Ford Motor Co. v. United States

• Decision Date: 30 May 2017
• Docket Number: No. 14-458T,14-458T
• Parties: FORD MOTOR COMPANY, Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

FORD MOTOR COMPANY, Plaintiff, v. UNITED STATES, Defendant.

No. 14-458T

United States Court of Federal Claims

May 30, 2017

Corporate tax case; interest netting claim; I.R.C. § 6621(d); jurisdiction over a claim for interest on an overpayment under I.R.C. § 6611; "same taxpayer" within the meaning of I.R.C. § 6621(d)

Robert E. Kolek, Schiff Hardin, LLP, Chicago, Illinois, for plaintiff. With him on the briefs and at the hearing were Robert R. Pluth, Jr. and Ivan H. Golden, Schiff Hardin, LLP, Chicago, Illinois.

Jason Bergmann, Attorney, Tax Division, United States Department of Justice, Washington, D.C., for defendant. With him on the briefs were David A. Hubbert, Acting Assistant Attorney General, Tax Division, and David I. Pincus, Chief, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C.

OPINION AND ORDER

LETTOW, Judge.

Plaintiff, Ford Motor Company ("Ford"), brings suit to recover interest that the government, acting through the Internal Revenue Service ("IRS"), allegedly owes as a result of Ford's overpayment of taxes. This is an interest netting case. Ford seeks to balance the interest it owed and paid on underpayments of taxes with interest received from the IRS on overpayments. Ford made an overpayment to the IRS for the taxes it owed in 1992, while Ford Export Services B.V. ("Export"), a former foreign sales corporation owned by Ford, made underpayments between 1990 and 1998. Interest accrues on both underpayments and overpayments, but the interest rate imposed on taxpayers for underpayments is higher than the rate applied to the government for overpayments. Under certain circumstances, however, a taxpayer may "net" accrued interest on equivalent underpayments and overpayments, thus negating the different interest rates. The IRS denied Ford's attempts to net its overpayment from 1992 with Export's underpayments between 1990 and 1998 after determining that Ford and Export were not the "same taxpayer," as required by 26 U.S.C. ("I.R.C.") § 6621(d). Ford contends that it is the "same taxpayer" as Export and that interest netting should accordingly be permitted under I.R.C. § 6621(d).

Pending before the court are Ford's motion for summary judgment and the government's cross-motion for summary judgment pursuant to Rule 56 of the Rules of the Court of Federal Claims ("RCFC"). For the reasons stated, Ford's motion is denied and the government's cross-motion is granted.

BACKGROUND

A. Interest Netting for Overpayment and Underpayment of Taxes

Generally, a taxpayer owes interest on tax underpayments, and the IRS owes interest on tax overpayments. See I.R.C. § 6601(a) (providing for interest on underpayments owed to the government); I.R.C. § 6611(a) (providing for interest on overpayments owed to taxpayers). Between 1939 and 1986, the interest rates for underpayments and overpayments were comparable or the same. See United States Department of the Treasury, Office of Tax Policy, Report to Congress on Netting of Interest on Tax Overpayments and Underpayments (Apr. 1997), https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Netting-Interest-1997.pdf ("Treasury Report"), at 7. In 1986, Congress amended I.R.C. § 6621, which provides the applicable interest rates for underpayments and overpayments, through the Tax Reform Act of 1986, Pub. L. No. 99-514, § 1511(a), 100 Stat. 2085, 2744. That Act established a higher interest rate for underpayments, setting the overpayment rate as the sum of the short-term Federal rate and two percentage points, and the underpayment rate as the sum of the short-term Federal rate and three percentage points. Id. Those rates have remained the same since 1986 as applied to most corporations, with certain exceptions for large corporate payments where the overpayment rate is decreased to half of one percent and the underpayment rate is increased to five percent. See I.R.C. §§ 6621(a)(1)-(2), (c).

In 1996, Congress directed the Secretary of the Treasury Department to conduct a study and issue a report that addressed the "netting of interest on overpayments and underpayments." Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 1208, 110 Stat. 1452, 1473. In its 1997 report, the Treasury Department explained that the IRS permitted "annual netting" of a taxpayer's equivalent underpayments and overpayments within a single tax year, which negates the interest rate differential to the extent the underpayments and overpayments match for that year. Treasury Report at 1. The IRS also permitted another form of netting for equivalent payments, referred to as "offsetting," when "taxpayers simultaneously have outstanding tax overpayments and underpayments for different years." Id. at 1, 8-11; see also I.R.C. §§ 6402(a), 6601(f). In 1997, the IRS also took the position that it did not allow "global netting," where either the overpayment or underpayment was already satisfied, and thus not outstanding, when the netting computation was performed. Id. at 1, 13 (explaining that the IRS did not allow global netting when "the deficiency has already been fully paid by the taxpayer and/or the overpayment has already been fully refunded by the [g]overnment, so that one of the taxpayer's tax accounts has a balance of zero").

The Treasury Department responded by "recommend[ing] that Congress enact clear statutory authority for global interest netting," id. at 44, and Congress did so through the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, Title III, § 3301(a), 112 Stat. 685, 741 (codified at I.R.C. § 6621(d)). The relevant provision states:

To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.

I.R.C. § 6621(d). In amending Section 6621, Congress explained:

The Committee believes that taxpayers should be charged interest only on the amount they actually owe, taking into account overpayments and underpayments from all open years. The Committee does not believe that the different interest rates provided for overpayments and underpayments were ever intended to result in the charging of the differential on periods of mutual indebtedness.

S. Rep. No. 105-174, at 61-62 (1998); H.R. Rep. No. 105-364, at 63-64 (1997). Congress directed the Treasury Department to "implement the most comprehensive interest netting procedures that are consistent with sound administrative practice." S. Rep. No. 105-174, at 62; see also H.R. Rep. No. 105-364, at 65.

B. Foreign Sales Corporations

In 1971, Congress "provided special tax treatment for export sales made by an American manufacturer through a subsidiary that qualified as a 'domestic international sales corporation' (DISC)." Boeing Co. v. United States, 537 U.S. 437, 440 (2003) (footnote omitted). That authority was largely replaced by provisions regarding foreign sales corporations ("FSC"), id. at 442, as set forth in the Deficit Reduction Act of 1984, Pub. L. No. 98-369, Title VIII, § 801(a), 98 Stat. 494, 985 (codified at I.R.C. §§ 921-27, repealed by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, Pub. L. No. 106-519, § 2, 114 Stat. 2423)). A qualifying FSC presented tax advantages for its parent company within the United States because a portion of the FSC's export income was exempt from taxation. See Staff of S. Comm. on Finance, Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984, S. Print No. 98-169, Vol. I, at 636; see also I.R.C. §§ 921(a), 923 (specifying the particular portion of a FSC's foreign trade income that would be excluded from gross income). The parent company of a FSC could use those tax benefits by selling its products to the FSC for resale in foreign markets, or by paying the FSC a commission for selling the parent's products in foreign markets. See I.R.C. §§ 925(a), (b)(1); Abbott Labs. v. United States, 84 Fed. Cl. 96, 102 (2008) (detailing the FSC scheme), aff'd, 573 F.3d 1327 (Fed. Cir. 2009). The remaining foreign trade income that was not exempt from taxation, when distributed to a parent company as a dividend, would generally not be subject to an additional tax on that distribution. See I.R.C. § 245(c)(1)(A). "The net effect of this scheme was to shift a prescribed amount of profit on export sales from an entity with a 35 percent effective tax rate to an entity (the FSC) with an effective tax rate of approximately 12 percent." Abbott Labs., 84 Fed. Cl. at 100 (citing Staff of JointComm. on Taxation, 98th Congress, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (Comm. Print 1984), at 1045).

In light of the taxation precepts set forth by the World Trade Organization's General Agreement on Tariffs and Trade ("GATT"), which permit "an exemption from tax of export income . . . only if the economic processes [giving] rise to the income take place outside the United States," the Senate Finance Committee provided that "a FSC must have a foreign presence, it must have economic substance, and [its] activities that relate to the export income must be performed by the FSC outside the U.S. customs territory." S. Print No. 98-169 at 636. A foreign corporation seeking to qualify as a FSC would thus need to, among other requirements, be created and organized under the laws of a foreign country or under the "laws applicable to any possession of the United States," maintain an office and accounting records in a foreign country, include at least one individual on the board of directors who is not a resident of the United States, and make a formal election with the IRS to receive FSC treatment. I.R.C. § 922(a). FSCs were also required to be "managed outside the United States," holding board meetings and maintaining a principal bank account in a...