Sunoco Inc. v. Comm'r of Internal Revenue

Decision Date07 October 2011
Docket NumberNo. 09–2423.,09–2423.
Citation108 A.F.T.R.2d 2011,2011 USTC P 50665,663 F.3d 181
CourtU.S. Court of Appeals — Third Circuit
PartiesSUNOCO INC. and Subsidiaries v. COMMISSIONER OF INTERNAL REVENUE, Appellant.


John A. DiCicco, Esq., Acting Assistant Attorney General, Andrea Tebbets, Esq., Francesca U. Tamami, Esq. (Argued), Attorneys, Tax Division, Appellate Section, Department of Justice, Washington, D.C., Attorneys for Appellant.

Stephen D.D. Hamilton, Esq. (Argued), Alfred W. Putnam, Jr., Esq., D. Alicia Hickock, Esq., Drinker, Biddle & Reath LLP, Philadelphia, PA, Attorneys for Appellees.

Before: McKEE, Chief Judge, SMITH, Circuit Judge, and STEARNS, District Judge.*


McKEE, Chief Judge.

The Commissioner of the Internal Revenue Service (“IRS”) appeals the United States Tax Court's ruling that the latter had subject matter jurisdiction over a claim by Sunoco, Inc., and its Subsidiaries (collectively referred to as “Sunoco”). The underlying dispute arises from Sunoco's overpayment of income tax for certain years. The IRS either refunded the overpayments to Sunoco or applied the overpayments as credits to other tax years and/or to other of Sunoco's liabilities for other types of taxes before Sunoco contested a notice of deficiency the IRS issued for those years. Sunoco claimed that the IRS did not pay it enough overpayment interest on those overpayments. The Tax Court ruled that it had subject matter jurisdiction over Sunoco's claim. In its appeal, the IRS argues that the Tax Court lacked subject matter jurisdiction over Sunoco's claim. We agree and will therefore vacate the Tax Court's ruling.


Sunoco, Inc., formerly Sun Company, Inc., headquartered in Philadelphia, Pennsylvania, is the parent of a group of companies engaged primarily in the manufacturing and marketing of petroleum products, logistics businesses, and cokemaking operations, in the United States and elsewhere. For many years, Sunoco has filed a consolidated Federal tax return that includes several hundred of its subsidiaries.

As is typical of most large public companies, Sunoco is continually audited by the IRS. The audits generally result in various adjustments to Sunoco's tax liabilities for a particular year, as items are identified by the IRS and by Sunoco's in-house tax personnel. Those adjustments are both “up” (meaning additional taxes are owed) and “down” (meaning that Sunoco overpaid a given tax for a given period). Many of these adjustments are resolved administratively within the IRS, either at the audit level or the IRS appeals office level.

The audits and appeals typically take years to complete. Any applicable period of limitation is usually extended by the parties' execution of IRS Form 872–A, entitled “Special Consent to Extend the Time to Assess Tax.” In return, Form 872–A extends the time in which the taxpayer may file a claim for credit or refund for a given tax year.

On July 1, 1997, after the completion of one such audit cycle and an IRS administrative appeals process, the IRS issued a notice of deficiency to Sunoco for the tax years 1979, 1981, and 1983. The IRS claimed deficiencies of income tax in the amounts of $10,563,157.00, $5,163,449.00, and $35,916,359.00 respectively, for a total amount of $51,642.965.00.

Sunoco responded to the notice of deficiency by filing a timely petition in the Tax Court in which it contested the IRS's determination of deficiencies for 1979, 1981, and 1983. It also asserted that it had made income tax overpayments for those years totaling $46,100,857.00. Sunoco sought a refund of the overpayment together with interest.

Thereafter, in November of 1997, Sunoco amended its petition to add, inter alia, allegations relating to certain errors that Sunoco claimed the IRS had made in computing underpayment and overpayment interest. Sunoco alleged that for each of the disputed years, the interest the IRS had charged on “underpayments” pursuant to I.R.C. § 6601 was too high, and the interest the IRS had paid to Sunoco on “overpayments” pursuant to I.R.C. § 6611 was too low.1

The Tax Court held a trial on the merits with respect to certain substantive issues not related to the amount of interest owed.2 The Tax Court subsequently issued two opinions on the disputed substantive issues. 3

In May of 1999, Sunoco and the IRS entered into various stipulations that disposed of most of the competing claims. The remaining disputes included the claim that the amount of interest paid to Sunoco on its overpayment of various taxes was insufficient. That was the claim that Sunoco had added by amending the petition it had filed in the Tax Court in response to the notice of tax deficiency.4

In March of 2000, the IRS moved to dismiss Sunoco's amended petition to the extent that it asked the Tax Court to order the IRS to pay additional overpayment interest under I.R.C. § 6611, 26 U.S.C. § 6611. The IRS contended that Sunoco's “claims for overpayment interest for the taxable years 1979, 1981, and 1983 must be “dismissed for lack of jurisdiction [because] the Tax Court does not have jurisdiction to determine the amount of interest due on overpayments allowed prior to the commencement of the case.” Most of the overpayments underlying Sunoco's claims for interest were interim overpayments that the IRS credited against a tax liability of Sunoco for a different tax year and/or a different tax, pursuant to I.R.C. § 6402(a), 26 U.S.C. § 6402(a), before the notice of deficiency issued.5 The IRS had refunded the remaining overpayments to Sunoco before the notice of deficiency issued. In its motion to dismiss, the IRS challenged the Tax Court's jurisdiction to adjudicate Sunoco's claim for interest on Sunoco's overpayment of taxes. The IRS contended that Sunoco's appropriate remedy for seeking overpayment interest with respect to the amounts that had previously been refunded or credited is a timely-filed suit in a federal district court or the Court of Federal Claims. 6

The Tax Court denied the IRS's motion to dismiss in an opinion dated February 4, 2004. It held that it had jurisdiction to determine interest with respect to overpayments where the overpayments and interest on overpayments had been refunded to the taxpayer or otherwise credited to the taxpayer's account before the case arrived in the Tax Court. Sunoco, Inc. and Subsidiaries v. Comm'r of the IRS, 122 T.C. 88 (2004). The court's decision was based on its interpretation of 26 U.S.C. § 6512(b)(1) and (3) as well its earlier decision in Estate of Baumgardner v. Comm'r of Internal Revenue, 85 T.C. 445 (1985).

After the Tax Court denied a motion to reconsider, the IRS and Sunoco filed a second stipulation of settled issues limited to the interest calculation issue. Sunoco and the IRS expressed their intention to “agree to the underlying facts and the computation of interest, if the [Tax] Court's determination as to jurisdiction is either not appealed or is sustained on appeal, while preserving for potential appeal the legal issue of the Court's jurisdiction over [Sunoco's] claim to additional overpayment interest.”

Concurrently with the second stipulation of settled issues, the parties filed a stipulation as to the underlying tax liabilities for each of the disputed years, showing an overpayment of $14,587,489 for 1979, a deficiency of $287,345 to be assessed and paid for 1981, and a deficiency of $24,138,971 to be assessed for 1983, of which $20,104,500 remains to be paid. The Tax Court entered a decision accordingly on February 12, 2009.

The IRS then filed this appeal challenging the Tax Court's jurisdiction over Sunoco's claim to additional interest on Sunoco's tax overpayments.


We have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1). Our review of the Tax Court's construction of the Internal Revenue Code is plenary. Nat'l Starch & Chem. Corp. v. Comm'r of the IRS, 918 F.2d 426, 428 (3d Cir.1990). We therefore exercise de novo review over the Tax Court's determination of its subject matter jurisdiction. Stepnowski v. Comm'r of the IRS, 456 F.3d 320, 322 (3d Cir.2006).


As noted earlier, when Sunoco filed its amended petition for redetermination of deficiencies for 1979, 1981, and 1983, Sunoco claimed, inter alia, additional interest on overpayments that the IRS had previously refunded to Sunoco and/or credited to other of Sunoco's tax liabilities, before the notice of deficiency issued. As we have also noted, the Tax Court determined that it could exercise jurisdiction over Sunoco's claim based on its reading of 26 U.S.C. § 6512(b)(1) and (3), and its earlier holding in Estate of Baumgardner v. Comm'r of the IRS. See 122 T.C. at 96–101.7

On appeal here, the IRS contends that the Tax Court erred as a matter of law in its reading of the controlling statutes and in relying on the analysis in Baumgardner. We agree, and we will address each of the IRS's main arguments separately.8


At the outset, it is important to understand the difference between the two types of interest claims that Sunoco asserted in its amended petition. Sunoco's first claim was that it had paid too much “deficiency interest.” Deficiency interest is interest charged to a taxpayer pursuant to I.R.C. § 6601, on tax underpayments the taxpayer has made (or should have made) for a given period.9 The IRS, like banks or any other creditor, charges interest on money it is owed over time. Thus, when a taxpayer underpays taxes for a certain tax period, the IRS charges interest on the amount of the deficiency. Concomitantly, the IRS pays a taxpayer interest on any amount of taxes that a taxpayer pays that exceeds the actual tax liability for a given year. This second type of interest is known as “overpayment...

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