Halliburton Co. v. C.I.R.

• Decision Date: 04 November 1991
• Docket Number: No. 90-4739,90-4739
• Citation: 946 F.2d 395
• Parties: -5798, 91-2 USTC P 50,569 HALLIBURTON COMPANY, Plaintiff-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 395

946 F.2d 395

68 A.F.T.R.2d 91-5798, 91-2 USTC P 50,569

HALLIBURTON COMPANY, Plaintiff-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellant.

No. 90-4739.

United States Court of Appeals Fifth Circuit.

Nov. 4, 1991.

Charles Bricken, Gary R. Allen, Chief, Appellate Sec., Shirley D. Peterson, Richard Farber, Asst. Attys. Gen., Dept. of Justice, Tax Div., Washington, D.C., for petitioner-appellant.

David T. Harvin, Vinson & Elkins, Houston, Tex., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before POLITZ and HIGGINBOTHAM, Circuit Judges and KAZEN, ^* District Judge.

KAZEN, District Judge:

OPINION

The Commissioner of Internal Revenue ("Commissioner") appeals from an adverse judgment by the Tax Court. Halliburton Co. v. Commissioner, 93 T.C. 758 (1989). The Commissioner raises two issues on appeal: (1) whether the Tax Court erroneously shifted the burden of proof from the taxpayer Halliburton Company ("Halliburton") to Commissioner, and (2) whether the Tax Court's conclusion that Halliburton had no reasonable prospect of recovering its expropriation loss as of the end of 1979 was clearly erroneous. Finding no reversible error, we affirm.

BACKGROUND

There is little, if any, dispute regarding the facts. Halliburton is an oilfield service company. In 1976 it invested $955,000.00 to purchase 25% of the stock of an Iranian barite mining venture which became known as "Doreen/IMCO." From 1977 through early 1979, Halliburton loaned Doreen/IMCO an additional $6,952,875.

In late 1978, Ayatollah Ruhollah Khomeini led an Islamic revolution in Iran, ousting Shah Mohammad Reza Pahlavi from power. As a result, many foreign interests in Iran were expropriated. Doreen/IMCO's facilities were expropriated in May 1979.

On November 4, 1979, Iranian militants seized hostages at the American embassy in Tehran. Ten days later, President Carter froze approximately $12 billion of Iranian assets in United States banks and their foreign branches. Many American businesses with claims against Iran subsequently filed lawsuits in United States courts and obtained pre-judgment attachments against approximately $2 billion of the frozen assets.

Halliburton did not follow this course, however, because no legal forum existed in any country in which it could have successfully pursued an expropriation claim against Iran. The Foreign Sovereign Immunities Act of 1976 and the "act of state" doctrine rendered Iran immune from any suit by Halliburton in the United States based on expropriation. See generally 28 U.S.C. §§ 1602-1611 (1982); Treaty of Amity, Economic Relations, and Consular Rights, June 16, 1957, U.S.-Iran, art. IV, para. 2, art. XI, para. 4, 8 U.S.T. 899; Callejo v. Bancomer, S.A., 764 F.2d 1101 (5th Cir.1985) (discussing act of state doctrine and sovereign immunity). The parties agree that Halliburton could not realistically have pursued its claim in Iranian courts because of the hostilities between the United States and Iran.

By the end of 1979, Halliburton concluded that it had lost its investment in Doreen/IMCO. On its 1979 federal income tax return it deducted a long-term capital loss of $955,000 for its expropriated stock, and claimed an ordinary bad debt deduction of $6,913,116 for its expropriated loans, pursuant to section 165(a) of the Internal Revenue Code of 1954. ¹

On January 19, 1981, after months of fruitless negotiation, the United States and Iran reached a series of agreements known as the "Algiers Accords." The Accords, inter alia, provided for release of the hostages and created the Iran-United States Claims Tribunal for the purpose of hearing claims of American citizens against Iran. Iran took control of the frozen assets, from which approximately $5 billion were used to repay loans from United States banks. Approximately $1 billion were used to establish a security fund in order to pay awards of the Claims Tribunal.

On November 16, 1981, Halliburton filed a claim in the Claims Tribunal seeking to recover approximately $10 million in connection with its Doreen/IMCO losses. In 1984 Halliburton was awarded $2,955,000 in settlement of its claims. After deducting expenses incurred during the settlement, Halliburton reported this award on its 1984 federal income tax return.

Commissioner disallowed Halliburton's 1979 deduction of its Doreen/IMCO losses, asserting that Halliburton had a claim for reimbursement with respect to which there was a reasonable prospect of recovery as of the end of 1979, and therefore section 1.165-1(d)(2)(i) of the Treasury Regulations on Income Tax ² barred deduction. Halliburton filed suit, asserting that its expropriation losses were properly deductible in 1979.

The Tax Court found that even if Halliburton had a "claim for reimbursement" at the end of 1979, ³ it had no reasonable prospect of recovering on that claim and thus deduction in 1979 was proper. 93 T.C. at 781.

ANALYSIS

I. The Burden of Proof

The taxpayer bears the burden of establishing that it had no reasonable prospect of recovery within the meaning of section 1.165-1(d)(2)(i). Boehm v. Commissioner, 326 U.S. 287, 293-94, 66 S.Ct. 120, 124, 90 L.Ed. 78 (1945) (citing Burnet v. Houston, 283 U.S. 223, 51 S.Ct. 413, 75 L.Ed. 991 (1931)); Korn v. Commissioner, 73,258 T.C.M. (P-H) 1173, 1176 (1973), aff'd, 524 F.2d 888, 890 (9th Cir.1975); George M. Still, Inc. v. Commissioner, 19 T.C. 1072, 1076 (1953). The Commissioner argues that despite the Tax Court's explicit acknowledgement that the burden of proof was on Halliburton and its ultimate finding that Halliburton met this burden, the Tax Court in fact imposed on the Commissioner the burden of negating any scenario in which Halliburton would have no means to recover its loss. In other words, the Commissioner contends that the Tax Court actually required him to prove that Halliburton had a reasonable prospect of recovering its loss, rather than requiring Halliburton to prove that it had no such prospect.

Whether the Tax Court applied the proper legal standard in making its findings of fact is subject to review de novo. Jacobson v. Commissioner, 915 F.2d 832, 837 (2d Cir.1990) (citing Sochin v. Commissioner, 843 F.2d 351, 353 (9th Cir.), cert. denied, 488 U.S. 824, 109 S.Ct. 72, 102 L.Ed.2d 49 (1988)); Bailey v. Commissioner, 912 F.2d 44, 47 (2d Cir.1990); American Realty Trust v. United States, 498 F.2d 1194, 1198 (4th Cir.1974). We conclude that the Tax Court did not shift the burden of proof from Halliburton to the Commissioner.

The Tax Court opinion expressly recited that Halliburton had the burden of proof. The Commissioner selects several sentences from a thirty-seven page opinion as proof of erroneous burden-shifting. These sentences generally contained statements by the Tax Court rejecting various arguments by the Commissioner on the pivotal issue of whether Halliburton had a reasonable prospect of recovering its loss in 1979. The Tax Court explained that while certain scenarios presented some prospect of recovery, they did not present a reasonable prospect of recovery. The ultimate finding was that Halliburton "has carried its burden of proof that it suffered losses deductible in 1979...." 93 T.C. at 781. The Tax Court's lengthy opinion must be read in its entirety and not in "artificial isolation." See, e.g., United States v. Price, 877 F.2d 334, 338 (5th Cir.1989) (regarding jury instructions).

II. Tax Court's Findings of Fact

Whether Halliburton had a reasonable prospect of recovering its expropriation losses is a question of fact. 26 C.F.R. § 1.165-1(d)(2)(i); see Boehm, 326 U.S. at 294, 66 S.Ct. at 124 (whether corporate stock became worthless during particular year is "purely" question of fact); Colish v. Commissioner, 48 T.C. 711, 715 (1967) (appropriate time for deduction under section 165 is question of fact to be determined from surrounding circumstances); accord Korn, 524 F.2d at 890. The findings of the Tax Court may not be disturbed unless they are clearly erroneous. Fed.R.Civ.P. 52(a); Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1200, 4 L.Ed.2d 1218 (1960); Korn, 524 F.2d at 890 (citing National Brass Works, Inc. v. Commissioner, 205 F.2d 104, 107 (9th Cir.1953)); Estate of Fuchs v. Commissioner, 413 F.2d 503, 507 (2d Cir.1969). As the Duberstein court explained:

"A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 [(1948) ]. The rule itself applies also to factual inferences from undisputed basic facts.... And Congress has in the most explicit terms attached the identical weight to the findings of the Tax Court.

Duberstein, 363 U.S. at 291, 80 S.Ct. at 1200 (citations omitted); accord Boehm, 326 U.S. at 293, 66 S.Ct. at 124; Reeves v. B & S Welding, Inc., 897 F.2d 178, 180 (5th Cir.1990); Lewis v. Timco, Inc., 736 F.2d 163, 166 n. 2 (5th Cir.1984) (citing Pullman-Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982)).

The clearly erroneous standard of review is a deferential one. " 'If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.' " Amadeo v. Zant, 486 U.S. 214, 226, 108 S.Ct. 1771, 1779, 100 L.Ed.2d 249 (1988) (quoting Anderson v. Bessemer City, 470 U.S. 564, 574, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985)); accord Houston Oil & Minerals Corp. v. American International Tool Co., 827 F.2d 1049, 1055 (5th Cir.1987).

Under the plain language of section 1.165-1(d)(2)(i), the proper evaluation of whether Halliburton had a reasonable prospect of recovering its losses as of the end of 1979 is the ...