Opinion ID: 2792378
Heading Depth: 2
Heading Rank: 3

Heading: Definition of Rebate

Text: The government also argues that the Court of Federal Claims erred in finding that MassMutual’s guaranteed dividends were rebates. Specifically, the government alleges that the IRS’s interpretation that these types of payments are not rebates is controlling and should be given deference. Even without deference, the government alleges that the IRS’s interpretation of Treasury Regulation § 1.461-4(g)(3) should prevail in light of the surrounding language of the regulation, and the legislative and regulatory history. When construing a regulation, the court applies the same interpretative rules it uses when analyzing the language of a statute. See Tesoro Haw. Corp. v. United States, 405 F.3d 1339, 1346 (Fed. Cir. 2005) (“We construe a regulation in the same manner as we construe a statMASSACHUSETTS MUTUAL LIFE INS v. US 19 ute . . . .”). Accordingly, it is appropriate to first consider the “plain language [of the regulation] and consider the terms in accordance with their common meaning.” Lockheed Corp. v. Widnall, 113 F.3d 1225, 1227 (Fed. Cir. 1997). In doing so, the court considers “the text of the regulation as a whole, reconciling the section in question with sections related to it.” Lengerich v. Dep’t of Interior, 454 F.3d 1367, 1370 (Fed. Cir. 2006) (citing Reflectone, Inc. v. Dalton, 60 F.3d 1572, 1577–78 (Fed. Cir. 1995)). If the regulatory language is clear and unambiguous, then no further inquiry is usually required. Roberto v. Dep’t of the Navy, 440 F.3d 1341, 1350 (Fed. Cir. 2006). If the language is ambiguous, then the court must typically defer to the agency’s interpretation of the regulation. Auer v. Robbins, 519 U.S. 452, 461–62 (1997); Gose, 451 F.3d at 836 (“As a general rule, we must defer to an agency’s interpretations of the regulations it promulgates, as long as the regulation is ambiguous and the agency’s interpretation is neither plainly erroneous nor inconsistent with the regulation.”) (citing Gonzales v. Oregon, 126 S. Ct. 904, 914 (2006) (“An administrative rule may receive substantial deference if it interprets the issuing agency’s own ambiguous regulation.”)); see also Christensen v. Harris Cnty., 529 U.S. 576, 588 (2000) (“In Auer, we held that an agency’s interpretation of its own regulation is entitled to deference. But Auer deference is warranted only when the language of the regulation is ambiguous.”) (citations omitted). Deference can even be afforded to an agency’s interpretation when that interpretation is advanced in a legal brief. See Chase Bank USA, N.A. v. McCoy, 131 S. Ct. 871, 881 (2011) (explaining that the deference granted in Auer was to an agency’s interpretation that was presented in an amicus brief submitted by the agency at the Supreme Court’s invitation). But such deference is not always afforded to an agency’s interpretation of its own regulation. “Deference is undoubtedly inappropriate, for example, when the agen20 MASSACHUSETTS MUTUAL LIFE INS v. US cy’s interpretation is ‘plainly erroneous or inconsistent with the regulation.’” Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2166 (2012) (quoting Auer, 591 U.S. at 461). It is also unwarranted when there is “reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question.” Auer, 519 U.S. at 462. Such a reason exists “when the agency’s interpretation conflicts with a prior interpretation, or when it appears that the interpretation is nothing more than a convenient litigating position, or a post hoc rationalization advanced by an agency seeking to defend past agency action against attack.” Christopher, 132 S. Ct. at 2166–67 (quotations and citations omitted). 1. Interpretation of “Rebates, Refunds, and Similar Payments” When deciding how to construe the terms “rebate, refund, and similar payments” in Treasury Regulation § 1.461-4(g)(3), the Court of Federal Claims determined that there was no general definition for the term rebate or refund in the Treasury Regulations; rather, the only definitions in the regulations for rebates and refunds were for very specific contexts, not at issue in this case. Because “neither the Tax Code nor the Treasury Regulations provide a specific definition for rebate or refund applicable to this case,” the Court of Federal Claims decided to apply basic statutory interpretation principles, including reliance on dictionary definitions, to determine the correct interpretation of refunds and rebates in the context of Treasury Regulation § 1.461-4(g)(3). Mass Mut. Life Ins. Co., 103 Fed. Cl. at 155. It ultimately concluded that MassMutual’s policyholder dividend payments qualified as rebates, refunds, or similar payments. Id. at 166. As previously discussed, the matching requirement of Treasury Regulation § 1.461-5(b)(5)(ii) can be satisfied by rebates or refunds as described in Treasury Regulation § 1.461-4(g)(3), which states: MASSACHUSETTS MUTUAL LIFE INS v. US 21 (3) Rebates and refunds. If the liability of a tax- payer is to pay a rebate, refund, or similar pay- ment to another person (whether paid in property, money, or as a reduction in the price of goods or services to be provided in the future by the tax- payer), economic performance occurs as payment is made to the person to which the liability is owed. This paragraph (g)(3) applies to all rebates, refunds, and payments or transfers in the nature of a rebate or refund regardless of whether they are characterized as a deduction from gross in- come, an adjustment to gross receipts or total sales, or an adjustment or addition to cost of goods sold. In the case of a rebate or refund made as a reduction in the price of goods or services to be provided in the future by the taxpayer, “payment” is deemed to occur as the taxpayer would other- wise be required to recognize income resulting from a disposition at an unreduced price. See Ex- ample 2 of paragraph (g)(8) of this section. For purposes of determining whether the recurring item exception of § 1.461-5 applies, a liability that arises out of a tort, breach of contract, or violation of law is not considered a rebate or refund. 26 C.F.R. § 1.461-4(g)(3). The Treasury Regulations provide no applicable definition for the terms “rebate, refund, or similar payment.” When terms are undefined, the court may consider the definitions of those terms in order to determine their meaning. See Xianli Zhang v. United States, 640 F.3d 1358, 1364 (Fed. Cir. 2011) (“Dictionary definitions can elucidate the ordinary meaning of statutory terms.”); Am. Express Co., 262 F.3d at 1381 n.5 (“It is appropriate to consult dictionaries to discern the ordinary meaning of a term not explicitly defined by statute or regulation.”). 22 MASSACHUSETTS MUTUAL LIFE INS v. US At the time the disputed regulation was adopted in 1992, Black’s Law Dictionary defined the term “rebate” as a “[d]iscount; deduction or refund of money in consideration of prompt payment. A deduction from a stipulated premium on a policy of insurance, in pursuance of an antecedent contract. A deduction or drawback from a stipulated payment, charge, or rate . . . not taken out in advance of payment, but handed back to the payer after he has paid the full stipulated sum . . . .” BLACK’S LAW DICTIONARY 1266 (6th ed. 1990). It also defined “refund” as “[t]o repay or restore; to return money in restitution or repayment; e.g. to refund overpaid taxes; to refund purchase prices of returned goods.” Id. at 1281. Reviewing these definitions, it is clear that the term rebate encompasses a return of a portion of the original life insurance premium to a policyholder in the form of a policyholder dividend, also known as a premium adjustment. The IRS Code itself supports such an interpretation, by defining “premium adjustment” in the context of insurance as “any reduction in the premium under an insurance or annuity contract which (but for the reduction) would have been required to be paid under the contract.” 26 U.S.C. § 808(d). Additionally, this construction comports with this court’s own understanding of policyholder dividends. See John Hancock Servs., Inc. v. United States, 378 F.3d 1302, 1303 (Fed. Cir. 2004) (“Policyholder dividends are price rebates that the company can deduct from its taxable earnings.”); Principal Mut. Life Ins. Co. v. United States, 295 F.3d 1241, 1242 (Fed. Cir. 2002) (“Mutual life insurance companies give premium rebates to their policyholders.”); CUNA Mut. Life Ins. Co. v. United States, 169 F.3d 737, 738 (Fed. Cir. 1999) (“Life insurance companies traditionally rebate to their policy holders, as excessive charges, part of the premiums paid and deduct these payments from their income.”). The government argues, nevertheless, that the surrounding language in § 1.461-4(g) and in the related MASSACHUSETTS MUTUAL LIFE INS v. US 23 Treasury Regulation § 1.461-4, which describes the recurring item exception, do not support this interpretation. Reflectone, 60 F.3d at 1577–78 (citing Beecham v. United States, 511 U.S. 368, 372 (1994) (“The plain meaning that we seek to discern is the plain meaning of the whole statute, not of isolated sentences.”)). For example, the government cites to language in § 1.461-4(g) that explains a rebate or refund can be “an adjustment to gross receipts or total sales,” “an adjustment or addition to cost of goods sold,” or “a reduction in the price of goods or service to be provided in the future by the taxpayer.” It contends that such language is inapplicable in this case. But contrary to the government’s argument, this language actually supports the conclusion that a premium adjustment—an adjustment to the initial cost of insurance—is a rebate. The government also cites to § 1.461-4(g)(5), which discusses insurance, warranty, and service contracts, to support its conclusion that policyholder dividends are not rebates. Treasury Regulation § 1.461-4(g)(5) states that “[i]f the liability of a taxpayer arises out of the provision to the taxpayer of insurance, or a warranty or service contract, economic performance occurs as payment is made to the person to which the liability is owed.” Because this section refers explicitly to insurance, the government contends that, if refunds and rebates were to cover policyholder dividends, there would likewise be a specific reference to such dividends in § 1.461-4(g)(3). What the government neglects to mention is that there are no specific references made to the types of refunds included in § 1.461-4(g)(3); the failure to include a particular reference to policyholder dividends, thus, is not surprising. There is nothing in the regulations the government references that conflicts with the construction of rebate adopted by the Court of Federal Claims. Additionally, the government asserts that its interpretation is supported by both legislative and regulatory history, because there was no mention of policyholder 24 MASSACHUSETTS MUTUAL LIFE INS v. US dividends as rebates in either the discussion of the statute which statutorily established the economic performance requirement, the Deficit Reduction Act of 1984, or the IRS regulations related to that act. While the government is correct that policyholder dividends are not referenced in the House Conference Report on the Deficit Reduction Act of 1984 or by the IRS, only one type of rebate or refund is ever referenced with specificity—utility refunds, which are given to natural gas utilities when they have been overcharged by their suppliers. See H.R. Conf. Rep. No. 98-861, at 876 (1984) (discussing that with the changes to 26 U.S.C. 461(h) requiring economic performance, commentators argued that the statute should be interpreted to allow “a utility [to] deduct [natural gas supplier] refunds in the year the refund was included in the income of the utility, provided that the refunds are passed through to consumers within a reasonable period of time in the following taxable year”); 57 Fed. Reg. 12411, 12416, T.D. 8408 (Apr. 9, 1992) (noting that “the final regulations [relating to the economic performance requirement did] not provide any special rules for natural gas suppliers or other public utilities”). The discussion of one very specific type of refund does not create an inference that policyholder dividends in the form of premium adjustments should not be considered “rebates, refunds, or similar payments,” especially when adopting such a construction would conflict with the plain and ordinary meaning of the contested terms. Here, the plain and ordinary meaning of the terms rebate and refund include premium adjustments distributed to policyholders in the form of dividends. While the government also complains that the Court of Federal Claims’ analysis is flawed for giving undue weight to industry usage, and ignoring the actual nature of policyholder dividends, which could be also seen as a return of equity and not merely a price rebate, on the record before us, we find these arguments unpersuasive. The Court of MASSACHUSETTS MUTUAL LIFE INS v. US 25 Federal Claims thoroughly considered these questions and we see no error in the manner in which it did so. The government’s final argument is that the IRS’s interpretation of the regulation should be afforded deference. Because the terms are unambiguous, the court need not consider whether it should defer to the IRS’s interpretation of the regulation. Even if we were to conclude that the regulation is ambiguous, moreover, for the reasons explained below, we decline to afford deference to the IRS’s interpretation in this case. 2. Deference to the IRS’s interpretation of § 1.461-4(g)(3) The court first notes that the government did not present a deference argument to the Court of Federal Claims. As a general principle, appellate courts do not consider issues that were not clearly raised in the proceeding below. Hormel v. Helvering, 312 U.S. 552, 556 (1941); see San Carlos Apache Tribe v. United States, 639 F.3d 1346, 1354–55 (Fed. Cir. 2011) (“Because the [litigant] did not raise this argument before the Court of Federal Claims, it is waived on appeal.”). “Only rarely will an appellate court entertain” a novel argument raised for the first time on appeal. Karuck Tribe of Cal. v. Ammon, 209 F.3d 1366, 1379 (Fed. Cir. 2000); see Singleton v. Wulff, 428 U.S. 106, 121 (1976) (“The matter of what questions may be taken up and resolved for the first time on appeal is one left primarily to the discretion of the courts of appeals, to be exercised on the facts of individual cases.”). While the government argues that the doctrine of waiver is inapplicable here because the Court of Federal Claims raised the deference issue sua sponte in its opinion, the government mischaracterizes the court’s discussion of deference. In considering how to define rebates and refunds, the Court of Federal Claims first considered whether 26 U.S.C. § 461(h)(3), the statute which discusses the recurring item exception, explained what type of 26 MASSACHUSETTS MUTUAL LIFE INS v. US transactions met the exception. In finding it did not, the Court of Federal Claims next considered if Treasury Regulation § 1.461-5, which address the matching requirement of §461(h)(3), was a reasonable and consistent interpretation of the statute. If the regulation was consistent with the aim of the statute, then the court could rely upon it in determining if policyholder dividends satisfied the matching requirement. Mass Mut. Ins. Co., 103 Fed. Cl. at 151 (“Treasury regulations are entitled to great deference, and must be sustained unless unreasonable and plainly inconsistent with the revenue statutes.” (quoting CUNA Mut. Life Ins. Co., 169 F.3d at 742)). The Court of Federal Claims never discussed whether the IRS’s interpretation of Treasury Regulation § 1.461-4(g)(3) was entitled to deference; it only considered whether the IRS’s statutory interpretation was reasonable. Accordingly, the court will not excuse the government’s failure to raise the Auer deference argument below. Assuming arguendo that the government did not waive its deference argument, deference would not be warranted here. The government asserts that the IRS’s interpretation of Treasury Regulation § 1.461-4(g)(3) to exclude policyholder dividends as rebates or refunds— which was advanced for the first time in this litigation— should be afforded deference. It cites to two IRS Field Service Advisories to support its contentions that the IRS has considered the question carefully, and that its ultimate interpretation “reflect[s] the agency’s fair and considered judgment on the matter in question,” and was not merely created for litigation purposes. Auer, 519 U.S. at 462. The two IRS Field Service Advisories cited by the government do not take any position as to how policyholder dividend liabilities should be classified, however. See IRS Field Service Advisory, 1994 WL 1865978 (Apr. 28, 1994) (“Given that, in theory, policyholder dividends may represent in part a return on equity and in part a price adMASSACHUSETTS MUTUAL LIFE INS v. US 27 justment, we believe that the policyholder dividend liabilities at issue are appropriately classified as § 1.461-4(g)(7) ‘other liabilities,’ § 1.461-4(g)(3) ‘rebates and refunds,’ or some combination of the two.”); IRS Field Service Advisory, 1998 WL 1984267 (Aug. 24, 1998) (“Although we believe it is possible to characterize the liability to pay policyholder dividends either as a rebate or as an ‘other’ liability, we characterize the liability as a rebate for purposes of this advice.”). “While agency positions articulated in litigation briefs may be entitled to deference, such deference is earned only if the brief represents the agency’s considered position and not merely the views of litigating counsel.” Abbott Labs. v. United States, 573 F.3d 1327, 1333 (Fed. Cir. 2009) (emphasis added). In this case, there is no evidence that the IRS’s present interpretation reflects such contemplation. Am. Signature, Inc. v. United States, 598 F.3d 816, 827 (Fed. Cir. 2010) (“Where the agency’s interpretation seeks to advance its litigating position, deference is typically not afforded to the agency’s position announced in a brief. But, where the agency is not advancing its litigating position, deference may be afforded [to] an agency’s position articulated in its brief.”) (citation omitted); compare Adair v. United States, 497 F.3d 1244, 1252 (Fed. Cir. 2007) (declining to afford deference to OPM’s regulatory interpretation in part because there was no indication that the opinion had been circulated through OPM), and Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988) (“[W]e have declined to give deference to an agency counsel’s interpretation of a statute where the agency itself has articulated no position on the question . . . .”), with Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 163–64, 171 (2007) (explaining there was no reason to suspect the agency’s interpretation did not reflect its fair and considered judgment because it had considered revising its interpretation at least three times over the course of 15 years but had declined to make a change). 28 MASSACHUSETTS MUTUAL LIFE INS v. US Without any other evidence that the IRS had thoughtfully considered its position, “[t]o defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires.’” Christopher, 132 S. Ct. at 2167 (quoting Gates & Fox Co. v. Occupational Safety & Health Review Comm’n, 790 F.2d 154, 156 (D.C. Cir. 1986) (Scalia, J.)). Accordingly, if the court had found the regulatory language ambiguous, the IRS’s interpretation of § 1.461- 4(g)(3) to exclude policyholder dividends still would not have been entitled to deference.