Guardian Industries Corp. v. U.S.

• Decision Date: 23 February 2007
• Docket Number: No. 2006-5058.,2006-5058.
• Citation: 477 F.3d 1368
• Parties: GUARDIAN INDUSTRIES CORP. and Subsidiaries, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

477 F.3d 1368

GUARDIAN INDUSTRIES CORP. and Subsidiaries, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.

No. 2006-5058.

United States Court of Appeals, Federal Circuit.

February 23, 2007.

A. Duane Webber, Baker & McKenzie LLP, of Washington, DC, argued for plaintiff-appellee. With him on the brief was George M. Clarke III.

Joan I. Oppenheimer, Attorney, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With her on the brief were Eileen J. O'Connor, Assistant Attorney General; Richard T. Morrison, Deputy Assistant Attorney General; and Gilbert S. Rothenberg and Frank P. Cihlar, Attorneys.

Before LINN, DYK, and MOORE,

Circuit Judges.^*

DYK, Circuit Judge.

The United States appeals from the judgment of the United States Court of Federal Claims granting the motion for summary judgment of appellee Guardian Industries Corp. and Subsidiaries ("Guardian") and ordering judgment in Guardian's favor in the amount of $2,729,268.00 for overpayment of taxes for the tax period ending December 31, 2001. Guardian Indus. Corp. v. United States, 65 Fed.Cl. 50 (2005). We affirm.

BACKGROUND

This case concerns the extent to which domestic corporations, under the United States tax code, can claim tax credits for foreign taxes they have paid. Section 901 of the Internal Revenue Code provides for a credit for "the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States." I.R.C. § 901(b)(1) (2006). Typically a domestic corporation cannot claim a foreign tax credit for foreign taxes paid by its foreign subsidiary until the year that the subsidiary repatriates its earnings. The regulations create an exception to this rule, however. Under Treas. Reg. § 301.7701-3(a) (2006) a foreign subsidiary can elect to be treated as a "disregarded" entity. If such an election is made, the U.S. parent and the foreign subsidiary are treated as a single company for U.S. tax purposes. The U.S. parent then reports the income of both entities on its U.S. tax return and can claim a foreign tax credit for foreign taxes paid by the subsidiary.¹

In this case Guardian Industries Corp., a Delaware corporation, is the parent company of a group of subsidiaries in the United States, referred to collectively as "Guardian," which have elected to file a consolidated return. One of Guardian's domestic subsidiaries, Interguard Holding Corp. ("IHC") is the sole shareholder of Guardian Industries Europe, S.a.r.l. ("GIE"), a Luxembourg company. In 2001, the Internal Revenue Service ("IRS") approved an election by GIE under Treas. Reg. § 301.7701-3(a) to be treated as a foreign eligible entity with a single owner and to be disregarded as an entity separate from IHC. GIE holds a controlling interest in and is the parent of a number of Luxembourg subsidiaries. The question here is whether Guardian can claim a credit for certain foreign taxes paid by GIE.

For tax year 2001, GIE paid 3,429,074 Euros in Luxembourg income taxes ("loi de l'impôt sur le revenu" or "LIR") on behalf of itself and its subsidiaries. Guardian had first filed its 2001 tax return treating the Luxembourg tax paid by GIE on behalf of itself and its subsidiaries as allocable pro rata among GIE and its subsidiaries, and claimed a credit only for that portion of the tax allocable to GIE itself. Then, in an amended U.S. tax return for tax year 2001, Guardian, pursuant to I.R.C. § 901, claimed it was entitled to a credit in the amount of Luxembourg taxes paid by GIE on behalf of both itself and its subsidiaries. Having obtained no action on its request for a refund, Guardian filed a complaint in the Court of Federal Claims claiming entitlement to a refund of taxes paid.

The government made two arguments in the Court of Federal Claims, relying on two regulations. The first regulation provides in relevant part that "[t]he person by whom tax is considered paid for purposes of [I.R.C.] section[ ] 901 . . . is the person on whom foreign law imposes legal liability for such tax, even if another person (e.g., a withholding agent) remits such tax." Treas. Reg. § 1.901-2(f)(1) (emphasis added). The government argued that, under Luxembourg law, GIE's subsidiaries were legally liable for taxes on the income they had earned, even though GIE paid those taxes on the subsidiaries' behalf, and that therefore Guardian was not entitled to a foreign tax credit with respect to those taxes. The second regulation provides that if a corporation and its subsidiaries are jointly and severally liable for a tax under foreign law, then each entity is liable "for the amount of the foreign income tax that is attributable to its portion of the base of the tax." Treas. Reg. § 1.901-2(f)(3). With respect to this regulation the government argued that, under Luxembourg law, GIE and its Luxembourg subsidiaries were jointly and severally liable for the LIR tax, and consequently that Guardian could not obtain a credit for taxes paid by GIE on the subsidiaries' behalf.

The Court of Federal Claims, relying on the text of the Luxembourg statutes and regulations and on reports and declarations of several well-qualified experts in Luxembourg law presented by both sides, concluded that Luxembourg law did not make GIE and its subsidiaries jointly and severally liable for the taxes under Treas. Reg. § 1.901-2(f)(3). While the Court of Federal Claims stated that GIE, the parent, was liable for the tax, it did not address in any detail the government's other argument that, under Treas. Reg. § 1.901-2(f)(1), the subsidiaries, and not the parent, were "the person on whom foreign law imposes legal liability for such tax." The Court of Federal Claims granted summary judgment for Guardian and entered judgment in Guardian's favor in the amount of $2,729,268.00 for overpayments, with interest. The government timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3) (2000).

DISCUSSION

On appeal the government does not challenge the determination of the Court of Federal Claims that, under Luxembourg law, GIE and its subsidiaries are not jointly and severally liable for the taxes paid by GIE, and that consequently, Treas. Reg. § 1.901-2(f)(3) does not require apportionment of the tax. Rather, the government's sole argument is that, pursuant to Treas. Reg. § 1.901-2(f)(1), GIE did not have "legal liability" for the tax imposed on its subsidiaries within the meaning of the regulation, and, therefore, Guardian cannot claim a credit for the tax imposed on GIE's subsidiaries. "We review the Court of Federal Claims' decisions on summary judgment and conclusions of law without deference." Old Stone Corp. v. United States, 450 F.3d 1360, 1367 (Fed.Cir.2006).

I

As noted, Treas. Reg. § 1.901-2(f)(1) states in relevant part that "[t]he person by whom tax is considered paid for purposes of [I.R.C.] section[ ] 901 . . . is the person on whom foreign law imposes legal liability for such tax, even if another person (e.g., a withholding agent) remits such tax." The regulation on its face distinguishes between two situations. In one the person paying the tax is merely a withholding agent (or similarly, a remittance agent) and is paying the tax on behalf of another person who is legally liable for the tax. In the other the person paying the tax is the person with "legal liability for such tax." Treas. Reg. § 1.901-2(f)(1).

The line separating a person who is liable for the tax and a person who is merely a withholding or remittance agent is a difficult one to draw, and the regulation itself provides no guidance. Rather, the regulation mandates an inquiry into "foreign law" to determine which situation exists. Treas. Reg. § 1.901-2(f)(1). The determination of foreign law is a question of law which we review de novo. See Fed.R.Civ.P. 44.1; id., Advisory Committee Notes ("[T]he court's determination of an issue of foreign law is to be treated as a ruling on a question of `law,' not `fact,' so that appellate review will not be narrowly confined by the `clearly erroneous' standard of [review]."); 9 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure §§ 2444, 2446 (2d ed.1994).

II

The government argues that the parent here should be treated as a mere collection or remittance agent, relying on several Tax Court cases involving foreign tax credits. In virtually all of these cases the tax years in question predated the adoption of section 1.901-2 of the regulations in 1983, see 48 Fed.Reg. 46,272 (October 12, 1983), and the decisions did not interpret the regulation. Rather they appeared to apply generally the same test later incorporated in the regulations. We turn to those cases.²

In the first case, a New York corporation loaned funds to its British subsidiary, which paid interest to the parent. Pursuant to British law the subsidiary withheld a portion of its interest payments to its parent and paid that portion to the British government as a tax. Gleason Works v. Comm'r, 58 T.C. 464, 464-65, 1972 WL 2582 (1972). The court held that the party on whom the tax was imposed was the U.S. corporation, and that the British subsidiary paid the tax "purely as a matter of collection." Id. at 479. The court analogized the common situation where a U.S. employer withholds a portion of an employee's wages and pays it over to the IRS, but the tax is nonetheless imposed on the employee. Id. at 478. The government also relies on a series of cases involving Brazilian law, of which Nissho Iwai American Corp. v. Comm'r, 89 T.C. 765, 1987 WL 45300 (1987), is representative. There too foreign borrowers were required to pay to the Brazilian state a portion of the interest payments owing to U.S. banks on loans. Id. at 768-69. The interest rate in those cases was net of the tax, so that the borrower had to absorb any increase in the Brazilian tax and the lender was unaffected. Id. at 769. Also,...