Dwa Holdings LLC v. United States
| Decision Date | 09 May 2018 |
| Docket Number | 2017-1358 |
| Citation | 889 F.3d 1361 |
| Parties | DWA HOLDINGS LLC, Plaintiff-Appellant v. UNITED STATES, Defendant-Appellee |
| Court | U.S. Court of Appeals — Federal Circuit |
Gregory G. Garre, Latham & Watkins LLP, Washington, DC, argued for plaintiff-appellant. Also represented by Drew Curtis Ensign, Miriam Fisher, Brian C. McManus, Benjamin Snyder.
Jacob Earl Christensen, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by David A. Hubbert, Gilbert Steven Rothenberg, Francesca Ugolini.
Before Prost, Chief Judge, O'Malley and Taranto, Circuit Judges.
This appeal concerns the scope of section 101(d) of the American Jobs Creation Act of 2004 ("AJCA"), Pub. L. No. 108-357, 118 Stat. 1418 (2004), a "transitional rule" that places a limit on "the amount includible in gross income" for "transactions during 2005 and 2006." DWA Holdings, LLC ("DWA") appeals from the U.S. Court of Federal Claims' ("Claims Court") summary judgment ruling that income DWA earned overseas after 2006 pursuant to a 2006 transaction was not entitled to transitional benefits under section 101(d).
For the reasons set forth below, we conclude that the Claims Court erred in holding that section 101(d) only provided transitional relief for extraterritorial income earned in 2005 and 2006. Accordingly, we reverse and remand for further proceedings.
In this case, as in many other cases involving statutory construction, the history underlying Congress’s decision to enact the statute at issue merits discussion. We discuss some of that history briefly before turning to the factual and procedural history of this case.
The AJCA was enacted against a backdrop of decades of dialogue between the United States and other countries with whom we have treaty obligations. As a starting point, although income earned by American taxpayers typically is subject to taxation in the United States, regardless of where in the world the income is earned, other countries, such as those in Europe, only tax income earned within their borders. See H.R. Rep. No. 106-845, at 13 (2000).
Although the possibility of "double taxation" of foreign income is a concern both in the United States and abroad, countries take different measures to address it. Id. The United States generally provides credits for taxes paid to foreign governments on income earned abroad, while European and other systems typically exempt from taxation income earned abroad. Id. Congress has long believed that the exemption method used in Europe and elsewhere puts American companies at a disadvantage in terms of exports. See Staff of Joint Comm. on Internal Revenue Taxation, 92d Cong., General Explanation of the Revenue Act of 1971, at 85–86 (1972); see also id. at 86 (); H.R. Rep. No. 106-845, at 13–14 ().
Over the years, Congress has enacted a number of tax regimes in an effort to address the imbalance it perceived and to create a more level playing field for domestic producers. Each time, however, the United States received push back from its European trading partners, who claimed each taxing structure Congress devised resulted in an effective export subsidy for U.S. producers, in violation of our treaty obligations.
While Congress denied the claims made against its respective tax regimes, in the interest of accommodating its trading partners and paying due respect to the rulings of international trade bodies, it continued to revise the relevant U.S. tax regimes. Importantly, however, Congress sought to ease the burden on domestic producers imposed by these responsive tax revisions. It did so primarily by providing transitional relief for transactions occurring during specified years following passage of each of these new tax regimes.
One example of such transitional relief appeared in the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 ("ETI Act"), Pub. L. No. 106-519, 114 Stat. 2423 (2000), enacted on November 15, 2000. While the ETI Act applied generally to "transactions after September 30, 2000," ETI Act § 5(a), the Act allowed previously established Foreign Sales Corporations ("FSCs") to continue receiving favorable tax treatment for any "transactions" that occurred before January 1, 2002, more than a year after the passage of the FSC repeal, ETI Act § 5(c)(1)(A). Specifically, the law provided that, "[i]n the case of a FSC (as so defined) in existence on September 30, 2000, and at all times thereafter, the amendments made by this Act shall not apply to any transaction in the ordinary course of trade or business involving a FSC which occurs" either "before January 1, 2002" or "after December 31, 2001, pursuant to a binding contract ... between the FSC (or any related person) and any person which is not a related person; and ... in effect on September 30, 2000, and at all times thereafter." Id. (emphasis added).
The European Union challenged the ETI regime—in particular, its transitional rules—in the World Trade Organization ("WTO"). The WTO ruled against the United States, and, in October 2004, Congress responded by repealing the ETI Act and enacting the AJCA, the tax scheme before us in this appeal. See H.R. Rep. No. 108-548(I), at *7 (June 16, 2004) (); AJCA § 101(a). In this go-round, Congress did not enact a regime specific to exports; instead, it created a more diffuse benefit for all "domestic production activities," regardless of whether they resulted in export sales. AJCA § 102. The House Report accompanying the AJCA explained that the reason for the repeal was to comply with the WTO’s decisions: H.R. Rep. No. 108-548(I), at 114 (2004).
Section 101 of the AJCA, titled "Repeal of Exclusion for Extraterritorial Income," contains a number of provisions that operate together to "phase out" the relevant portions of the ETI Act and help domestic companies transition to a new regime. First, section 101(a) expressly repeals 26 U.S.C. § 114, the provision in the ETI Act that excluded extraterritorial income from taxation. AJCA § 101(a). And section 101(c), titled "Effective Date," provides that the repeal is effective for "transactions after December 31, 2004"—two months after the enactment of the statute. Id. § 101(c).
Section 101(d), the provision at issue in this case, provides the following "Transitional Rule for 2005 and 2006":
Id. § 101(d). Finally, Congress included a "grandfather provision" in AJCA section 101(f), titled "Binding Contracts," providing that the repeal "shall not apply" to certain transactions occurring pursuant to a "binding contract" that was "in effect on September 17, 2003, and at all times thereafter." Id. § 101(f).
The European Union again objected before the WTO, arguing that the United States had failed to entirely remove the prohibited ETI subsidies. Specifically, it argued that the grandfather provision of section 101(f) improperly maintained the full ETI tax benefit for certain transactions indefinitely, while the transitional rule of section 101(d) provided a reduced, but still objectionable, ETI tax benefit relating to transactions entered into in 2005 and 2006. The United States, in filings made to the WTO, characterized section 101(f) as "exempt[ing] certain pre-existing binding contracts from the repeal of the ETI tax exclusion." J.A. 1863. Turning to section 101(d), it explained that the provision "provides for a two-year phase out of the ETI Act tax exclusion." Id. It further submitted that, in dispute settlement negotiations with European community members, "[a]lthough there were legislative proposals then pending for transition periods as long as five years, Congress accommodated the E[uropean Communities'] concerns by limiting the transition period to two years, and by reducing the amount of the tax exclusion in each year." Id. And, according to the United States, "Congress did so with the understanding that, together with repeal, limiting the transition period to two years would resolve the dispute." Id. In other words, the United States made clear that, while Congress was sensitive to the WTO’s concerns, it would continue to seek out ways to alleviate any undue harshness to domestic companies caused by the need to make continual changes to our tax regimes.
In September 2005, a WTO panel agreed with the European Union that the ACJA improperly maintained certain ETI subsidies, and stated that the United States therefore continued to fail to implement fully the WTO’s recommendations and rulings to withdraw the prohibited subsidies. Specifically, it found that, to the extent section 101 of the AJCA "maintains prohibited FSC and ETI subsidies through these transitional and grandfathering measures, it continues to fail to implement fully" directives to "withdraw the prohibited subsidies and to bring its measures into conformity with its obligations under the relevant covered agreements."...
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