Dresser Industries, Inc. v. U.S.

• Decision Date: 25 June 1999
• Docket Number: No. 3-98-CV-0369-BD.,3-98-CV-0369-BD.
• Citation: 73 F.Supp.2d 682
• Parties: DRESSER INDUSTRIES, INC. and its Subsidiaries, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Texas

73 F.Supp.2d 682

DRESSER INDUSTRIES, INC. and its Subsidiaries, Plaintiff, v. UNITED STATES of America, Defendant.

No. 3-98-CV-0369-BD.

United States District Court, N.D. Texas, Dallas Division.

June 25, 1999.

COPYRIGHT MATERIAL OMITTED

Andrew L. Sobotka, U.S. Dept. of Justice, Tax Div., Dallas, TX, for Defendant.

Robert H. Albaral, Baker & McKenzie, Dallas, TX, for Plaintiff.

MEMORANDUM OPINION AND ORDER

KAPLAN, District Judge.

This case is before the Court on cross-motions for partial summary judgment. For the reasons stated herein, both motions are granted in part and denied in part.

I.

This is a suit to recover federal income taxes and interest paid by Dresser Industries, Inc. and its subsidiaries for the 1981-1987 tax years.¹ On February 28, 1994, the United States Tax Court determined that Dresser underpaid its taxes for 1980-1982 and assessed a deficiency of $22,385,587. (Jt. Stipulation ¶ 4, Exh. 1). This sum was paid on September 22, 1993, along with an additional $23,242,401 in taxes and interest for 1982, 1984, 1986, and 1987.² (Id. ¶ 6). Dresser now seeks a refund in the amount of $2,585,776. (Id. ¶¶ 7-9, 11-12).

Numerous tax issues are implicated by this refund claim. Two are raised in the pending summary judgment motions. The first involves the calculation of combined taxable income for Dresser and its Domestic International Sales Corporation ("DISC") and Foreign Sales Corporation ("FSC").³ A brief explanation of the DISC is necessary to put this issue in context. The DISC is a creature of federal tax law, created in 1971 as part of an overall strategy to boost domestic exports by providing tax incentives to companies involved in export trade. See REVENUE ACT OF 1971, Pub.L. No. 92-178, 85 Stat. 535 (1971), codified as amended at 26 U.S.C. §§ 991-997. Typically, it is a "shell corporation" with no facilities, employees, or inventory of its own. The DISC acts as a paper broker and skims profits of the parent company by taking "commissions" on export sales. A qualified DISC subsidiary is not taxed on income derived from the sale of exports. Rather, its shareholders are taxed on a specified percentage of DISC taxable income as if a dividend distribution had been made at the end of the tax year. DISC taxable income, from which this dividend distribution is calculated, is based on a complex statutory framework that establishes a "deemed" transfer price for export goods provided to the DISC by the parent supplier. Id. Dresser calculates the deemed transfer price as 50% of the "combined taxable income" of the DISC and its parent for the 1983-1986 tax years. 26 U.S.C. § 994(a)(2). Combined taxable income is computed by deducting expenses related to the production and sale of export property from gross receipts of the DISC. See H.R.Rep. No. 533, 92nd Cong., 1st Sess., reprinted in 1971 U.S.C.C.A.N. 1825, 1887-88. One such expense is interest. Dresser contends that it is entitled to first allocate interest expense to interest income before allocating a portion of the remaining interest expense to income generated by the sales of export property through the DISC. Netting the interest in this manner reduces combined taxable income and Dresser's overall tax liability. The government rejects this approach and maintains that only a ratable share of "gross interest" can be apportioned to the DISC.

The second issue is whether Dresser can use foreign tax credit carrybacks to offset deficiency interest owed for 1981 and 1984. Ordinarily, a taxpayer who underpays its taxes is liable for interest on all unpaid amounts from the time the tax is due until the date it is paid in full. See 26 U.S.C. § 6601(a) & (b). Dresser paid deficiency interest in the amount of $1,552,575 as a result of a $265,109 tax liability for 1981 and a $6,261,397 tax liability for 1984. (Jt. Stipulation ¶¶ 8, 12, 26-27). However, it accumulated excess foreign tax credits of $265,109 in 1983 and $6,261,397 in 1986. (Id. ¶¶ 26-27). These credits were carried back to the earlier tax years and became taxes "deemed paid" in those years. 26 U.S.C. § 904(c). Dresser now claims that it is entitled to a refund of deficiency interest because the foreign tax credit carrybacks eliminated the initial deficiencies.

Both parties move for partial summary judgment on procedural and substantive grounds. The government contends that: (1) some of the refund claims for 1981 and 1982 are untimely under the applicable statutes of limitation; (2) a portion of the 1985 claim is precluded by the doctrine of variance; and (3) the Court lacks subject matter jurisdiction over the claims for 1986 and 1987. Dresser maintains that its refund claims are not barred by limitations or any other procedural defense. It also seeks judgment as matter of law on two substantive issues. Dresser argues that: (1) it is entitled to apportion net interest expense as a component of the combined taxable income of its DISC and FSC subsidiaries; and (2) it is entitled to a refund of interest paid on deficiencies that were subsequently eliminated by foreign tax credit carrybacks. The parties have briefed these issues and presented oral argument at a hearing on May 21, 1999. This matter is now ripe for determination.

II.

Summary judgment is proper when there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). A dispute is "genuine" if the issue could be resolved in favor of either party. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Thurman v. Sears, Roebuck & Co., 952 F.2d 128, 131 (5th Cir.), cert. denied, 506 U.S. 845, 113 S.Ct. 136, 121 L.Ed.2d 89 (1992). A fact is "material" if it might reasonably affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Matter of Gleasman, 933 F.2d 1277, 1281 (5th Cir.1991).

This case is before the Court on cross-motions for summary judgment.⁴ Consequently, each party has the burden of producing evidence to support its motion. Dutmer v. City of San Antonio, 937 F.Supp. 587, 589-90 (W.D.Tex.1996). A movant who does not have the burden of proof at trial must point to the absence of a genuine fact issue. Duffy v. Leading Edge Products, Inc., 44 F.3d 308, 312 (5th Cir.1995); Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5th Cir.1995). The burden then shifts to the non-movant to show that summary judgment is not proper. Duckett v. City of Cedar Park, Texas, 950 F.2d 272, 276 (5th Cir.1992). Either party may satisfy its evidentiary burden by tendering depositions, affidavits, and other competent evidence. Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.), cert. denied, 506 U.S. 825, 113 S.Ct. 82, 121 L.Ed.2d 46 (1992). All the evidence must be viewed in the light most favorable to the party opposing the motion. Rosado v. Deters, 5 F.3d 119, 122 (5th Cir.1993).

III.

The parties first dispute whether the refund claims are procedurally barred. The government argues that: (1) some of the claims for 1981 and 1982 are untimely under the applicable statutes of limitations; (2) a portion of the 1985 claim is precluded by the doctrine of variance; and (3) the Court lacks subject matter jurisdiction over the claims for 1986 and 1987. Each of these procedural issues will be examined in turn.

A.

The statutes of limitations applicable to tax refund claims are set forth in 26 U.S.C. § 6511. As a general rule, such a claim must be filed "within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later." 26 U.S.C. § 6511(a). The tax code also contains special limitations rules applicable to particular types of credits and refunds. Id. § 6511(d). Two are at issue here. The first rule applies when the refund claim is based on the allowance of a foreign tax credit:

If the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country ... in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 10 years from the date prescribed by law for filing the return for the year with respect to which the claim is made.

Id. § 6511(d)(3)(A). The second rule applies to net operating loss carrybacks:

If the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback ... in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions thereof) for the taxable year of the net operating loss ... which results in such carryback, or the period prescribed in subsection (c) in respect of such taxable year, whichever expires later ...

Id. § 6511(d)(2)(A).⁵ In cases where the allowance of a net operating loss carryback "is otherwise prevented by the operation of any law or rule of law," a refund claim is timely if "filed within the period provided in subparagraph (A) of this paragraph." Id. § 6511(d)(2)(B).

Dresser paid its taxes for 1981 and 1982 on September 22, 1993. It filed formal claims for refund on June 27, 1995. Dresser maintains that these refund claims were timely because the special rules applicable to foreign tax credits and net operating loss carrybacks supplant only the three-year limitations period of section 6511(a), not the alternative period of "2 years from the time the tax was paid." Because each tax year implicates a different statute of limitations, the Court will address them separately.

1.

Dresser claims that it is entitled to a deduction for DISC commission expense and an increase in DISC deemed dividends based on a recalculation of its combined taxable income for the 1983 tax year. These adjustments create a foreign...