General Elec. Co. and Subsidiaries v. U.S., 03-5153.

• Decision Date: 27 September 2004
• Docket Number: No. 03-5153.,03-5153.
• Citation: 384 F.3d 1307
• Parties: GENERAL ELECTRIC COMPANY AND SUBSIDIARIES, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

384 F.3d 1307

GENERAL ELECTRIC COMPANY AND SUBSIDIARIES, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 03-5153.

United States Court of Appeals, Federal Circuit.

DECIDED: September 27, 2004.

Appeal from the Court of Federal Claims, Francis M. Allegra, J.

Robert L. Moore, II, Miller & Chevalier, Chartered, of Washington, DC, argued for plaintiff-appellant. With him on the brief were Thomas D. Johnston and Alan I. Horowitz. Of counsel on the brief were Patricia M. Lacey and Laurence A. Hoch, General Electric Co. and Subsidiaries, of Albany, New York.

Charles Bricken, Attorney, Tax Division, United States Department of Justice, of

Washington, DC, argued for defendant-appellee. With him on the brief were Eileen J. O'Connor, Assistant Attorney General, and Thomas J. Clark, Attorney.

Jerome B. Libin, Sutherland Asbill & Brennan LLP, of Washington, DC, for amici curiae. With him on the brief were Steuart H. Thomsen, Mary E. Monahan, and James V. Heffernan.

Before RADER, BRYSON, and GAJARSA, Circuit Judges.

BRYSON, Circuit Judge.

This federal income tax case concerns the amount of interest the government owes the taxpayer, General Electric Company and Subsidiaries ("GE"), based on GE's overpayment of its taxes for 1978. A statute enacted in 1994 provided that as of January 1, 1995, the rate of interest paid on corporate tax overpayments in excess of $10,000 would be reduced from its previous level. GE argues that the lower rate does not apply in this case because by 1995 GE's overpayment of taxes for 1978 had already been repaid and only the accrued interest on the overpayment remained outstanding. The Court of Federal Claims rejected GE's legal theory and held that the lower statutory interest rate applies to the remaining obligation to GE for the years beginning with 1995. Gen. Elec. Co. v. United States, 56 Fed.Cl. 488 (Fed.Cl.2003). We agree with the Court of Federal Claims that GE was not entitled to earn interest at the higher statutory rate on the entire remaining obligation even though the principal of the overpayment had been fully retired by the time the new statutory interest rate took effect. Although we agree with the trial court's analysis and its rejection of GE's claim, we remand for the trial court to consider whether GE is entitled to an adjustment in the amount of interest it is owed.

I

The overpayment at issue in this case arose from a 1993 decision of the Tax Court holding that GE had overpaid its income taxes for 1978 by $15,497,938. As a result of that decision, there was also an abatement of restricted interest in the amount of $11,185,064.39. Pursuant to an agreement in response to that ruling, the IRS made adjustments in GE's tax account, applying the overpayment and interest to offset GE's tax obligations for other years. In applying $17,437,905.92 of that amount to GE's tax liability for 1988, however, the IRS made an error that deprived GE of $810,006.94 in statutory interest on the overpayment for which GE should have been credited. On February 4, 2002, the government paid that sum to GE, together with the interest that had accrued since 1988. The dispute in this case is over whether the IRS used the correct interest rate in calculating the amount of compound interest earned on the $810,006.94 between January 1, 1995, and February 4, 2002.

Section 6611 of the Internal Revenue Code, 26 U.S.C. § 6611, provides that interest "shall be allowed and paid upon any overpayment in respect of any internal revenue tax at the overpayment rate established under section 6621." Section 6621, in turn, provides that the rate of interest paid on overpayments shall be the sum of the federal short-term interest rate, as calculated according to a formula set forth in the statute, plus "3 percentage points (2 percentage points in the case of a corporation)." 26 U.S.C. § 6621(a)(1). Section 6622 provides that in computing any amount of interest required to be paid under the Internal Revenue Code, the interest will be compounded daily. 26 U.S.C. § 6622.

In 1994, Congress amended section 6621(a)(1) by adding the following language:

To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3)) exceeds $10,000, subparagraph (B) shall be applied by substituting "0.5 percentage point" for "2 percentage points".

Pub. L. No. 103-465, § 713, 108 Stat. 5001-02 (1994). The new language has remained a part of the statute since that time, without material change. Because the new statutory language was enacted as part of the statute that gave effect to the agreements reached at the Uruguay Round of Multilateral Trade Negotiations conducted under the auspices of the General Agreement on Tariffs and Trade ("GATT"), the lower corporate overpayment interest rate of 0.5 percent set forth in the 1994 amendment is referred to as the "GATT rate." The higher interest rate on corporate overpayments that applied to all corporate overpayments prior to the 1994 Act is referred to as the "regular rate." Under the 1994 Act, the regular rate continues to apply to small corporate overpayments (i.e., those not in excess of $10,000).

In the Court of Federal Claims, GE argued that the GATT rate set forth in the 1994 statute did not apply to the government's remaining obligation based on GE's 1978 overpayment, because the principal of that overpayment had long since been retired and only accrued interest on the overpayment remained to be paid. GE interpreted section 6621 to mean (1) that the GATT rate applies only to a corporate overpayment of tax exceeding $10,000 that was outstanding as of the effective date of the 1994 statute, and (2) that the term "overpayment of tax" does not include interest on an overpayment.

In response, the government argued that the "overpayment" referred to in section 6621 means the amount by which the taxpayer overpaid its taxes for the year of the overpayment, not the amount of the original overpayment that remained outstanding at the time the statute took effect. Thus, the government argued that the GATT interest rate applies to all principal and interest stemming from the portion of an overpayment that exceeds $10,000. The government explained that under its interpretation of section 6621, all interest on a sum attributable to an overpayment "derives either from a basket in which has been put the first $10,000 of a taxpayer's overpayment, or from a second basket in which has been put the remainder of that taxpayer's overpayment. The basket from which the interest is derived compels the rate at which interest is to be compounded."

The Court of Federal Claims rejected GE's argument. It began its analysis by characterizing a tax overpayment as the difference between the tax owed for a particular taxable period and the tax paid for that period. From that premise, the court reasoned that once the tax overpayment is determined for a particular taxable period, it is fixed for purposes of determining the interest rates that are payable under section 6621(a)(1). Thus, in the trial court's view, the amount of the "tax overpayment" does not vary as the government makes refunds or credits that retire the overpayment, nor does the amount of the overpayment increase as the government's debt accrues statutory interest. (In this respect the court noted, the calculation of an overpayment differs from the calculation of a tax underpayment, which includes accrued interest.) Accordingly, the court adopted the government's interpretation of section 6621, although it used a different metaphor to explain the operation of the statute. The court stated that its analysis "suggests that, once triggered, the statute requires the interest stream owing to a given [corporate] tax overpayment to be carved in two — one flow attributable to the amount less than or equal to the first $10,000 of overpayment and the other to the amount greater than this figure." The first stream would earn interest at the regular rate and the second would earn interest at the GATT rate. Although the court concluded that section 6621 required the interest stream to be divided into two parts, one earning interest at the GATT rate and one earning interest at the regular rate, the court nonetheless sustained the government's position on summary judgment that, on the facts of this case, the GATT interest rate applied to the entire outstanding balance owed to the taxpayer as of January 1, 1995. Disagreeing with the court's analysis, GE took this appeal.

II

As it did in the Court of Federal Claims, GE argues that the GATT rate is not applicable to any portion of the accrued interest on its 1978 overpayment. GE acknowledges that section 6621 makes the regular interest rate applicable only to small corporate overpayments not exceeding $10,000 (and to the first $10,000 of larger corporate overpayments). It also acknowledges that its original overpayment for 1978 and the amount still owed from that overpayment as of January 1, 1995, were both much larger than $10,000. Nonetheless, GE argues that the rate of interest to be paid on the entire amount owed to GE based on its 1978 overpayment is governed by the regular interest rate that section 6621 designates for small corporate overpayments of $10,000 or less, rather than the lower GATT rate that the statute designates for corporate overpayments in excess of $10,000.

GE's reasoning is as follows: In addressing the interest rate to be paid on overpayments, section 6621 refers to the overpayments themselves, not to the compound interest that may have accrued on the overpayments. Prior to 1995, the government had repaid all of the principal and much of the interest that it owed GE based on the 1978 overpayment, through credits applied to other tax years. Because the principal of the overpayment had been repaid by 1995, GE contends that there was no longer any "overpayment" to be subject to the lower statutory interest rate as of January...