Abbott Laboratories v. U.S.

• Decision Date: 29 July 2009
• Docket Number: No. 2009-5014.,2009-5014.
• Citation: 573 F.3d 1327
• Parties: ABBOTT LABORATORIES and U.S. Subsidiaries, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

573 F.3d 1327

ABBOTT LABORATORIES and U.S. Subsidiaries, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 2009-5014.

United States Court of Appeals, Federal Circuit.

July 29, 2009.

Thomas V. Linguanti, Baker & McKenzie LLP, of Chicago, IL, argued for plaintiff-appellant. With him on the brief were Robert S. Walton; and Robert W. DeJoy, Jr. and Eric J. Weber, of New York, NY.

Francesca U. Tamami, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her

on the brief were John A. DiCicco, Acting Assistant Attorney General, Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and Kenneth L. Greene, Attorney.

Before LINN, DYK, and PROST, Circuit Judges.

PROST, Circuit Judge.

Appellant Abbott Laboratories ("Abbott") appeals from the dismissal of its suit in the United States Court of Federal Claims. Abbott Labs. v. United States, 84 Fed.Cl. 96 (2008). For the reasons set forth below, we affirm.

BACKGROUND

Generally, the government must assess any taxes owed within three years of the date the taxpayer filed its return. 26 U.S.C. § 6501(a). However, 26 U.S.C. § 6501(c)(4) permits the government and the taxpayer to agree to an extension of the assessment period. If the government receives the benefit of additional time in which to assess any taxes owed, under 26 U.S.C. § 6511(c)(1) the taxpayer receives six months from the end of the assessment period in which to file any claim for a refund.

At the time of the tax years at issue in this case (1987-89), certain provisions of the U.S. Code permitted a U.S. parent company to create a "foreign sales corporation," or FSC (pronounced "fisc"), and by so doing exempt a portion of the parent company's foreign sales income (about 65% of the FSC's profits) from U.S. corporate income tax. See 26 U.S.C. §§ 921-927 (repealed 2000). A FSC could be classified as a "buy/sell FSC," meaning that the parent company sold product to the FSC for resale abroad, or a "commission FSC," meaning that the parent paid a commission to the FSC when the FSC made a foreign sale. See id. § 925; Abbott Labs., 84 Fed. Cl. at 102. Section 925(a) set forth specific transfer pricing rules for buy/sell FSCs, whereas § 925(b)(1) explicitly gave the Secretary of the Treasury the authority to "prescribe regulations setting forth ... rules which are consistent with the rules set forth in subsection (a) for the application of this section in the case of commissions."

In addition to the tax exemption benefit, the parent company (called the "related supplier") and the FSC also had the option of choosing among various transfer pricing methods to select the one that would yield the largest tax exemption. 26 U.S.C. § 925(a). While the FSC and its related supplier selected a transfer pricing method prior to filing a tax return, in certain circumstances they could request a redetermination of tax liability after filing if they found that an alternative method would have been more beneficial. Temp. Treas. Reg. § 1.925(a)-1 T(e)(4). It is the regulation authorizing this redetermination, Temporary Treasury Regulation § 1.925(a)-1T(e)(4), that is at the heart of the dispute in this case.

Abbott created a wholly owned commission FSC named Abbott Trading Company, Inc. ("ATCI"). Abbott and ATCI were "treated as separate taxpayers, filing separate returns." Abbott Labs., 84 Fed.Cl. at 100. For tax years 1987-89, Abbott initially calculated ATCI's commissions after grouping transactions by product group. Id. Both Abbott and ATCI then agreed to extend their assessment periods pursuant to § 6501, but while Abbott extended its assessment period to September 30, 1998, ATCI agreed to extend its assessment period only until December 31, 1997. These agreements had the effect of extending the period in which Abbott and ATCI could claim refunds to March 30, 1999, and June 30, 1998, respectively. On June 29, 1998, Abbott requested a redetermination of its tax liability using a transaction-by-transaction method to calculate ATCI's commissions. Id. This redetermination would have had the effect of decreasing Abbott's tax liability for the years in question and increasing ATCI's tax liability by a related amount. See id. at 101.

The government denied Abbott's refund claim because although both Abbott and ATCI's refund periods under § 6511 remained open, ATCI's assessment period under § 6501 had long since expired. Thus, if the government processed and paid Abbott's refund claim, it could not offset that refund by assessing and collecting additional tax revenues from ATCI. In its view, the government had authority to deny Abbott's claim under Regulation § 1.925(a)-1 T(e)(4). The relevant portion of Regulation § 1.925(a)1 T(e)(4) reads:

[1] The FSC and its related supplier would ordinarily determine under section 925 and this section the transfer price or rental payment payable by the FSC or the commission payable to the FSC for a transaction before the FSC files its return for the taxable year of the transaction.... [4] In addition, a redetermination may be made by the FSC and related supplier if their taxable years are still open under the statute of limitations for making claims for refund under section 6511 if they determine that a different transfer pricing method may be more beneficial.... [6] Any redetermination shall affect both the FSC and the related supplier.

Temp. Treas. Reg. § 1.925(a)-1 T(e)(4) (emphasis and bracketed numerals added). At issue here is the sixth sentence, which the government relied upon in denying Abbott's claim. The government interpreted that sentence to require that the § 6501 assessment period must be open for both Abbott and ATCI, since "[t]he inability to assess a deficiency against either FSC or related supplier, as the offset to the claim for refund, clearly prevents the redetermination from `affecting' both parties."

Abbott then took its request for a refund to the Court of Federal Claims. The court ultimately denied Abbott's motion for partial summary judgment and granted the government's motion for summary judgment, concluding that "amended returns reflecting a redetermination had to be filed while the statute of limitations for assessment was open as to the entity whose income would be increased by the redetermination." Abbott Labs., 84 Fed.Cl. at 108. Abbott now appeals. We have jurisdiction over the appeal under 28 U.S.C. § 1295(a)(3).

DISCUSSION

This court reviews grants of summary judgment by the Court of Federal Claims de novo. Nat'l Am. Ins. Co. v. United States, 498 F.3d 1301, 1303-04 (Fed.Cir.2007). The interpretation of a regulation is also a question of law which we review de novo. Yanco v. United States, 258 F.3d 1356, 1362 (Fed.Cir.2001). While we do not defer to the trial court, an agency's interpretation of its own regulation is entitled to a level of deference even "broader than deference to the agency's construction of a statute, because in the latter case the agency is addressing Congress's intentions, while in the former it is addressing its own." Cathedral Candle Co. v. U.S. Int'l Trade Comm'n, 400 F.3d 1352, 1363-64 (Fed.Cir.2005). That being said, "an agency's inconsistent interpretation of its regulation detracts from the deference we owe to that interpretation." Gose v. U.S. Postal Serv., 451 F.3d 831, 837-38 (Fed.Cir.2006) (citations and quotation marks omitted).

As explained above, the government interprets Regulation § 1.925(a)-1T(e)(4) as imposing two conditions that must be satisfied prior to receiving a redetermination. First, the government argues that the party requesting redetermination must file a request within the § 6511 refund periods for both the FSC and its related supplier. This condition was discussed at length by the U.S. Tax Court in Union Carbide Corp. v. Commissioner, 110 T.C. 375, 1998 WL 310924 (1998). Second, pursuant to the sixth sentence's "shall affect" requirement, the government claims that the request also must be filed within each party's § 6501 assessment period. This is because the "requirement that `[a]ny redetermination shall affect both the FSC and the related supplier necessarily refers to a meaningful tax effect.'" Appellee's Br. 22 (alteration in original).

The regulation does not specify the manner in which the redetermination must "affect" both parties. Indeed, although the plain language might conceivably cover a limitless range of effects, even Abbott does not contend that an entirely unrelated effect is contemplated. See Appellant's Br. 30 (interpreting the "shall affect" language to require "that income and expense must be correspondingly and accurately reflected on the books of both the related supplier and the FSC"). We conclude, therefore, that the sixth sentence's "shall affect" requirement is ambiguous. Accordingly, deference is appropriate if the government's interpretation of the regulation's "shall affect" language is not "plainly erroneous or inconsistent with the regulation." Cathedral Candle, 400 F.3d at 1364 (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945)). This is true "even when that interpretation is offered in the very litigation in which the argument in favor of deference is made" given that we have "no reason to suspect that the interpretation does not reflect the agency's fair and considered judgment on the matter in question." Id. (quoting Auer v. Robbins, 519 U.S. 452, 462, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997)); see Long Island Care at Home v. Coke, 551 U.S. 158, 127 S.Ct. 2339, 2349, 168 L.Ed.2d 54 (2007).

We agree with the Court of Federal Claims that the government's interpretation of the "shall affect" language in Regulation § 1.925(a)-1T(e)(4) is not plainly erroneous or inconsistent with the regulation. First, as the government notes, the FSC provisions were passed after an earlier set of tax provisions, which created an...