Bankers Trust NY Corp v. U.S.

• Decision Date: 20 September 2000
• Citation: 225 F.3d 1368
• Parties: (Fed. Cir. 2000) BANKERS TRUST NEW YORK CORPORATION and CONSOLIDATED SUBSIDIARIES, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee. 99-5066 DECIDED:
• Court: U.S. Court of Appeals — Federal Circuit

Page 1368

225 F.3d 1368 (Fed. Cir. 2000)

BANKERS TRUST NEW YORK CORPORATION and CONSOLIDATED SUBSIDIARIES, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

99-5066

United States Court of Appeals for the Federal Circuit

DECIDED: September 20, 2000

Appealed from: United States Court of Federal Claims Judge Moody R. Tidwell, III

Thomas C. Durham, Mayer, Brown & Platt, of Chicago, Illinois, argued for plaintiff-appellant. With him on the brief were Joel V. Williamson, Russell R. Young, Mayer, Brown & Platt, of Chicago, Illinois; and Kim Marie Boylan, Mayer, Brown & Platt, of Washington, DC.

Charles Bricken, Attorney, Tax Division, Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Loretta C. Argrett, Assistant Attorney General; and David English Carmack, Attorney.

Before PLAGER, LOURIE, and CLEVENGER, Circuit Judges.

PLAGER, Circuit Judge.

This is a tax refund case, on appeal from the United States Court of Federal Claims. The United States Internal Revenue Service ("IRS") refused to allow Bankers Trust New York Corporation and Consolidated Subsidiaries (collectively "Bankers Trust") to claim a foreign tax credit for certain taxes assessed by and paid to Brazil on the interest earned from loans to borrowers in that country. When Bankers Trust sued to obtain the credit sought, the Court of Federal Claims granted the Government's motion for summary judgment denying the tax credit. See Bankers Trust New York Corp. v. United States, 36 Fed. Cl. 30 (1996). Bankers Trust appeals the ruling of the Court of Federal Claims. Because the Court of Federal Claims erred in not following binding precedent, we reverse the judgment of the Court of Federal Claims.

BACKGROUND

Bankers Trust is the common parent for a group of U.S. corporations that filed a consolidated income tax return for tax year 1980. Bankers Trust had outstanding loans to customers in Brazil during tax year 1980. Following an audit of tax year 1980, Bankers Trust claimed on its U.S. income tax return an additional Foreign Tax Credit ("FTC") for taxes paid to Brazil. The FTC provides U.S. taxpayers with tax credits for taxes paid to foreign governments, with the purpose of avoiding double taxation of the income. See I.R.C. § 901(b)(1) (1976). ¹ The credit is applied directly to the taxpayer's tax liability. The additional credit claimed by Bankers Trust was for taxes that had been assessed by and paid to Brazil on the interest earned on Brazilian loans in that year, but only part of which had been claimed on the original return.

All of the loans at issue in the present case were 'net' loans. In a net loan, the lender and borrower agree on an interest rate that the lender is to receive, net of taxes--that is, the borrower pays the lender the agreed interest, and the borrower also pays any taxes levied by the borrower's jurisdiction on the interest income received by the lender. As a consequence of this arrangement, the amount of interest the borrower owes remains constant. In terms of the borrower's overall liability, however, the risk of change in the tax rate is on the borrower, both negatively (if the rate goes up, the borrower pays more) and positively (if the rate goes down, the borrower pays less).

Under Brazilian tax law in effect in 1980, even under a net loan, the foreign lender was the party legally responsible for paying to Brazil the income tax levied on the interest that the lender earned from loans to Brazilian borrowers. However, to ease its collection problems, the Brazilian government placed upon the borrower the responsibility for withholding the tax and paying it to the government. The borrower could not obtain the foreign currency from its local correspondent bank needed to make the interest payment to the foreign lender without first demonstrating that it had paid the Brazilian tax. It did this by paying to the local bank, for subsequent transmittal to the government, the amount of tax due on the interest payment.

Because of certain historical practices (related to its problems with maintaining its foreign exchange balances), at the time in question, Brazil taxed the interest on foreign loans at a 25% rate, and then provided a "pecuniary benefit" to the borrower. The pecuniary benefit was a subsidy, proportional to the amount of tax paid, that was returned to the borrower after payment of the tax. The original amount of the pecuniary benefit was 85% of the tax paid. The combined effect of the 25% tax rate and 85% pecuniary benefit resulted in an effective tax rate of 3.75% (25% paid - (85% x 25%) refunded = 3.75% effective rate).

The amount of the benefit fluctuated somewhat over time, and its exact amount at the time in question is not entirely clear from the record. The actual amount, however, is not important to the issue before us. What is important is that, though the legal obligation for the tax belonged to the foreign lender, because the loans were net loans the effect of the pecuniary benefit was to return a portion of the tax paid directly to the borrower, and not to the foreign lender.

Brazilian law imposed minimum size and length of term requirements on foreign loans. In order to assist small borrowers whose attempts to obtain foreign loans were hindered by these regulations, Brazilian law provided for 'repass' loans. In a repass loan, a Brazilian bank would borrow money from a foreign lender such as Bankers Trust, and then lend it out in smaller parcels to borrowers. The Brazilian bank collected the tax and received the pecuniary benefit, which it was required to pass on to the repass borrowers. In a repass loan, Bankers Trust had no direct financial relationship with the ultimate borrower, the third party that actually received the pecuniary benefit.

The IRS originally allowed taxpayers lending to Brazil to claim a full FTC on amounts paid as tax to Brazil (i.e., calculated using the 25% tax rate), ignoring the pecuniary benefit. See, e.g., Priv. Ltr. Rul. 7611239900A (Nov. 22, 1976). However, in 1978, the Service changed this position in a revenue ruling. See Rev. Rul. 78-258, 1978-1 C.B. 239. It later codified this ruling in a treasury regulation. See Temp. Treas. Reg. § 4.901-2(f) (1980) (effective for tax years ending after June 15, 1979). The regulation provided that if any part of the tax paid was refunded to the taxpayer or to an entity which engaged in a business transaction with the taxpayer, then that part of the tax was not eligible for the FTC. ²

For tax year 1980, Bankers Trust originally complied with the regulation and did not claim the FTC for the amount of the tax that was refunded to the Brazilian borrower in the form of the pecuniary benefit. However, after an IRS audit, Bankers Trust requested a refund equal to the amount of FTC not originally claimed, alleging that the failure to receive the full FTC was erroneous. When it did not receive the refund after six months, Bankers Trust, as allowed by law, filed suit in the Court of Federal Claims.

Before the Court of Federal Claims, Bankers Trust challenged the validity of Temporary Treasury Regulation § 4.901-2(f), claiming it was invalid because it failed to take into account whether the taxpayer had received an 'economic benefit' from the subsidy. Since Bankers Trust received no such benefit, it took the position that it was entitled to the entire amount of tax paid.

Even more to the point, Bankers Trust argued that the regulation conflicted directly with binding legal precedent. In the Mexican Railroad Car cases ³ (discussed in detail infra), the United States Court of Claims had considered transactions mechanically identical to the Brazilian transactions. The Court of Claims concluded that what happened in the foreign country was that country's business, and therefore the foreign subsidy was irrelevant; the FTC should be applied to all tax that was paid, regardless of what happened after that. Under this precedent, argued Bankers Trust, it should receive the FTC for the full amount of taxes paid, not just the net after the subsidy is applied. Further, Bankers Trust argued, the IRS, as an administrative agency, lacked the power to overrule by regulation a precedent of an appellate tribunal.

Since the parties agreed that there were no disputed factual issues (all facts were submitted in the form of a joint stipulation), disposition on summary judgment was appropriate. The Court of Federal Claims ruled in favor of the IRS.

The Court of Federal Claims found the regulation to be a valid exercise of authority delegated to the IRS. The Court of Federal Claims particularly noted that the Seventh and Eighth Circuits recently had both ruled directly on the same question and found the regulation valid. See Continental Ill. Corp. v. Commissioner, 998 F.2d 513 (7th Cir. 1993); Norwest Corp. v. Commissioner, 69 F.3d 1404 (8th Cir. 1995). While these decisions are not binding on the Court of Federal Claims, the court found them persuasive in their own right, and concluded that they should be followed in the interest of harmony among the circuits.

With respect to the Mexican Railroad Car cases, the Court of Federal Claims held that Temporary Treasury Regulation § 4.901-2(f) had effectively overruled those cases. The Court of Federal Claims noted that it was required to follow Court of Claims precedent unless it had been "overruled by the court en banc, or by other controlling authority such as an intervening statutory change or Supreme Court decision." Texas Am. Oil Co. v. United States Dep't of Energy, 44 F.3d 1557 (Fed. Cir. 1995) (en banc). The Court of Federal Claims found the regulation to be "other controlling authority" and held that it was thus not required to follow the Mexican Railroad Car cases.

Bankers Trust appeals the judgment of the Court of Federal Claims, essentially on the same grounds urged before the Court of Federal Claims. In addition to challenging the validity of...