Maxus Energy Corp. and Subsidiaries v. U.S., 93-5005
| Decision Date | 29 July 1994 |
| Docket Number | No. 93-5005,93-5005 |
| Citation | 31 F.3d 1135 |
| Parties | -5385, 94-2 USTC P 50,393, 29 Fed.R.Serv.3d 1507 MAXUS ENERGY CORPORATION AND SUBSIDIARIES, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Federal Circuit |
Thornton Hardie, III, Thompson & Knight, Dallas, TX, argued, for plaintiff-appellant.
Charles Bricken, Dept. of Justice, Washington, DC, argued, for defendant-appellee. With him on the brief were James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen and Richard Farber.
Before COWEN, Senior Circuit Judge, and, MAYER and PLAGER, Circuit Judges.
This is a tax case. The Internal Revenue Service (IRS) determined that deductions, taken in 1984 and 1985 by a manufacturer of the Agent Orange chemical defoliant based on a settlement of claims brought by Vietnam veterans for injuries allegedly arising from exposure to Agent Orange, were improper. Maxus Energy Corporation (Maxus) and subsidiaries sought relief in the Court of Federal Claims. 1 That court, after granting partial summary judgment, then dismissed pursuant to a joint stipulation of the parties the complaint seeking a refund of taxes paid in the 1974 and 1975 taxable years based on a carry back of the 1984 and 1985 deductions. Slip op., No. 4-89 T (Ct.Fed.Cl. Sept. 3, 1992). We vacate and remand for further proceedings consistent with this opinion.
The events that led to this appeal are somewhat convoluted, and require that they be given in considerable detail in order to make the issues understandable. Maxus and its subsidiaries (the Group) are an affiliated group of corporations which files its tax returns on a consolidated basis. Diamond Shamrock Chemicals Corporation (Diamond) is a member of the Group. During the Vietnam The Group reports its income and expenses using the accrual method of accounting. In 1984 and 1985, respectively, the Group reported deductions of $23,254,217 and $85,200. These amounts reflected expenses which had allegedly accrued to Diamond in 1984 and 1985 through an agreement it had entered into in 1984. In that agreement, Diamond settled class action claims brought against it and other class action defendants in 1979 by Vietnam veterans alleging injuries arising from exposure to Agent Orange. 2 Pursuant to that settlement agreement, Diamond agreed to contribute $21,667,347 (out of a total of $180,000,000) to a court administered settlement fund established by Judge Weinstein of the United States District Court of the Eastern District of New York. In re Agent Orange Product Liability Litigation, 597 F.Supp. 740 (E.D.N.Y.1984), aff'd, 818 F.2d 145 (2d Cir.1987), cert. denied sub nom. Pinkey v. Dow Chemical Co., 484 U.S. 1004, 108 S.Ct. 695, 98 L.Ed.2d 648 (1988). Pursuant to court order, Diamond was not required to immediately transfer the prescribed amount. Instead, it was allowed to transfer the prescribed amount plus accrued interest within 10 days of the date the court approved the settlement agreement. 3 However, Diamond was required to transfer, by July 2, 1984, a letter of credit, bond, or other acceptable instrument sufficient to secure its payment of the prescribed amount.
War era, Diamond was a manufacturer of the Agent Orange chemical defoliant.
To fulfill its obligation of securing the prescribed payment, Diamond executed on July 2, 1984 with Mellon Bank (Mellon) an irrevocable standby letter of credit in favor of the clerk of the court, the designated custodian of the settlement fund. The amount secured by the letter was $22,807,372, and the expiration date of the letter was September 14, 1984. In that letter, Mellon undertook to meet Diamond's obligations with respect to the settlement fund in the event of Diamond's default. In addition, the letter obligated Diamond to repay Mellon any amount Mellon expended pursuant to the letter. To secure Diamond's repayment obligations, the letter provided Mellon with a security interest in, a lien on, and a right of set-off against Diamond's deposit accounts with Mellon. The amount secured by the letter was subsequently increased to $23,630,800 during 1984 to reflect the accrual of interest. In addition, the expiration date was extended to January 15, 1985.
The settlement agreement provided that any class action defendant, who in its discretion believed that the number of plaintiffs who had opted out of the class was substantial, could withdraw from the agreement no later than 20 days before the date of the first public hearing scheduled for the purpose of certifying the class pursuant to Fed.R.Civ.P. 23. On June 11, 1984, the court scheduled such a hearing for August 8, 1984. Thus, the deadline for a defendant to withdraw from the agreement became July 19, 1984.
On January 7, 1985, the court issued an order approving the settlement agreement. Consequently, Diamond's payment obligation to the fund became due within 10 days of this date. In satisfaction of this obligation, Diamond, on January 14, 1985, paid $23,339,417 to the fund. The increase relative to the original $21,667,347 figure reflected the interest that had accrued since the date of the settlement agreement. The $23,254,217 deduction taken in 1984 represented that portion of the total of $23,339,417 which allegedly accrued in 1984; the $85,200 deduction taken in 1985 represented the residual portion of the total which allegedly accrued in 1985.
On June 2, 1987, the Group filed with the IRS refund claims for the 1972-1975 taxable years. The claims for the 1974 and 1975 years were based in part on carrying back, pursuant to I.R.C. Secs. 172(b)(1)(I)-(j) (1988), the $23,254,217 and $85,200 deductions the In the action that gave rise to this appeal, the Group, on January 4, 1989, filed suit in the Court of Federal Claims against the United States asserting its refund claims for the 1972-1975 taxable years. On October 2, 1990, the parties filed with the court a set of stipulated facts. One such stipulated fact which is at issue in this appeal is the stipulation that the letter of credit issued by Mellon was "collateralized."
Group had reported in 1984 and 1985. 4 On October 26, 1988, and April 14, 1989, respectively, the IRS denied the refund claims.
On February 21, 1991, the government filed a motion for partial summary judgment seeking a ruling that the Group was not entitled as a matter of law to the portions of the 1974 and 1975 refund claims which arose from the $23,254,217 and $85,200 deductions taken in 1984 and 1985 respectively. On July 11, 1991, the court issued an opinion granting the government's motion.
In its opinion, the court first analyzed whether the deductions were proper on the basis of the execution on July 2, 1984 of the letter of credit. At that time, under applicable law, an accrual basis taxpayer was allowed to deduct expenses incurred in satisfaction of a contested liability provided (1) the taxpayer transferred money or property in satisfaction of the contested liability, (2) the transfer was beyond the control of the taxpayer, and (3) but for the fact that the liability was contested, the liability of the taxpayer was fixed. The court concluded that the execution of the letter of credit did not meet these requirements for two reasons. First, according to the court, the letter of credit was not, contrary to the parties' stipulation, fully collateralized; thus, any purported "transfer" arising from that event was not beyond the control of Diamond. Second, but for the fact the liability was contested, Diamond's liability was not fixed on July 2nd because it had until July 19, 1984 to withdraw from the settlement agreement.
The court next analyzed whether the extinguishment on July 19, 1984 of Diamond's option to withdraw from the settlement agreement provided the necessary basis for the deductions. The court concluded it did not because by that date, the applicable law had changed. As the trial court saw it, under the law then in effect, an accrual basis taxpayer could not deduct an expense in relation to a contested tort liability prior to the date when disbursement was made to the individual tort claimants unless payment was made to a "designated" settlement fund. Since the fund in question is not a "designated" fund 5, and since the individual claimants of that fund were not paid by the date in question, the extinguishment of Diamond's option to withdraw from the settlement agreement likewise did not support the deductions.
The parties then reached a settlement on the remaining issues in the case. Specifically, the government granted the portion of the Group's 1974-1975 refund claims that were based on deductions other than those at issue in this appeal, and it granted in their entirety the Group's 1972-1973 refund claims. Accordingly, the parties, on June 30, 1992, filed with the trial court a stipulation dismissing with prejudice all the remaining claims in the Group's complaint except one: The Group's claims were dismissed without prejudice "as to any adjustments to carrybacks from other taxable years." According to undisputed evidence submitted by the Group's counsel of record, the exception was included at the government's insistence to protect it in the event it was later determined that the net operating loss carrybacks which formed the basis of the refunds it had granted had been erroneously computed. In that event, the government wanted to be able to recover the refunds from the Group.
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