State Farm Mutual Automobile Insurance Company and Subsidiaries v. Commissioner , 126 T.C. No. 2 ( 2006 )

126 T.C. No. 2UNITED STATES TAX COURT
STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1859-01. Filed January 17, 2006.
P filed a Motion Pursuant to Rule 261 to
Redetermine Interest on Overpayment. The issue raised
in P’s motion is whether accrued interest on P’s
overpayment as of Dec. 31, 1994, is subject to the
regular rate of interest or the lower rate of interest
provided by sec. 6621(a)(1), I.R.C., beginning on Jan.
1, 1995 (the GATT rate). R’s position that the GATT
rate applies was previously sustained by the Court of
Federal Claims and the Court of Appeals for the Federal
Circuit in Gen. Elec. Co. v. United States, 384 F.3d
1307 (Fed. Cir. 2004), affg. in part and remanding in
part 56 Fed. Cl. 488 (2003). See also Exxon Mobil
Corp. v. Commissioner, 126 T.C. (2006).
The parties also dispute whether any portion of
the overpayment remains subject to the $10,000
threshold as provided in sec. 6621(a)(1), I.R.C.
Held: We hold that the GATT rate applies to the
accrued interest owed P as of Dec. 31, 1994.
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Held, further, the entire overpayment of tax
remaining is subject to the GATT rate since an amount
in excess of the $10,000 threshold was refunded to P on
the due date of P’s return for the taxable year in
question.
Jerome B. Libin, James V. Heffernan, and Mary E. Monahan,
for petitioner.
Robert Morrison and Jan E. Lamartine, for respondent.
OPINION
GOEKE, Judge: Before us is petitioner’s motion under Rule
2611 seeking a higher rate of interest on petitioner’s
overpayment. The difference between petitioner’s interest
computation method and respondent’s method stems from a
difference of view regarding the effect of a 1994 amendment to
section 6621(a)(1), the so-called GATT amendment. That amendment
reduced the rate of overpayment interest applicable to that
portion of a corporate tax overpayment that exceeds $10,000 for
purposes of determining interest after December 31, 1994.
Because we hold that the reduced rate of interest effective after
December 31, 1994, applies to interest accrued on petitioner’s
overpayment as of that date, petitioner’s motion will be denied.
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, all section references
are to the Internal Revenue Code as amended.
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Background
Respondent issued a notice of deficiency with respect to
petitioner’s 1987 taxable year. Petitioner filed a petition and
alleged that it had made an overpayment of tax for 1987 in the
amount of $56,900,746. On December 19, 2002, this Court held
that petitioner had made such an overpayment for 1987. State
Farm Mut. Auto. Ins. Co. v. Commissioner, 119 T.C. 342 (2002),
affd. 105 Fed. Appx. 67 (7th Cir. 2004). The Court of Appeals
for the Seventh Circuit affirmed this Court’s decision on June
29, 2004. No petition for certiorari was filed by or on behalf
of petitioner, and the decision of this Court became final on
September 27, 2004. See sec. 7481(a)(2)(A).
On December 15, 2004, respondent issued two checks
aggregating $113,418,286.92 payable to petitioner. The checks
ostensibly covered the amount of petitioner’s overpayment plus
statutory interest thereon. Petitioner was furnished with a copy
of respondent’s computations supporting the total amount of the
checks. In its motion, petitioner takes issue with respondent’s
computation of the overpayment interest payable to petitioner
because respondent computes interest using a reduced rate set
forth in section 6621(a)(1), which is commonly referred to as the
GATT rate after 1994 in compounding the interest that had accrued
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prior to 1995.2 Petitioner asserts the regular rate of interest
should continue to apply to the previously accrued interest after
January 1, 1995.
As computed by petitioner, the overpayment interest that
should have been paid to petitioner is $65,288,523.47, which is
$4,375,689.66 greater than the $60,912,833.81 computed by
respondent as the interest payable.
Respondent’s position, which was successfully asserted in
Gen. Elec. Co. v. United States, 384 F.3d 1307 (Fed. Cir. 2004),
affg. in part and remanding in part 56 Fed. Cl. 488 (2003), is
that the lower GATT rate should be applied as of January 1, 1995,
in calculating the compound interest on any previously accrued
interest attributable to that portion of an overpayment in excess
of $10,000. Such interest would have been compounded at the
regular corporate overpayment rate up to that date.
Petitioner timely filed a motion pursuant to section 7481(c)
and Rule 261 for a redetermination of the interest owed to it on
2
The GATT amendment was enacted by the Uruguay Round
Agreements Act, Pub. L. 103-465, sec. 713, 108 Stat. 4809, 5001
(1994). The amendment was adopted as a revenue raiser in
connection with the General Agreement on Tariffs and Trade
(GATT). Interest computed pursuant to the amendment is generally
referred to as GATT interest and the revised interest rate as the
GATT rate.
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the overpayment of tax previously determined by this Court with
respect to its taxable year 1987, and the parties have filed
memoranda on the issue raised.
Petitioner also disputes that $10,000 of the overpayment due
on the effective date should receive the regular rate of interest
rather than the GATT rate. Respondent counters that the
refunding of more than $10,000 of the original overpayment on the
due date of petitioner’s return relieves the need for any further
application of the $10,000 threshold in section 6621(a)(1).
Discussion
Interest on overpayments is authorized by section 6611(a) at
the rate established in section 6621. Section 6622(a) requires
that the overpayment interest be compounded daily. The issue
before us concerns whether the GATT rate change in corporate
overpayment interest applies in computing interest on the
interest accrued before the effective date. This change results
in 1.5 percent less interest after December 31, 1994. The
following sentence was added to section 6621(a)(1) by the Uruguay
Round Agreements Act, Pub. L. 103-465, sec. 713(a), 108 Stat.
5001 (1994):
To the extent that an overpayment of tax by a
corporation for any taxable period (as defined in
subsection (c)(3)) exceeds $10,000, subparagraph (B)
shall be applied by substituting “0.5 percentage point”
for “2 percentage points.”
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The effective date of this change is described in the Uruguay
Round Agreements Act, sec. 713(b), 108 Stat. 5002:
(b) Effective Date.-- The amendment made by this
section shall apply for purposes of determining
interest for periods after December 31, 1994.
Section 6621(a)(1), effective after December 31, 1994,
provides as follows:
SEC. 6621. DETERMINATION OF RATE OF INTEREST.
(a) General Rule.--
(1) Overpayment rate.--The overpayment rate
established under this section shall be the sum of
(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 (as defined in
subsection (c)(3), applied by substituting
“overpayment” for “underpayment”) exceeds $10,000,
subparagraph (B) shall be applied by substituting “0.5
percentage point” for “2 percentage points”.
By virtue of its placement in section 6621 and the effective
date description, this was a change in the rate of interest.
Petitioner maintains the scope of this change was limited to the
overpayment itself, not the interest on accrued interest. In
addressing this question, we first examine the precedent in the
Court of Appeals for the Federal Circuit.
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The General Electric Case
In Gen. Elec. Co. v. United States, supra, the entire amount
of the taxpayer’s (General Electric’s) 1978 overpayment of $15.5
million had been refunded or credited in 1988, but $810,000 of
accrued interest on the 1978 overpayment was not credited and
remained unpaid until 2002. The taxpayer’s position was that the
unpaid interest should continue to be compounded at the regular
rate until paid. The United States argued that as of January 1,
1995, the GATT rate replaced the regular rate for purposes of
compounding interest. The Court of Federal Claims held that the
full amount of General Electric’s pre-1995 accrued interest was
subject to the GATT rate as of January 1, 1995. Gen. Elec. Co.
v. United States, 56 Fed. Ct. 488 (2003). The Court of Appeals
for the Federal Circuit affirmed the primary holding, but
remanded the case for a determination whether the taxpayer was
entitled to any additional interest at the regular rate after
January 1, 1995, on the interest that had accrued prior to
January 1, 1995, on the first $10,000 of its overpayment. Gen.
Elec. Co. v. United States, 384 F.3d at 1313.
The Court of Appeals for the Federal Circuit initially
addressed the meaning of the term “overpayment” as follows:
We agree with GE and the trial court that the term
“overpayment,” as used in the Internal Revenue Code,
does not ordinarily include interest that is earned on
the overpayment. We do not agree with GE, however, that
the statutory provision that preserves the regular
interest rate for small corporate overpayments of
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$10,000 or less should be interpreted to mean that the
interest on very large overpayments should accrue
interest at the rate Congress reserved for small
overpayments. 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. [Emphasis supplied.]
Id. at 1310-1311.
After noting that section 6611 “authorizes the allowance of
interest on any ‘overpayment’” and that section 6611 “dictates
that interest shall be paid ‘at the overpayment rate established
under section 6621’”, id. at 1308, the Court of Appeals for the
Federal Circuit stated that because sections 6611 and 6621 are
“integrally related * * * the term ‘overpayment’ must mean the
same thing in the two sections.” Gen. Elec. Co. v. United
States, supra at 1311. This led the court to conclude that
“section 6611 requires us to reject GE’s theory of the case”.
Id. at 1311-1312.
As we shall discuss, petitioner believes this analysis by
the Court of Appeals for the Federal Circuit is flawed because
“overpayment” does not include interest compounded under section
6622.
Petitioner challenges the holding of the Court of Appeals
for the Federal Circuit by arguing that the phrase “overpayment
of tax” in section 6621(a) limits the scope of the change in
corporate interest rates to the overpayment itself, thus allowing
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accrued interest on the overpayment to continue to receive the
regular interest rate, which is always 1.5 percent higher.
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. Given the role of section 6621 in the
statutory scheme for interest, we must reject petitioner’s
construction.
The role of section 6621 is to set interest rates which are
not constant but may change quarterly. Sec. 6621(b); sec.
301.6621-1(a)(3), Proced. & Admin. Regs. The GATT rate change is
described in public law as a change for purposes of determining
interest after December 31, 1994. Uruguay Round Agreements Act,
sec. 713, 108 Stat. 5001. This change from the regular rate
applies on its face to all applications of interest after
December 31, 1994, in situations when the GATT rate is triggered.
The language added to section 6621(a) triggers a change in
interest rate.
Sections 6611, 6621, and 6622 constitute the statutory
scheme to authorize interest on overpayments, set the rate of
interest, and provide for the method of computation,
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respectively. Each section has a distinct role in an integrated
scheme for overpayment interest.
Petitioner would read the sections in isolation to separate
the overpayment from the accrued interest. This reading would
have section 6621 accomplish more than simply set the interest
rate. We do not interpret the change to section 6621 to
bifurcate the interest rate for compounding from the overpayment
interest rate. Further, the legislative history of the change
and the description of the effective date in section 713(b) of
the Uruguay Round Agreements Act do not support petitioner’s
interpretation. Both the legislative history accompanying the
1994 amendment and the effective date language discuss a change
in the rate of interest without distinguishing between the rate
paid on an overpayment and the rate compounded.3 The legislative
history does not state that the rate was meant to be bifurcated
between interest on the overpayment itself and interest on
accrued interest. We find that the importance of such a
distinction leads to the conclusion that the omission was
intentional. This conclusion is supported by Exxon Mobil Corp.
v. Commissioner, 126 T.C. __ (2006) (slip op. at 12), filed
today, finding that a “bifurcation in the interest to be paid on
3
See S. Rept. 103-412, at 11 (1994) (“The outlay reductions
in Title VII derive from * * * reducing the interest rate * * *
with respect to large corporate tax overpayments.” (Emphasis
added.)). The language in the effective date was discussed
previously.
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the tax overpayment itself and the interest to be paid on
interest is not found in the statute.”
Petitioner further challenges the Court of Appeals for the
Federal Circuit’s position that section 6611 authorizes the
payment of interest by explaining that only simple interest was
paid before section 6622 became law. Interest on interest is a
function of the compounding provided by section 6622; however,
the interest that is compounded originates as the interest
authorized by section 6611 on an overpayment, and the rate of
both is set by section 6621. One common component of the
interest rate applicable to all overpayments is the Federal
short-term rate. Sec. 6621(a)(1)(A). The Federal short-term
rate used in section 6621(a)(1)(A) is redetermined on a quarterly
basis. Sec. 6621(b). A fluctuation in the Federal short-term
rate affects the rate applicable to corporate overpayments under
both sections 6611 and 6622. Similarly, there is no logical
reason that requires a different result regarding the GATT rate
change, effective after December 31, 1994.
Petitioner points to the refund estimates prepared for
Congress at the time the GATT rate was adopted to support its
position. Petitioner asserts that in these estimates accrued
interest was not subject to the lower GATT rate. Petitioner also
argues that respondent initially applied the GATT rate only to
the overpayment, not the accrued interest, and now respondent has
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changed his practice. While both these circumstances may
evidence confusion about how the change would be implemented, we
do not find that either point overcomes the logical meaning of
the statutory language itself.
The remaining issue is whether the $10,000 threshold is to
be applied to the highest total overpayment that previously
existed or the amount at the effective date of the statutory
change.
Much of the controversy in Gen. Elec. Co. v. United States,
384 F.3d 1307 (Fed. Cir. 2004) centered on the question whether
the term “overpayment” as used in section 6621(a)(1) referred to
a single, cumulative amount for a particular taxable year (the
amount by which the tax paid for the year exceeded the tax
liability for the year before any credits or refunds) or referred
instead to the amount owed to the taxpayer at a particular point
in time (e.g., the amount of any excess tax paid for a year that
remained unrefunded and uncredited on January 1, 1995). Although
the two amounts could be the same in any given case, the issue
was important in Gen. Elec. Co. because the “single, cumulative
amount” of its 1978 overpayment had been fully refunded or
credited before January 1, 1995, and the only “amount owed” to it
on that date was previously accrued interest, which the parties
agreed was not part of the “overpayment” as that term is used in
section 6621(a)(1) for purposes of defining the $10,000
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threshold. The taxpayer argued since there was no “overpayment”
on January 1, 1995, its overpayment was less than $10,000, and
the regular rate applied under section 6621(a)(1). The Court of
Appeals for the Federal Circuit agreed with the Court of Federal
Claims that the term “overpayment” as used in section 6621(a)(1)
refers to a single, cumulative amount, not to whatever amount of
overpayment may be owed to the taxpayer at a particular point in
time.4 This point is important in the present case regarding the
second issue raised by petitioner’s motion, whether, despite the
prior refund, $10,000 of the overpayment due on the effective
date should receive the regular rate of interest rather than the
GATT rate.
We agree with the analysis of the Court of Appeals for the
Federal Circuit which requires that the threshold is met based on
the cumulative overpayment amount for the taxable year, not the
specific amount remaining at the effective date after credits had
been previously provided. Gen. Elec. Co. v. United States, 384
f.3d at 1308-1309.5 Accordingly, we will deny both aspects of
4
The Court of Appeals for the Federal Circuit stated that
“we agree with the trial court’s analysis” that the amount of a
tax overpayment once established is “fixed” and “does not vary as
the government makes refunds or credits.” Gen. Elec. Co. v.
United States, 384 F.3d 1307, 1308-1309 (Fed. Cir. 2004), affg.
in part and remanding in part 56 Fed. Cl. 488 (2003).
5
Since there was never any accrued interest on the first
$10,000 of petitioner’s overpayment, we are not faced with the
allocation issue that required a remand by the Court of Appeals
(continued...)
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petitioner’s motion.
To reflect the foregoing,
An appropriate order will be
issued.
5
(...continued)
for the Federal Circuit in Gen. Elec. Co. v. United States,
supra.