Sprint Nextel Corp.. v. U.S.

• Decision Date: 04 March 2011
• Docket Number: Civil Action No. 09–2325–KHV/JPO.
• Parties: SPRINT NEXTEL CORPORATION AND SUBSIDIARIES and Embarq Corporation, Plaintiffs,v.UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Kansas

779 F.Supp.2d 1184
107 A.F.T.R.2d 2011-1204
2011-1 USTC P 50,269

SPRINT NEXTEL CORPORATION AND SUBSIDIARIES and Embarq Corporation, Plaintiffs,
v.
UNITED STATES of America, Defendant.

Civil Action No. 09–2325–KHV/JPO.

United States District Court, D. Kansas.

March 4, 2011.

[779 F.Supp.2d 1185]

Brian R. Markley, Stinson Morrison Hecker LLP, Kansas City, MO, Timothy L. Fallaw, II, Alston & Bird, LLP, Atlanta, GA, for Plaintiffs.Gregory E. Van Hoey, Jessica S. Reimelt, U.S. Department of Justice, Washington, DC, for Defendant.MEMORANDUM AND ORDER KATHRYN H. VRATIL, District Judge.

Plaintiffs bring suit against the United States seeking a refund of federal income taxes paid for the taxable years that ended December 31,1990 through 1994, and certain tax credits from the taxable year that ended December 31, 1988. Plaintiffs argue that they are entitled to the refund and tax credits because they incorrectly treated payments from the Federal Communications Commission (“FCC”) Universal Service Fund (“USF”) as taxable gross income instead of nontaxable nonshareholder contributions to capital. ¹ The government disagrees. It argues that such payments are not contributions to capital, but are taxable as gross income.² The parties have stipulated to all material facts; they thus present a purely legal question: whether the USF high-cost support payments which plaintiffs received during the taxable years in question constitute nonshareholder contributions to capital. This matter comes before the Court on the parties' cross-motions for summary judgment— Plaintiffs' Motion For Summary Judgment (Doc. # 38) filed December 7, 2010 and United States' Motion For Summary Judgment (Doc. # 40) filed December 7, 2010. For the reasons set forth below, the Court sustains the government's motion and overrules plaintiffs' motion.

Legal Standards

Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Vitkus v. Beatrice Co., 11 F.3d 1535, 1538–39 (10th Cir.1993). The parties agree that there are no genuine issues of material fact, but disagree over which party is entitled to judgment as a matter of law.

In a tax refund suit, the taxpayer has the burden of showing that the disputed tax assessment was erroneous as well as the amount that it is entitled to recover. See United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976); Dye v. United States, 121 F.3d 1399, 1408 (10th Cir.1997). Plaintiffs “bear[ ] the burdens

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both of production and of persuasion” on these elements of its case. Dye, 121 F.3d at 1408.Statutory And Regulatory Background

The parties' only dispute is whether the high-cost support payments plaintiffs received from the USF constitute taxable gross income or nontaxable nonshareholder contributions to capital. I.R.C. Section 61 defines “gross income” broadly as “all income from whatever source derived.” I.R.C. § 61(a). Gross income, minus allowable deductions, equals taxable income. See I.R.C. § 63(a). The Supreme Court has repeatedly stated that the “sweeping scope” of Section 61 reflects Congress's intent to “exert ... the full measure of its taxing power.” Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 S.Ct. 473, 99 L.Ed. 483 (1955). It has also emphasized the corollary to this principle—that courts must narrowly construe exclusions from income. Comm'r v. Schleier, 515 U.S. 323, 328, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995); see Mayo Found. for Med. Educ. & Research v. United States, –––U.S. ––––, 131 S.Ct. 704, 715, 178 L.Ed.2d 588 (2011).

The tax provision at the center of this litigation, Section 118(a), creates such an exclusion; it provides as follows: “In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.” I.R.C. § 118(a). “Contribution to capital” is not expressly defined by statute or regulation, but Treasury Regulation Section 1.118–1 provides the following guidance:

Section 118 ... applies to contributions to capital made by persons other than shareholders. For example, the exclusion applies to the value of land or other property contributed to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community, or for the purpose of enabling the corporation to expand its operating facilities.

Treas. Reg. § 1.118–1. In addition, a number of federal circuit courts of appeal have concluded that the legislative history of Section 118 makes it clear that Congress intended to incorporate existing ( i.e., pre–1954) court decisions that defined contributions to capital, and the parties agree. See AT & T, Inc. v. United States, 629 F.3d 505, 511–12 (5th Cir.2011); Nathel v. Comm'r, 615 F.3d 83, 89 (2d Cir.2010); Federated Dep't Stores, Inc. v. Comm'r, 426 F.2d 417, 421 (6th Cir.1970); United Grocers, Ltd. v. United States, 308 F.2d 634, 637–38 (9th Cir.1962); see also H.R.Rep. No. 83–1337 § VII(H)(1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4042 (Section 118 “in effect places in the code the court decisions on this subject”); S.Rep. No. 83–1622 (1954) § I(1), reprinted in 1954 U.S.C.C.A.N. 4621, 4648 (same). Neither the Treasury Regulation, which essentially summarizes the Supreme Court case law, nor the Court's decisions, provide a particularly clear definition of “contributions to capital.”Pre–1954 Supreme Court Decisions Edwards v. Cuba Railroad Co.

In Edwards v. Cuba Railroad Co., the Supreme Court held that payments from the Cuban government for the construction and operation of railroad lines in Cuba were contributions to capital. 268 U.S. 628, 45 S.Ct. 614, 69 L.Ed. 1124 (1925).³

[779 F.Supp.2d 1187]

It noted that “[t]he subsidy payments were proportionate to mileage completed,” which “indicate[d] a purpose to reimburse plaintiff for capital expenditures.” Id. at 632, 45 S.Ct. 614. It then observed that the payments were (1) not “to be used for the payment of dividends, interest or anything else properly chargeable or payable out of earnings income,” (2) not “made for services rendered or to be rendered” and (3) not “profits or gains from the use or operation of the railroad.” Id. at 633, 45 S.Ct. 614.Texas & Pacific Railway Co. v. United States

Texas & Pacific Railway dealt with post-World War I federal government payments designed to help railroads transition from federal control to profitable private enterprise. The Court concluded that such payments were not contributions to capital. 286 U.S. 285, 52 S.Ct. 528, 76 L.Ed. 1108 (1932). Section 209 of the Transportation Act of 1920 guaranteed certain railroads a minimum operating income for six months after the end of the war. Id. at 288, 52 S.Ct. 528. The “purpose of the guaranty provision was to stabilize the credit position of the roads by assuring them a minimum operating income.” Id. at 289, 52 S.Ct. 528. If a railroad's operating income exceeded the guaranteed amount, it was required to pay the excess back to the government. Id. at 288, 52 S.Ct. 528.

The Court reasoned as follows:

If the fruits of the employment of a road's capital and labor should fall below a fixed minimum, then the government agreed to make up the deficiency, and, if the income were to exceed that minimum, the carrier bound itself to pay the excess into the federal treasury. In the latter event, the carrier unquestionably would have been obligated to pay income tax measured by actual earnings; in the former, it ought not to be in a better position than if it has earned the specified minimum. Clearly, then, the amount paid to bring the yield from operation up to the required minimum was as much income from operation as were the railroad's receipts from fares and charges.

Id. at 289, 52 S.Ct. 528. It further noted that the payments “were not subsidies or gifts ... conditioned upon construction work performed.” Id. Rather, they were “measured by a deficiency in operating income, and might be used for the payment of dividends, of operating expenses, of capital charges, or for any other purpose within the corporate authority, just as any other operating revenue might be applied.” Id. at 290, 52 S.Ct. 528.Detroit Edison Co. v. Commissioner of Internal Revenue

Detroit Edison Co. v. Commissioner of Internal Revenue involved whether payments from power company customers to cover the costs of providing them service were contributions to capital. 319 U.S. 98, 63 S.Ct. 902, 87 L.Ed. 1286. Detroit Edison, a power company, received many applications for service that “would require an investment in extension of its facilities greater than prospective revenues therefrom would warrant.” Id. at 99, 63 S.Ct. 902. In such a circumstance, it would enter into a contract with the customer pursuant to which the customer would pay for the estimated cost of extending the company's facilities. Id. at 99–100, 63 S.Ct. 902. Detroit Edison placed the customer payments into its general account and did not earmark the payments for use on particular projects. Id. at 100, 63 S.Ct. 902. The Court concluded that

it overtaxes imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the Company. The transaction neither in form

[779 F.Supp.2d 1188]

nor in substance bore such a sembalance [sic]. The payments were to the customer the price of the service. The receipts have gone, so far as here involved, to add to the Company's surplus.Id. at 102–03, 63 S.Ct. 902.Brown Shoe Co. v. Commissioner of Internal Revenue

Brown Shoe Co. v. Commissioner of Internal Revenue, similar to Detroit Edison, involved payments intended to induce Brown Shoe to locate or expand...