Stokely-Van Camp, Inc. v. U.S.

• Decision Date: 09 September 1992
• Docket Number: No. 91-5055,STOKELY-VAN,91-5055
• Citation: 974 F.2d 1319
• Parties: -5649, 92-2 USTC P 50,459 CAMP, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1319

974 F.2d 1319

70 A.F.T.R.2d 92-5649, 92-2 USTC P 50,459

STOKELY-VAN CAMP, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 91-5055.

United States Court of Appeals, Federal Circuit.

Sept. 9, 1992.

Robert H. Aland, Baker & McKenzie, of Chicago, Ill., argued for plaintiff-appellant. With him on the brief were Neal J. Block and Karen A. Kuenster.

Charles Bricker, Attorney, Dept. of Justice, of Washington, D.C., argued for defendant-appellee. With him on the brief were Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen and Gilbert S. Rothenberg, Attorneys. Of counsel was Bruce R. Ellisen, Attorney, Dept. of Justice.

Before NEWMAN, ARCHER and MICHEL, Circuit Judges.

ARCHER, Circuit Judge.

Stokely-Van Camp, Inc. (SVC) appeals the November 2, 1990 summary judgment of the United States Claims Court holding that SVC is not entitled to income tax refunds for the years ending May 31, 1978 through May 31, 1982. ¹ Stokely-Van Camp, Inc. v. United States, 21 Cl.Ct. 731 (1990). SVC contends that it is entitled to deduct commissions paid to its domestic international sales corporation (DISC), Stokely-Van Camp Overseas, Inc. (SVCO) and that part of the amount SVC paid to redeem stock is a deductible or amortizable cost. We affirm.

BACKGROUND

SVC's primary business is the manufacture, marketing and distribution of high quality food products. During the years in issue, SVC's stock was held publicly, with the largest single shareholder owning approximately 11 percent of the outstanding shares of common stock. SVC's original federal income tax returns for taxable years 1978-82 were filed before the company was acquired by the Quaker Oats Company (Quaker) on October 31, 1983.

The issues involved in SVC's case came before the Claims Court on cross motions for summary judgment. Both parties agreed that there was no genuine issue as to any material fact, and that disposition by summary judgment was appropriate. The Claims Court granted the government's motions for summary judgment, thereby denying the tax refunds claimed by SVC.

I.

A. Under the DISC provisions of the Internal Revenue Code (IRC), United States corporations engaged in export sales could defer the federal income taxes on a portion of the income from those sales through the use of a DISC. See IRC § 991-997 (1982). A DISC itself is not subject to tax, IRC § 991, but part of the income allocated to the DISC (in this case commission income) is taxed currently to the DISC's shareholders as though received as a dividend. The balance of the DISC's income is not taxed to the shareholders until distributed (or on the happening of certain events, such as when shareholders dispose of their stock or when the corporation ceases to qualify as a DISC). IRC § 995.

SVCO, a wholly-owned subsidiary of SVC at all times relevant for this case, elected DISC status under IRC § 992(b) and filed Form 4876 (Election To Be Treated as a DISC) on December 15, 1972, to be effective for its taxable year beginning January 1, 1973. For the taxable years 1977-1981 here at issue, SVCO timely filed annual returns as a DISC on Forms 1120-DISC. On its original returns, however, SVCO reported information that established it did no business as a DISC during that period. Before SVC was acquired by Quaker, SVC never claimed commission income payable to SVCO nor did SVCO report any such income.

On January 26, 1984, amended Forms 1120-DISC were filed for SVCO for the taxable years 1977 through 1981. In the amended returns, SVCO filed as a commission DISC and reported commission income from SVC. SVC filed corresponding amendments to its returns for its taxable years ending May 31, 1978 through 1980 on January 26, 1984, and for its taxable years ending May 31, 1981 and 1982 on February 10, 1984, claiming deductions for the commissions payable to SVCO. On February 28, 1984, Quaker sent $5,222,321 to SVCO to pay for SVC's "commission expenses" for the taxable years in issue.

B. Section 992(a) of the IRC establishes conditions for qualifying as a DISC. A DISC is defined in IRC § 992(a)(1). SVC concedes that SVCO does not qualify as a DISC under that section, but argues instead that SVCO qualifies under IRC § 992(a)(2) in conjunction with Treasury Regulation 26 C.F.R. § 1.992-1(g) (1982).

Section 992(a)(2) provides for the promulgation of regulations to deal with the status of a corporation which has filed a return as a DISC for a taxable year, but has failed to satisfy the requirements of IRC § 992(a)(1).

(2) Status as DISC after having filed a return as a DISC.

The Secretary shall prescribe regulations setting forth the conditions under and the extent to which a corporation which has filed a return as a DISC for a taxable year shall be treated as a DISC for such taxable year for all purposes of this title, notwithstanding the fact that the corporation has failed to satisfy the conditions of paragraph (1).

IRC § 992(a)(2). The authority given in section 992(a)(2) has been implemented by Reg. § 1.992-1(g).

(g) Status as DISC after having filed return as a DISC. Under section 992(a)(2), notwithstanding the failure of a corporation to meet the requirements of paragraph (a) of this section for a taxable year, such corporation will be treated as a DISC for purposes of the Code for such taxable year (and, thus, will not be able to claim that it is not eligible to be a DISC) if--

(1) Such corporation files a return as a DISC for such taxable year,

(2) Such corporation does not notify the district director, more than 30 days before the expiration of the period of limitation (including extensions thereof) on assessment for underpayment of tax for such taxable year (as determined under section 6501 and the regulations thereunder), that it is not a DISC for such taxable year, and

(3) The Internal Revenue Service has not issued, within such period of limitation (including extensions thereof) on assessment for underpayment of tax for such taxable year, a notice of deficiency based on a determination that such corporation is not a DISC for such taxable year.

A corporation is treated as a DISC, for all purposes, pursuant to the provisions of this paragraph for any taxable year for which it meets the requirements of this paragraph, even if such corporation is an ineligible corporation described in paragraph (f) of this section for such taxable year. Thus, for example, a corporation which is treated as a DISC for a taxable year pursuant to this paragraph is treated as a DISC for that taxable year for purposes of § 1.992-2(e)(3) (relating to the termination of a DISC election if a corporation is not a DISC for each of any 5 consecutive taxable years). If a corporation is treated as a DISC for a taxable year pursuant to this paragraph, persons who held stock of such corporation at any time during such taxable year are treated, with respect to such stock, as holders of stock in a DISC for the period or periods during which they held such stock within such taxable year.

26 C.F.R. § 1.992-1(g) (1982).

SVC contends that under section 992(a)(2) and Reg. § 1.992-1(g) SVCO must be treated as a DISC "for all purposes" of the tax code for its 1977-1981 taxable years because SVCO (a) filed returns as a DISC for those years and (b) did not notify or receive notification from the IRS prior to the expiration of the statute of limitations for the assessment of a deficiency that it was not a DISC. If SVC's position is correct, it would be entitled to deduct for its 1978-1982 years the commissions paid to SVCO. SVC argues that its interpretation is supported by the "plain meaning" of section 992(a)(2) and Reg. § 1.992-1(g).

SVC's position must fail, however, because it ignores the parenthetical language in the first paragraph of Reg. § 1.992-1(g), which states that a corporation satisfying the requirements of Reg. § 1.992-1(g) "will not be able to claim that it is not eligible to be a DISC." (Emphasis added.) Thus, Reg. § 1.992-1(g), when read in its entirety, applies only in those cases where a taxpayer, having previously filed a return as a DISC, seeks to avoid DISC status. This reading of the regulation is supported by the legislative history of section 992(a)(2) and by the changes that were made in the course of promulgating Reg. § 1.992-1(g).

Although SVC argues that the legislative history of section 992(a)(2) supports its interpretation, it quotes and relies on only a part of the relevant paragraph from the Senate and House Committee reports:

The regulations would provide that in the case of a corporation which has not indicated more than 30 days before the running of the statute of limitations for the year that it is not a DISC and has filed a tax return as if it were a DISC, then the corporation ... is to be treated as if it were a DISC for the year in question, if the [IRS] has not issued a notice of deficiency based upon a determination that the corporation was not a DISC.

S.Rep. No. 437, 92d Cong., 1st Sess. 93-94 (1971), reprinted in 1971 U.S.C.C.A.N. 1918, 1999-2000 and 1972-1 C.B. 559, 611; H.R.Rep. No. 533, 92d Cong., 1st Sess. 61 (1971), reprinted in 1971 U.S.C.C.A.N. 1825, 1875 and 1972-1 C.B. 498, 530. The first sentence of that paragraph, however, states:

In addition, provision is made for regulations to provide rules dealing with a corporation which has filed a return as a DISC and subsequently claims that it is not eligible for DISC status.

Id. Consistent with the text of Reg. § 1.992-1(g), the Senate and House reports show that IRC § 992(a)(2) was intended to cover only those situations where a taxpayer after having claimed DISC status, seeks to avoid that status.

The regulatory history of Reg. § 1.992-1(g) also confirms this reading of the regulation. When Reg. § 1.992-1(g) was proposed initially, it did not contain the parenthetical language discussed above. See 37 Fed.Reg. 10,369 (1972). The reason for adding the parenthetical language, as explained in...