126 T.C. No. 3
UNITED STATES TAX COURT
EXXON MOBIL CORPORATION AND AFFILIATED COMPANIES, f.k.a. EXXON CORPORATION AND AFFILIATED COMPANIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 18618-89, 18432-90 Filed January 17, 2006. 23331-95.
Held: Under secs. 6611, 6621(a)(1) and 6622, petitioners’ outstanding Dec. 31, 1994, cumulative accrued overpayment interest balance of $1.6 billion relating to the years involved herein accrues further compound interest after Dec. 31, 1994, at the reduced interest rate applicable to large corporate overpayments, not at the regular interest rate. Gen. Elec. Co. v. United States, 56 Fed. Cl. 488 (2003), affd. 384 F.3d 1307 (Fed. Cir. 2004), and State Farm Mut. Auto. Ins. Co. v. Commissioner, 126 T.C. (2006), followed. Petitioners’ claim for an additional $450 million in accrued interest is denied. - 2 -
Robert L. Moore II, Thomas D. Johnston, and Kevin Kenworthy,
for petitioners.
Robert M. Morrison, for respondent.
OPINION
SWIFT, Judge: This matter is before us on petitioners’
motions under section 7481(c) and Rule 261 for the Court to
determine the correct amount of overpayment interest due
petitioners.1
The primary issue presented is whether petitioners’
cumulative accrued overpayment interest balance outstanding on
December 31, 1994, of approximately $1.6 billion (relating to
petitioners’ consolidated Federal income taxes for 1979 through
1985) accrues compound interest thereafter until paid to
petitioners at the regular corporate overpayment interest rate,
as petitioners contend, or at the reduced overpayment interest
rate applicable to large corporate overpayments, as respondent
contends.
In its discussion of essentially the same question of
statutory interpretation presented herein, the Court of Appeals
for the Federal Circuit in Gen. Elec. Co. v. United States, 384
F.3d 1307, 1309 (Fed. Cir. 2004), explained:
1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
Because the new statutory language [in section 6621] was enacted as part of the statute that gave effect to the agreements reached at the Uruguay Round of Multilateral Trade Negotiations conducted under the auspices of the General Agreement on Tariffs and Trade (“GATT”), the lower corporate overpayment interest rate of 0.5 percent set forth in the 1994 amendment is referred to as the “GATT rate.” The higher interest rate on corporate overpayments that applied to all corporate overpayments prior to the 1994 Act and [that applies to corporate overpayments of $10,000 and less] is referred to as the “regular rate.” * * *
We use the same nomenclature herein.
Due to the 1.5-percent differential under section 6621(a)(1)
between the regular rate and the GATT rate, if the higher regular
overpayment interest rate applies to petitioners’ December 31,
1994, overpayment interest balance, there will accrue, after
December 31, 1994, additional interest in favor of petitioners of
approximately $450 million.
Background
The parties have stipulated the facts relevant to the
instant motions.
Petitioners’ corporate Federal income tax returns for 1979
through 1985 were timely filed with respondent. On each of those
tax returns as filed, petitioners reported tax overpayments in
excess of $10,000 and claimed refunds or credit transfers of the
tax overpayments, which respondent allowed and credited in favor
of petitioners. - 4 -
Upon audit, respondent determined substantial deficiencies
in petitioners’ Federal income taxes for 1979 through 1985.
During the course of respondent’s audits, petitioners’
administrative appeals, and the litigation of these and related
cases,2 petitioners made a number of substantial advance
payments to respondent of taxes and of interest with respect to
each of the tax deficiencies determined by respondent against
petitioners for 1979 through 1985.
As of the January 1, 1995, effective date of the above GATT
amendment to section 6621(a)(1), with respect to each of the
years 1979 through 1985, petitioners had received from respondent
refunds of tax overpayments far in excess of $10,000, and
petitioners still had outstanding with respondent overpayments of
tax in excess of $10,000.
After the litigation and after settlement between the
parties of many issues, all underlying tax issues relating to the
Federal income taxes of petitioners for 1979 through 1985 have
2 See, e.g., Exxon Corp. v. Commissioner, T.C. Memo. 1993- 616, affd. sub nom. Texaco, Inc. v. Commissioner, 98 F.3d 825 (5th Cir. 1996) (involving the allocation of profits from sales of Saudi Arabian crude oil); Exxon Corp. v. Commissioner, 102 T.C. 721 (1994) (involving the computation of percentage depletion relating to the sale of natural gas); Exxon Corp. v. Commissioner, T.C. Memo. 1999-247 (involving the deductibility of interest relating to contested tax deficiencies); Exxon Corp. v. Commissioner, 113 T.C. 338 (1999) (involving the credibility of petroleum revenue tax paid to the United Kingdom); Exxon Mobil Corp. v. Commissioner, 114 T.C. 293 (2000) (involving the deductibility of estimated dismantlement, removal, and restora- tion costs relating to the Prudhoe Bay, Alaska, oil field). - 5 -
been resolved, and decisions have been entered in each of these
consolidated cases.
Discussion
We start our analysis of the legal question before us with
the language and structure of the statute itself. Kaiser
Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 835 (1990);
United States v. Ron Pair Enters, Inc., 489 U.S. 235, 241 (1989);
Anderson v. Commissioner, 123 T.C. 219, 233 (2004), affd. 137
Fed. Appx. 373 (1st Cir. 2005).
Section 6611 provides that taxpayers are to be allowed and
are to be paid interest on any overpayments in respect of any
internal revenue tax at the rate established under section 6621.
Section 6622 provides that in computing the amount of
interest required to be paid under section 6611, the interest
will be compounded daily.
Section 6621 provides that the rate of interest to be paid
by respondent to corporate taxpayers on overpayments shall be
the sum of the Federal short-term interest rate, as calculated
according to the formula set forth in section 6621(b), plus 2
percentage points, but plus only 0.5 percentage point where a
corporate overpayment for a year is in excess of $10,000.
The relevant text of section 6621(a)(1) provides as follows:
(1) Overpayment rate.--The overpayment rate established under this section shall be the sum of -- - 6 -
(A) the Federal short-term rate determined under subsection (b), plus
(B) 3 percentage points (2 percentage points in the case of a corporation).
To the extent that an overpayment of tax by a corporation for any taxable period * * * exceeds $10,000, subparagraph (B) shall be applied by substituting “0.5 percentage point” for “2 percentage points”.[3]
The flush language of section 6621(a)(1), reflecting the
reduced overpayment interest rate for large corporate
overpayments for periods after December 31, 1994, was added to
the Code in 1994 as part of the Uruguay Round Agreements Act
(GATT), Pub. L. 103-465, sec. 713(a), 108 Stat. 5001-5002 (1994).
In accordance with the terminology used in Gen. Elec. Co. v.
United States, 384 F.3d at 1309, we refer to the amendment of
section 6621(a)(1) as the GATT amendment.
The effective date of the GATT amendment was provided in
section 713(b), as follows:
(b) Effective Date.–-The amendment made by this section shall apply for purposes of determining interest for periods after December 31, 1994.
3 The version of the statute quoted in the text is the current version, reflecting changes not relevant herein made by the Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. 105-34, sec. 1463(a), 111 Stat. 1057; TRA 1997, sec. 1604(b)(1), 111 Stat. 1097; Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3302(a), 112 Stat. 741. - 7 -
The GATT amendment also included a corollary 2-percentage
point interest rate differential applicable for periods after
December 31, 1994, in the interest rate applicable to large
corporate tax underpayments in excess of $100,000. Sec. 6621(c).
The above changes in the interest rates applicable to large
corporate over- and underpayments were added by Congress as
“outlay reduction[s] * * * to assist in offsetting the projected
cost of the implementing legislation” relating to the GATT
treaty. S. Rept. 103-412, at 11 (1994); H. Rept. 103-826 (I),
at 9 (1994), U.S.C.C.A.N. 1994, pp. 3773, 3781. The Senate
report explained as follows:
As set forth below in the * * * [Congressional Budget Office] cost estimate, the Uruguay Round agreement includes a commitment by the United States to reduce U.S. tariffs which would cause a loss of receipts to the U.S. Treasury. As explained above, the Budget Enforcement Act and Senate Rules require that these costs be offset. Due to this pay-as-you go requirement, it is both “necessary” and “appropriate” that provisions designed to offset the costs of the Uruguay Round agreement be included in this implementing legislation. [S. Rept. 103-412, at 135.]
Petitioners acknowledge that respondent, with respect to
each of the years in issue, has refunded to petitioners all
overpaid taxes and overpaid interest that petitioners paid to
respondent, plus compound interest thereon through December 31,
1994. - 8 -
As indicated, however, petitioners contend that respondent
undercalculates, and has not paid petitioners, the full amount of
the additional interest that accrued after December 31, 1994, on
petitioners’ cumulative accrued overpayment interest balance of
approximately $1.6 billion that was outstanding on December 31,
1994, and that was not paid to petitioners until 2004 and 2005.
As petitioners read the above GATT amendment to section
6621(a), the GATT overpayment interest rate reduction does not
apply to petitioners’ December 31, 1994, overpayment interest
balance. Petitioners read section 6621(a)(1) either as expressly
supporting their interpretation or as vague and lacking a
specific mandate that the reduced GATT interest rate is to apply
to their December 31, 1994, overpayment interest balance.
Petitioners argue that “In the absence of some specific
instruction to the contrary, the interest continues to compound
at the same rate at which interest first began to accrue on the
tax overpayment”; i.e., at the regular rate. Petitioners argue
further that the GATT amendment “directs that the change in
interest rate * * * should be limited to a portion of the amounts
owed to the taxpayer-–with the remaining portion continuing to
accrue interest at the regular rate.”
Petitioners’ arguments focus on, or are dependent primarily
on, the interpretation of the flush language in section
6621(a)(1) that refers to an “overpayment of tax”. Petitioners - 9 -
argue that the words “overpayment of tax” do not include
overpayment interest, particularly the overpayment interest
balance that was outstanding on December 31, 1994.
Beginning January 1, 1995, petitioners effectively would
place interest accrual on their overpayments of interest relating
to 1979 through 1985 into three baskets:
First Basket: Interest accruing after December 31, 1994, relating to overpayments of tax of $10,000 or less and statutory interest thereon;
Second Basket: Interest accruing after December 31, 1994, relating to overpayments of tax in excess of $10,000 and statutory interest thereon;
Third Basket: Interest accruing after December 31, 1994, relating to overpayment interest balance outstanding as of December 31, 1994.
Petitioners would apply the GATT rate only to the contents
of the second basket. To the contents of the first and third
baskets, petitioners would apply the regular interest rate, not
the GATT rate.
The third basket, however, suggested by petitioners is not
supported by the statutory language. The second basket already
includes post-December 31, 1994, interest accrual and compound
interest thereon relating to corporate tax overpayments in excess
of $10,000; namely, the subject matter to which the flush
language of section 6621(a)(1) applies the reduced GATT interest
rate. - 10 -
For purposes of further interest accrual on petitioners’
December 31, 1994, overpayment interest balance, it is
statutorily placed in the second and only other basket.
Petitioners’ interpretation of section 6621(a)(1) (that
would place in a third basket interest accruing after
December 31, 1994, on a corporation’s December 31, 1994,
overpayment interest balance) stretches the language of section
6621(a) beyond logic.
Disregarding fluctuations in the Federal short-term rate,
the language of section 6621(a)(1) establishes a specific and
definite overpayment interest rate where a corporation has made a
tax overpayment for a year of $10,000 or less and another
specific and definite overpayment interest rate where a
corporation has made a tax overpayment in excess of $10,000.4
If or where the reduced GATT rate becomes applicable to a
corporation for a year (because of a tax overpayment for the year
in excess of $10,000), the flush language of section 6621(a)(1)
does not provide its own, stand-alone, reduced interest rate that
becomes applicable only to overpayments of tax. Rather, that
language explicitly bumps the corporation back up into section
6621(a)(1)(B) and “substitutes” or replaces the “2 percentage
points” therein with “0.5 percentage point”. In that situation,
4 We note in the language of sec. 6621(a) the definite article “the” –– “The overpayment rate”. - 11 -
with respect to that corporation (and with respect to all
overpayment interest accrual except that relating to the
corporation’s tax overpayment up to $10,000), section 6621(a)(1)
effectively provides only one interest rate –- the reduced GATT
rate.
In the above situation, in effect (for everything other than
interest relating to a corporation’s tax overpayment up to
$10,000) the regular interest rate, for practical purposes, is
eliminated from the statutory language of section 6221, and there
remains in section 6621(a)(1) only one interest rate –– the GATT
rate -- that applies to all further interest accrual relating to
corporate overpayments of tax and to accrual of compound interest
thereon.
Section 6621(a)(1) does not refer to overpayment “rates”.
Once the GATT trigger occurs, then any and all further interest
after December 31, 1994, relating to or associated with that
excess corporate overpayment, is to accrue only at the reduced
GATT rate.
Our interpretation of the statutory language is supported by
the holding of this Court in State Farm Mut. Auto. Ins. Co. v.
Commissioner, 126 T.C. (2006), filed today, and also by the
recent holdings of the Court of Appeals for the Federal Circuit
and the U.S. Court of Federal Claims in Gen. Elec. Co. v. United - 12 -
States, 384 F.3d 1307 (Fed Cir. 2004), affg. on this issue and
remanding in part 56 Fed. Cl. 488 (2003).
As explained in State Farm Mut. Auto. Ins. Co. v.
Commissioner, supra (slip op. at 9), with regard to the language
of section 6621(a)(1):
The role of the phrase “overpayment of tax” is central to this dispute. We find the phrase in question is a device to describe the occasion when the GATT rate is triggered for all interest computational purposes including compounding under section 6622. We do not read the phrase “overpayment of tax” as a limitation on the scope of the applicability of the changed rate once triggered. * * *
The legislative history of the GATT rate change and the
effective date language, set forth above, discuss only a change
in the rate of interest “without distinguishing between the rate
paid on an overpayment and the rate compounded.” State Farm Mut.
Auto. Ins. Co. v. Commissioner, supra (slip op. at 10). A
bifurcation in the interest to be paid on the tax overpayment
itself, and the interest to be paid on interest is not found in
the statute.
In Gen. Elec. Co. v. United States, 384 F.3d at 1311, the
Court of Appeals for the Federal Circuit explained its holding,
in part, as follows:
We think it highly unlikely that Congress intended the exception to the GATT rate for small overpayments to have such dramatic potential consequences for overpayments vastly larger than the modest overpayments of $10,000 or less that are eligible for the regular rate. * * * While the statutory - 13 -
scheme is not easy to unravel, the most straightforward interpretation of the statutory language leads us to reject [the taxpayer’s] submission.
In Gen. Elec. Co. v. United States, 56 Fed. Cl. at 496, the
Court of Federal Claims explained its holding, in part, as
follows:
The GATT rate merely attaches prospective impact to the meeting of a condition as of the effective date of the statute, to wit, the existence of an overpayment for the relevant taxable year that exceeds $10,000. * * *
Petitioners read the language of section 6621(a)(1) (“to the
extent that an overpayment of tax * * * exceeds $10,000") as
providing more than the trigger for application of the GATT rate.
Petitioners read that language as limiting application of the
GATT rate to just the “overpaid taxes” and interest accruing on
the overpaid taxes after December 31, 1994, and petitioners
describe the December 31, 1994, accrued overpayment interest
balance as neither “‘tax’ nor something that was ever ‘overpaid’”
by petitioners.
Petitioners refer us to Code sections and to various
situations in which overpayment interest is or has been treated
differently from overpayments of tax and from underpayment
interest. For example, section 6601(e)(1) specifically provides
that any reference to “tax” shall also refer to underpayment
interest (“any tax imposed by this title shall be deemed also to - 14 -
refer to interest imposed by this section on such tax”), while no
similar provision covers overpayment interest.
Under section 6511(a) a 3-year limitation period applies to
a refund of an “overpayment of any tax,” while a refund of
overpayment interest is governed by the general 6-year period of
limitation applicable to claims against the Government. 28
U.S.C. secs. 2401, 2501. Gen. Instrument Corp. v. United States,
33 Fed. Cl. 4, 6 (1995).
Under section 6402(a) an overpayment “including any interest
allowed thereon” may be credited against a taxpayer’s other tax
liabilities. Prior to 1954, however, the predecessor to section
6402(a) referred only to “overpayment”, and it was understood
that the statutory language did not allow the crediting of
overpayment interest. See S. Rept. 1622, 83d Cong., 2d Sess.
5230 (1954) (“This section * * * changes existing law so as to
permit expressly the crediting of interest on an overpayment
against any outstanding liability for any tax.”).
Prior to 1997, under section 6512(b)(1) this Court’s
jurisdiction with respect to an “overpayment” was held not to
include overpayment interest. Harrison v. Commissioner, T.C.
Memo. 1994-614. In 1997, section 7481(c) was amended to permit
us to exercise jurisdiction over some overpayment interest.
In Rev. Proc. 87-43, 1987-2 C.B. 590, respondent took the
position that section 6601(c) (which at that time suspended the - 15 -
running of interest on a tax deficiency if respondent failed to
make notice and demand on the taxpayer within 30 days of the
taxpayer’s filing of a waiver of restrictions on assessment) only
suspended interest on a tax deficiency, not on the interest that
had accrued on the underlying tax deficiency before the beginning
of the suspension period.5
The above examples apparently persuade petitioners that when
Congress wants overpayment interest treated the same as
overpayments of tax, it knows how to explicitly so provide.
Certainly, the language of section 6621(a)(1) could be
clearer. Congress could have made explicit in the statutory
language what respondent argues and what we today hold -- by
expressly providing in the flush language of section 6621(a)(1)
language to the effect that the reduced GATT rate, if triggered,
would apply to any December 31, 1994, overpayment interest
balance.
Congress also could have made explicit in the statutory
language what petitioners argue -- by expressly providing in the
flush language of section 6621(a)(1) the GATT rate (rather than
substituting in section 6621(a)(1)(B) the GATT rate for the
regular rate), by leaving the regular rate in section
6621(a)(1)(B), and by providing language to the effect that the
5 Congress later changed the interpretation set forth in Rev. Proc. 87-43, 1987-2 C.B. 590, by amending sec. 6601(c) to refer explicitly to accrued interest. - 16 -
regular interest rate left in section 6621(a)(1)(B) would apply
to any December 31, 1994, overpayment interest balance, even
though a corporation had a tax overpayment in excess of $10,000.
As explained, however, on the basis of the language of
section 6621(a)(1), as enacted, we conclude that the GATT rate
applies to a corporation’s December 31, 1994, overpayment
interest balance for further accrual of interest thereon after
December 31, 1994.
On brief, petitioners set forth an example involving a
corporation’s $100,000 tax overpayment for a year, as of
March 15, 1990. In petitioners’ example, on January 1, 1992,
respondent refunds to the corporation $50,000 in principal, and
on January 1, 1996, respondent refunds the remaining $50,000
principal balance. Petitioners then state:
For the 1992-1995 period, the applicable interest rate is applied to $50,000 in remaining principal, plus previously accrued interest. It is irrelevant to that latter computation that the “original” overpayment was $100,000.
But if, under the governing statutory language in
petitioners’ example, a corporation’s overpayment of tax for a
year in excess of $10,000 triggered a reduction in the
overpayment interest rate, then the fact that the corporation’s
original overpayment was more than $100,000 would be highly
relevant. That is the situation presented to us herein. - 17 -
Petitioners suggest that their calculations are supported by
the manner by which interest calculations routinely are adjusted
in commercial debtor-creditor relationships for changes either in
the principal amount outstanding or in the interest rate. We
disagree. The “wrinkle” petitioners acknowledge herein that is
not typical in the routine debtor-creditor relationship is that
petitioners seek to apply the reduced interest rate not to the
full outstanding balance of the overpayment interest on the
effective date of the rate reduction but only to a portion
thereof. It is that wrinkle that is in issue, and we find no
support in petitioners’ examples for the proposition petitioners
seem to put forth that under commercial debtor-creditor loan
agreements a prospective reduction in the applicable interest
rate similar to that reflected in the GATT amendment necessarily
would not apply to overpayment interest balance on the effective
date of the rate reduction.
We conclude that petitioners’ December 31, 1994,
$1.6 billion overpayment interest balance accrues interest after
December 31, 1994, at the reduced GATT rate.
As a related issue, petitioners contend that under section
6621(a)(1) the $10,000 exemption from the reduced GATT rate
should apply to the last $10,000 of their tax overpayment for
each year. - 18 -
Respondent counters that the $10,000 exemption applies to
the first $10,000 of petitioners’ tax overpayment for each year.
The amount of the additional interest in dispute on this
issue is set forth below:
Post-Dec. 31, 1994, Additional Interest Accrual Claimed on Year $10,000 of Tax Overpayment 1979 $2,461 1980 2,597 1981 2,597 1982 2,868 1983 2,857 1985 2,857
We find petitioners’ contention counterintuitive and
contrary to the statutory language. It is noteworthy that in
petitioners’ own memorandum of law filed herein on February 28,
2005 (in the context of a discussion of the first issue discussed
above), petitioners describe the $10,000 exemption as applicable
to the “first” $10,000 of a taxpayer’s tax overpayment.
Respondent emphasizes that each of petitioners’ corporate
Federal income tax returns for 1979 through 1985, when initially
filed with respondent, reflected overpayments of tax in the
millions of dollars, and that the tax overpayments reflected on
those tax returns were paid to petitioners on or about the date
the tax returns were filed via refunds or credits to petitioners’
taxes for other years and long before January 1, 1995.
Accordingly, respondent argues that as of the January 1, 1995, - 19 -
effective date of the GATT amendment, all of petitioners’ then-
remaining outstanding tax overpayments for each of the years in
issue represented tax overpayments by petitioners in excess of
$10,000, no portion of which qualifies for the exemption from the
GATT rate. We agree.
Under section 301.6611-1(b), Proced. & Admin. Regs., the
date of overpayment of a tax is the date of payment of the first
amount which, when added to previous payments, is in excess of
the tax liability (including any interest, addition to tax, or
additional amount). This regulation provides that tax
overpayments are to be refunded beginning with the first payment
that exceeds the tax liability. Accordingly, all of petitioners’
tax overpayments for the years in issue that remained outstanding
after December 31, 1994, and that petitioners eventually received
in 2004 and 2005 constituted overpayments “in excess of $10,000”
and, beginning January 1, 1995, accrued interest at the reduced
Appropriate orders will be
entered.