109 T.C. No. 1
UNITED STATES TAX COURT
BANKAMERICA CORPORATION, as successor in interest to CONTINENTAL BANK CORPORATION, as successor in interest to CONTINENTAL ILLINOIS CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent%
Docket No. 5931-83. Filed July 15, 1997.
P had deficiencies in its Federal income tax for years 1 and 2. In year 3, P carried back an amount of investment tax credit to years 1 and 2, reducing the
% This Court has issued five opinions under this docket number, each captioned Continental Illinois Corp. v. Commissioner: T.C. Memo. 1988-318, T.C. Memo. 1989-468, T.C. Memo. 1989-636, 94 T.C. 165 (1990), and T.C. Memo. 1991-66, relating to the tax liability of petitioner's predecessor for the tax years 1975 through 1979. Portions of the decisions in T.C. Memo. 1988-318, T.C. Memo. 1989-636, and T.C. Memo. 1991-66 were affirmed in part and reversed in part and remanded to this Court in Continental Illinois Corp. v. Commissioner, 998 F.2d 513 (7th Cir. 1993), cert. denied 510 U.S. 1041 (1994), and a decision was entered in accordance with the opinion of the Court of Appeals for the Seventh Circuit. Petitioner has filed a timely motion to redetermine interest. - 2 -
amount of its deficiencies. In year 6, a net operating loss arose which was carried back to year 3. The carryback of the year 6 loss displaced a year 3 foreign tax credit, which was then carried back to years 1 and 2, displacing the investment tax credit originally taken in those years. R computed interest under sec. 6601, I.R.C., from the end of year 3 to the due date of the return for year 6 on deficiency amounts for years 1 and 2, calculated after the effect of the year 6 loss, without reducing the deficiencies by the amounts of ITC taken from year 3 to year 6. P filed a timely motion under sec. 7481(c), I.R.C., to redetermine interest. Held, P has made overpayments of interest for years 1 and 2 because R should have taken the investment tax credit amounts into account in calculating interest accruing from the end of year 3 until the due date of the return for year 6 on deficiency amounts reduced by the investment tax credit carried back.
Roger J. Jones and Jeffrey B. Frishman, for petitioner.
Pamela V. Gibson and Richard G. Goldman, for respondent.
SUPPLEMENTAL OPINION
TANNENWALD, Judge: A decision was entered in this case on
November 17, 1994, pursuant to a stipulated computation, in
accordance with the opinion of the Court of Appeals for the
Seventh Circuit in Continental Illinois Corp. v. Commissioner,
998 F.2d 513 (7th Cir. 1993), cert. denied 510 U.S. 1041 (1994).
On December 20, 1995, petitioner filed a timely motion under
section 7481(c)1 and Rule 261 to redetermine interest for the
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
1977 and 1978 tax years, alleging that respondent has erroneously
calculated such interest. The issue for decision is whether
respondent has failed to take into account the carryback of a
1979 investment tax credit (ITC), and consequently overcharged
petitioner for interest which accrued before the effect of a 1982
net operating loss (NOL) carryback.
Background
In 1983, respondent determined deficiencies against
petitioner's predecessor in interest for the tax years 1975
through 1979. Petitioner's predecessor challenged these
deficiencies in this Court, which issued the following five
opinions, under this same docket number, each captioned
Continental Illinois Corp. v. Commissioner: T.C. Memo. 1988-318,
T.C. Memo. 1989-468, T.C. Memo. 1989-636, 94 T.C. 165 (1990), and
T.C. Memo. 1991-66. Decision was entered on May 13, 1992 (the
1992 decision), and was based on Rule 155 computations (the 1992
computations) which took into account certain amounts of an ITC
carried back from 1979.
Portions of this Court's decision as reflected in T.C. Memo.
1988-318, T.C. Memo. 1989-636, and T.C. Memo. 1991-66 were
appealed by the parties to the Court of Appeals for the Seventh
Circuit. The Court of Appeals for the Seventh Circuit affirmed
in part and reversed in part and remanded the case to this Court
in Continental Illinois Corp. v. Commissioner, 998 F.2d 513, - 4 -
issued on July 9, 1993. Following this remand, the parties filed
with the Court on November 2, 1994, stipulated computations (the
1994 computations) covering the years 1976 to 1979. The 1994
computations did not include the amounts of the 1979 ITC that
were included in the 1992 computations. This Court's decision,
based on the 1994 computations, was entered on November 17, 1994,
and became final within the meaning of section 7481(a)2 on
December 17, 1994 (the 1994 decision). As part of that decision,
it was decided that there was an overpayment for the taxable year
1977 in the amount of $9,089,070.00, and a deficiency for the
taxable year 1978 in the amount of $1,544,492.72. The decision
document indicated that it "[incorporated] herein the facts
recited in the respondent's computation as the findings of the
Court".
Petitioner's tax liability for the taxable years at issue,
with the effect and timing of various credit and net operating
loss (NOL) carrybacks, reflecting the 1994 decision, is described
in more detail as follows:
1977 Tax Year
Petitioner had a tax liability for the 1977 tax year of
$24,200,118, before taking into account any credit carrybacks.
Between April 15, 1977, and June 17, 1978, petitioner made
2 That section provides for a 30-day instead of a 90-day period for a decision of this Court to become final where there has been a remand by the Court of Appeals. - 5 -
payments totaling $14,234,576 against this tax liability,
producing a deficiency of $9,965,542.
In 1979, there arose a foreign tax credit (FTC) in the
amount of $29,327,737 and an ITC in the amount of $17,238,117.
In that year, petitioner applied $27,020,189 of the FTC, as well
as some of the ITC, to its 1979 tax liability, and carried
$2,307,548 of the FTC and $7,947,605 of the ITC back to 1977.
For interest purposes, petitioner received the benefit of this
carryback as of December 31, 1979. Sec. 6601(d).3 Taking into
account a refund petitioner received in the amount of $4,067,608
for 1977, petitioner had, as of January 1, 1980, a 1977 tax
liability of $3,777,997.
In 1982, there arose an NOL, $59,552,102 of which was
carried back to petitioner's 1979 tax year, pursuant to section
172(b),4 eliminating petitioner's 1979 tax liability. The
elimination of the 1979 tax liability had the effect of releasing
the FTC and ITC which had arisen in 1979, to be used in other
3 Sec. 346 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324, amended sec. 6601(d), effective for interest accruing after October 3, 1982, to change the date on which a taxpayer receives the benefit of a carryback for interest purposes from the last day of the tax year in which the carryback arose to the due date for the return for that year. 4 Sec. 172(b)(1) provides that an NOL for any taxable year shall be carried back to each of the 3 taxable years preceding the loss year. Sec. 172(b)(2) provides that the entire amount of the NOL shall be carried back first to the earliest year possible. - 6 -
years. Petitioner carried back $27,356,042 of the FTC to 1977,
which, along with other credits from 1980 (work incentive credits
and new jobs credits) in the amount of $342,819, satisfied its
tax liability for 1977. Because of ITC limitation rules found in
section 46(a)(3) and (4),5 the 1979 ITC originally carried back
to 1977 could no longer be used (since there was now, as of 1982,
after application of the FTC, no tax liability for 1977 against
which it could be applied), and was thus displaced and
subsequently carried over to 1981, a year not at issue. As a
result of the NOL's causing the release and carryback of the 1979
FTC to 1977 (and the consequent release of the ITC), there was as
of March 15, 1983 (the due date for the 1982 return)6 an
overpayment of $9,089,070 for petitioner's 1977 tax year.7
5 For 1977, sec. 46(a)(3) and (4) limits available ITC to $25,000 plus 50 percent of tax remaining after the application of the FTC allowable for that year. The $25,000 limit was taken up with ITC that arose and was used in 1977, and that is otherwise not at issue. Also under sec. 38(c), effective for carrybacks from tax years after Dec. 31, 1983, amounts of FTC must be applied before any amounts of ITC. 6 See supra note 3. 7 The ITC at this point no longer affected petitioner's substantive tax liability for 1977. - 7 -
1978 Tax Year
Petitioner had a tax liability of $6,608,807 for the 1978
tax year,8 not reflecting the effect of any carrybacks from
subsequent years. Between April 17, 1978, and October 12, 1979,
petitioner made payments totaling $3,633,741 against this
liability, leaving a deficiency of $2,975,066.
In 1979, there arose an FTC and an ITC, as discussed above.
None of the 1979 FTC was carried back to 1978, and $444,727 of
the 1979 ITC was carried back. Thus, as of January 1, 1980,
petitioner had a 1978 tax liability of $2,530,339.
In 1982, there arose, as discussed above, an NOL which was
carried back to 1979, eliminating tax liability for 1979 and
releasing the FTC and ITC which had arisen in that year. Of the
released 1979 FTC, $1,971,695 was carried back to 1978. Because
of the effect of the carryback of this FTC, petitioner was
precluded by section 46 from using the ITC carried back from
1979, which was then carried forward to 1981, a year not at
issue. When adjusted for additional payments and credits of
$79,925, petitioner had a tax liability for 1978, as of March 15,
1983, of $1,464,568.
The deficiencies and interest amounts involved were assessed
for both years by respondent and fully paid by petitioner. In
8 This liability reflects an ITC that arose in 1978 and was used in 1978. - 8 -
early 1995, shortly after the 1994 decision became final,
petitioner contacted respondent regarding the issue of the
inclusion of the 1979 amounts of ITC. Discussions between
petitioner and respondent continued throughout 1995, after which
petitioner timely filed a motion under Rule 261 to redetermine
the interest flowing from the stipulated 1994 computations with
respect to the 1977 and 1978 tax years.
Discussion
For the 1977 tax year, respondent has computed interest on a
deficiency of $11,733,7769 from December 31, 1977, to March 14,
1983. For the 1978 tax year, respondent has computed interest on
a deficiency of $2,975,066 from December 31, 1977, to March 14,
1983. Respondent has not given effect to amounts of 1979 ITC
which were carried back during the period 1980 through 1983
because these amounts of ITC were ultimately displaced and not
used for the years at issue.
Petitioner claims that respondent has overcharged it for
interest by not taking into account the amounts of the 1979 ITC,
with the effect of charging petitioner interest on higher
deficiency amounts. Petitioner's position is that respondent
must, in plain terms, "give it credit" for the 1979 ITC which
9 There is an unexplained difference of $8,174 in this figure. It is elsewhere listed as $11,725,602. We use the figure from the stipulated 1994 computations. - 9 -
reduced its 1977 deficiency to $3,777,997 during the period
January 1, 1980, to March 14, 1983, and reduced its 1978
deficiency to $2,530,339 during the same period, and charge it
interest on those lesser deficiency amounts during that period.
Petitioner's claim is based on the notion that respondent had use
of the money represented by the 1979 ITC "payment" during the
"interim" period from January 1, 1980, to March 14, 1983, and
cannot now charge petitioner for the use of that money.
Petitioner alleges that the amounts of ITC, which were
included in the Rule 155 computations that were prepared in 1992
before a decision was rendered by the Court of Appeals for the
Seventh Circuit, were erroneously left out of the 1994
computations.10 Due to the effects of the subsequent carryback
of the NOL from 1982, the inclusion or exclusion of the amounts
of 1979 ITC does not alter the underlying net tax liability for
either taxable year. Petitioner does not contest in any way its
tax liability for the deficiencies as reflected in the 1994
decision.
Section 7481(c) provides:
Jurisdiction Over Interest Determinations.-- Notwithstanding subsection (a), if -- (1) an assessment has been made by the Secretary under section 6215 which includes interest as imposed by this title,
10 See appendix and discussion infra page 16. - 10 -
(2) the taxpayer has paid the entire amount of the deficiency plus interest claimed by the Secretary, and (3) within 1 year after the date the decision of the Tax Court becomes final under subsection (a), the taxpayer files a petition in the Tax Court for a determination that the amount of interest claimed by the Secretary exceeds the amount of interest imposed by this title, then the Tax Court may reopen the case solely to determine whether the taxpayer has made an overpayment of such interest and the amount of any such overpayment. * * *
See also Rule 261, which implements sec. 7481(c); Note to Rule
261, 93 T.C. 1040-1041; Stauffacher v. Commissioner, 97 T.C. 453,
455-456 (1991). There is no dispute that, as to both tax years,
the three requirements of section 7481(c) have been met.
First, the entire amount of the deficiency plus interest has
been paid. Sec. 7481(c)(2); Melin v. Commissioner, 54 F.3d 432
(7th Cir. 1995), affg. an order of this Court.
Second, a timely petition was filed. Sec. 7481(c)(3).
Third, a deficiency which includes interest has been
assessed in respect of each year. Sec. 7481(c)(1); Asciutto v.
Commissioner, T.C. Memo. 1992-564, affd. 26 F.3d 108 (9th Cir.
1994). In this connection, even though an overpayment was
ultimately found for 1977, there was a deficiency for the period
during which interest accrued, which is the subject of this
dispute. In addition, where we have jurisdiction to determine an
overpayment (as we did in the original deficiency proceeding in
this case), we also have jurisdiction over the interest on that
overpayment. Estate of Baumgardner v. Commissioner, 85 T.C. 445 - 11 -
(1985). Under these circumstances, the interest issue before us
in respect of 1977 is within our jurisdiction.11
There is also some question as to the exact nature of the
relief petitioner is requesting for 1978. The statute only
grants this Court jurisdiction to determine an overpayment of
interest on a deficiency. Petitioner alleges that respondent
has, on the whole, underassessed interest on the 1978 deficiency.
However, petitioner also contends that, as part of the interest
calculation which resulted in an underassessment with respect to
the 1978 tax year, respondent has overcharged interest on the
1978 deficiency during the period between its initial use of the
carryback of the 1979 ITC and the occurrence of the superseding
1982 NOL. Under these circumstances, we are satisfied that we
have jurisdiction to determine whether there has been an
overpayment of interest during the specific "interim" period.12
The three requirements of section 7481(c) having been
satisfied, we turn our attention to the basic question involved
herein, i.e., the extent to which the ITC for 1979, which was
omitted from the 1994 computation, should be taken into account
11 We note that respondent does not contest our jurisdiction as to 1977. 12 In reaching this conclusion, we note respondent's indication on brief that respondent will make any computational adjustments that are a consequence of our decision, whether they result in interest due to petitioner or respondent. - 12 -
as a payment for purpose of determining interest due. The
parties have locked horns on four elements upon which the
resolution of this question depends:
(1) Respondent contends that the 1994 decision has
become final and that petitioner's motion seeks to modify
that decision contrary to the established principle that
this Court does not have jurisdiction to take such action in
the absence of a showing of fraud on the Court, or lack of
jurisdiction, in respect of the 1994 decision, which
elements are concededly not present herein. Petitioner
asserts that, since it seeks no change in the amounts of the
deficiencies for 1977 and 1978 set forth in the 1994
decision, it is not seeking to modify a final decision, but
only the underlying figures set forth in the 1994
computations for the limited purpose of determining interest
due.
(2) Respondent also argues that the relief petitioner
is requesting involves a change in the numbers set forth in
the 1994 computations, including specific line entries and
that such changes would require the Court to re-open the
record to admit new facts, a procedure that constitutes a
prohibited attempt to introduce a new matter in a Rule 155
proceeding.
(3) Respondent contends that, even if we find that we
have jurisdiction, petitioner is bound by the 1994 - 13 -
computations which it signed and that any modification of
those computations is accordingly unwarranted. In so doing,
respondent denies that there was a mutual mistake by the
parties based upon the omission from the 1994 computations
of the 1979 ITC which had been included in the 1992
computations. Petitioner asserts that this omission
constituted a mutual mistake and that therefore it should
not be bound by those computations.
(4) Respondent asserts that, in any event, the 1994
computations reflected the correct ordering of the
carrybacks by petitioner and that petitioner's use of the
ITC to reflect payment is not justified, as a matter of law,
because the ITC amounts were made unavailable by the 1982
NOL and the 1979 FTC. Petitioner counters that the fact
that the later events prevented the application of the ITC
against its tax liability for deficiencies does not preclude
its ability, for the purpose of computing interest due, to
continue to treat them as payment for the periods when they
were used, i.e., between the effective dates of the credits
involved and the dates of occurrence of the later events.
We deal with each of these elements in turn.
Initially, we note that the existence of a final decision
does not tie our hands in this case. We recognize that we may
not modify a final decision absent a showing of fraud or lack of
jurisdiction. Abatti v. Commissioner, 86 T.C. 1319, 1326 (1986), - 14 -
affd. 859 F.2d 115 (9th Cir. 1988). However, section 7481(c)
specifically carves out an exception to the rule on the finality
of our decisions. Indeed, a prerequisite for invoking section
7481(c) is that the decision be final. Aldrich v. Commissioner,
T.C. Memo. 1993-290. Thus, as long as we do not change the
substance of the final decision, we are free to act under section
7481(c).
Stauffacher v. Commissioner, supra, cited by respondent, is
clearly distinguishable. In that case, the taxpayer sought a
change in the amount of deficiencies, although the taxpayer was
apparently requesting that this be done only for the purpose of
computing interest. Petitioner herein is not seeking a change in
the amounts of the deficiencies for any purpose. We do not think
that the fact that the 1994 decision specifically incorporated
the 1994 computations, see supra p. 4, requires a different
conclusion. Under the circumstances herein, such action does not
elevate the computations from a position of providing a basis for
the decision to the position of an integral part of the decision
itself.
Respondent also seeks refuge in the rule that petitioner may
not raise a new issue in a Rule 155 proceeding. Cloes v.
Commissioner, 79 T.C. 933 (1982). But even if the issue of the
proper application of the 1979 ITC as it affects interest
liability were never raised before, it is not a "new issue"
within the meaning of Rule 155. Since in the instant case the - 15 -
proper application of the 1979 ITC only affects interest, we had
no jurisdiction to decide the issue during the main deficiency
proceeding. Pen Coal Corp. v. Commissioner, 107 T.C. 249, 255
(1996). Thus, petitioner cannot be accused of raising a "new"
issue that it could not have brought up before.
Moreover, this is not a Rule 155 proceeding, and
respondent's argument on this point reveals a misunderstanding of
the nature of the relief petitioner is requesting, and a
misapprehension of the difference between Rules 155 and 261. The
purpose of a computation under Rule 155 is to show "the correct
amount of the deficiency, liability, or overpayment to be entered
as the decision." Rule 155(a). If there is disagreement between
the parties, the Court will determine the correct computation,
and argument on that point is "confined strictly to consideration
of the correct computation of the deficiency, liability, or
overpayment resulting from the findings and conclusions made by
the Court". Rule 155(c). Not only does Rule 155 not contemplate
that a computation thereunder should reflect interest amounts,
but, contrary to respondent's arguments on brief, the Rule does
not allow arguments as to any other issues beyond the issues
litigated in respect of the ultimate bottom-line deficiency,
liability, or overpayment for the years at issue.
Rule 261(d), on the other hand, specifically contemplates
"bona fide factual dispute[s]" which would have to be addressed
by an evidentiary hearing. This Rule implies that this Court - 16 -
will, if necessary, accept new facts, specifically in the context
of a final decision, for the purpose of redetermining interest.
Additionally, respondent has never contested the existence of the
amounts of ITC, nor has respondent disputed the accuracy of the
amounts set forth in petitioner's motion. The record herein
contains all the evidence needed to decide the ultimate issue
before us. Thus, respondent's assertion of the need for new
facts is unfounded.
As we view the situation in respect of the procedural
elements involved herein, petitioner is simply seeking to flesh
out the 1994 computations so as to provide the foundation for a
proper calculation of its liability for interest without in any
way changing its liabilities for the deficiencies. Although
petitioner's efforts reflect changes in some of the numbers in
the 1994 computations, those changes do no more than offset each
other. This is clearly reflected in the appendix to this opinion
which shows that in each year petitioner first adds in the 1979
ITC credits and then subtracts an identical amount. In view of
the foregoing, we are satisfied that neither the rule as to the
finality of our decisions nor the principle that a new issue may
not be raised in a Rule 155 proceeding precludes us from
addressing the substance of petitioner's motion.
Respondent also objects to any change in the 1994
computations, on the grounds that the computations were based on
a stipulation of settlement between petitioner and respondent, - 17 -
and petitioner cannot now seek to be relieved of its stipulation.
According to respondent, petitioner cut a deal and is now stuck
with it. According to petitioner, the amounts of ITC in
discussion were included in the 1992 computations but, as a
result of mutual inadvertence, then left out of the 1994
computations.13
It is clear that we may reopen an otherwise valid settlement
agreement based on the existence of mutual mistake. Callen v.
Pennsylvania R. Co., 332 U.S. 625, 630 (1948); Dorchester Indus.
Inc. v. Commissioner, 108 T.C. 320, 334 (1997). We may also
relieve a party of a stipulation where justice requires. Cf.
Rule 91(e); Adams v. Commissioner, 85 T.C. 359, 375 (1985); Shaw
v. Commissioner, T.C. Memo. 1991-372 n.3. On the other hand,
unilateral mistake is generally not a ground for reforming a
settlement or stipulation. Stamm Intl. Corp. v. Commissioner, 90
T.C. 315, 320 (1988); see Markin v. Commissioner, T.C. Memo.
1989-665. It is also clear that the mere fact that a decision
which has become final is based on a stipulation does not bar the
application of section 7481(c). In Stauffacher v. Commissioner,
97 T.C. 453 (1991), the underlying issues had been resolved on
the basis of a stipulated decision. While the Court rejected the
13 We note that the Court of Appeals for the Seventh Circuit did not address any issue or otherwise take any action in respect of the application of carrybacks in the 1992 computations. - 18 -
taxpayer's attempt to construct a different settlement, it did
redetermine the amount of interest owed, as recalculated by
respondent, which was lower than the amount which had been
assessed and paid.
We must, therefore, determine whether the omission of the
amounts of 1979 ITC from the 1994 computations was a result of
unilateral or mutual mistake. In respondent's initial notice of
objection to petitioner's motion, respondent conceded that the
ITC amounts were inadvertently left out of the 1994 computations:
Respondent agrees that, on the basis of information now available, respondent would have agreed to the computations petitioner now advocates, had the matter been raised in 1994 when the computation on remand was being prepared.
In a supplemental notice of objection to petitioner's motion, and
on brief, respondent recants this concession, because, "upon
further consideration", respondent contends that the 1994
computations "correctly reflect the application of payments and
credits to the deficiencies determined therein." Thus,
respondent does not deny that a mistake was originally made, but
rather contends that the mistake led to what respondent now
believes is the correct result, and therefore is not a mistake on
respondent's part. As a consequence, respondent seeks to enforce
the 1994 computations as submitted on the ground that only a
unilateral mistake was involved.
Stipulations are treated under general principles of
contract law. Stamos v. Commissioner, 87 T.C. 1451, 1455 (1986). - 19 -
If a contract is based on a mutual mistake, a defense to
reformation or rescission is not that the contract with the
mistake is more beneficial to the defending party. Similarly, it
is no defense to petitioner's motion for respondent to decide
that the outcome of the case with the stipulation based on a
mutual mistake is more favorable to respondent than the outcome
petitioner proposes.
Respondent cannot claim prejudice by petitioner's proposed
treatment of the interim interest, respondent having included the
ITC amounts in question in the 1992 computations, Dorchester
Indus. Inc. v. Commissioner, supra, and petitioner having raised
the issue with respondent shortly after discovering the error.
See 13 Williston, Contracts, sec. 1578, at 507 n.5 (3d ed. 1970).
Finally, as we discuss below, while it is uncontested that
the 1994 computations correctly reflect payments so as to
determine tax liability for the deficiencies, they do not
correctly reflect payments so as to determine the proper interest
liability. According to respondent, if a change of heart takes
place, that is enough to eliminate the existence of a mutual
mistake even though in point of fact the change of heart proves
to be incorrect. Respondent is in effect saying that, even if
petitioner's contention as to the substantive law is correct,
respondent's changed position remains unassailable. We think
respondent's position creates a catch-22 situation and is
incongruous to say the least. - 20 -
We conclude that, in the interest of justice, petitioner
should be relieved from the effects of the stipulated 1994
computations for the narrow purpose of redetermining interest for
the 1978 and 1977 tax years during the interim period at issue.
Cf. Rule 91(e); Louisiana Land and Exploration Co. v.
Commissioner, 90 T.C. 630, 648 (1988); Korangy v. Commissioner,
893 F.2d 69, 72 (4th Cir. 1990), affg. T.C. Memo. 1989-2
(applying Rule 91(e) to a settlement agreement).
In this context, we find it irrelevant whether the error as
to the carryback of the 1979 ITC was due to the carelessness of
either party, in this case, the failure of petitioner to protect
its interest by pointing out to respondent at the time the 1994
computations were constructed that the amounts of the 1979 ITC
had been omitted. As we stated in Woods v. Commissioner, 92 T.C.
776, 789 (1989):
The circumstances of this case do not warrant withholding relief from a mistake. The mere fact that the party seeking relief did not exercise reasonable care does not preclude reformation. 1 Restatement, Contracts 2d, sec. 155, comment a; sec. 157, p. 416.
Reformation provides a result that both parties agreed to and prevents an unintended and unexpected windfall. * * *
We now turn to the proper computation of interest, for
purposes of determining whether or not petitioner has actually - 21 -
made an overpayment under section 6601(d), which deals with the
correct timing and application of loss and credit carrybacks.14
The parties agree that through the interplay of sections
46(a) and 172(b), the 1979 ITC was displaced as of March 15,
1983, for purposes of determining petitioner's ultimate tax
liability. Respondent, however, contends that this displacement
also means that the ITC may not be taken into account in
14 Sec. 6601(d) provides: Income Tax Reduced by Carryback or Adjustment for Certain Unused Deductions.-- (1) Net operating loss or capital loss carryback.--If the amount of any tax imposed by subtitle A is reduced by reason of a carryback of a net operating loss, or net capital loss such reduction in tax shall not affect the computation of interest under this section for the period ending with the filing date for the taxable year in which the net operating loss or net capital loss arises. (2) Certain credit carrybacks.-- (A) In general.--If any credit allowed for any taxable year is increased by reason of a credit carryback, such increase shall not affect the computation of interest under this section for the period ending with the filing date for the taxable year in which the credit carryback arises, or, with respect to any portion of a credit carryback from a taxable year attributable to a net operating loss carryback, capital loss carryback, or other credit carryback from a subsequent taxable year, such increase shall not affect the computation of interest under this section for the period ending with the filing date for such subsequent taxable year. (B) Credit carryback defined.--For purposes of this paragraph, the term "credit carryback" has the meaning given such term by section 6511(d)(4)(C) [referring to the carryback of business credits, including the ITC, under section 39]. - 22 -
determining interest liability during the period January 1, 1980,
to March 14, 1983. We disagree.
In Manning v. Seeley Tube & Box Co., 338 U.S. 561 (1950),
the Supreme Court held that the carryback of an NOL to abate a
deficiency does not abate the interest accrued on that deficiency
up until the date the NOL arises. Absent a clear legislative
expression to the contrary, the "use of money" principle will
apply to the accrual of interest on a deficiency. Id. at 566.
The "use of money" principle is reflected in section 6601.
Section 6601(a) provides for interest to be charged on a
deficiency. Section 6601(d) provides that interest is not
affected by a carryback before the filing date of the year in
which the loss or credit arises.15 That is, the party who has
the use of the money pays interest up until the event which
causes the party no longer to have use of that money. In
general, interest liability is determined under section 6601
synchronically, looking at the period during which interest
accrues, without reference to future events, such as loss or
credit carrybacks. This general principle, evident from the
statute itself, is also clearly set forth in respondent's own
rulings.
15 Sec. 6601(d) mentions specifically net capital losses, NOL's and ITC's, but is silent as to FTC's. See infra note 18. - 23 -
For example, in Rev. Rul. 66-317, 1966-2 C.B. 510, the
taxpayer claimed an ITC in year 1. In year 4, an NOL arose which
was carried back to year 1, eliminating taxable income and tax
liability for year 1, and thereby displacing the ITC originally
claimed. The ruling holds that the taxpayer was not required to
pay interest from year 1 to year 4 on that portion of the tax
that had been originally offset by the ITC that was displaced by
the NOL.
In Rev. Rul. 71-534, 1971-2 C.B. 414, the taxpayer incurred
an NOL for year 6, which was carried back to year 3, eliminating
taxable income against which an FTC had been claimed in year 3.
As a result, the FTC was carried back to year 1, for which year a
refund was claimed. The ruling holds that interest was due to
the taxpayer on the refund from the first day after the close of
year 6, because the significant event that gave rise to the year
1 overpayment was the year 6 NOL.16
In Rev. Rul. 82-172, 1982-2 C.B. 397, the taxpayer had an
unused ITC in year 3 that it carried back to year 1. In year 4,
the taxpayer incurred an NOL which it carried back to year 1,
eliminating all income and resultant tax liability against which
the ITC could be applied, and resulting in a refund for year 1.
The displaced ITC was carried to year 2, resulting in an
overpayment of tax for year 2. The ruling holds that the
16 See infra note 18. - 24 -
significant event that gave rise to the year 1 refund and the
year 2 overpayment was the year 4 NOL and that the taxpayer was
entitled to interest on both amounts only after the last day of
year 4. Consistent with Rev. Rul. 66-317, supra, the ruling also
holds that the taxpayer did not have to pay interest on the
amount of its tax liability originally satisfied by the ITC from
year 3 to year 4, but then replaced by the NOL. The ruling
specifically notes that "the obligation to pay * * * must be
considered sequentially." Rev. Rul. 82-172, 1982-2 C.B. 397,
398.
According to respondent, the use-of-money principle
illustrated in the revenue rulings only applies where there is a
fixed liability. In this case, respondent's position is that,
because of the course of the litigation, the final liability for
1977 and 1978 did not become fixed until after the 1982 NOL
arose, which, by way of carryback, eliminated the use of any
amounts of ITC to reduce that liability, or reduce interim
interest charged. Respondent's analysis is fundamentally flawed.
While it is true that petitioner's final liability was fixed
by the 1994 decision of this Court, that decision, like all Tax
Court decisions, relates back to the time the liability arose.
That is, the effect of a decision of this Court is that a
deficiency or overpayment is found to exist in the amount
determined by this Court for all purposes, including interest.
There is no question that the ITC in question qualified as a - 25 -
payment of the tax as initially shown on the returns. Certainly,
the ITC is a payment of the tax as ultimately determined by this
Court. The fact that the ultimate decision by this Court as to
petitioner's tax liability was delayed by the litigation process
is irrelevant.
It is clear that these rulings reinforce petitioner's
position and the application herein of the general rule of
Manning v. Seeley Tube & Box Co., supra, and section 6601, that
"the underlying objective is to determine in a given situation
whose money it is and how long the other party had use of it."
Rev. Rul. 82-172, 1982-2 C.B. 397. If respondent had use of
petitioner's money, even in the form of a credit, during the
relevant period, then respondent must take account of that money
in computing interest on any deficiency. See also Rev. Rul. 85-
65, 1985-1 C.B. 366; Tech. Adv. Mem. 83-26-001 (Feb. 25, 1983);
Tech. Adv. Mem. 86-24-002 (Dec. 5, 1985); Tech. Adv. Mem. 94-43-
007 (May 19, 1994).17
There are two exceptions to this general rule. See G.C.M.
39,359 (May 14, 1985). The first exception occurs in the case
where there is "clear legislative expression" indicating that the
17 "[A]lthough the petitioners are not entitled to rely upon unpublished private rulings which were not issued specifically to them, such rulings do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws." Hanover Bank v. Commissioner, 369 U.S. 672, 686 (1962) (fn. refs. omitted). - 26 -
underlying principle of section 6601(d) should not apply.
Manning v. Seeley Tube & Box Co., 338 U.S. at 566. Neither party
contends that such an exception applies to the facts of this
case.18
The second exception occurs when the later event relates
back to the beginning of the interest period, in which case
interest is calculated from the beginning taking the change into
account. This exception can be illustrated by General Dynamics
Corp. v. United States, 214 Ct. Cl. 369, 562 F.2d 1201 (1977),
which respondent cites in support of the argument that interest
on petitioner's deficiency not be reduced by the amounts of ITC
used between 1979 and 1983. In that case, the taxpayer
18 But see Fluor Corp. v. United States, 35 Fed. Cl. 520 (1996), which holds that sec. 6601(d) does not apply to FTC's and abated interest on a deficiency eliminated by the carryback of an FTC. FTC carryovers "shall be deemed taxes paid or accrued" in the years to which they are carried back or forward. Sec. 904(c). Sec. 6611(g) provides that, notwithstanding the provisions of sec. 904(c), interest on an overpayment attributable to an FTC accrues, not from the date "deemed" paid, but from the date the taxes were actually paid. Significantly, however, sec. 6601(d) with regard to underpayments lacks any analogous provision as to the treatment of FTC's. The court in Fluor interpreted this silence as the "clear legislative expression" required by Manning v. Seeley Tube & Box Co., 338 U.S. 561, 566 (1950), to suspend the otherwise general "use of money" principle, and not charge the taxpayer interest on the deficiency eliminated by the carryback of the FTC. While we recognize that there is a lack of statutory clarity in the interplay between secs. 904, 6601, and 6611, we are not confronted herein with comparable lack of clarity which would cause us to characterize such lack of clarity as a "clear legislative expression" for purposes of Manning v. Seeley Tube & Box Co., supra. - 27 -
originally took FTC's in 1958 and 1959. In 1961, an NOL arose,
which was carried back and displaced the FTC's from 1958 and
1959. The taxpayer then decided to deduct the foreign taxes
(instead of taking them in the form of a credit) in 1958 and
1959. The court held that the taxpayer owed interest as if FTC's
had not been invoked in the first place, but rather as if the
taxes had been deducted initially, because the later decision to
change from a credit to a deduction related back to the time the
credits or deductions arose, at the beginning of the interest
period.
General Dynamics Corp. v. United States, supra, is clearly
distinguishable. In the instant case, petitioner has not
attempted to deduct items previously reflected in a credit, or to
change the nature of a previously claimed credit, nor has it
claimed any new deductions against its 1977 or 1978 income.
Here, a credit was replaced not with a deduction, but with
another credit. In Rev. Rul. 66-317, 1966-2 C.B. 510, the
replacement of a credit with a loss did not produce an interim
interest liability. We are unable to see how petitioner's
replacement of a credit with a credit (ITC for FTC) could produce
such a liability herein.
It is clear that the general use-of-money principle
enunciated in Manning v. Seeley Tube & Box Co., supra, reflected
in section 6601(d), and illustrated in respondent's rulings,
applies to the facts of this case. For the application of that - 28 -
principle for the period in dispute, the later event is the NOL
which arose in 1982, and which was carried back to 1979 which
displaced more 1979 credits back to 1977. Section 6601(d)(1)
provides specifically:
If the amount of any tax * * * is reduced by reason of a carryback of a net operating loss * * * such reduction in tax shall not affect the computation of interest under this section for the period ending with the filing date for the taxable year in which the net operating loss * * * arises.
Thus, applying the statute, the interest computation is not
changed by the 1982 NOL before March 15, 1983. Before that date,
interest is computed on the deficiencies as they existed on
January 1, 1980, reflecting the ITC carried back from 1979, as if
the NOL had not occurred.
Interest should then properly be charged based on the
deficiency determined sequentially by succeeding events. That
is, as to the 1977 tax year, for the period January 1, 1980, to
March 14, 1983, interest is to be computed based on the
deficiency amount of $3,777,997, which reflects the carryback
from 1979 of an ITC in the amount of $7,947,605 and an FTC in the
amount of $2,307,548. As to the 1978 tax year, for the period
January 1, 1980, to March 14, 1983, interest is to be computed
based on the deficiency amount of $2,530,339, which reflects the
carryback from 1979 of an ITC in the amount of $444,727.
It should be pointed out that, under this analysis, there is
no danger of petitioner's receiving a double benefit for the 1979 - 29 -
ITC. In the end, after taking into account the effects of the
1982 NOL, petitioner's ultimate tax liability was reduced by the
1979 ITC only once, namely, in 1981. In addition, the 1979 ITC
reduced petitioner's liability for interest on any deficiency
from the point at which it was paid, first for the 1977 and 1978
tax years from January 1, 1980, to March 14, 1983, and then for
the 1981 tax year from March 15, 1983, onward. There is no
overlap of periods to which the 1979 ITC was applied for purposes
of interest or liability for deficiencies.
To reflect the foregoing,
An appropriate order will
be issued. - 30 -
APPENDIX
TAX COURT DOCKET NO. 5931-83 MOTION TO REDETERMINE INTEREST ON DEFICIENCY TAX LIABILITY TAX YEAR 1977 Petitioner's Sec 7481(c) Interest Nov., 1994 Computation Stipulation Difference Determination of Overassessment for Restricted Interest Tax liability without credit carrybacks 24,200,118 24,200,118 0 Tax assessed and paid 14,234,576 14,234,576 0 Deficiency without allowance for carrybacks 9,965,542 9,965,542 0
Tax liability after consideration of carryback from 1979 to 1977: Foreign tax credit carryback 2,307,548 2,307,548 0 Investment tax credit carryback 7,947,605 0 7,947,605 Total credit carryback from 1979 to 1977 10,255,153 2,307,548 7,947,605 Unexplained difference included in stipulation 8,174 (8,174) Tax liability after consideration of carryback from 1979 to 1977 13,944,965 21,900,744 (7,955,779) Tax assessed and paid: Total payments 14,234,576 14,234,576 0 Tentative allowance from 1979 to 1977 4,067,608 4,067,608 0 Net payments 10,166,968 10,166,968 0 Deficiency after consideration of credit carryback from 1979 to 1977 3,777,997 11,733,776 (7,955,779)
Tax liability after consideration of carryback from 1982 to 1977: Current year investment tax credit (freed up) (4,576,641) (4,576,641) 0 Unexplained difference included in stipulation (8,174) 8,174 Foreign tax credit carryback 25,048,494 25,048,494 0 Investment tax credit carryback/(freed up) (7,947,605) 0 (7,947,605) Work incentive tax credit carryback 15,550 15,550 0 Jobs tax credit carryback 327,269 327,269 0 Total credit carryback from 1982 to 1977 17,443,708 25,391,313 (7,947,605) Tax liability after consideration of carryback from 1982 to 1977 1,077,898 1,077,898 0 Net payments 10,166,968 10,166,968 0 Overpayment after consideration of credit carryback from 1982 to 1977 (9,089,070) (9,089,070) 0
Determination of Overassessment Tax liability Tax liability without credit carrybacks 24,200,118 24,200,118 0 Current year investment tax credit (freed up) (4,576,641) (4,576,641) 0 Foreign tax credit carryback 27,356,042 27,356,042 0 Investment tax credit carryback/(freed up) 0 0 0 Work incentive tax credit carryback 15,550 15,550 0 Jobs tax credit carryback 327,269 327,269 0 Total credit carryback 27,698,861 27,698,861 0 Tax liability after consideration of credit carryback from 1979 and 1982 1,077,898 1,077,898 0 Tax assessed and paid Total payments 14,234,576 14,234,576 0 Tentative allowance from 1979 to 1977 4,067,608 4,067,608 0 Net payments 10,166,968 10,166,968 0 Overpayment after consideration of credit carryback from 1979 and 1982, as reflected in the Tax Court Decision dated November 17, 1994 (9,089,070) (9,089,070) 0 TAX COURT DOCKET NO. 5931-83 MOTION TO REDETERMINE INTEREST ON DEFICIENCY TAX LIABILITY TAX YEAR 1978 - 31 -
Petitioner's Sec 7481(c) Interest Nov., 1994 Computation Stipulation Difference Determination of Deficiency to be Paid for Restricted Interest Tax liability without credit carrybacks 6,608,807 6,608,807 0 Tax assessed and paid 3,633,741 3,633,741 0 Deficiency without allowance for carrybacks 2,975,066 2,975,066 0
Tax liability after consideration of carryback from 1979 to 1978: Investment tax credit carryback 444,727 0 444,727 Total credit carryback from 1979 to 1978 444,727 0 444,727 Tax liability after consideration of carryback from 1979 to 1978 6,164,080 6,608,807 (444,727) Tax assessed and paid 3,633,741 3,633,741 0 Deficiency after consideration of credit carryback from 1979 to 1978 2,530,339 2,975,066 (444,727)
Tax liability after consideration of carryback from 1982 to 1978: Current year investment tax credit (freed up) (541,122) (541,122) 0 Foreign tax credit carryback 1,971,695 1,971,695 0 Investment tax credit carryback/(freed up) (444,727) 0 (444,727) Total credit carryback from 1982 to 1978 1,526,968 1,971,695 (444,727) Tax liability after consideration of carryback from 1982 to 1978 5,178,234 5,178,234 0 Tax assessed and paid 3,633,741 3,633,741 0 Tax assessed 9/30/92 subsequent to Tax Court Decision 2,076,812 2,076,812 0 Total assessment 5,710,553 5,710,553 0 Overassessment after consideration of credit carryback from 1982 to 1978 (532,319) (532,319) 0 Tax assessed 9/30/92 subsequent to Tax Court Decision but not paid 2,076,812 2,076,812 0 Tax deficiency before taking into account 9/30/92 assessment, as reflected in the Tax Court Decision dated November 17, 1994 1,544,493 1,544,493 0 Payments and credits applied after the Tax Court Decision 79,925 79,925 0 Deficiency after consideration of carryback from 1979 and 1982, and payments subsequent to the November 17, 1994 Tax Court Decision 1,464,568 1,464,568 0
Determination of Deficiency Tax liability Tax liability without credit carrybacks 6,608,807 6,608,807 0 Current year investment tax credit (freed up) (541,122) (541,122) 0 Foreign tax credit carryback 1,971,695 1,971,695 0 Investment tax credit carryback/(freed up) 0 0 0 Total credit carryback 1,971,695 1,971,695 0 Tax liability after consideration of credit carryback from 1979 and 1982 5,178,234 5,178,234 0 Tax assessed and paid Tax assessed and paid without consideration of events subsequent to Tax Court Decision 3,633,741 3,633,741 0 Tax deficiency before taking into account 9/30/92 assessment, as reflected in the Tax Court Decision dated November 17, 1994 1,544,493 1,544,493 0 Payments and credits applied after the Tax Court Decision 79,925 79,925 0 Deficiency after consideration of carryback from 1979 and 1982, and payments subsequent to the November 17, 1994 Tax Court Decision 1,464,568 1,464,568 0