ITT Corp. v. US

• Decision Date: 23 July 1991
• Docket Number: No. 84 Civ. 5458 (PKL) to 84 Civ. 5461 (PKL).,84 Civ. 5458 (PKL) to 84 Civ. 5461 (PKL).
• Parties: ITT CORPORATION and Affiliated Companies, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

770 F. Supp. 863

ITT CORPORATION and Affiliated Companies, Plaintiffs, v. UNITED STATES of America, Defendant.

Nos. 84 Civ. 5458 (PKL) to 84 Civ. 5461 (PKL).

United States District Court, S.D. New York.

July 23, 1991.

Kronish, Lieb, Weiner & Hellman, New York City, for plaintiffs; Stephen D. Gardner, Robert A. Kagan, Ann-Elizabeth Purintun and Richard F. Irwin, of counsel.

Otto G. Obermaier, U.S. Atty., S.D.N.Y., New York City, for defendant; Nancy G. Milburn, Asst. U.S. Atty., of counsel.

OPINION AND ORDER

LEISURE, District Judge.

These are four nonjury tax refund actions for the tax years 1966 through 1969. The parties have filed stipulations of partial dismissal for each case.¹ Currently before the Court are the parties' cross-motions concerning the construction and enforcement of the stipulations for the tax years 1968 and 1969.

BACKGROUND

Plaintiffs ITT Corporation and its affiliated companies (collectively, "ITT" or "plaintiffs") filed the tax refund actions at issue seeking refunds for income tax paid for the years 1968 and 1969, on the grounds, inter alia, that the government improperly characterized some of ITT's gains for those years as ordinary income rather than long-term capital gains.

In 1967 and 1968, ITT entered into a number of forward currency contracts (the "Contracts") with domestic banks, under which ITT agreed to deliver foreign currency to the banks on given dates in the future. Before the delivery date fell due, ITT sold each of the Contracts to a foreign bank. The gains realized on the sales of those Contracts were reported on ITT's 1968 and 1969 income tax returns as long-term capital gains from a foreign source.

The Internal Revenue Service ("IRS") subsequently audited those returns and re-characterized the gains as ordinary income from a domestic source. The explanation given in the Revenue Agent's Report (RAR), issued on October 11, 1974, was that the foreign banks had acted merely as agents for ITT in the delivery of the currency to the domestic banks, and that therefore the transactions between ITT and the foreign banks were not bona fide sales, and thus were ineligible for capital gain treatment.

Plaintiffs timely filed refund claims on March 24, 1983. Among other claims for refunds not relevant to the instant motions, ITT stated that as to the Contracts,

ITT reported long-term capital gains of $4,618,202. The IRS improperly treated these gains as constituting ordinary income on the alleged ground that ITT had not actually sold the contracts to the foreign banks. Rather, the IRS has taken the erroneous position that the foreign banks were acting merely as ITT's agents in making delivery of the currency to the New York banks as required by the contracts. ITT claims that such treatment is incorrect and that the gains realized by ITT are capital gains, not ordinary income. The decrease in tax for the year 1968 for which refund is claimed is $1,062,186.

Declaration of Nancy G. Milburn, dated February 19, 1991 ("Milburn Dec."), Exhibit A, Schedule II at 3; see also id., Exhibit B, Schedule II at 3 (identical language in refund claim for 1969).

Thus, while ITT clearly raised the issue of the proper treatment of the gains as either capital gains or ordinary income (the "capital gain issue"), it made no explicit reference to a dispute over whether the gains were derived from a foreign or domestic source (the "sourcing issue").

On August 2, 1984, plaintiffs filed the instant actions in this Court. The language of the complaint for the 1968 tax year concerning the Contracts was as follows:

The Commissioner improperly disallowed ITT long-term capital gain treatment under Subchapter P of the Internal Revenue Code ... and improperly treated such gains as constituting ordinary income, thereby resulting in an improper increase in Plaintiffs' tax by $1,168,405 ($1,062,186 plus 10% surcharge).

Milburn Dec. Exhibit A, Complaint ¶ 12; see also id., Exhibit B, Complaint ¶ 12 (language of complaint for 1969 identical in substance). Thus, the complaints in these actions explicitly raised the capital gain, but not the sourcing, issue.

It is undisputed that ITT's calculations of the amount of refund, in both its original refund claims and its complaints, were based solely on the recharacterization of the gains as capital gains, and did not include any refund based on the sourcing issue. However, plaintiffs assert that the figures were merely tentative and preliminary.

After negotiations and the exchange of correspondence between the parties, stipulations of partial settlement were executed for all four cases, including the 1968 and 1969 cases. See JX A-2, JX A-3, JX A-4, JX A-6.² The stipulations incorporate by reference eight letters between counsel for the parties, stating in pertinent part:

It is ... agreed that (1) plaintiff shall be entitled to an overpayment for its taxable year 1968 resulting from the settlement of the forward contracts issue, the terms of which settlement are contained in various correspondence from plaintiff's counsel to the Department of Justice under dates of June 4, 1985, July 17, 1985, February 24, 1987, March 10, 1987 and July 22, 1987, and correspondence from the Department of Justice to plaintiff's counsel under dates of August 28, 1986, May 22, 1987 and July 1, 1987.

JX A-4; see also JX A-6 (identical language for 1969).

One of the chief areas of dispute between the parties is whether the correspondence referred to in the stipulations made a resolution of the sourcing issue one of the terms of settlement.

ITT's counsel's letter dated June 4, 1985, refers to an enclosed draft stipulation prepared by ITT on "the foreign exchange contracts capital gain issue." JX B-1. The letter also refers to two enclosed Actions on Decisions ("AODs") issued by the IRS, which according to ITT "indicate that the Government has, in effect, conceded capital gains on the sale of foreign exchange future contracts." Id. The enclosed draft stipulation recites the dates, places, and terms of each sale of a Contract, and also the following:

ITT treated the ... gain from the 1968 and 1969 sales of the Contracts as long term capital gain from foreign sources in those years. The Commissioner treated such amounts as ordinary income from domestic sources and claimed that "the foreign banks indicated from purchasers, were actually acting as agents for the taxpayer corporation in the delivery of the currency to the New York City banks."

The parties agree that to the extent that the Court determines that the transactions ... were bona fide sale or exchange transactions and not the creation of agency or brokerage relationships for purposes of closing the contracts, then ITT is entitled to the refund claimed with respect to such transactions.

JX B-16—B-17 (emphasis added).

ITT's letter dated July 17, 1985, primarily addresses other issues, but also refers to information provided by ITT in response to the government's requests concerning the Contracts. Plaintiff's counsel states that for each Contract, he is enclosing photocopies of documents showing "both the purchase and sales confirmations," as well as lists of "the place of closing and the names of the ITT officials and of the purchaser's representatives who attended the closing and who executed the sales documents." JX C-3.

The August 28, 1986 letter, from Gerald T. Ford ("Ford"), who at the time was the Assistant United States Attorney assigned to these actions, is perhaps the most crucial of these documents in that it contains the government's statement of the proposed settlement terms. It states:

The terms of the settlement offer are as follows. ITT agrees to concede the allocation of inter-company interest payments issue a separate issue in the 1968 and 1969 refund cases. In return, the Government agrees to concede the foreign currency contract issue. If this comports with your understanding of the settlement proposal, please sign in the space below.

JX D-1. Ford further noted that the settlement offer was subject to approval by the Department of Justice. The signature of counsel for ITT appears in the signature space referred to above.

ITT's letter dated February 24, 1987, is a non-substantive cover letter enclosing information on a number of issues in response to inquiries by the Department of Justice Tax Division. The information enclosed in connection with the Contracts was several pages of the RAR. See JX E-2, E-3—E-4.

ITT's letter dated March 10, 1987, again to the Justice Department, listed the dates, places and purchasers involved in the sale of each Contract. It goes on to explain that

since each sale was a "spot" sale of a forward currency contract, it would have been impossible to have negotiated the terms of the sale prior to the actual closing. (Where the terms of a currency contract sale are negotiated beforehand, the sale is a "forward" sale, not a "spot" sale.) ... While appointments with the prospective purchasers were undoubtedly made in advance, the negotiations and the terms of the contract could not have been prearranged before the actual sales were effected at the then current price.

JX F-2.

The Justice Department Tax Division's letter to ITT dated May 22, 1987, refers to the settlement terms of the August 28, 1986 letter, restates the concession that each side was to make, and advises plaintiffs that "the proposed partial settlement is being referred to the Joint Committee on Taxation." JX G-1.

The Tax Division's letter to ITT dated July 1, 1987, states:

We have been advised by the Joint Committee staff that it finds no reasons to offer any adverse criticism to the proposed partial settlement. Accordingly, your offer has been accepted on behalf of the Attorney General. We previously requested the IRS to prepare a computation of the overpayments under the proposed partial settlement. Upon receipt of the Service's computation, we will forward it to you for examination.

JX H-1. The letter also...