Fluor Corp. and Affiliates v. U.S., 96-5130

• Decision Date: 19 August 1997
• Docket Number: No. 96-5130,96-5130
• Citation: 126 F.3d 1397
• Parties: -6022, 97-2 USTC P 50,615 FLUOR CORPORATION AND AFFILIATES, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1397

126 F.3d 1397

80 A.F.T.R.2d 97-6022, 97-2 USTC P 50,615

FLUOR CORPORATION AND AFFILIATES, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.

No. 96-5130.

United States Court of Appeals, Federal Circuit.

Decided Aug. 19, 1997.

Amended Oct. 17, 1997.

Rehearing Granted; Suggestion for Rehearing In Banc

Declined Oct. 30, 1997.

Stanford G. Ross, Arnold & Porter, Washington, DC, argued for plaintiff-appellee.

Charles Bricken, Attorney, Tax Division, Department of Justice, argued for defendant-appellant. With him on the brief were Loretta C. Argrett, Assistant Attorney General, and Richard Farber, Attorney. Of counsel was Murray S. Horwitz, Attorney.

Before CLEVENGER, Rader and BRYSON, Circuit Judges.

ORDER

A petition for rehearing having been filed by the APPELLEE, and a response thereto having been invited by the court and filed by the APPELLANT,

UPON CONSIDERATION THEREOF, it is

ORDERED that rehearing be granted for the limited purpose of modifying this court's opinion.

IT IS FURTHER ORDERED that the previous opinion of the court in this appeal is withdrawn. The new opinion accompanies this order.

Before CLEVENGER, RADER, and BRYSON, Circuit Judges.

BRYSON, Circuit Judge.

This tax case presents the question whether a taxpayer is liable for interest on a tax deficiency when the deficiency is later erased by a foreign tax carryback. The Court of Federal Claims held that the effect of the carryback was to release the taxpayer from both the tax underpayment and interest on that underpayment. We hold that while the foreign tax carryback eliminated the original tax deficiency for taxable year 1982, it did not release the taxpayer from the obligation to pay interest on that tax deficiency, and we therefore reverse.

I

A

Under prescribed circumstances, the Internal Revenue Code allows a "foreign tax credit" to U.S. taxpayers. See 26 U.S.C. § 901(a). For domestic corporate taxpayers, the credit is equal to "the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States." 26 U.S.C. § 901(b)(1). The Code, however, limits the amount of the foreign tax credit that can be taken in a particular year. Specifically, the ratio of the foreign tax credit to the taxpayer's pre-credit United States tax liability cannot exceed the ratio of the taxpayer's taxable income from the foreign country to the taxpayer's total taxable income. See 26 U.S.C. § 904(a). For cases in which the ceiling on the amount of the credit that can be taken in a particular year is too low to exhaust the amount of the credit available to the taxpayer, the Code permits the excess foreign tax to be carried back to the two preceding taxable years, and then carried forward to each of the five succeeding taxable years until the excess foreign tax is exhausted. 26 U.S.C. § 904(c). The statute effects the carryover by providing that the foreign tax credit that is carried back or carried forward "shall be deemed taxes paid or accrued to foreign countries or possessions of the United States" in the carryover years. Id.

B

The pertinent facts of this case are not in dispute. Plaintiff, which we refer to as Fluor, is an affiliated group of corporations. For its tax year ending October 31, 1982, Fluor underpaid its federal income taxes, and the Internal Revenue Service assessed a deficiency for that year. In Fluor's 1984 tax year, it paid foreign taxes that generated a foreign tax credit under section 901. Because the full amount of its 1984 foreign tax credit could not be used in 1984, Fluor exercised its right under section 904(c) to carry a portion of the tax back to its 1982 tax year. Setting aside some of the details of the tax transactions at issue, the effect of the carryback of the excess 1984 foreign tax was to eliminate Fluor's 1982 tax deficiency.

The parties agreed that following the application of the tax credit Fluor was not liable for the tax deficiency that had been assessed for 1982. The parties did not, however, agree on whether Fluor was liable for interest on the deficiency that accrued prior to the time the credit became available. When the IRS insisted that Fluor was liable for interest on the deficiency between 1982 and 1984, Fluor paid the interest and filed an action in the Court of Federal Claims seeking a refund. The Court of Federal Claims ruled in Fluor's favor, holding that Fluor was entitled to a refund of the assessed interest for the 1982 deficiency, plus interest on the refunded amount. The government has appealed that judgment to this court.

II

What is in dispute in this case is whether Fluor is liable for interest on the 1982 tax deficiency during the period between the time its 1982 taxes were due and the time its 1984 foreign tax credit was applied to eliminate the 1982 deficiency. Fluor argues, and the Court of Federal Claims agreed, that Fluor does not owe interest on the 1982 deficiency because the 1984 foreign tax credit must be treated as if it were a tax paid in 1982. Accordingly, Fluor argues, the foreign tax carryback from 1984 eliminated the 1982 deficiency nunc pro tunc and destroyed any justification for assessing interest charges for the deficiency against Fluor. The government, on the other hand, argues that the 1982 deficiency was not eliminated until the foreign tax credit became available in 1984. Accordingly, the government contends that it should not be deprived of its statutory right to interest on the deficiency during the period after the deficiency arose and before it was eliminated by the foreign tax carryback.

At the time this case arose and was litigated in the Court of Federal Claims, the Internal Revenue Code did not provide a clear answer to the question presented here. Congress, however, has recently amended the Code to include an explicit provision requiring that a taxpayer in Fluor's position pay interest on a deficiency that is subsequently eliminated by a foreign tax carryback. See Taxpayer Relief Act of 1997, Pub.L. No. 105-34, § 1055, 111 Stat. 788. That statutory change resolves the question presented in this case for all future years. Because the statutory change was made prospective only, however, it does not affect this case. To decide this case, which is governed by the pre-1997 version of the Code, we draw guidance from the principles announced in two closely analogous decisions of the Supreme Court and from the statutory context in which this issue arose.

A

In the first of the two Supreme Court cases, Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346 (1950), the government assessed a deficiency in Seeley's 1941 taxes, with interest from the date the taxes were due. Seeley later filed a return for 1943 in which it showed a net operating loss for that year. When carried back to 1941, the net operating loss was sufficient to eliminate Seeley's tax liability for that year. The Commissioner abated the deficiency, but refused to refund the interest that had been assessed on the deficiency.

The Supreme Court ruled that the Commissioner had properly withheld the interest on the deficiency, holding that the "subsequent cancellation of the duty to pay this assessed deficiency does not cancel in like manner the duty to pay the interest on that deficiency." 338 U.S. at 565, 70 S.Ct. at 388. For the period that the deficiency was outstanding, the Court explained,

the taxpayer, by its failure to pay the taxes owed, had the use of funds which rightfully should have been in the possession of the United States. The fact that the statute permits the taxpayer subsequently to avoid the payment of that debt in no way indicates that the taxpayer is to derive the benefits of the funds for the intervening period. In the absence of a clear legislative expression to the contrary, the question of who properly should possess the right of use of the money owed to the Government for the period it is owed must be answered in favor of the Government.

Id. at 566, 70 S.Ct. at 389.

The Court began its analysis by stating the general principle, evidenced by a number of statutory provisions, that "Congress intended the United States to have the use of money lawfully due when it became due." 338 U.S. at 566, 70 S.Ct. at 389. Thus, the Court noted, when the Commissioner assesses a deficiency "he also may assess interest on that deficiency from the date the tax was due to the assessment date." Id. The carryback provision did not alter that principle, the Court explained, and it should not "be interpreted as deferring or delaying the prompt payment of taxes properly due." Id. at 567, 70 S.Ct. at 389

The Court found support for its position in the statute that prohibits a taxpayer who pays a tax that is later abated by a carryback from claiming interest from the government for the intervening period. That statute, the Court explained, makes it clear that Congress "did not intend to change the basic statutory policy: the United States is to have the possession and use of the lawful tax at the date it is properly due." 338 U.S. at 568, 70 S.Ct. at 390.

Finally, the Court stated that to sustain Seeley's contention "would be to place a premium on failure to conform diligently with the law." 338 U.S. at 568, 70 S.Ct. at 390. For if a taxpayer could avoid paying interest on a deficiency that was later canceled by a carryback, "a taxpayer who did not pay his taxes on time would receive the full use of the tax funds for the intervening period," while the taxpayer who paid his taxes promptly would be statutorily prohibited from having the use of the money for that period. Id. The Court concluded: "We cannot approve such a result." Id.

Five years later, in United States v. Koppers Co., 348 U.S. 254, 75 S.Ct. 268, 99 L.Ed. 302 (1955), the Court reached a similar result in a case involving an abatement of two corporations' excess profits tax liabilities. The abatements...