Exxon Mobil Corp. v. Comm'r

• Decision Date: 08 August 2012
• Docket Number: Docket Nos. 11–2814,11–2817.
• Citation: 689 F.3d 191,110 A.F.T.R.2d 2012
• Court: U.S. Court of Appeals — Second Circuit
• Parties: EXXON MOBIL CORP. & AFFILIATED COS., f/k/a Exxon Corp. & Affiliated Cos., Petitioners–Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant.

689 F.3d 191

110 A.F.T.R.2d 2012-5491

EXXON MOBIL CORP. & AFFILIATED COS., f/k/a Exxon Corp. & Affiliated Cos., Petitioners–Appellees,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant.¹

Docket Nos. 11–2814, 11–2817.

United States Court of Appeals, Second Circuit.

Argued: April 25, 2012.

Decided: Aug. 8, 2012.

Alan I. Horowitz, Miller & Chevalier Chartered, Washington, D.C. (Kevin L. Kenworthy, Miller & Chevalier Chartered, Washington, D.C., on the brief, Charles T. Fee, Jr., David J. Bolen, and Hiep V. Tran, Exxon Mobil Corp., Houston, TX, of counsel), for Petitioners–Appellees.

Jennifer M. Rubin (Richard Farber, on the brief, Tamara W. Ashford, Deputy Assistant Attorney General, of counsel), U.S. Department of Justice, Tax Division, Washington, D.C., for Respondent–Appellant.

Before: WINTER, WALKER, and CABRANES, Circuit Judges.

JOSÉ A. CABRANES, Circuit Judge:

Under section 6621 of the Internal Revenue Code (“I.R.C.”), interest is calculated at a higher rate for corporate tax underpayments than it is for corporate tax overpayments.² In principle, therefore, a corporate taxpayer could owe the Treasury underpayment interest even if the amount by which the taxpayer had underpaid its taxes in one tax year (or set of tax years) was entirely offset by the amount by which it had overpaid in another tax year (or set of tax years).³ To remedy this apparent inequity, Congress amended section 6621 in 1998 to include a provision for “global interest netting,” ⁴ by which the interest rate differential is adjusted to yield a net interest rate of zero for periods of reciprocal indebtedness—that is, periods during which the taxpayer's overpayments in one set of tax years overlap and offset its equivalent underpayments in another set. SeeI.R.C. § 6621(d), 26 U.S.C. § 6621(d).

Along with section 6621(d), Congress adopted a statutory, but uncodified, “special rule,” which makes section 6621(d) applicable under certain circumstances to periods of overlapping indebtedness that occurred prior to the effective date of the statute, July 22, 1998. See Internal Revenue Service Restructuring and Reform Act of 1998 (“RRA”), Pub.L. No. 105–206, § 3301(c)(2), 112 Stat. 685 (1998).⁵ Among other conditions, the special rule is “[s]ubject to any applicable statute of limitation not having expired with regard to either a tax underpayment or a tax overpayment.” Id., as amended byPub.L. No. 105–277, § 4002(d), 112 Stat. 2681 (1998). The question presented in this appeal is whether retrospective global interest netting is permitted when the limitations period for either of the “legs” of the period of overlapping indebtedness has not expired, or only when the period of limitations for both legs is open.⁶

We conclude that the language of the special rule is ambiguous, but hold that the structure of section 6621(d) as a whole, as well as its historical context and purpose, makes clear that taxpayers may benefit from retrospective global interest netting even when the limitations period for one of the legs of the overlap has expired. In so holding, we reject the argument of the Commissioner of Internal Revenue (the “Commissioner”)—derived from an opinion of the Court of Appeals for the Federal Circuit on this issue, see Fed. Nat'l Mortg. Ass'n v. United States (“Fannie Mae II”), 379 F.3d 1303 (Fed.Cir.2004)—that the special rule is a waiver of sovereign immunity, and must therefore be strictly construed in favor of the government.

Accordingly, we affirm the judgment of the Tax Court in favor of appellees Exxon Mobil Corp. and Affiliated Companies (jointly, “Exxon”).

BACKGROUND

I. Section 6621(d) and the Special Rule

As part of the Tax Reform Act of 1986, Congress amended section 6621 of the I.R.C. to introduce an interest rate differential: Interest owed by a taxpayer on underpayments is calculated at a higher percentage rate than interest owed to a taxpayer on overpayments. See Tax Reform Act of 1986 (“TRA”), Pub.L. No. 99–514, § 1511(a), 100 Stat.2085 (1986).⁷ As a result of the interest rate differential, a taxpayer may be liable for interest owed to the Treasury even when the amount of its underpayments and overpayments offset each other such that the taxpayer owes no net tax.

Even as it introduced the interest rate differential, Congress recognized that it was inequitable for a taxpayer to be liable for interest owed to the Treasury when no net tax is due. In the Conference Report accompanying the TRA, Congress directed the Internal Revenue Service (“IRS”), by the close of a three-year transition period, to “implement[ ] the most comprehensive [interest] netting procedures that are consistent with sound administrative practice.” H.R.Rep. No. 99–841, pt. 2, at 785 (1986), 1986 U.S.C.C.A.N. 4075, 4873. Over the years, as Congress revisited (and increased) the interest rate differential, it reiterated its expectation that the IRS would institute global interest-netting procedures that would result in no net interest being owed whenever no net tax is owed. See, e.g., H.R.Rep. No. 101–964, at 1101 (1990), 1990 U.S.C.C.A.N. 2374 (accompanying the Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101–508, 104 Stat. 1388); S.Rep. No. 103–412, at 144 (1994) (accompanying Uruguay Round Agreements Act, Pub.L. No. 103–465, 108 Stat. 4809 (1994), and urging the IRS to “implement the most comprehensive [interest netting] procedures ... that are consistent with sound administrative practice ... as rapidly as is practicable.” (emphasis added)).

The IRS had still not implemented global interest netting by 1996 when, as part of the Taxpayer Bill of Rights, Congress directed the Secretary of the Treasuryto “conduct a study of the manner in which the Internal Revenue Service has implemented the netting of interest on overpayments and underpayments and of the policy and administrative implications of global netting.” Taxpayer Bill of Rights 2, Pub.L. No. 104–168, § 1208, 110 Stat. 1452 (1996). The Treasury Department submitted its report to Congress in April 1997. See Dep't of the Treasury, Office of Tax Policy, Report to the Congress on Netting of Interest on Tax Overpayments and Underpayments (“Treasury Report”) (1997), available at http:// www. treasury. gov/ resource- center/ tax- policy/ Documents/ t 0 neting. pdf.

The Treasury Report acknowledged that “Congress has repeatedly instructed [the IRS] to implement the most extensive interest netting procedures possible, consistent with sound administrative practice,” but reiterated the IRS's previously stated position that it lacked adequate statutory authority to institute global interest netting without express authorization. Id. at 40. The Treasury Report proceeded to offer several suggested limitations in the event that Congress acted to expressly authorize global interest netting.

First, it recommended that “global interest netting should be implemented legislatively through an interest equalization approach, rather than through a credit/offsetting approach.” Id. at 41. As explained elsewhere in the Treasury Report, under the “interest equalization approach,” a zero net interest rate can be achieved by crediting the taxpayer with a “rate equalization amount” equivalent to the interest rate differential for the period and amount of mutual indebtedness. Id. at 32. In other words, interest equalization works either by increasing the interest rate applied to the taxpayer's overpayment or by decreasing the interest rate applied to the taxpayer's underpayment. See id. at 31–32. According to the IRS, employing the interest equalization approach would require that at least one “leg” of the overlap have an outstanding balance. Id. at 41.

Citing the IRS's interests in finality and ease of administration, the Treasury Report proceeded to recommend that global interest netting “should apply only to tax years that are not barred by statute.” Id. at 42. In addition, the Treasury Report recommended that global interest netting be limited to income taxes only, id. at 41; that the taxpayer should have the burden of requesting, and demonstrating entitlement to, global interest netting, id. at 42; and that Congress make additional appropriations to cover the costs to the Treasury associated with the implementation of global interest netting, id. at 43.

When Congress enacted the RRA, it rejected, in whole or in part, most of the suggestions contained in the Treasury Report. Section 3301(d) of the RRA, codified as I.R.C. § 6621(d), provides as follows:

Elimination of interest on overlapping periods of tax overpayments and underpayments.—To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.

I.R.C. § 6621(d), 26 U.S.C. § 6621(d); see note 2, ante. As evident from the text of the statute, Congress rejected the Treasury Report's suggestion that interest netting be limited to income taxes, making it available instead for any “tax imposed by this title.” I.R.C. § 6621(d), 26 U.S.C. § 6621(d). Congress also rejected the Treasury Report's suggestion that the taxpayer generally bear the burden of establishing its entitlement to interest netting.

Instead, section 6621(d) requires the IRS to automatically apply a net interest rate of zero on equivalent overpayments and underpayments. See id. (“[T]he net rate of interest under this section ... shall be zero ....” (emphasis added)).⁸ As the Tax Court recognized in this case, the resulting provision “significantly broadened the availability of interest netting beyond what was recommended by the Treasury [R]eport.” Exxon Mobil Corp. & Affiliated Cos. v. Comm'r, 136 T.C. 99, 108 (2011) (“ Exxon ”).

Congress did, however, accept the Treasury Report's suggestion that global interest netting be achieved through the...