Ies Industries v. U.S.

• Decision Date: 14 November 2003
• Docket Number: No. 02-3106.,02-3106.
• Parties: IES INDUSTRIES, INC., and Subsidiaries, Plaintiff, Alliant Energy Corporation, Successor in Interest to IES Industries, Inc. and Subsidiaries, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

349 F.3d 574

IES INDUSTRIES, INC., and Subsidiaries, Plaintiff Alliant Energy Corporation, Successor in Interest to IES Industries, Inc. and Subsidiaries, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 02-3106.

United States Court of Appeals, Eighth Circuit.

Submitted: June 12, 2003.

Filed: November 14, 2003.

Thomas C. Borders, argued, Chicago, IL (Matthew P. Larvick, Chicago, IL, and Diane Kutzko, Cedar Rapids, IA, on the brief), for appellant.

John A. Dudeck, Jr., argued, U.S. Dept. of Justice, Tax Div., Washington, DC (Richard Farber, U.S. Dept. of Justice, Tax Div., on the brief), for appellee.

Before BOWMAN, MURPHY, and BYE, Circuit Judges.

BOWMAN, Circuit Judge.

IES Industries, Inc., appeals from the judgment of the District Court¹ awarding federal tax refunds to IES, but in an amount far less than IES seeks.² We affirm.

I.

This tax refund case is before us for the second time. In the first appeal, IES challenged the District Court's decision that the Internal Revenue Service (IRS) had properly characterized a series of securities trades in which IES had engaged as sham transactions for tax purposes. We reversed and remanded. IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001). We affirmed on the IRS's cross appeal of the decision to award IES a tax refund related to the assessment of environmental cleanup costs, and that issue is not before us in this second appeal. For the interested reader, the facts regarding the refunds are set out in detail in our first opinion. We will repeat them here only as necessary to explain our decision today.

In 1991 and 1992, IES engaged in the purchase and sale of American Depository Receipts, or ADRs. As a result of the somewhat complicated transactions, IES, among other things, recognized capital losses and sought to offset capital gains earned in 1989 and 1990; claimed a foreign tax credit; and deducted other expenses in connection with the trades. IES also reported gross dividend income of nearly $90.8 million. After an audit, the IRS declared the ADR trades to be sham transactions, without economic substance. The IRS disallowed the capital losses and capital-loss carrybacks, as well as the foreign tax credit. Moreover, the IRS eliminated the reported foreign dividends from IES's income, just as it "disallowed all [other] results of [IES's] ADR trades." Brief of Appellee at 19. IES paid the taxes and filed a refund suit in the District Court. That court agreed with the IRS's conclusion that the ADR trades were sham transactions. On appeal, we determined that the ADR trades did not lack business purpose or economic substance, that is, that they were not shams, and remanded "for further action consistent with" our opinion. IES Indus., Inc., 253 F.3d at 356.

After remand, on December 14, 2001, IES and the IRS filed a joint report concerning the final judgment. They agreed that IES should have judgment (1) for a refund of $26,033.00 plus interest for tax year 1989 and (2) for a refund of $25,976,839.00 plus interest for tax year 1990. The parties were unable to agree to judgment for tax year 1992. On January 15, 2002, the IRS filed a motion to amend its answer to conform to the evidence, which IES opposed. The IRS believed it should be able to add to its answer the affirmative defenses of offset and equitable recoupment, to set off refunds owed to IES for tax years 1989, 1990, and 1992 because IES owed additional taxes for 1991 and 1992 for the foreign (ADR) dividends paid to the company in those years. The IRS asserted that it was entitled to those equitable defenses notwithstanding that the applicable statute of limitations would preclude the IRS from assessing and collecting any taxes for years 1991 and 1992.

The District Court granted the IRS's motion to amend, allowed the defenses, and entered judgment for IES in an amount almost $13.9 million less than the amount of IES's overpayment plus interest. Specifically, the court held that the IRS could "properly seek an offset of the $4,615,405 1992 refund based upon the inclusion of the previously removed $46.1 million of 1992 dividend income," completely eliminating the claimed refund for that year. Order of July 22, 2002, at 4. The court also ordered that the IRS "shall be permitted to equitably recoup the 1991 and 1992 tax underpayments from the 1989 and 1990 tax overpayments resulting from reversing the IRS adjustments in this matter." Id. at 6. IES appeals.

II.

For its first issue on appeal, IES claims that the District Court's decision is contrary to the mandate of this Court. We disagree. Nowhere in our opinion did we address the issues of offset and equitable recoupment as they may relate to taxes owed on IES's foreign dividend income. We said nothing at all about equitable recoupment, and our only comment on offset was in a footnote, where we noted the IRS's argument that it mistakenly allowed "IES to claim deductions for interest, commissions, and one-half of the foreign income tax withheld [relating to the ADR trades], and sought an offset against any overpayment of taxes by IES (that is, refunds due IES)." IES Indus., Inc., 253 F.3d at 353 n. 3. We said our holding — that the ADR trades had economic substance for tax purposes — resolved the offset issue, but we did not address offset or equitable recoupment in connection with the ADR dividends that the IRS eliminated from income when it audited IES's 1991 and 1992 tax returns, declared the ADR trades to be shams, and redetermined IES's tax liability for those years.

We did acknowledge the foreign dividends that resulted from the ADR trades in our opinion, but specifically to note that those dividends were income, that is, taxable, to IES.³ See, e.g., id. at 352 ("IES retained the dividends, which were ordinary income to the company...."), 354 ("[T]he entire amount of the ADR dividends was income to IES ...."). The ultimate taxability of the dividends specifically, after we resolved the tax status of the ADR trades generally, was not on the Court's radar screen because it was not a question that needed to be answered in order to decide the appeal. We remanded "for further proceedings," never indicating, as IES suggests, how or in what amount judgment should be granted for IES on the ADR trades. Id. at 359. We did not remand for entry of judgment in the amount IES sought to have refunded, and so the issue was not, as IES contends, "settled on appeal." Reply Brief of Appellant at 7. There is no law of the case set out in our first opinion regarding the actual amount of the judgment to be entered on remand.

We reject IES's attempt to read between the lines of our opinion so as to interpret what we said to the company's advantage. The text of the opinion makes clear what we subjectively know: this Court did not intend to decide, and we did not decide, any question relating to any taxes IES may owe on the foreign dividends that the IRS originally excluded. We hold that the District Court's decisions to allow the amendment sought by the IRS and to allow the defenses were not in violation of our mandate.

III.

We next consider IES's argument that the District Court abused its discretion when it granted the IRS's motion made under Federal Rule of Civil Procedure 15 to amend its answer. See Clark v. Martinez, 295 F.3d 809, 815 (8th Cir.2002) (standard of review). Under Rule 15(b), an issue not raised in the pleadings, but tried by express or implied consent of the parties, "shall be treated" as having been raised in the pleadings. Fed.R.Civ.P. 15(b) (emphasis added). Thus, "[s]uch amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment." Id. (emphasis added).

A.

According to IES, the District Court erred on remand in granting the motion to amend because the IRS had expressly waived its right to assert the affirmative defenses of offset and equitable recoupment by the time the government sought to amend its answer. IES did not mention this "express waiver" theory in its opposition to the government's motion to amend, which is probably why the District Court does not refer to it in its order granting the motion. Nevertheless, we will assume (without deciding) that IES's contention that the IRS's failure to assert its offset and recoupment defenses earlier put the District Court on notice of a waiver issue, that the District Court considered waiver when granting the motion, and that the issue is therefore properly before this Court on appeal.

The first waiver, according to IES, is found in a footnote in the government's memorandum in support of its partial summary judgment motion filed in the District Court before the first appeal. In that note, the IRS stated that the return of the ADR dividends to IES's income for tax years 1991 and 1992, should IES be entitled to its claimed capital-loss carrybacks, was not an issue on summary judgment. That was true. It would be a distortion of the IRS's position to read that one sentence in a footnote in its summary judgment memorandum to constitute a knowing and intelligent relinquishment of its right to raise the defenses of offset and equitable recoupment at some point later in the litigation, when the dividend income might become an issue. The government did raise the defenses, by seeking to amend its answer, when those defenses became an issue in the case after it lost on appeal. Cf. Buder v. United States, 7 F.3d 1382, 1386 (8th Cir.1993) (holding that offset defense was waived when it was not raised until ten days before the trial date, and "the Government never pleaded or amended its complaint to include the setoff defense").

The other proof of waiver to which IES points presents a closer call. As we explained above, in the joint report filed with the District Court six months after our opinion was issued and one month before the IRS...