Exxon Corp. v. U.S.

• Decision Date: 30 April 1991
• Docket Number: No. 90-5152,90-5152
• Citation: 931 F.2d 874
• Parties: -900, 91-1 USTC P 50,214 EXXON CORPORATION, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 874

931 F.2d 874

67 A.F.T.R.2d 91-900, 91-1 USTC P 50,214

EXXON CORPORATION, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.

No. 90-5152.

United States Court of Appeals, Federal Circuit.

April 30, 1991.

Robert L. Moore, II of Miller & Chevalier, Washington, D.C., argued for plaintiff-appellee. Of counsel were Jennings T. Smith, of the Exxon Corp., Irving, Texas, John B. Magee, Gerald Goldman, Thomas D. Johnston, J. Bradford Anwyll, and Anthony F. Shelley, of Miller & Chevalier.

Mildred L. Seidman of the Tax Div., Dept. of Justice, Washington, D.C., argued for defendant-appellant. With her on the brief were Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen and Jonathan S. Cohen, attys.

Before MAYER, MICHEL and LOURIE, Circuit Judges.

MICHEL, Circuit Judge.

The United States appeals the July 13, 1990 judgment of the United States Claims Court awarding to Exxon Corporation (Exxon) a refund of income tax and interest it had paid for tax year 1960. See Exxon Corp. v. United States, 19 Cl.Ct. 755 (1990) (opinion prior to entry of final judgment). Because Chief Judge Smith was permitted, on remand, to revisit and revise the finding of ultimate fact made by the predecessor trial judge, former Chief Judge Kozinski, and because the government has not shown any subsidiary finding on which the new judgment is based to be clearly erroneous, we affirm.

BACKGROUND

The factual background of this lengthy and complex litigation has already been set out in some detail in two Federal Circuit and three Claims Court opinions, ¹ and we will therefore confine ourselves to a summary of only the facts most pertinent to our disposition of this appeal.

The litigation concerns the income tax consequences to Exxon of Fidel Castro's takeover of Cuba in 1959 and the Cuban government's seizure in 1960 of Exxon's Cuban-based subsidiary, Esso Standard Oil S.A. (known as "Essosa"). ² Specifically, two deductions on Exxon's 1960 tax return are at stake in this appeal: (1) a $9 million bad debt deduction for a loan Exxon had made to Essosa, and (2) a worthless securities deduction of $2.13 million representing Exxon's basis in Essosa's stock. Both parties agree that the allowability of these deductions depends upon the date on which Essosa became insolvent. If, as the government maintains, Essosa became insolvent as a result of a corporate reorganization on June 30, 1960, in which Essosa's non-Cuban assets were transferred to a newly formed Exxon subsidiary, then both deductions must be disallowed. On the other hand, if, as Exxon contends, the insolvency did not occur until Castro's government actually seized Essosa's Cuban assets on the next day, July 1, 1960, then both deductions must be allowed.

This litigation began after the Internal Revenue Service, on audit, disallowed a bad debt deduction on Exxon's 1960 return for $27.4 million Essosa owed to Esso Export, another Exxon subsidiary, at the time of the Cuban government's expropriation of Essosa. Exxon paid the tax on this sum under protest, and in 1979 brought suit for a refund. The government then alleged that its earlier allowance of the $9 million and $2.13 million deductions had been erroneous, and argued that they should be offset The case was tried before Judge Alex Kozinski, then Chief Judge of the United States Claims Court, ³ who held that the $27.4 million debt was not worthless because Esso Export had a reasonable chance of recovering it in an action against Exxon, in which it could argue that the June 30 corporate reorganization was a fraudulent conveyance because it left Essosa insolvent. The court therefore rendered a partial judgment dismissing Exxon's $27.4 million claim. Exxon Corp. v. United States, 7 Cl.Ct. 347, 357 (1985). In his opinion, Chief Judge Kozinski found that Essosa did in fact become insolvent immediately after the June 30 corporate reorganization, id. at 354, though he noted that this finding was in no way necessary to his decision, the dispositive issue being only whether "the question of solvency was sufficiently in doubt so that a fraudulent conveyance action ... would have had a reasonable probability of success." Id. at 354 n. 8.

against any amount Exxon might be awarded.

Exxon appealed, and we reversed, holding that Exxon was entitled to the $27.4 million bad debt deduction because Esso Export and Exxon were a single entity for tax purposes, and thus Esso Export could have no fraudulent conveyance claim against its parent, Exxon. Exxon Corp. v. United States, 785 F.2d 277, 281 (Fed.Cir.1986) ("Exxon I "). Judge Kozinski's findings of fact as to the date of insolvency of Essosa were not addressed in, or in any way material to, our decision in Exxon I.

On remand to the Claims Court, the case was assigned to Chief Judge Kozinski's successor, Chief Judge Smith. Stating that our opinion in Exxon I had implicitly determined that Essosa's insolvency was caused by the seizure on July 1 and not the reorganization on June 30, the court ruled that the law of the case doctrine required it to deny the government's request for offset of the $9 million bad debt and $2.13 million worthless stock deductions. Exxon Corp. v. United States, 12 Cl.Ct. 434, 439-40 (1987). The court accordingly awarded Exxon the tax and interest it had paid on the entire $27.4 million as to which it was entitled to a bad debt deduction, with no offset. Id. at 440.

Upon the government's appeal, we noted that our earlier decision in Exxon I had not addressed, explicitly or implicitly, the question of when Essosa had became insolvent, and held that the Claims Court had erred in ruling that the law of the case required it to allow the $9 million bad debt and $2.13 million worthless stock deductions. Accordingly, we vacated the court's judgment and remanded for further proceedings on the offset issues. Exxon Corp. v. United States, 840 F.2d 916, 917 (Fed.Cir.1988) ("Exxon II ").

On this second remand, the parties stipulated to having the offset issues decided on the record as it had been developed before Chief Judge Kozinski. Chief Judge Smith concluded that the court's original finding that Essosa became insolvent on June 30 was based on erroneous assumptions and faulty analysis of the evidence in the record, and found instead that Essosa did not become insolvent until July 1. Exxon Corp. v. United States, 19 Cl.Ct. 755, 764 (1990). The court therefore ruled in favor of Exxon as to both the $9 million bad debt deduction and the $2.13 million worthless stock deduction (though in light of Exxon's admission that the proper amount of the deduction was only $1.49 million and not $2.13 million, it allowed the government to offset $640,000). Id. at 765. The government appeals.

We have jurisdiction pursuant to 28 U.S.C. Sec. 1295(a)(3) (1988).

DISCUSSION

Two distinct issues are presented in this appeal, which we shall consider in the following order: (1) to what extent Chief Judge Smith had authority to amend the finding of ultimate fact made by his predecessor, Chief Judge Kozinski, and (2)

whether the findings before us in this appeal have been shown to be clearly erroneous.

I

A

The government contends that when the dispositive finding of Chief Judge Kozinski as to the date of Essosa's insolvency was not disturbed on appeal, it became the law of the case and thus not subject to further revision. This argument misapprehends the scope and meaning of the law of the case doctrine.

In our decision in Jamesbury Corp. v. Litton Indus. Prod., Inc., 839 F.2d 1544, 5 USPQ2d 1779 (Fed.Cir.), cert. denied, 488 U.S. 828, 109 S.Ct. 80, 102 L.Ed.2d 57 (1988) ⁴, we summarized the doctrine as follows:

The law of the case is a judicially created doctrine, the purposes of which are to prevent the relitigation of issues that have been decided and to ensure that trial courts follow the decisions of appellate courts. The doctrine requires a court to follow the decision on a question made previously during the case.... When a judgment of a trial court has been appealed, the decision of the appellate court determines the law of the case, and the trial court cannot depart from it on remand.... Orderly and efficient case administration suggests that questions once decided not be subject to continued argument, but the court has the power to reconsider its decisions until a judgment is entered.

839 F.2d at 1550, 5 USPQ2d at 1783 (footnotes omitted). ⁵ Law of the case, then, merely requires a trial court to follow the rulings of an appellate court. ⁶ It does not constrain the trial court with respect to issues not actually considered by an appellate court, Holcomb v. United States, 622 F.2d 937, 940 (7th Cir.1980), and thus has long been held not to require the trial court to adhere to its own previous rulings if they have not been adopted, explicitly or implicitly, by the appellate court's judgment. See Quern v. Jordan, 440 U.S. 332, 347 n. 18, 99 S.Ct. 1139, 1148 n. 18, 59 L.Ed.2d 358 (1979) ("The doctrine of law of the case comes into play only with respect to issues previously determined.... 'While a mandate is controlling as to matters within its compass, on the remand a lower court is free as to other issues.' ") (quoting Sprague v. Ticonic Nat'l Bank, 307 U.S. 161, 168, 59 S.Ct. 777, 780, 83 L.Ed. 1184 (1939)). ⁷

Here, though Chief Judge Kozinski's decision did indeed come before this court, his finding of fact as to the date of insolvency was not addressed in, or in any way relevant to, our decision in Exxon I. Indeed, we explicitly stated in Exxon II that our decision in Exxon I "did not address when Essosa became insolvent." 840 F.2d at 917. We hold that when a judgment has come before us for review, and certain findings of fact were not examined in, relied on, or otherwise necessary to our decision in that appeal, law of the case does not prevent the trial court on remand from reexamining those findings, with no more deference than if the decision had never been...