Brown & Williamson, Ltd. v. United States

• Decision Date: 25 August 1982
• Docket Number: No. 39-81T.,39-81T.
• Citation: 688 F.2d 747
• Parties: BROWN & WILLIAMSON, LIMITED v. The UNITED STATES.
• Court: U.S. Claims Court

688 F.2d 747

BROWN & WILLIAMSON, LIMITED v. The UNITED STATES.

No. 39-81T.

United States Court of Claims.

August 25, 1982.

Lee H. Spence, Washington, D. C., for plaintiff; James K. Caudill, Louisville, Ky., attorney of record. Robert L. Ash, Kaler, Worsley, Daniel & Hollman, Washington, D. C., of counsel.

Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen. Glenn L. Archer, Jr., Washington, D. C., for defendant. Theodore D. Peyser, Jr., and Robert S. Watkins, Washington, D. C., of counsel.

Before FRIEDMAN, Chief Judge, DAVIS, Judge, and SKELTON, Senior Judge.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

FRIEDMAN, Chief Judge:

Following a retroactive reduction of taxes by an income tax treaty, the plaintiff received a refund of taxes it had paid for four years before the effective date of the treaty. The question in this case, which is before us on cross-motions for summary judgment, is whether the plaintiff is entitled to interest on the refunds from the original date of payment of the taxes (as the plaintiff contends) or only from the effective date of the treaty (as the government argues). We hold for the plaintiff.

I.

The plaintiff is a British corporation. In the years 1975 to 1978, the plaintiff's American subsidiaries paid it dividends from which the payors withheld federal income taxes. Under the Convention on Income Taxes, April 16, 1945, United States-United Kingdom, art. VI, para. 1, 60 Stat. 1377, 1381, T.I.A.S. No. 1546, as modified by Supplementary Protocol, March 17, 1966, art. 4, 17 U.S.T. 1254, 1257, T.I.A.S. No. 6089, the withholding rate for taxes on these dividends was a flat 15 percent. This withholding satisfied the tax liability of the plaintiff on these dividends.

The Convention on Income Taxes, Dec. 31, 1975, United States-United Kingdom, art. 10(2)(b)(i), 31 U.S.T. 5668, ___, T.I.A.S. No. 9682, 1980-1 C.B. 394, 399, reduced the tax rate on these dividends to five percent. The effective date of the treaty was April 25, 1980. Under article 28(2)(b)(ii), the reduced tax rate was made effective as of January 1, 1975. Id., 31 U.S.T. at ___, 1980-1 C.B. at 404. The plaintiff accordingly sought and received refunds of almost $17.5 million for the years 1975 to 1978.

The plaintiff sought also interest from the original date of payment of the refunded taxes. The Internal Revenue Service, however, ruled that interest was due only from April 25, 1980, the date the treaty went into effect. Rev.Proc. 80-18, § 4.04, 1980-1 C.B. 623, 628. The Service paid the plaintiff interest from the latter date to a date not more than 30 days before the date the refund was paid. See I.R.C. § 6611(b)(2) (1976), 26 U.S.C. § 6611(b)(2) (1976). In the present suit, the plaintiff seeks interest of more than $2.6 million for the period between 1975 and April 25, 1980.

II.

Section 6611 of the Code governs the award of interest on overpayments of taxes. Subsection (b)(2) provides that interest on refunded taxes shall be paid "from the date of the overpayment" to a date not more than 30 days before the date of the refund check. The issue in this case is what was "the date of the overpayment" of taxes that were refunded to the plaintiff. The plaintiff contends that the effect of the treaty provision making the reduction in taxes effective as of January 1, 1975, was to make the date of overpayment the dates upon which the refunded taxes were paid for the years 1975 to 1978. The government argues in opposition that since the amount of taxes paid in those years was correct at the time of payment, there was no overpayment until the treaty on its effective date in 1980 reduced the taxes retroactively, and that the later date therefore was the date of overpayment.

A. The United States concedes that the Service's normal practice has been and is to pay interest on retroactive refunds of taxes. As an example, it refers to the situation involving refunds of taxes paid on subsistence allowances of state police officers. After the Supreme Court in Commissioner v. Kowalski, 434 U.S. 77, 98 S.Ct. 315, 54 L.Ed.2d 252 (1977), held that those allowances were part of the taxpayer's gross income and subject to tax, Congress in 1978 amended the Code to provide that those allowances should not be included in gross income for tax years beginning January 1, 1970. Act of Oct. 7, 1978, Pub.L.No.95-427, § 3(b), 92 Stat. 996, 996, as amended by Act of Dec. 28, 1980, Pub.L.No.96-605, § 107(a), 94 Stat. 3521, 3524 (codified at I.R.C. § 119 note). The Service then made retroactive refunds of the taxes the police officers had paid on those allowances for those years, Rev.Proc. 79-13, 1979-1 C.B. 493, which, according to the government, also included interest on the refunds from the date of payment of the taxes.

The government's practice accords with the language of the Code. When a statute provides for a retroactive refund of taxes, the effect is to convert the previously paid taxes into overpayments, i.e., the amount of tax paid, although originally correct, now exceeds the correct tax liability. The date of overpayment of the refunded tax, therefore, is the date on which it originally was paid.

The practice also accords with Treas.Reg. § 301.6611-1(b), which provides: "The dates of overpayment of any tax are the date of payment of the first amount which (when added to previous payments) is in excess of the tax liability ... and the dates of payment of all amounts subsequently paid with respect to such tax liability." There is nothing in this language which supports the government's argument that the regulation covers only normal refunds but not refunds resulting from retroactive tax changes.

When Congress intends to deny interest on refunds, it explicitly so provides. For example, section 6611(e) of the Code provides that in the case of refunds of certain overpayments made within 45 days of the date for or the date of filing the return, "no interest shall be allowed under subsection (a) on such overpayment." Other provisions of the Code have the effect of limiting the amount of interest on refunds of overpayment. See, e.g., I.R.C. §§ 6611(f) and 6611(g); Treas.Reg. §§ 301.6611-1(e), (f); Rev.Proc. 60-17, 1960-2 C.B. 942.

Moreover, where a statute retroactively increases the tax, the general rule apparently is that a taxpayer is liable for interest on the underpayments, even though the payments were proper when made. "The Tax Reform Act of 1976 Pub.L.No.94-455, 90 Stat. 1520, enacted on October 4, 1976, made several changes which increased tax liabilities from the beginning of 1976." S.Rep.No.66, 95th Cong., 1st Sess. 85, reprinted in 1977 U.S. CODE CONG. & AD.NEWS 185, 262. Congress then passed the Tax Reduction and Simplification Act of 1977, Pub.L.No.95-30, § 305, 91 Stat. 126, 152 (codified at I.R.C. § 6601 note), which relieved "taxpayers from additions to tax, interest, and penalties (but not liability for tax) attributable to estimated tax payments which were too low because of changes in the tax law." S.Rep.No.66, 95th Cong., 1st Sess. 86, reprinted in 1977 U.S. CODE CONG. & AD.NEWS 185, 263. The report added, "The committee believes it is appropriate to grant to taxpayers affected by the 1976 legislation relief from additions to tax, interest, and penalties, similar to that which has traditionally been granted in connection with earlier legislation where provisions were enacted with retroactive application." Id., reprinted in 1977 U.S. CODE CONG. & AD.NEWS 185, 263. The congressional understanding was that interest is payable on retroactive tax increases unless Congress forgives it. Cf. Morton-Norwich Products, Inc. v. United States, 221 Ct.Cl. 83, 602 F.2d 270 (1979), cert. denied, 445 U.S. 927, 100 S.Ct. 1314, 63 L.Ed.2d 760 (1980) (taxpayer owed interest on deficiency even though pertinent regulations were applied retroactively in part).

The Supreme Court has stressed the importance of symmetry in the payment of interest. United States v. Koppers Co., 348 U.S. 254, 267, 75 S.Ct. 268, 274, 99 L.Ed. 302 (1955); Manning v. Seeley Tube & Box Co., 338 U.S. 561, 568, 70 S.Ct. 386, 390, 94 L.Ed. 346 (1950). It would be inconsistent with these principles and unfair to taxpayers to deny them interest on retroactive refunds of taxes while requiring them to pay interest on retroactive increases in taxes.

Finally, what little decisional law there is on the subject supports the plaintiff. In Siegel v. United States, 84 Ct.Cl. 551, 18 F.Supp. 771 (1937), the court held that interest was due on a refund made under a retroactive tax statute. The court said that paying interest on refunds was the general rule and that it would apply, even in retroactive situations, unless Congress specifically prohibited it. The court distinguished its earlier decision in Sunny Brook Distillery Co. v. United States, 72 Ct.Cl. 157, 48 F.2d 976, cert. denied, 284 U.S. 637, 52 S.Ct. 20, 76 L.Ed. 542 (1931), which had denied interest on a retroactive refund, on the ground that Sunny Brook arose under "a special act of Congress ... which was not a part of a general revenue statute." 84 Ct.Cl. at 559-60, 18 F.Supp. at 775. In the present case, the claim for interest rests upon a general provision of the Code, section 6611.

B. The government argues that because it was entitled to and properly held the refunded taxes prior to the effective date of the retroactive reduction of the taxes on April 25, 1980, it should not have to pay interest for that period. It urges that interest is payment for the use of money that it has in effect borrowed from someone else and that if the possession of the money was valid, interest on it is not due when the money is refunded because of a subsequent event. It relies upon Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346 (1950).

In Seeley, the Commissioner assessed deficiencies in 1941 taxes together with interest from the date the tax...