Morton-Norwich Products v. United States

• Decision Date: 18 July 1979
• Docket Number: No. 83-77.,83-77.
• Citation: 602 F.2d 270
• Parties: MORTON-NORWICH PRODUCTS, INC., a corporation v. The UNITED STATES.
• Court: U.S. Claims Court

602 F.2d 270

MORTON-NORWICH PRODUCTS, INC., a corporation v. The UNITED STATES.

No. 83-77.

United States Court of Claims.

July 18, 1979.

Frank A. Wollaeger, Chicago, Ill., attorney of record, for plaintiff; Morgan J. Ordman, Frank R. Krok, McBride, Baker, Wienke & Schlosser, Chicago, Ill., of counsel.

D. Patrick Mullarkey, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant; Theodore D. Peyser, Jr., Washington, D.C., of counsel.

Before NICHOLS, KUNZIG, and BENNETT, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

BENNETT, Judge:

Plaintiff, Morton-Norwich Products, Inc., seeks refunds for overpayments of federal income taxes and interest for tax years 1965 through 1973. The case, which presents various claims for refund, is before the court on cross-motions for summary judgment.

In Counts II and VI of the petition, taxpayer claims refunds for a loss deductible under I.R.C. § 165(a). This loss involved research and development expenditures (R&D) incurred in an attempt to discover uses and methods of recovery of geothermal deposits (plaintiff having had a substantial leasehold interest in a geothermal deposit), which R&D costs plaintiff had elected to capitalize pursuant to I.R.C. § 174, and claimed to have been abandoned in 1970 (Count II) or, in the alternative, 1973 (Count VI). Counts IV (for the tax year ending June 30, 1971) and V (for the years ending June 30, 1972, and June 30, 1973) examine whether, if plaintiff prevails on Count II, it may, under section 162(a), deduct certain expenses subsequently incurred as ordinary and necessary business expenses related to the underlying leasehold plaintiff retained. Per stipulation, the parties agreed that the bad debt claim stated in Count III was erroneous and properly disallowed. The amount of such losses ($38,108) is added, by stipulation, to plaintiff's deferred R&D costs, and thus to plaintiff's claim for an abandonment loss under Count II or VI.

We determine that the issues involved in these counts cannot be decided on summary judgment as, despite the existence of stipulations and agreements as to some of the facts, there are still issues of fact to be resolved. Therefore, we remand that portion of the petition to the trial division.

The issue posed for resolution in Count I of the petition is whether interest on a deficit in income tax for the taxable years at issue resulting from the allocation, pursuant to I.R.C. § 482,¹ of gross income and deductions between plaintiff and its affiliated corporation on account of non-arm's-length, interest-free loans is properly calculated from the time the original income tax returns for those years were due, or from the time that notice and demand for payment were made. This presents an important issue of first impression which is appropriate for summary judgment. For the following reasons, we hold that interest on income tax resulting from a section 482 allocation is properly assessable from the time the original return was due and grant judgment accordingly for defendant.

Morton-Norwich is the parent of an affiliated group of corporations. During the years 1965 through 1973 it made loans to its wholly owned foreign subsidiaries. No interest was charged on these loans. During those periods taxpayer had borrowed funds from third parties and claimed deductions for interest paid on those funds. The Commissioner determined that taxpayer had underpaid its tax for those years to the extent it had not reported interest at the rate of 5 percent on the loans it tendered.² Correlative adjustments were made with respect to the taxes of the subsidiaries which had received the loans.³

The taxpayer originally filed a petition in the Tax Court challenging the IRS's determination of liability for some of the years involved. A settlement was reached and embodied in a stipulation in the Tax Court. Also, the taxpayer and Commissioner agreed upon the amount of adjustment for the years after the Tax Court action. Neither the agreement nor the stipulation waived taxpayer's right to file claims for refund or credit based on the contention that some or all of the interest on the deficiencies was not properly due the IRS. Taxpayer paid the assessments agreed upon, plus interest from the date that the tax returns for the involved periods were due to the date of payment. Plaintiff seeks a refund of the amount of interest charged from the date that the original tax was due to the date of the Service's notice and demand for payment of the deficiency.

I

The general rule for interest is that it runs from the "last date prescribed for payment," to the date paid. I.R.C. § 6601(a). When a return of tax is required, section 6151, entitled "Time and place for paying tax shown on returns," requires a taxpayer to pay the tax at the time and place fixed for filing the return. If the date for payment is not prescribed, the last date for payment is deemed to be the date the liability arises, in no event later than notice and demand therefor. I.R.C. § 6601(b)(4). One exception to the general rule is that interest only runs on an assessable penalty, additional amount, or addition to the tax from the date of notice and demand. I.R.C. § 6601(e)(3).

Our problem is how to treat within this framework the underpayment of income tax for a taxable year resulting from a section 482 allocation. Plaintiff's argument that the general rule does not apply depends upon the application to this case of the doctrine enunciated with respect to the accumulated earnings tax, I.R.C. § 531,⁴ set forth in the opinion of this court in Motor Fuel Carriers, Inc. v. United States, 420 F.2d 702, 190 Ct.Cl. 385 (1970).

In Motor Fuel Carriers, this court held that interest did not begin to run on the assessment of the accumulated earnings tax until notice and demand were made. The court supported its conclusion on alternative grounds: (1) the accumulated earnings tax was an "assessable penalty, additional amount, or addition to the tax" within the meaning of section 6601(f)(3) now I.R.C. § 6601(e)(3);⁵ and (2) if the general rule of section 6601(a) did apply, the last date prescribed for payment was the date of notice and demand pursuant to section 6155. Other courts have reached the same result with respect to the accumulated earnings tax. Bardahl Mfg. Corp. v. United States, 452 F.2d 604 (9th Cir. 1971) (section 531 tax an addition to the tax or penalty (§ 6601 (e)(3))); Ray E. Loper Lumber Co. v. United States, 444 F.2d 301 (6th Cir. 1971) (last date for payment of accumulated earnings tax not prescribed (§ 6601(b)(4))).

The court in Motor Fuel Carriers relied on the following principal factors in determining that either the accumulated earnings tax was an addition to the tax under section 6601(e)(3) or that the last date prescribed for payment was the date of notice and demand under sections 6155 and 6601(a). The first was that it was clear from the statute, the legislative history, and administrative practice that the accumulated earnings tax was separate from, and in addition to, the normal corporate income tax under section 11. The statute explicitly provides that such tax is "in addition to other taxes imposed by this chapter." I.R.C. § 531. Second, the tax was not self-assessable like normal income taxes, but assessment requires "an administrative determination by the Service" of the fact and amount of the unreasonable accumulation of earnings and profits. Motor Fuel Carriers, Inc. v. United States, supra, 420 F.2d at 707, 190 Ct.Cl. at 393. "There is no provision in, or part of, Treasury Form 1120 (the return form) for reporting the amount subject to this tax; nor are there any schedules or instructions for reporting the item. It is left wholly to the Government's initiative." Id., 420 F.2d at 705, 190 Ct.Cl. at 390 cite omitted. In the court's thinking, it was the second group of factors which demonstrated the logic of treating the liability for the accumulated earnings tax as not having vested until notice and demand. The logic has supported the result in respect to the accumulated earnings tax—whether the rationale was that it is a penalty or addition to the tax under Motor Fuel Carriers or Bardahl, or that the last date prescribed for payment was the date of notice and demand under Motor Fuel Carriers, or that the last date for payment was not prescribed under Loper.

Other than certain superficial similarities concerning assessments under sections 531 and 482, the provisions are not at all comparable. Section 531 imposes a tax after the normal corporate income tax is assessed under section 11, on the unreasonable accumulation of earnings and profits of a corporation. The tax is imposed on a corporation "formed or availed of for the purpose of avoiding the income tax with respect to its shareholders * * *." I.R.C. § 532(a). Special rates, unrelated to corporate income tax rates, are applied not to taxable income, but to that portion of aftertax income which has been unreasonably accumulated.

Section 482, however, does not impose a tax by operation of its provision alone. The section authorizes the Secretary to "distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among corporations." I.R.C. § 482. Such action can change the amount of taxable income of a corporation for a taxable year resulting in the recomputation of the corporate income tax under section 11. The Secretary's action results in the amendment of the original corporate income tax return to show the proper amount of gross income, deductions, credits, or allowances. It is under the provisions of section 11, which provide for a tax on the taxable income of corporations, that an overpayment or underpayment of the proper tax is found.

Section 531 has often been described as a penalty imposed upon corporations for their failure to distribute dividends to...