Case Name: BROWN & WILLIAMSON, LIMITED v. The UNITED STATES
Court: United States Court of Claims
Jurisdiction: United States
Decision Date: 1982-08-25
Citations: 688 F.2d 747
Docket Number: No. 39-81T
Parties: BROWN & WILLIAMSON, LIMITED v. The UNITED STATES.
Judges: Before FRIEDMAN, Chief Judge, DAVIS, Judge, and SKELTON, Senior Judge.
Reporter: Federal Reporter 2d Series
Volume: 688
Pages: 747–765

Head Matter:
BROWN & WILLIAMSON, LIMITED v. The UNITED STATES.
No. 39-81T.
United States Court of Claims.
Aug. 25, 1982.
Lee H. Spence, Washington, D. C., for plaintiff; James K. Caudill, Louisville, Ky., attorney of record. Robert L. Ash, Kaler, Worsley, Daniel & Hollman, Washington, D. C., of counsel.
Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen. Glenn L. Archer, Jr., Washington, D. C., for defendant. Theodore D. Peyser, Jr., and Robert S. Watkins, Washington, D. C., of counsel.
Before FRIEDMAN, Chief Judge, DAVIS, Judge, and SKELTON, Senior Judge.

Opinion:
ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT
FRIEDMAN, Chief Judge:
Following a retroactive reduction of taxes by an income tax treaty, the plaintiff received a refund of taxes it had paid for four years before the effective date of the treaty. The question in this case, which is before us on cross-motions for summary judgment, is whether the plaintiff is entitled to interest on the refunds from the original date of payment of the taxes, (as the plaintiff contends) or only from the effective date of the treaty (as the government argues). We hold for the plaintiff.
I.
The plaintiff is a British corporation. In the years 1975 to 1978, the plaintiff's American subsidiaries paid it dividends from which the payors withheld federal income taxes. Under the Convention on Income Taxes, April 16, 1945, United States-United Kingdom, art. VI, para. 1, 60 Stat. 1377, 1381, T.I.A.S. No. 1546, as modified by Supplementary Protocol, March 17, 1966, art. 4, 17 U.S.T. 1254, 1257, T.I.A.S. No. 6089, the withholding rate for taxes on these dividends was a flat 15 percent. This withholding satisfied the tax liability of the plaintiff on these dividends.
The Convention on Income Taxes, Dec. 31, 1975, United States-United Kingdom, art. 10(2)(b)(i), 31 U.S.T.-,-, T.I.A.S. No. 9682, 1980-1 C.B. 394, 399, reduced the tax rate on these dividends to five percent. The effective date of the treaty was April 25, 1980. Under article 28(2)(/j)(ii), the reduced tax rate was made effective as of January 1, 1975. Id., 31 U.S.T. at -, 1980-1 C.B. at 404. The plaintiff accordingly sought and received refunds of almost $17.5 million for the years 1975 to 1978.
The plaintiff sought also interest from the original date of payment of the refunded taxes. The Internal Revenue Service, however, ruled that interest was due only from April 25, 1980, the date the treaty went into effect. Rev.Proc. 80-18, § 4.04, 1980-1 C.B. 623, 628. The Service paid the plaintiff interest from the latter date to a date not more than 30 days before the date the refund was paid. See I.R.C. § 6611(b)(2) (1976), 26 U.S.C. § 6611(b)(2) (1976). In the present suit, the plaintiff seeks interest of more than $2.6 million for the period between 1975 and April 25, 1980.
II.
Section 6611 of the Code governs the award of interest on overpayments of taxes. Subsection (b)(2) provides that interest on refunded taxes shall be paid "from the date of the overpayment" to a date not more than 30 days before the date of the refund check. The issue in this case is what was "the date of the overpayment" of taxes that were refunded to the plaintiff. The plaintiff contends that the effect of the treaty provision making the reduction in taxes effective as of January 1, 1975, was to make the date of overpayment the dates upon which the refunded taxes were paid for the years 1975 to 1978. The government argues in opposition that since the amount of taxes paid in those years was correct at the time of payment, there was no overpayment until the treaty on its effective date in 1980 reduced the taxes retroactively, and that the later date therefore was the date of overpayment.
A. The United States concedes that the Service's normal practice has been and is to pay interest on retroactive refunds of taxes. As an example, it refers to the situation involving refunds of taxes paid on subsistence allowances of state police officers. After the Supreme Court in Commissioner v. Kowalski, 434 U.S. 77, 98 S.Ct. 315, 54 L.Ed.2d 252 (1977), held that those allowances were part of the taxpayer's gross income and subject to tax, Congress in 1978 amended the Code to provide that those allowances should not be included in gross income for tax years beginning January 1, 1970. Act of Oct. 7,1978, Pub.L.No.95-427, § 3(b), 92 Stat. 996, 996, as amended by Act of Dec. 28, 1980, Pub.L.No.96-605, § 107(a), 94 Stat. 3521, 3524 (codified at I.R.C. § 119 note). The Service then made retroactive refunds of the taxes the police officers had paid on. those allowances for those years, Rev.Proc. 79-13, 1979-1 C.B. 493, which, according to the government, also included interest on the refunds from the date of payment of the taxes.
The government's practice accords with the language of the Code. When a statute provides for a retroactive refund of taxes, the effect is to convert the previously paid taxes into overpayments, i.e., the amount of tax paid, although originally correct, now exceeds the correct tax liability. The date of overpayment of the refunded tax, therefore, is the date on which it originally was paid.
The practice also accords with Treas.Reg. § 301.6611-l(b), which provides: "[T]he dates of overpayment of any tax are the date of payment of the first amount which (when added to previous payments) is in excess of the tax liability . and the dates of payment of all amounts subsequently paid with respect to such tax liability." There is nothing in this language which supports the government's argument that the regulation covers only normal refunds but not refunds resulting from retroactive tax changes.
When Congress intends to deny interest on refunds, it explicitly so provides. For example, section 6611(e) of the Code provides that in the case of refunds of certain overpayments made within 45 days of the date for or the date of filing the return, "no interest shall be allowed under subsection (a) on such overpayment." Other provisions of the Code have the effect of limiting the amount of interest on refunds of overpayment. See, e.g., I.R.C. § 6611(f) and 6611(g); Treas.Reg. § 301.6611-l(e), (f); Rev.Proc. 60-17, 1960-2 C.B. 942.
Moreover, where a statute retroactively increases the tax, the general rule apparently is that a taxpayer is liable for interest on the underpayments, even though the payments were proper when made. "The Tax Reform Act of 1976 [Pub.L.No.94-455, 90 Stat. 1520], enacted on October 4, 1976, made several changes which increased tax liabilities from the beginning of 1976." S.Rep.No.66, 95th Cong., 1st Sess. 85, reprinted in 1977 U.S. Code Cong. & Ad.News 185, 262. Congress then passed the Tax Reduction and Simplification Act of 1977, Pub.L.No.95-30, § 305, 91 Stat. 126, 152 (codified at I.R.C. § 6601 note), which relieved "taxpayers from additions to tax, interest, and penalties (but not liability for tax) attributable to [estimated tax payments which were too low because of] changes in the tax law." S.Rep.No.66, 95th Cong., 1st Sess. 86, reprinted in 1977 U.S. Code Cong. & Ad.News 185,263. The report added, "The committee believes it is appropriate to grant to taxpayers affected by the 1976 legislation relief from additions to tax, interest, and penalties, similar to that which has traditionally been granted in connection with earlier legislation where provisions were enacted with retroactive application." Id., reprinted in 1977 U.S. Code Cong. & Ad.News 185, 263. The congressional understanding was that interest is payable on retroactive tax increases unless Congress forgives it. Cf. Morton-Norwich Products, Inc. v. United States, 221 Ct.Cl. 83, 602 F.2d 270 (1979), cert. denied, 445 U.S. 927, 100 S.Ct. 1314, 63 L.Ed.2d 760 (1980) (taxpayer owed interest on deficiency even though pertinent regulations were applied retroactively in part).
The Supreme Court has stressed the importance of symmetry in the payment of interest. United States v. Koppers Co., 348 U.S. 254, 267, 75 S.Ct. 268, 274, 99 L.Ed. 302 (1955); Manning v. Seeley Tube & Box Co., 338 U.S. 561, 568, 70 S.Ct. 386, 390, 94 L.Ed. 346 (1950). It would be inconsistent with these principles and unfair to taxpayers to deny them interest on retroactive refunds of taxes while requiring them to pay interest on retroactive increases in taxes.
Finally, what little decisional law there is on the subject supports the plaintiff. In Siegel v. United States, 84 Ct.Cl. 551, 18 F.Supp. 771 (1937), the court held that interest was due on a refund made under a retroactive tax statute. The court said that paying interest on refunds was the general rule and that it would apply, even in retroactive situations, unless Congress specifically prohibited it. The court distinguished its earlier decision in Sunny Brook Distillery Co. v. United States, 72 Ct.Cl. 157, 48 F.2d 976, cert. denied, 284 U.S. 637, 52 S.Ct. 20, 76 L.Ed. 542 (1931), which had denied interest on a retroactive refund, on the ground that Sunny Brook arose under "a special act of Congress . which was not a part of a general revenue statute." 84 Ct.Cl. at 559-60, 18 F.Supp. at 775. In the present case, the claim for interest rests upon a general provision of the Code, section 6611.
B. The government argues that because it was entitled to and properly held the refunded taxes prior to the effective date of the retroactive reduction of the taxes on April 25, 1980, it should not have to pay interest for that period. It urges that interest is payment for the use of money that it has in effect borrowed from someone else and that if the possession of the money was valid, interest on it is not due when the money is refunded because of a subsequent event. It relies upon Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346 (1950).
In Seeley, the Commissioner assessed deficiencies in 1941 taxes together with interest from the date the tax was due. For the year 1942-43, the taxpayers had a net operating loss which, when carried back to 1941, fully abated the 1941 tax liability. The taxpayer filed claims for refund of the 1941 tax it had paid and for abatement of the assessed deficiency and interest. The Commissioner abated the deficiency and returned part of the tax paid but retained an amount covering the interest that had been assessed on the deficiency.
The Supreme Court held that
the interest was properly withheld by the Collector. The subsequent cancellation of the duty to pay this assessed deficiency does not cancel in like manner the duty to pay the interest on that deficiency. From the date the original return was to be filed until the date the deficiency was actually assessed, the taxpayer had a positive obligation to the United States: a duty to pay its tax. See Rodgers v. United States, 332 U.S. 371, 374 [68 S.Ct. 5, 7, 92 L.Ed. 3] (1947); United States v. Childs, 266 U.S. 304, 309-310 [45 S.Ct. 110, 111, 69 L.Ed. 299] (1924); Billings v. United States, 232 U.S. 261, 285-287 [34 S.Ct. 421, 425-426, 58 L.Ed. 596] (1914). For that period the taxpayer, by its failure to pay the taxes owed, had the use of funds which rightfully should have been in the possession of the United States. The fact that the statute permits the taxpayer subsequently to avoid the payment of that debt in no way indicates that the taxpayer is to derive the benefits of the funds for the intervening period. In the absence of a clear legislative expression to the contrary, the question of who properly should possess the right of use of the money owed the Government for the period it is owed must be answered in favor of the Government.
338 U.S. at 565-66, 70 S.Ct. at 388-89.
Seeley did not involve the issue here, which is whether the "date of the overpayment" of the refunded taxes was the date of original payment or the effective date of the treaty that retroactively created the overpayment. Seeley rested in considerable part upon the Court's analysis of the loss carryback provisions of the Code, which it interpreted as not modifying either the taxpayer's duty timely to pay all taxes it owed or "the right of the United States to the interim use of the tax payments." Id. at 569, 70 S.Ct. at 390. It was because of this analysis that the Court in Seeley held that "where a deficiency and interest have been validly assessed under any applicable statutory procedure, a subsequent carryback with an abatement of the deficiency does not abate the interest previously assessed on that deficiency." Id. at 570, 70 S.Ct. at 391.
The present case, in contrast to Seeley, involves neither a deficiency assessment nor the "abate[ment of] the interest previously assessed on that deficiency." It involves the wholly different question of a taxpayer's right to recover interest upon taxes that initially were properly paid but that were refunded as a result of a subsequent retroactive change in the tax law. We decline to read into section 6611(b)(2) the use of money dictum from Seeley upon which the government relies.
For the reasons already stated, such a limitation of the broad language of that section would unduly and improperly limit its scope. Our conclusion on this point is consistent with prior decisions in which we similarly have refused to adopt the expansive reading of the Seeley dictum which the government espouses. E.g., Martin-Marietta Corp. v. United States, 189 Ct.Cl. 291,418 F.2d 502 (1969).
C. Finally, the government makes several arguments based upon the 1980 treaty which, it asserts, requires the denial of interest on the refunds for the years 1975-78.
1. Although the treaty does not explicitly provide for the payment or nonpayment of interest, the government argues that the provision that the treaty "shall enter into force immediately after the expiration of thirty days following the date on which the instruments of ratification are exchanged," indicates that interest is not payable before that date. The same sentence also provides that the treaty "shall thereupon have effect . in the United States . in respect of tax withheld at the source, for amounts paid or credited on or after 1 January 1975." The fact that the treaty did not "enter into force" until April 25, 1980, does not establish that interest is not payable on the retroactive refunds of taxes that the treaty provided.
There have been other tax treaties that expressly provided that refunds were to be made without interest. Convention on Estate, Inheritance and Gift Taxes, Nov. 24, 1978, United States-France, art. 13, para. 2, 31 U.S.T. -, -, T.I.A.S. No. 9812, 1980-2 C.B. 391, 395 ("Any refund based on the provisions of this Convention shall be made without payment of interest on the amount so refunded"); Convention on Estate Taxes, April 16, 1945, United States-United Kingdom, art. VI, para. 2, 60 Stat. 1391, 1394, T.I.A.S. No. 1547 ("Any such refund shall be made without payment of interest on the amount so refunded"), revoked, Convention on Estate and Gift Taxes, Oct. 19, 1978, United States-United Kingdom, art. 14, 30 U.S.T. 7223, 7235-36, T.I.A.S. No. 9580 (art. 9(5), 30 U.S.T. at 7233, the refund provision, is silent on interest). When the draftsmen of treaties intended to deny interest, they knew how to do so.
2. The government contends that the general principles governing the payment of interest on refunds of retroactive tax reductions are inapplicable when the reduction results from a treaty rather than from a statute. It offers no convincing reason for that conclusion, however. The Internal Revenue Code itself recognizes that its provisions are subject to "any treaty obligation of the United States." I.R.C. § 7852(d); see also I.R.C. § 894.
The government points to the sentence in Rev.Proc. 80-18, § 4.04, 1980-1 C.B. 623, 628, stating that "Pursuant to Article 28 and for purposes of section 6611, the date of overpayment shall be considered to be April 25, 1980." This statement merely announced the Service's position on this issue, and gave no persuasive arguments to support the conclusion. It cannot be fairly read, as the government seeks to do, as distinguishing between retroactive refunds of taxes made pursuant to statute or pursuant to treaty.
III.
Almost two months after the oral argument in this case, the defendant filed a motion to dismiss for lack of jurisdiction. It relies on 28 U.S.C. § 1502 (1976), which states: "Except as otherwise provided by Act of Congress, the Court of Claims shall not have jurisdiction of any claim against the United States growing out of or dependent upon any treaty entered into with foreign nations." The government argues that the claim for interest is one "growing out of or dependent upon" the 1980 treaty.
Although the 1980 treaty created the right to a retroactive refund of taxes, it is section 6611 of the Code that creates the right to interest upon the refunded taxes. As we have shown, the critical issue in the case is what was the "date of the overpayment" of the refunded taxes. That issue arises out of and is determined by the statute, not by the treaty.
In S. N. T. Fratelli Gondrand v. United States, 166 Ct.Cl. 473 (1964) (eong.ref.), the court held that for section 1502 to apply, the claim must "derive 'its life and existence' from the Treaty," and that section 1502,
as its words read and as it has been construed, permits the court to pass upon a treaty issue raised as a defense to a claim which is independent of the treaty. The prohibition is not framed, nor has it been applied, as forbidding this court to construe or apply a treaty. Rather, the statute is a jurisdictional provision directed to the plaintiff's own case and claim, not to the defendant's position.
166 Ct.Cl. at 478 (footnote omitted); see also Hughes Aircraft Co. v. United States, 209 Ct.Cl. 446, 467-73, 534 F.2d 889, 902-06 (1976).
In the present case, as in Fratelli and Hughes, the plaintiff's claim (for interest retroactive to the date of payment of the refunded taxes) derives its "life and existence" not from the treaty but from section 6611 of the Code. The interest claim is independent of the treaty, and the government invokes the treaty as a defense to that independent claim. Section 1502 does not bar us from entertaining the claim.
CONCLUSION
The plaintiff's motion for summary judgment is granted, and the defendant's motions to dismiss and for summary judgment are denied. Judgment is entered for the plaintiff. Pursuant to Rule 75(a)(2), the defendant is ordered to compute the amount of interest to which the plaintiff is entitled.