Union Pacific R. Co. v. U.S.

• Decision Date: 25 May 1988
• Docket Number: No. 87-1452,87-1452
• Citation: 847 F.2d 1567
• Parties: -1200, 88-1 USTC P 9357 UNION PACIFIC RAILROAD COMPANY and Affiliated Companies, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1567

847 F.2d 1567

61 A.F.T.R.2d 88-1200, 88-1 USTC P 9357

UNION PACIFIC RAILROAD COMPANY and Affiliated Companies Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

Appeal No. 87-1452.

United States Court of Appeals Federal Circuit.

May 25, 1988.

James P. Holden, Steptoe & Johnson, Washington, D.C., argued for plaintiff-appellant.

Francis M. Allegra, Dept. of Justice, Washington, D.C., argued for defendant-appellee. With him on the brief were William S. Rose, Jr., Asst. Atty. Gen., Gary R. Allen and David English Carmack.

Before RICH and NIES, Circuit Judges and NICHOLS, Senior Circuit Judge.

NICHOLS, Senior Circuit Judge.

Union Pacific Railroad Company and Affiliated Companies (Union Pacific) appeal the decision of the United States Claims Court, 9 Cl.Ct. 702 (1986) (Margolis, J.), denying Union Pacific recovery of statutory interest on overpayments of federal income and excess profits taxes incurred between tax years 1943 and 1945. We affirm.

I Background

During World War II, Union Pacific, a Utah corporation, transported war-related materials for the Federal Government. Pursuant to the Transportation Act of 1940, ch. 722, pt. II, 54 Stat. 898, 954-55 (1940), shipments transported and intended for military use were entitled to receive special rates known as "land grant" freight rates, but the true end use was often not disclosed to the carrier because of wartime secrecy. Section 322 of the Act required the government to pay transportation charges as presented by the carrier, subject to later audit procedures designed to identify the purpose of the wartime shipments and determine the amount of excess transportation charges paid to railway carriers. The General Accounting Office implemented the audit procedures.

Between 1941 and 1946, Union Pacific collected $61,953,803 in excess transportation charges. The government recouped this amount, without interest, between 1942 and 1957, mainly by offsetting the overpaid amount against other tariffs that were owed to the railroad. The monies withheld in this manner were referred to by both the government and the railroads as "cutbacks." The excess rates were reflected as income on wartime tax returns for 1941 through 1946; and for years 1942 through 1957, Union Pacific deducted the amounts refunded to the United States only in the year of repayment as required by the "claim-of-right" doctrine. North American Oil Consol. v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197 (1932). The net result, however, did not fully offset Union Pacific's tax liability generated by the previous years' reporting of excess transportation charges because the wartime tax rates were so much higher. Union Pacific faced a significant tax liability for excess charges that were reported as income and later recaptured because, for tax purposes, the recoveries could not be related to the years the transportation was performed.

To remedy the situation, Union Pacific applied, under authority of section 43 of the 1939 Internal Revenue Code (IRC), to the Commissioner of the Internal Revenue Service (IRS) to make adjustments to determine clear reflection of income for the years in question. Letters exchanged between Union Pacific and the IRS resulted in an agreement (the "1948 agreement") which allowed adjustment of wartime income and excess profits taxes to reflect the later "cut-backs" and to eliminate them from later years' tax deductions accordingly and also required Union Pacific to restrict the amount of interest it would receive on refunds to the amount it would pay for adjusting later income upward. At the time of the agreement, Union Pacific did not object in writing to the restriction of interest. Specifically, on November 29, 1948, the IRS responded to Union Pacific's counterproposals regarding cutback deductions:

[P]ermission is granted under the authority conferred in section 43 of the Internal Revenue Code [of 1939] to allocate, on the terms and conditions hereinafter stated, repayments heretofore or hereafter made of excessive transportation charges * * * to the years in which such charges were included in taxable income.

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3. The amount of interest on refunds of income and excess profits taxes resulting from these adjustments shall be allowed only to the extent of, and limited to, the amount of interest on deficiencies resulting from these adjustments.

Union Pacific accepted the Commissioner's restrictions in a letter dated December 14, 1948. Union Pacific then proceeded to amend its returns and to reflect the proper income for each tax year in question, whether as an overpayment or as an underpayment.

Section 3771(a) of the 1939 Code and section 6611 of the 1954 Code and the 1986 Code require that interest be paid on overpayment of internal revenue taxes. 26 U.S.C. Sec. 3771(a) (1939); 26 U.S.C. Sec. 6611 (1986). Union Pacific has received its overpayment refunds from IRS without interest except as offset by underpayment interest. A partial settlement of Union Pacific's claims for the years 1943 and 1944 was evidenced by a Form 870-AD executed by Union Pacific and the IRS Commissioner in 1977. In 1978, the Commissioner refused to pay interest on the overpayments listed in Union Pacific's 1943 and 1944 tax returns, in what Union Pacific complains, is a violation of Sec. 3771(a), supra, and Sec. 6611, supra. After unsuccessful attempts at settling the dispute, Union Pacific filed suit in the United States Claims Court on June 15, 1984, alleging tax overpayments due the railroad resulting from retroactive deduction of excess transportation charges. On cross-motions for summary judgment, the Claims Court held that the interest restriction stated in the 1948 agreement is enforceable and that the forfeiture of interest was properly applied by the Commissioner. 9 Cl.Ct. at 707. Union Pacific timely filed its appeal on July 10, 1987.

II Issues

The main issue at hand, two-fold in nature, regards the propriety of the interest restriction inserted in the 1948 agreement. Initially, the question is whether the agreement is valid and enforceable. If not, then, does equitable estoppel prevent Union Pacific from challenging: (1) the validity of the interest restriction in the agreement; and (2) its failure to receive interest on overpayments made on its excess profits? A minor issue we discuss in Part III C, below.

III Discussion

A. Validity of the Agreement

Union Pacific's case revolves around the validity and enforceability of the 1948 agreement. Initially, the government asserted the agreement's validity and Union Pacific contested both its validity and enforceability. The government, however, has, in its candor, relieved the taxpayer of some of its burden by conceding, both in its brief here and at oral argument, that the 1948 agreement is not binding. The invalidity results from the agreement not having been signed by the proper Treasury officials, as the statute law required, I.R.C. Sec. 3670 (1939). The government maintains the agreement may yet be enforced citing the Supreme Court case of Botany Worsted Mills v. United States, 278 U.S. 282, 49 S.Ct. 129, 73 L.Ed. 379 (1929), which states that an informal tax settlement agreement is "not binding of itself," id. at 289, 49 S.Ct. at 132, but "may when executed become, under some circumstances binding on the parties by estoppel[ ]." Id. Following the government's concession, therefore, the crucial question now becomes whether Union Pacific is equitably estopped from recovering the claimed additional interest on overpayments of excess profits, which the Commissioner earlier denied the taxpayer. The Claims Court held that the agreement was enforceable and valid, a conclusion with which we cannot, under the circumstances, agree. We hold, therefore, that the agreement is not binding of its own force.

B. Equitable Estoppel

The government argues, in the alternative, that Union Pacific is estopped from challenging the validity of the interest restriction. In essence, the government argues that a suit may not be predicated on omissions induced by the party suing, Swain v. Seamens, 76 U.S. (9 Wall.) 254, 274, 19 L.Ed. 554 (1870); see also R.H. Stearns Co. v. United States, 291 U.S. 54, 54 S.Ct. 325, 78 L.Ed. 647 (1934); in this case, failure to object to the interest restriction and subsequently complying with the terms of the agreement.

In its brief, the government also cites to Guggenheim v. United States, 111 Ct.Cl. 165, 77 F.Supp. 186 (1948), cert. denied, 335 U.S. 908, 69 S.Ct. 411, 93 L.Ed. 441 (1949), for the proposition that the government cannot be placed in the same position it was in before the challenge of the agreement and that, therefore, Union Pacific should not now be heard to complain about its lost interest. The railroad is estopped from objecting to that which it should have objected to in 1948 or soon thereafter. As the Claims Court notes: "The plaintiff [Union Pacific] had legal advice during and after the war. The Internal Revenue Code was known by the plaintiff. The plaintiff knew the alternatives and made its choice." Union Pacific, 9 Cl.Ct. at 707. We agree with the Claims Court's and the government's positions regarding equitable estoppel.

The lack of a signature by the proper official was a relatively minor defect which could have readily been corrected if plaintiff had given prompt notice of its insistence on having such a signature. More serious is the charge that the government, having conceded that the retroactive correction of the returns for the war years was necessary to reflect taxable income fairly, had no right to exact a waiver of statutory interest as a precondition for doing what it ought to have done gratis. We think, however, even if the government committed a serious wrong in doing as it did, equity is against taxpayer having any right to sign without protest, knowing of the wrong, and say nothing, and rely on the wrong at a much later date. The court...