United States v. Commw. Energy System

• Decision Date: 05 October 2000
• Docket Number: No. 00-1113,00-1113
• Citation: 235 F.3d 11
• Parties: (1st Cir. 2000) UNITED STATES OF AMERICA, PLAINTIFF, APPELLANT, V. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES, DEFENDANT, APPELLEE. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 11

235 F.3d 11 (1st Cir. 2000)

UNITED STATES OF AMERICA, PLAINTIFF, APPELLANT,

V.

COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES, DEFENDANT, APPELLEE.

No. 00-1113.

United States Court of Appeals, For the First Circuit.

Heard Oct. 5, 2000.

Decided December 21, 2000.

Amended August 1, 2001.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Joseph L. Tauro, U.S. District Judge.

Thomas J. Sawyer, Attorney, Tax Division, with whom Paul M. Junghans, Acting Assistant Attorney General, Donald K. Stern, United States Attorney, and Bruce R. Ellisen, Attorney, Tax Division, were on brief, for appellant.

Richard P. Swanson, with whom Teena H. Kim, Thelen Reid & Priest, Llp, and Michael K. Callahan, were on brief, for appellee.

Before Torruella, Chief Judge, Lynch and Lipez, Circuit Judges.

Torruella, Chief Judge.

This appeal concerns a transition provision of the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085 (1986), that provided temporary relief from the repeal of the investment tax credit (ITC). See Tax Reform Act §§ 204(a)(3). The district court held that certain property purchased by appellee Commonwealth Energy System ("Commonwealth") was "readily identifiable with and necessary to carry out a written supply or service contract . . . which was binding on [December 31, 1985]." United States v. Commonwealth Energy Sys., 49 F. Supp. 2d 57, 58 (D. Mass. 1999). We affirm the district court's holding that the I.R.S. filed its claim within the applicable statute of limitations period. See United States v. Commonwealth Energy Sys., 994 F. Supp. 80 (D. Mass. 1998). But because we conclude that the property in question did not qualify under §§ 204(a)(3), we reverse on the merits.

BACKGROUND

Neither party disputes the facts at issue here, which are as follows.

In 1965, Commonwealth entered into a set of power supply contracts (the "Contract") with several other utilities, pursuant to which it agreed to build a power plant known as Canal Unit No. 1 (the "Plant"). The other utilities agreed to purchase all Plant output for 33 1/3 years from the date of completion (1968). The Contract required Commonwealth to build "a new conventional steam plant" with a capability of "approximately 560 megawatts." Commonwealth was required to "use all due diligence" in delivering the electricity "regularly and without interruption," and promised to "operate and maintain the [Plant] in an economical and efficient manner and in accordance with good utility practice and all applicable law." However, the Contract did not provide for any specific repair schedules nor mandate the replacement of particular parts.

In 1990 and 1991, with the Contract still in effect, Commonwealth made several repairs and improvements to the Plant at an approximate expense of $7.8 million, including (i) replacement of the generator rotor, two silica analyzers, a recorder system, welded tubes, burner panels, insulation, air preheater parts, and valves; (ii) addition of two barge mooring dolphins; (iii) addition of a penthouse heating system; and (iv) repairs to the boiler feed pump. After the I.R.S. required Commonwealth to capitalize these items (rather than deduct them as ordinary and necessary business expenses), Commonwealth asserted that the items qualified for the investment tax credit under the transition rules. The I.R.S. issued refunds totaling approximately $880,000 by check dated July 25, 1995 which was deposited by Commonwealth on July 27, 1995. The I.R.S. filed suit on July 30, 1997, claiming that the refunds were granted erroneously.

As a preliminary matter, the district court held that the claim was not time-barred because the two-year limitations period did not begin until the date the refund check cleared, on August 2, 1995. See Commonwealth Energy, 994 F. Supp. at 82.

The district court found the "readily identifiable with" language of §§ 204(a)(3) ambiguous, and thus examined the legislative history of the supply or service contract provision. The court refused to "limit the transition tax credit provision to property explicitly designated in a supply contract," but instead relied on a congressional colloquy for a broader interpretation of §§ 204(a)(3). Commonwealth Energy, 49 F. Supp. 2d at 59-60. The court held that, at least "in the power supply context, that generating equipment/property is 'readily identifiable with' the written supply contract where the contract specifies (1) the primary energy source; and (2) the total generating capacity." Id. at 60. As the Contract specified both source and capacity, the district court held principally for appellee Commonwealth, only excluding a refund for the mooring dolphins because they were neither "generating equipment" nor "generating property" under the Contract.¹ Id. at 61.

DISCUSSION

I. Statute of Limitations

We begin with the proposition that statutes of limitations (when sought to be applied against the Government) are construed strictly in favor of the Government. See, e.g., Badaracco v. Comm'r, 464 U.S. 386, 391 (1984). 26 U.S.C. §§ 6532(b) provides that the "recovery of an erroneous refund . . . shall be allowed only if such suit is begun within 2 years after the making of such refund. . . ." Here, Commonwealth received a refund check on July 27, 1995. The check cleared at the Federal Reserve Bank and payment was authorized by the Treasury on August 2, 1995. The Government filed its complaint on July 30, 1997. Accordingly, the Government suggests that the statute of limitations does not begin to run until the Treasury has approved payment; Commonwealth argues that the limitations period runs from the date of receipt and thus the action should have been time-barred.

This is a case of first impression in this Court, and one that apparently has not been addressed by the Supreme Court and has only been addressed indirectly by one other court of appeals.² However Commonwealth points to Supreme Court dicta suggesting that the appropriate date is the date of receipt. In O'Gilvie v. United States, 519 U.S. 79 (1996), the Court ruled against the taxpayer, holding that, as between the date the refund check was mailed and the date of receipt by the taxpayers, the date of receipt would govern. The Court did not consider whether the date of payment would govern over the date of receipt. The Court noted that the cause of action in question was rooted in the common law claim of assumpsit, and that such an action "accrue[d] upon the receipt of payment." Id. at 91 (quoting New Bedford v. Lloyd Inv. Assocs., Inc., 363 Mass. 112, 119 (1973)). In a much older case, United States v. Wurts, 303 U.S. 414 (1938), the Court held that the forerunner of §§ 6532(b) ran from the date of "payment," rather than from the date which the refund was allowed. See id. at 418. However, the Court said little about what the "date of payment" was, at least as it bears on the present case.

The Ninth Circuit has decided the issue, albeit indirectly. In United States v. Carter, 906 F.2d 1375 (9th Cir. 1990), the court held that the taxpayer had failed to carry its burden to show that the check had been received before December 8, 1985, which would render untimely the government's complaint, filed on December 8, 1987. The taxpayer negotiated the check on December 23, 1985; thus, if the court used the date the check cleared, the government's complaint would have been within the two-year period. See id. at 1378. But the court assumed, without elaboration, that the date a refund is "made" is the date it is received, and did not address the important policies which we have considered in choosing between the date of receipt rule and date of clearance rule.

We agree with the district court's conclusion that the statute of limitations did not begin to run until August 2, 1995, at the time the check cleared the Federal Reserve and payment was authorized by the Treasury. First, we note that the Court's reasoning in Wurts rested on the fact that a taxpayer was not entitled to the refund money until the date of payment, as opposed to the date of allowance. The Court noted that "even after a check was signed and mailed," the Commissioner might cancel the payment. Id. at 417-18 (citing Daube v. United States, 289 U.S. 367, 372 (1933)). Under 31 U.S.C. §§ 3328 and regulations pursuant to it, the Government's right to cancel payment until Treasury authorization is clear. See 31 U.S.C. §§ 3328(f) ("Nothing in this section limits the authority of the Secretary to decline payment of a Treasury check after first examination thereof at the Treasury."); 31 C.F.R. §§ 240.3(d) ("Checks shall be deemed to be paid by the United States Treasury only after first examination has been fully completed.").

Second, because the date of receipt in O'Gilvie was sufficient to place the cause of action within the statute of limitations, the Court had no need to determine whether a complaint filed (as here) between two years from the date of receipt and two years from the check-clearing date would also so fall. However, in supporting its decision despite the greater clarity of a "date of mailing" rule, the Court noted that the check-clearing date at the very least "sets an outer bound." O'Gilvie, 519 U.S. at 91. Using the check-clearing date here both satisfies the rule that we construe statutes of limitations in favor of the Government and provides a certain limitations date by which the Government must abide. Although the Treasury cannot know for certain when a check is received by a taxpayer, it can know when that check clears, and determine whether or when to file suit accordingly.³

II. Tax Reform Act §§ 204(a)(3)

Before enactment of the Tax Reform Act of 1986, qualifying taxpayers were eligible for an income tax credit for certain qualified investments in tangible property. See 26 U.S.C. §§ 38 (1985). The Tax Reform Act eliminated this credit but softened the blow slightly by providing...