKAMERICA CORPORATION, as successor in interest to Continental Bank Corporation, as successor in interest to Continental Illinois Corporation, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.*

No. 5931–83.

United States Tax Court.

July 15, 1997.

P had deficiencies in its Federal income tax for years 1 and 2. In year 3, P carried back an amount of investment tax credit to years 1 and 2, reducing the amount of its deficiencies. In year 6, a net operating loss arose which was carried back to year 3. The carryback of the year 6 loss displaced a year 3 foreign tax credit, which was then carried back to years 1 and 2, displacing the investment tax credit originally taken in those years. R computed interest under sec. 6601, I.R.C., from the end of year 3 to the due date of the return for year 6 on deficiency amounts for years 1 and 2, calculated after the effect of the year 6 loss, without reducing the deficiencies by the amounts of ITC taken from year 3 to year 6. P filed a timely motion under sec. 7481(c), I.R.C., to redetermine interest. Held, P has made overpayments of interest for years 1 and 2 because R should have taken the investment tax credit amounts into account in calculating interest accruing from the end of year 3 until the due date of the return for year 6 on deficiency amounts reduced by the investment tax credit carried back.Roger J. Jones and Jeffrey B. Frishman, for petitioner.

Pamela V. Gibson and Richard G. Goldman, for respondent.

SUPPLEMENTAL OPINION

TANNENWALD, Judge:

A decision was entered in this case on November 17, 1994, pursuant to a stipulated computation, in accordance with the opinion of the Court of Appeals for the Seventh Circuit in Continental Illinois Corp. v. Commissioner, 998 F.2d 513 (7th Cir.1993), cert. denied 510 U.S. 1041, 114 S.Ct. 685, 126 L.Ed.2d 652 (1994). On December 20, 1995, petitioner filed a timely motion under section 7481(c) ¹ and Rule 261 to redetermine interest for the 1977 and 1978 tax years, alleging that respondent has erroneously calculated such interest. The issue for decision is whether respondent has failed to take into account the carryback of a 1979 investment tax credit (ITC), and consequently overcharged petitioner for interest which accrued before the effect of a 1982 net operating loss (NOL) carryback.

Background

In 1983, respondent determined deficiencies against petitioner's predecessor in interest for the tax years 1975 through 1979. Petitioner's predecessor challenged these deficiencies in this Court, which issued the following five opinions, under this same docket number, each captioned Continental Illinois Corp. v. Commissioner: T.C. Memo.1988–318, T.C. Memo.1989–468, T.C. Memo.1989–636, 94 T.C. 165, 1990 WL 17257 (1990), and T.C. Memo.1991–66. Decision was entered on May 13, 1992 (the 1992 decision), and was based on Rule 155 computations (the 1992 computations) which took into account certain amounts of an ITC carried back from 1979.

Portions of this Court's decision as reflected in T.C. Memo.1988–318, T.C. Memo.1989–636, and T.C. Memo.1991–66 were appealed by the parties to the Court of Appeals for the Seventh Circuit. The Court of Appeals for the Seventh Circuit affirmed in part and reversed in part and remanded the case to this Court in Continental Illinois Corp. v. Commissioner, 998 F.2d 513, issued on July 9, 1993. Following this remand, the parties filed with the Court on November 2, 1994, stipulated computations (the 1994 computations) covering the years 1976 to 1979. The 1994 computations did not include the amounts of the 1979 ITC that were included in the 1992 computations. This Court's decision, based on the 1994 computations, was entered on November 17, 1994, and became final within the meaning of section 7481(a) ² on December 17, 1994 (the 1994 decision). As part of that decision, it was decided that there was an overpayment for the taxable year 1977 in the amount of $9,089,070.00, and a deficiency for the taxable year 1978 in the amount of $1,544,492.72. The decision document indicated that it “[incorporated] herein the facts recited in the respondent's computation as the findings of the Court”

Petitioner's tax liability for the taxable years at issue, with the effect and timing of various credit and net operating loss (NOL) carrybacks, reflecting the 1994 decision, is described in more detail as follows:

1977 Tax Year

Petitioner had a tax liability for the 1977 tax year of $24,200,118, before taking into account any credit carrybacks. Between April 15, 1977, and June 17, 1978, petitioner made payments totaling $14,234,576 against this tax liability, producing a deficiency of $9,965,542.

In 1979, there arose a foreign tax credit (FTC) in the amount of $29,327,737 and an ITC in the amount of $17,238,117. In that year, petitioner applied $27,020,189 of the FTC, as well as some of the ITC, to its 1979 tax liability, and carried $2,307,548 of the FTC and $7,947,605 of the ITC back to 1977. For interest purposes, petitioner received the benefit of this carryback as of December 31, 1979. Sec. 6601(d).³ Taking into account a refund petitioner received in the amount of $4,067,608 for 1977, petitioner had, as of January 1, 1980, a 1977 tax liability of $3,777,997.

In 1982, there arose an NOL, $59,552,102 of which was carried back to petitioner's 1979 tax year, pursuant to section 172(b),⁴ eliminating petitioner's 1979 tax liability. The elimination of the 1979 tax liability had the effect of releasing the FTC and ITC which had arisen in 1979, to be used in other years. Petitioner carried back $27,356,042 of the FTC to 1977, which, along with other credits from 1980 (work incentive credits and new jobs credits) in the amount of $342,819, satisfied its tax liability for 1977. Because of ITC limitation rules found in section 46(a)(3) and (4),⁵ the 1979 ITC originally carried back to 1977 could no longer be used (since there was now, as of 1982, after application of the FTC, no tax liability for 1977 against which it could be applied), and was thus displaced and subsequently carried over to 1981, a year not at issue. As a result of the NOL's causing the release and carryback of the 1979 FTC to 1977 (and the consequent release of the ITC), there was as of March 15, 1983 (the due date for the 1982 return) ⁶ an overpayment of $9,089,070 for petitioner's 1977 tax year.⁷

1978 Tax Year

Petitioner had a tax liability of $6,608,807 for the 1978 tax year,⁸ not reflecting the effect of any carrybacks from subsequent years. Between April 17, 1978, and October 12, 1979, petitioner made payments totaling $3,633,741 against this liability, leaving a deficiency of $2,975,066.

In 1979, there arose an FTC and an ITC, as discussed above. None of the 1979 FTC was carried back to 1978, and $444,727 of the 1979 ITC was carried back. Thus, as of January 1, 1980, petitioner had a 1978 tax liability of $2,530,339.

In 1982, there arose, as discussed above, an NOL which was carried back to 1979, eliminating tax liability for 1979 and releasing the FTC and ITC which had arisen in that year. Of the released 1979 FTC, $1,971,695 was carried back to 1978. Because of the effect of the carryback of this FTC, petitioner was precluded by section 46 from using the ITC carried back from 1979, which was then carried forward to 1981, a year not at issue. When adjusted for additional payments and credits of $79,925, petitioner had a tax liability for 1978, as of March 15, 1983, of $1,464,568.

The deficiencies and interest amounts involved were assessed for both years by respondent and fully paid by petitioner. In early 1995, shortly after the 1994 decision became final, petitioner contacted respondent regarding the issue of the inclusion of the 1979 amounts of ITC. Discussions between petitioner and respondent continued throughout 1995, after which petitioner timely filed a motion under Rule 261 to redetermine the interest flowing from the stipulated 1994 computations with respect to the 1977 and 1978 tax years.

Discussion

For the 1977 tax year, respondent has computed interest on a deficiency of $11,733,776 ⁹ from December 31, 1977, to March 14, 1983. For the 1978 tax year, respondent has computed interest on a deficiency of $2,975,066 from December 31, 1977, to March 14, 1983. Respondent has not given effect to amounts of 1979 ITC which were carried back during the period 1980 through 1983 because these amounts of ITC were ultimately displaced and not used for the years at issue.

Petitioner claims that respondent has overcharged it for interest by not taking into account the amounts of the 1979 ITC, with the effect of charging petitioner interest on higher deficiency amounts. Petitioner's position is that respondent must, in plain terms, “give it credit” for the 1979 ITC which reduced its 1977 deficiency to $3,777,997 during the period January 1, 1980, to March 14, 1983, and reduced its 1978 deficiency to $2,530,339 during the same period, and charge it interest on those lesser deficiency amounts during that period. Petitioner's claim is based on the notion that respondent had use of the money represented by the 1979 ITC “payment” during the “interim” period from January 1, 1980, to March 14, 1983, and cannot now charge petitioner for the use of that money.

Petitioner alleges that the amounts of ITC, which were included in the Rule 155 computations that were prepared in 1992 before a decision was rendered by the Court of Appeals for the Seventh Circuit, were erroneously left out of the 1994 computations.¹⁰ Due to the effects of the subsequent carryback of the NOL from 1982, the inclusion or exclusion of the amounts of 1979 ITC does not alter the underlying net tax liability for either taxable year. Petitioner does not contest in any way its tax liability for the deficiencies as reflected in the 1994 decision.

Section 7481(c) provides:

Jurisdiction Over Interest Determinations.-

Notwithstanding subsection (a), if—

(...