Heublein, Inc. v. U.S., 698

Decision Date29 June 1993
Docket NumberD,No. 698,698
Parties-5324, 93-2 USTC P 50,397 HEUBLEIN, INC. and Subsidiaries, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. ocket 92-6096.
CourtU.S. Court of Appeals — Second Circuit

Shelley Cashion, Houston, TX (Chamberlain, Hrdlicka, White, Williams & Martin, of counsel), for plaintiff-appellant.

Sally J. Schornstheimer, Atty., Tax Div., Dept. of Justice, Washington, DC (James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen, Jonathan S. Cohen, Attys., Tax Div., Dept. of Justice, Washington, DC, Albert S. Dabrowski, U.S. Atty. D. Connecticut, New Haven, Conn., of counsel), for defendant-appellee.

Before: PIERCE, ALTIMARI and WALKER, Circuit Judges.

PIERCE, Senior Circuit Judge:

In this appeal we are asked to interpret a phrase in a tax provision in the Internal Revenue Code ("I.R.C.") that was never explicitly defined by Congress and has since been repealed. The issue arises in an appeal by Heublein, Incorporated and its subsidiary corporations (collectively, "Heublein") from a judgment of the United States District Court for the District of Connecticut (Alan H. Nevas, Judge), which granted the United States' cross-motion for summary judgment and denied Heublein's motion for summary judgment. For the reasons set forth below, the action of the district court is affirmed in part, reversed in part, and the case is remanded for further proceedings.

BACKGROUND

Most of the essential facts of this case are not disputed and the following is largely drawn from a stipulation of facts filed by the parties in the district court. Heublein, Incorporated is a corporation formed under the laws of the State of Connecticut, with its principal place of business in Connecticut. It is the parent of a consolidated group of corporations. During the period involved in this litigation--July 1, 1980 through October 12, 1982--Heublein, Incorporated owned all of the issued and outstanding capital stock of Kentucky Fried Chicken Corporation, which, in turn, owned all of the issued and outstanding stock of KFC National Management Company, Kentucky Fried Chicken of Louisville, and Kentucky Fried Chicken of Florida. On October 12, 1982, all of the issued and Heublein, for its fiscal periods ending June 30, 1981, June 30, 1982 and October 12, 1982, filed federal corporate income tax returns. Those returns reported Heublein's consolidated total income, consolidated total deductions, consolidated taxable income and consolidated federal income tax liabilities, along with other information required by law. For the fiscal year ending June 30, 1981, Heublein paid $49,080,624 in federal tax liabilities; for the fiscal year ending June 30, 1982, it paid $45,802,689 in federal tax liabilities; and for the fiscal period ending October 12, 1982, Heublein paid $12,218,674 in federal tax liabilities.

outstanding capital stock of Heublein, Incorporated was acquired by another company.

Heublein and the Internal Revenue Service ("IRS") subsequently entered into written agreements, extending the statute of limitations period for assessing deficiencies and claiming refunds for the tax returns covering Heublein's fiscal periods ending June 30, 1981, June 30, 1982 and October 12, 1982. Within the time period provided in the written agreements, by letters dated March 11, 1987, Heublein submitted to the IRS claims for refunds of taxes paid during these fiscal periods. In the letters, Heublein asserted that it was entitled to a refund for excess corporate income tax erroneously paid due to its failure to take a credit for qualified wages paid to employees, who were eligible for the Work Incentive Program ("WIN"), as prescribed by §§ 40, 50A and 50B of the I.R.C. of 1954, infra, in effect during the applicable fiscal periods. Both parties stipulated that each of the listed employees had worked twenty or more hours per week.

For the pertinent periods in question, § 40 of the I.R.C. permitted a taxpayer to claim, as a credit against taxes, the expenses incurred for the WIN program. See 26 U.S.C. § 40 (1982) (repealed 1984). Section 50A outlined how to determine the amount of credit allowable under § 40 for the taxable year as: (A) fifty percent of the first-year WIN expenses, and (B) twenty-five percent of the second-year WIN expenses. See 26 U.S.C. § 50A(a)(1) (1982) (repealed 1984). Section 50B contained the definitions for the WIN program. Subsections (a) and (h) of § 50B provided, in pertinent part:

(a) Work incentive program expenses

For purpose of this subpart--

(1) In general

The term "work incentive program expenses" means the amount of wages paid or incurred by the taxpayer for services rendered by eligible employees.

....

(4) Limitation on amount of work incentive program expenses

The amount of the work incentive program expenses taken into account with respect to any eligible employee for any one-year period described [as first-year and second-year WIN expenses] (as the case may be) shall not exceed $6,000.

....

(h) Eligible employee

(1) Eligible employee

For purposes of this subpart the term "eligible employee" means an individual--

(A) who has been certified by the Secretary of Labor or by the appropriate agency of State or local government as--

(i) being eligible for financial assistance under part A of title IV of the Social Security Act and as having continually received such financial assistance during the 90-day period which immediately precedes the date on which such individual is hired by the employer, or

(ii) having been placed in employment under a work incentive program established under section 432(b)(1) of the Social Security Act,

(B) who has been employed by the taxpayer for a period in excess of 30 consecutive days on a substantially full-time basis ...,

(C) who has not displaced any other individual from employment by the taxpayer, and

(D) who is not a migrant worker.

The term "eligible employee" includes an employee of the taxpayer whose services are not performed in connection with a trade or business of the taxpayer.

(2) Migrant worker

For purposes of paragraph (1), the term "migrant worker" means an individual who is employed for services for which the customary period of employment by one employer is less than 30 days if the nature of such services requires that such individual travel from place to place over a short period of time.

26 U.S.C. § 50B (1982) (repealed 1984).

On August 4, 1989, Heublein filed this tax refund suit in the District of Connecticut, seeking recovery for an overpayment of income taxes for the taxable periods ended June 30, 1981, June 30, 1982 and October 12, 1982. According to the complaint, the IRS "refused and continues to refuse to refund the income taxes claimed by" Heublein. In the Spring of 1990, Heublein filed amended tax refund claims with the IRS for the same taxable periods covered by this suit.

A pre-trial conference was held before the district judge on October 5, 1990. Heublein thereafter filed an amended complaint in the district court, and attached to that complaint were exhibits listing the names and social security numbers of Kentucky Fried Chicken employees for the pertinent periods. According to the amended complaint and attached exhibits, each of the listed employees was an eligible employee within the meaning of the WIN program in effect during 1980, 1981 and 1982. In the stipulated facts, the parties claimed that each of the listed employees had worked twenty or more hours per week. In the amended complaint, Heublein sought refunds of $511,941.58 for its taxable year that ended June 30, 1981; $705,222.45 for its taxable year that ended June 30, 1982; and $199,300.53 for its taxable period that ended October 12, 1982.

The parties engaged in some discovery, and stipulated to certain facts. On February 15, 1991, Heublein moved for summary judgment on the question of whether employment on a "substantially full-time" basis, as that phrase was used in 26 U.S.C. § 50B(h)(1)(B) (1982), meant employment at 19.6 hours per week (seventy-five percent of 26.2 hours per week, supposedly full-time weekly employment in the restaurant industry), or, as the United States contended, whether the phrase meant employment at thirty or more hours per week (seventy-five percent of forty hours per week). In its motion for summary judgment, Heublein conceded that it was not entitled to a tax credit under the WIN program for wages paid from July 1 though October 12, 1982, because it did not obtain the requisite certifications before hiring the employees involved; consequently, it only sought a refund under the WIN program for its tax years ending June 30, 1981 and June 30, 1982.

In its memorandum of law in support of its summary judgment motion, Heublein argued "that as a matter of law in this case, the language 'substantially full-time basis' used in the enabling statute means substantially full time in the restaurant industry, and that under the undisputed facts, substantially full time in the restaurant industry means 20 hours or more per week." On the same day, the United States filed a cross-motion for summary judgment, contending "that an individual must be employed for at least 30 hours a week to be considered 'employed * * * on a substantially full-time basis' in order for the employer to obtain a WIN tax credit with respect to that employee." In its cross-motion, the United States acknowledged that it had stipulated that all of the employees for which Heublein sought a WIN tax credit had worked at least twenty hours a week. In its summary judgment motion, Heublein moved, in the alternative, for the entry of partial summary judgment. Heublein asserted:

if the Court should reject Plaintiffs' contention that a full time work week in this case means "full-time basis" in the restaurant industry, and adopts a position between [Heublein's] and the Government['s], then [Heuble...

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