Riggs Nat. Corp. & Subsidiaries v. C.I.R.

• Decision Date: 12 July 2002
• Docket Number: No. 01-1121.,01-1121.
• Citation: 295 F.3d 16
• Parties: RIGGS NATIONAL CORPORATION AND SUBSIDIARIES, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 16

295 F.3d 16

RIGGS NATIONAL CORPORATION AND SUBSIDIARIES, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 01-1121.

United States Court of Appeals, District of Columbia Circuit.

Argued March 15, 2002.

Decided July 12, 2002.

Appeal from the United States Tax Court (No. 24368-89).

Thomas C. Durham argued the cause for appellant. With him on the briefs were Joel V. Williamson, Russell R. Young, Kim Marie Boylan, Charles W. Hall and Stephen M. Feldhaus.

Stephen D. Gardner was on the brief for amicus curiae National Foreign Trade Council, Inc. in support of appellant.

Charles Bricken, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief was David English Carmack, Attorney.

Before: SENTELLE, HENDERSON and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

This case returns to us after decision on remand by the United States Tax Court. Riggs Bank, asserting that the Central Bank of Brazil paid taxes to the Brazilian government on its behalf with respect to interest income on loans it had made to the Central Bank, claimed foreign tax credits under section 901 of the Internal Revenue Code. The Commissioner disallowed the credits and the Tax Court denied Riggs's petition for relief. Upon review, we conclude that official tax receipts that the Central Bank submitted on behalf of Riggs Bank are entitled to the presumption of regularity. Holding that the Commissioner failed to rebut this presumption through clear and specific evidence that the taxes had not, in fact, been paid, we reverse the decision of the Tax Court and hold that Riggs is entitled to the tax credits. We remand to the Tax Court for determination of whether the tax credits owed to Riggs should be reduced by offsetting subsidies reportedly paid to the Central Bank.

I. Background and Prior Proceedings

The origins of this case are set out more fully in our prior opinion Riggs National Corporation & Subsidiaries v. Commissioner, 163 F.3d 1363 (D.C.Cir.1999) (Riggs II), and will not be repeated at length here. We instead provide an overview of this case's prior history with a recitation of the facts giving rise to the issues now before us.

Riggs National Corporation's subsidiary, Riggs Bank ("Riggs"), made loans to the Central Bank of Brazil during the early to mid-1980's. These loans were of the "net loan" variety. In a net loan, the borrower contractually agrees to pay both the interest on the loan to the lender and any local (in this case, Brazilian) tax that the lender incurs as a result of the interest income. The attractiveness of such a loan is obvious: the lender receives the agreed upon interest income while the borrower is obligated to pay any tax that the lender owes on that interest. Making these types of loans even more appealing is an added benefit resulting from the United States's Internal Revenue Code ("IRC"). Under section 901 of the IRC, a United States taxpayer is able to take a credit against his U.S. tax liability on income earned in a foreign country equal to the amount of foreign tax paid on that income. 26 U.S.C. § 901. Thus, by providing ordinary net loans (i.e., net loans to individual foreign borrowers), Riggs could take a credit equal to the amount of taxes that Brazilian borrowers paid to Brazil on Riggs's behalf without running afoul of the IRC. See Riggs II, 163 F.3d at 1365; Continental Illinois Corp. v. Commissioner, 998 F.2d 513, 516-17 (7th Cir.1993).

At issue in Riggs II was the fact that the borrower was the Central Bank of Brazil, a government entity that is ordinarily immune from tax on its own income under the Federal Constitution of Brazil. Despite its tax immune status, and possibly because of pressure from foreign lenders who favored the tax credits under section 901, Brazil's Minister of Finance — the highest ranking Brazilian tax authority — ruled that the Central Bank was required under Brazilian law to pay the tax obligation it assumed from foreign lenders. The Minister of Finance justified his ruling under the rationale that the funds were available for "re-lending" by the Central Bank to private Brazilian borrowers. See Riggs Nat'l Corp. v. Commissioner, 107 T.C. 301, 331, 1996 WL 707024 (1996) (Riggs I). The Minister concluded that the Central Bank must, "as a substitute for such borrowers [to-be,] pay the income tax incident on the interest from January 1, 1984 to the end of the period of availability for such funds to be relent." Riggs II, 163 F.3d at 1366 (quoting Riggs I, 107 T.C. at 331). In response, the Central Bank issued official tax receipts, called "DARFs,"¹ to the foreign lenders which purportedly indicated the amount of tax paid on the lender's behalf. This comported with the standard practice in Brazil: taxpayers submit DARFs and the accompanying tax payment to commercial banks, which then transfer the payments to the Banco do Brasil, a quasi-public, quasi-private bank that collects taxes on behalf of Brazil's National Treasury.

Despite the Minister's ruling that the Central Bank was required to pay the taxes, and despite the receipt of DARFs indicating that the taxes had been paid, the Commissioner rejected the DARFs as sufficient proof that the taxes were paid, reasoning instead that because the Central Bank was a tax immune entity, any tax payments made by the Central Bank were voluntary and not "taxes paid or accrued... to any foreign country." 26 U.S.C. § 901(b)(1). The Commissioner consequently assessed a deficiency against Riggs. Before the Tax Court, Riggs submitted its DARFs as proof that the Central Bank paid the foreign taxes on Riggs's behalf. Riggs also provided the Tax Court with entries from the Banco do Brasil which purportedly showed that the Central Bank paid to the National Treasury the taxes withheld from its payments of interest to Riggs. The Tax Court, however, agreed with the Commissioner that the Central Bank was not obligated to pay the taxes and therefore disallowed the tax credits. Riggs I, 107 T.C. at 360. Riggs appealed.

On appeal, we held that the Minister of Finance's ruling that the Central Bank was obligated to pay the taxes was an act of state, which precluded the Commissioner from inquiring into its validity. We remanded "so that the Tax Court may determine in the first instance ... whether the taxes were in fact paid by the Central Bank" on Riggs's behalf, and whether any of the potential tax credits must be reduced by pecuniary benefits, or subsidies, paid to the Central Bank. Riggs II, 163 F.3d at 1369. Pecuniary benefits were originally instituted in 1975 and allowed Brazilian borrowers who paid interest to foreign lenders to receive a benefit, or subsidy, equal to a percentage of the amount of the tax paid with respect to the interest. The amount of the pecuniary benefit was originally 85 percent of the amount of the tax paid. It was reduced to 50 percent of the tax in July 1979, increased to 95 percent of the tax in December 1979, reduced to 40 percent of the tax in May 1980, and reduced to zero in June 1985. See Riggs I, 107 T.C. at 308.

On remand, the Tax Court ruled that Riggs failed to establish that the Central Bank had, in fact, paid the taxes at issue on Riggs's behalf. Riggs Nat'l Corp. & Subs. v. Commissioner, T.C. Memo. 2001-12, 81 T.C.M. 1023, 2001 Tax Ct. Memo LEXIS 20, *66, 2001 WL 47274 (Jan. 22, 2001) (Riggs III). Specifically, the Tax Court noted that letters and spreadsheets the Central Bank submitted with the DARFs reported that, for some of the payments, a pecuniary benefit had been reported as received after June 28, 1985. That is, the Central Bank continued to report pecuniary benefit information in documents submitted to Morgan Bank, the Central Bank's agent to foreign lenders such as Riggs, after Brazil stopped providing the pecuniary benefits. Reasoning that errors of this sort would not have been made if payment of the taxes had actually occurred (in other words, had the Central Bank actually paid the taxes, it would know that it did not receive a pecuniary benefit for those tax payments after June 28, 1985 and would therefore not report the receipt of such), the Tax Court found that the DARFs issued by the Central Bank were not reliable proof that the withholding taxes in issue had actually been paid by the Central Bank. Id. The Tax Court also disagreed with secondary accounting evidence relied on by Riggs to indicate that the taxes had been paid. Id. Consequently, the Tax Court ruled that Riggs was not entitled to the foreign tax credits at issue. Id. After ruling that Riggs was ineligible for the tax credits, the Tax Court had no occasion to reach the issue of whether Riggs's tax credits should be reduced by the value of any pecuniary benefits paid to the Central Bank. Id.

In this appeal, Riggs asserts that the Commissioner acted contrary to Treasury Regulations by refusing to accept the DARFs as definitive proof that the foreign taxes were paid. Riggs also contends that the DARFs are entitled to the presumption of administrative regularity and must be deemed reliable. Finally, Riggs argues that its foreign tax credits should not be reduced by the offsetting pecuniary benefits paid to the Central Bank. The Commissioner, however, contends that Riggs has the burden of proving its entitlement to the foreign tax credits. The Commissioner relies on the language of IRC § 905(b), which allows foreign tax credits only to the extent "the taxpayer establishes to the satisfaction of the Secretary" the amount of foreign tax paid. 26 U.S.C. § 905(b). The Commissioner argues that this section authorizes him to require more satisfactory proof that foreign taxes were, in fact, paid. The Commissioner also contends that Riggs waived its "presumption of regularity" argument by not raising it before the Tax Court, but that even if a presumption of regularity exists with respect to the DARFs, irregularities accompanying...