Norwest Corp. v. C.I.R.

• Decision Date: 14 November 1995
• Docket Number: 93-1741,Nos. 93-1274,s. 93-1274
• Citation: 69 F.3d 1404
• Parties: -7409, 95-2 USTC P 50,618 NORWEST CORPORATION, formerly known as Northwest Bancorporation and Affiliated Companies, and Affiliated Companies, Appellant/Cross-appellee, Norwest Bank, Fort Dodge, N.A., formerly First National Bank, and; Norwest Bank, Marion, N.A., formerly First National Bank of Marion, v. COMMISSIONER OF INTERNAL REVENUE, Appellee/Cross-appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1404

69 F.3d 1404

76 A.F.T.R.2d 95-7409, 95-2 USTC P 50,618

NORWEST CORPORATION, formerly known as Northwest

Bancorporation and Affiliated Companies, and

Affiliated Companies, Appellant/Cross-appellee,

Norwest Bank, Fort Dodge, N.A., formerly First National

Bank, and; Norwest Bank, Marion, N.A., formerly

First National Bank of Marion, v. COMMISSIONER OF INTERNAL REVENUE, Appellee/Cross-appellant.

Nos. 93-1274, 93-1741.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 8, 1993.

Decided Nov. 14, 1995.

Thomas C. Durham, Chicago, Illinois, argued (Joel V. Williamson, Arthur I. Gould, and Roger J. Jones, on the brief), for appellant.

Charles Bricken, U.S. Dept. of Justice, Washington, DC, argued (David English Carmack, on the brief), for appellee.

Before McMILLIAN and MAGILL, Circuit Judges, and JACKSON, ^* District Judge.

McMILLIAN, Circuit Judge.

Norwest Corporation and Affiliated Companies (Norwest) appeal from a final order entered in the United States Tax Court ¹ assessing and ordering Norwest to pay income tax deficiencies for its 1980 and 1982 taxable years. Norwest Corp. v. Commissioner, 63 T.C.M. (CCH) 3023, 1992 WL 103666 (1992). For reversal, Norwest claims that the tax court improperly held that it was not entitled to foreign tax credits (FTCs) under 26 U.S.C. Sec. 901 for income taxes paid to the Brazilian government pursuant to Brazil's tax on interest income earned by foreign lenders. Norwest claims the Commissioner erroneously determined it was not entitled to FTCs for portions of the tax the Brazilian government returned to borrowers pursuant to its "pecuniary benefit" program. The Commissioner cross-appeals the tax court's rejection of her alternative defense that Norwest deserved no FTCs because Norwest was not legally liable for the tax. For the reasons discussed below, we affirm the decision of the tax court and deny the cross-appeal.

I. Background

Norwest is the parent company of certain corporations that filed consolidated income tax returns for 1980 and 1982. During those years Norwest made loans to Brazilian borrowers, and Brazil imposed a tax on interest earned by foreign lenders of 25% of the lenders' interest income per payment (local tax). The Brazilian government collected this local tax by withholding the full amount of the local tax when borrowers purchased foreign currency to make their interest payments. Withholding was mandatory because Brazilian law required borrowers to obtain their foreign currency from local banks. Brazilian law also granted a "pecuniary benefit," or subsidy, to those borrowing from foreign lenders. When such borrowers would purchase foreign currency for interest payments, the bank handling the transaction would also credit the borrower's account for the pecuniary benefit. The government set the pecuniary benefit as a percentage of the local tax that the borrower was required to set aside through the withholding system.

Brazil allowed its larger banks to borrow money from foreign sources and then re-lend the money to secondary local, or "repass," borrowers. The Brazilian government extended the pecuniary benefit to the repass borrowers during the years at issue by requiring the initial borrowers to allocate the subsidies pro-rata to the repass borrowers.

During the years at issue, Norwest made loans to Brazilian borrowers. Some of these borrowers executed repass loans. Norwest, on its 1980 and 1982 tax returns, desired to claim FTCs under 26 U.S.C. Sec. 901 ² for the amounts withheld for the local tax. Norwest, however, subtracted from this amount the subsidies granted under the pecuniary benefit system, ostensibly to comply with revenue and private letter rulings by the Commissioner. Norwest subsequently filed a petition for redetermination with the tax court in 1986, claiming an overpayment of tax and seeking a refund of these amounts. The Commissioner disallowed this request, and Norwest filed suit in the tax court. The parties submitted the case with all facts fully stipulated. The tax court rejected the Commissioner's argument that Norwest was not legally liable for the local tax, and thus not entitled to a FTC altogether, and concluded that Norwest was entitled to a FTC for part of the local tax. This appeal by Norwest and cross-appeal by the Commissioner followed.

II. Discussion

A. The Commissioner's Cross-Appeal--Legal Liability for Tax

Under 26 U.S.C. Sec. 901, a domestic corporation may claim as a credit (subject to limitations inapplicable in the present case) against its federal income tax liability "the amount of any income ... taxes paid or accrued during the taxable year to any foreign country." The purpose of the FTC is to reduce international double taxation. See American Chicle Co. v. United States, 316 U.S. 450, 451, 62 S.Ct. 1144, 1144-45, 86 L.Ed. 1591 (1942). A foreign tax is creditable only for the taxpayer that is legally liable for the tax. Temp.Treas.Reg. Sec. 4.901-2(g)(1), 45 Fed.Reg. 75655 (Nov. 17, 1980), 26 C.F.R. Sec. 4.901-2(g)(1) (1981). The liability of the United States taxpayer for the foreign tax is determined in accordance with United States tax principles. Biddle v. Commissioner, 302 U.S. 573, 579, 58 S.Ct. 379, 381, 82 L.Ed. 431 (1938).

We address the Commissioner's cross-appeal first because, if successful, this argument renders Norwest's appeal moot. The Commissioner argues that Norwest is not legally liable for the local tax, and thus not entitled to FTCs for the local tax, because only the borrower was legally obligated to withhold it. We review the legal conclusions of the tax court de novo. E.g., Sargent v. Commissioner, 929 F.2d 1252, 1254 (8th Cir.1991).

We reject this argument as did the tax court below and the other courts which have addressed this question. See Continental Illinois Corp. v. Commissioner, 998 F.2d 513, 518-19 (7th Cir.1993) (Continental ), cert. denied, --- U.S. ----, 114 S.Ct. 685, 126 L.Ed.2d 652 (1994); Continental Illinois Corp. v. Commissioner, 55 T.C.M. (CCH) 1325, 1330, 1988 WL 75882 (1988), aff'd sub nom. Citizens & Southern Corp. v. Commissioner, 919 F.2d 1492 (11th Cir.1990) (per curiam); Nissho Iwai American Corp. v. Commissioner, 89 T.C. 765, 773-74, 1987 WL 45300 (1987) (Nissho ). It is a well-settled principle under United States tax law that the person obligated to pay the tax is not necessarily the same person to whom legal liability attaches. Nissho, 89 T.C. at 773, 1987 WL 45300. Nissho, which the tax court here cites, compared the Brazilian system to the wage withholding system in the United States under which employees remain legally liable for income taxes, although the employer is the person obligated to withhold the tax and pay the tax to the government. Id. Similarly, the Brazilian borrower is only charged with an administrative function. As explained, under Brazilian law, interest paid to foreign lenders like Norwest is subject to the local tax. The Brazilian borrower is required to withhold the local tax from each interest payment. Id. at 774, 1987 WL 45300, citing Gleason Works v. Commissioner, 58 T.C. 464, 478, 1972 WL 2582 (1972) (noting that liability for taxes "does not rest upon a search for the person from whom the tax is collectible but rather for the person upon whom the tax is imposed"). The Commissioner argues that in Brazil only borrowers have an enforceable legal obligation because withholding is the exclusive means of collection. The Commissioner's argument is unduly formalistic because Brazilian banking authorities will not allow the Brazilian borrower to buy foreign currency to pay interest to foreign lenders without proof it has withheld and paid the local tax. The lender thus could not escape liability and the absence of a law specifically applying to the lender is irrelevant. See Continental, 998 F.2d at 518. "[T]he [local] tax is 'paid' by the [foreign] lender even if the [Brazilian] borrower operates as [its] agent for payment and even if the [Brazilian government's] tax enforcement guns are trained on the agent [that is, the Brazilian borrower,] rather than on the principal [that is, the foreign lender]." Id. at 519. For the foregoing reasons, the Commissioner's cross-appeal is denied.

B. Norwest's Appeal--Pecuniary Benefit Program

During the years at issue, Temp.Treas.Reg. Sec. 4.901-2(f)(3)(i)(A), which is no longer in force, disallowed taxpayers from claiming as a FTC amounts "used directly or indirectly by the [foreign] country to provide a subsidy by any means (such as through a refund or credit) to the taxpayer." Temp.Treas.Reg. Sec. 4.901-2(f)(3)(ii)(B) further provided that "[a] foreign country is considered to provide a subsidy" to the taxpayer if (1) the foreign country provides a subsidy to another person with whom the taxpayer "[e]ngages in a business transaction" and (2) the subsidy received by such other person is determined directly or indirectly "by reference to the amount of income tax, or the base used to compute the income tax" imposed on the taxpayer. Subsection Sec. 4.901-2(g)(1) provided in part that "[i]ncome tax is paid or accrued by or on behalf of a person if foreign law imposes legal liability for income tax on that person and income tax is paid or accrued under paragraph (f) of this section." In other words, the regulation disallows a FTC to the extent that the foreign tax is used to subsidize the taxpayer. See Continental, 998 F.2d at 519. The regulation has been codified essentially without any change in wording in 26 U.S.C. Sec. 901(i). ³ The tax court below held that payments under Brazil's pecuniary benefit program met both requirements of Sec. 4.901-2(f)(3)(ii)(B) and thus constituted a subsidy to Norwest under Sec. 4.901-2(f)(3)(i)(A).

Norwest and the amici make related arguments challenging the regulation. Norwest and amicus Bankers Trust argue that Temp.Treas.Reg. Sec. 4.901-2(f)(3)(ii)(B) is inconsistent with the language of Sec. 901, which allows a credit for taxes ...