Court Opinion

ID: 4333037
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:59:35.000802+00
Date Added: 2024-06-11T14:19:58.456442
License: Public Domain

NESTLE HOLDINGS, INC., ON BEHALF OF ITSELF AND CONSOLIDATED SUBSIDIARIES, AND AS THE SUCCESSOR IN INTEREST TO NESTLE ENTERPRISES, INC. AND CONSOLIDATED SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNestle Holdings, Inc. v. CommissionerNo. 21562-90United States Tax CourtT.C. Memo 2000-374; 2000 Tax Ct. Memo LEXIS 442; 80 T.C.M. 829; T.C.M. (RIA) 54148; December 12, 2000, Filed 2000 Tax Ct. Memo LEXIS 442">*442  An appropriate order directing the parties to file revised computations will be issued.APPENDIX: FLOWCHART SUMMARIZING LITIGATION[Flowchart omitted] Joseph R. Goeke, Thomas Kittle-Kamp, and John T. Hildy, forpetitioner.Theodore J. Kletnick, Paulette Segal, and Oleida Mendiburt, forrespondent.  Vasquez, Juan F.VASQUEZSUPPLEMENTAL MEMORANDUM OPINIONVASQUEZ, JUDGE: This matter is before the Court on the parties' disputed computations under Rule 155 of the decision to be entered for Nestle Holding Inc.'s (petitioner) 1983, 1984, and 1985 tax years.  1 The ruling in this opinion relates solely to petitioner's 1985 tax year. 2 The issue presented to us is whether the parties agreed in two settlement agreements on the method of computing the deficiency and/or overpayment for the 1985 tax year. In the event that respondent's interpretation of the settlement agreements is rejected by the Court, respondent concedes that petitioner is entitled to a refund of $ 36,441,904. See Respondent's Additional Memorandum of Law.2000 Tax Ct. Memo LEXIS 442">*443  BACKGROUND1995 TAX COURT OPINIONRespondent determined deficiencies in petitioner's Federal income taxes as follows:   Taxable Year Ending       Amount   ___________________      ___________    Dec. 31, 1983       $ 38,934,552    Dec. 29, 1984        21,764,946    Dec. 28, 1985       285,591,539On September 14, 1995, after the settlement of numerous issues by the parties, the Court rendered an opinion (1995 opinion) with regard to remaining issues in the case. See Nestle Holdings, Inc. v. Commissioner, T.C. Memo 1995-441, affd. in part, revd. and remanded in part 152 F.3d 83">152 F.3d 83 (2d Cir. 1998). In the 1995 opinion, the Court (1) held that petitioner and Carnation Co. (Carnation) were entitled to interest deductions of $ 131,739,791, 3 (2) established the fair market value of various Carnation assets, and (3) concluded that Carnation (i.e., petitioner) had to recognize capital gains on the sale of those assets to Nestle S.A., a foreign entity. The Court ordered the parties to submit computations under Rule 155.2000 Tax Ct. Memo LEXIS 442">*444  1995 ADVANCE TAX PAYMENTSOn December 15, 1995, after the release of the 1995 opinion, but before the Court entered a decision, petitioner paid respondent the following amounts (advance tax payments) on the deficiencies as anticipated by petitioner for the tax years in issue:   Taxable Year Ending     Advance Tax Payments   ___________________     ____________________    Dec. 31, 1983         $ 6,774,252    Dec. 29, 1984         31,222,100    Dec. 28, 1985         114,964,176INITIAL TENTATIVE REFUNDS AND 1996 MOTION TO STRIKEOn August 7, 1996, a stipulation by the parties with regard to the Rule 155 computations (1996 stipulation) was filed. In order to understand the reason for this stipulation, we describe various actions previously undertaken by petitioner. During the litigation, petitioner filed with respondent Form 1139, Corporation Application for Tentative Refund, requesting tentative refunds attributable to carrying back a variety of net operating losses (NOL's), business credits, and net capital losses generated in post- 1985 tax years to the 1983 and 1984 tax years (initial2000 Tax Ct. Memo LEXIS 442">*445  tentative refunds). See sec. 6411. Respondent allowed those refunds.On July 26, 1996, before the parties filed their Rule 155 computations and proposed decision documents, petitioner filed a motion to strike paragraphs 4(cw) and 5(bt)(i) of its petition. Through the motion, petitioner sought to clarify that the amounts carried back to the 1983 and 1984 tax years (and any resulting adjustments) were not in issue before the Court. See infra 1996 stipulation.Respondent did not object to the motion. The Court granted petitioner's motion. For the purposes of this opinion, we interpret the "not in issue" terminology to mean that petitioner did not seek to have this Court establish whether the carrybacks which led to the initial tentative refunds were properly allowed by respondent.  41996 STIPULATION AND TAX COURT DECISIONThe relevant portions of the 19962000 Tax Ct. Memo LEXIS 442">*446  stipulation follow:     1. Respondent may assess the deficiencies determined to be   due pursuant to the foregoing decision for the taxable [years]   ended December 31, 1983, December 29, 1984, and December 28,   1985. The deficiencies shown in the foregoing decision for the   1983 and 1984 taxable years and the overpayment shown in the   foregoing decision for the 1985 taxable year were determined   WITHOUT GIVING PETITIONER CREDIT FOR CARRYBACKS, including   carrybacks that were tentatively allowed under the provisions of   I.R.C. sec. 6411, from taxable years after December 28, 1985,   which carrybacks are not in issue in this case. FURTHER, THE   AMOUNTS OF THE NET TAX ASSESSED AND PAID AND THE DEFICIENCIES   SHOWN IN THE FOREGOING DECISION FOR THE 1983 AND 1984 TAXABLE   YEARS WERE DETERMINED AFTER REDUCING THE TAX ASSESSED AND PAID   FOR THOSE YEARS BY ALL AMOUNTS THAT WERE REFUNDED OR CREDITED IN   CONNECTION WITH THE AFOREMENTIONED CARRYBACKS. The reflection in   the decision of these refunds is not a substantive determination   of whether2000 Tax Ct. Memo LEXIS 442">*447  the carrybacks are allowable and does not put the   carrybacks in issue.               * * * * * * *     9. It is further stipulated that business credit   carrybacks, net operating loss and capital loss carrybacks and   the effect of such carrybacks, and other similar tax attributes   defined in I.R.C. secs. 6511(d)(2) and (d)(4) arising with   respect to the Petitioner's taxable years beginning after   December 28, 1985, were not at issue in T.C. Docket No. 21562-90   and may be the subject of a claim for refund attributable to   such carrybacks and the effect of such carrybacks into   Petitioner's taxable years ended December 31, 1983, December 29,   1984, and December 28, 1985, * * *. [Emphasis added.]Pursuant to the record and the 1996 stipulation, on August 7, 1996, the Court also entered a decision (1996 decision) redetermining the deficiency determinations as follows:   Taxable Year Ending       Deficiency   ___________________       __________    Dec. 31, 1983        $ 6,780,4782000 Tax Ct. Memo LEXIS 442">*448      Dec. 29, 1984        33,217,385    Dec. 28, 1985        86,323,660Pursuant to the Court's refund jurisdiction under section 6512(b)(1), the Court also concluded in the 1996 decision that as to the 1985 tax year, petitioner had an overpayment of $ 28,640,516 5 in addition to the deficiency of $ 86,323,660.  6SUBSEQUENT TENTATIVE REFUNDSOn September 9, 1996, petitioner submitted to respondent another Form 1139 seeking2000 Tax Ct. Memo LEXIS 442">*449  tentative refunds (subsequent tentative refunds) of $ 556,698, $ 14,045,138, and $ 49,907,010 for the 1983, 1984, and 1985 tax years, respectively. The subsequent tentative refund for 1985 resulted from carrying back NOL's generated in the 1995 tax year to 1985.  7 Furthermore, when the NOL's were carried back to 1985, business credits that initially offset the 1985 tax liability became eligible to be applied to the 1983 and 1984 tax years, creating refunds in those years.  8 Specifically, the NOL's were derived from additional interest and State taxes resulting from the litigation of the instant case. Respondent allowed the subsequent tentative refunds for 1983, 1984, and 1985.2000 Tax Ct. Memo LEXIS 442">*450  APPEAL OF 1995 OPINIONIn late 1996, petitioner appealed the Court's valuation of the Carnation assets and the corresponding capital gains issue to the U.S. Court of Appeals for the Second Circuit. On December 30, 1996, respondent assessed the deficiencies redetermined by the Court in the 1996 decision.  9 On July 31, 1998, the Court of Appeals affirmed this Court's holding that petitioner had to recognize capital gains on the sale of the Carnation assets but reversed and remanded the Court's 1995 opinion with regard to the valuation of the Carnation assets.REMAND TO THE TAX COURT AND 1999 STIPULATIONAfter the Court scheduled the case for a2000 Tax Ct. Memo LEXIS 442">*451  new trial, the parties reached a basis of settlement in 1999 as to the value of the Carnation assets (1999 stipulation). The valuation dispute affected only the deficiency and overpayment determinations for the 1985 tax year. 10 As part of the 1999 stipulation, the parties described the deficiency and/or overpayment computation for the 1985 tax year in their Rule 155 computations. The parties agreed to the following:     1. * * * The parties hereby stipulate that Carnation   Company's basis in the trademarks was $ 239,500,000 and that the   capital gain upon the sale of these trademarks to NSA shall be   computed by reference to the foregoing basis * * *.     2. The parties' stipulation in paragraph 1 of Petitioner's   basis in the trademarks is for the sole purpose of resolving the   remaining disputed issue in this case2000 Tax Ct. Memo LEXIS 442">*452  and has no precedential   value beyond determining Carnation Company's basis in the   trademarks and goodwill/going concern value.     3. Pursuant to T.C. Rule 155, this Court entered a decision   in this case on August 7, 1996, determining a deficiency of   income tax due from Petitioner for the taxable year ended   December 28, 1985, in the amount of $ 86,323,660. As a result of   this Stipulation of Settled Issue, the foregoing DEFICIENCY MUST   BE RECOMPUTED PURSUANT TO THE PARTIES' STIPULATION OF BASIS IN   PARAGRAPH 1. The Court's August 7, 1996 decision was accompanied   by a stipulation signed by Petitioner's counsel and Respondent's   counsel on July 26, 1996, and August 2, 1996, respectively. THE   STIPULATION ACCOMPANYING THE AUGUST 7, 1996 DECISION [(1996   STIPULATION)] CONTROLS THE MANNER IN WHICH THE INCOME TAX AT   ISSUE FOR THE 1985 TAXABLE YEAR WILL BE RECOMPUTED. The parties   will expeditiously submit the recomputed deficiency for the   Court to enter pursuant to Rule 155. [Emphasis added.]For ease of reference, the Court provides a flowchart in the appendix2000 Tax Ct. Memo LEXIS 442">*453  which lists the various steps in this litigation.THE PARTIES' POSITIONSIn the present Rule 155 computational dispute, respondent arrives at a deficiency of $ 8,815,210 for the 1985 tax year, while petitioner arrives at a $ 41,091,800 overpayment. 112000 Tax Ct. Memo LEXIS 442">*454  Their deficiency and overpayment computations follow below:             RESPONDENT'S 1985           DEFICIENCY COMPUTATION  1   Tax liability             $ 45,560,035   Tax on return       $ 328,175   Amounts assessed    as a deficiency    86,323,660   __________________________________   Tax assessed    and paid      2 86,651,835   - Reductions      (49,907,010)   __________________________________   - Net tax assessed and paid      (36,744,825)   _________________________________________________   Deficiency                8,815,210             PETITIONER'S 1985           OVERPAYMENT COMPUTATION  1   Tax assessed and paid        2 $ 86,651,835   - Tax liability            (45,560,035)   _________________________________________________   Overpayment               41,091,8002000 Tax Ct. Memo LEXIS 442">*455  The parties agree that petitioner's tax liability for 1985 equals $ 45,560,035, but they interpret the 1996 and 1999 stipulations differently in determining the deficiency and/or overpayment for 1985. Although the NOL carrybacks, which resulted in the subsequent tentative refund for 1985, are not to be taken into account by the Court in redetermining the 1985 tax liability, 12 respondent argues that the 1996 and 1999 stipulations provide for the tax assessed and paid for the 1985 tax year to be reduced by the subsequent tentative refund. 13Respondent first contends that the 1999 stipulation provides that the 1996 stipulation "'controls the manner in which the income tax at issue for the 1985 taxable year will be computed.'" Respondent2000 Tax Ct. Memo LEXIS 442">*456  then argues that because the parties agreed in the 1996 stipulation that the initial tentative refunds for the 1983 and 1984 tax years would be treated as a reduction to the tax assessed and paid, the subsequent tentative refund for the 1985 tax year should be treated in the same fashion.Petitioner agrees that the 1999 stipulation directs the Court to consider the language of the 1996 stipulation. Petitioner, however, argues in a memorandum that the 1996 stipulation says "nothing at all" about whether the subsequent tentative refund is to be treated as a reduction to the tax assessed and paid for 1985. Petitioner further argues that the "absence of any such language for 1985 is not only conspicuous, but dispositive: it shows that the parties meant to treat 1985 differently from 1983 and 1984." 142000 Tax Ct. Memo LEXIS 442">*457  DISCUSSIONI. SETTLEMENT AGREEMENT ISSUEA. CONTRACT LAWThis Court applies general principles of contract law to compromises and settlements of Federal tax cases. We stated in Robbins Tire & Rubber Co. v. Commissioner, 52 T.C. 420">52 T.C. 420, 52 T.C. 420">435-436 (1969), that "a compromise is a contract and thus is a proper subject of judicial interpretation as to its meaning, in light of the language used and the circumstances surrounding its execution." See also Brink v. Commissioner, 39 T.C. 602">39 T.C. 602, 39 T.C. 602">606 (1962), affd.  328 F.2d 622">328 F.2d 622 (6th Cir. 1964); Saigh v. Commissioner, 26 T.C. 171">26 T.C. 171, 26 T.C. 171">177 (1956); Davis v. Commissioner, 46 B.T.A. 663">46 B.T.A. 663, 46 B.T.A. 663">671 (1942); Himmelwright v. Commissioner, T.C. Memo 1988-114. Absent wrongful misleading conduct or mutual mistake, we will enforce a stipulation of settled issues in accordance with our interpretation of its written terms. See Stamm Intl. Corp. v. Commissioner, 90 T.C. 315">90 T.C. 315, 90 T.C. 315">322 (1988); Korangy v. Commissioner, T.C. Memo 1989-2, affd.  893 F.2d 69">893 F.2d 69 (4th Cir. 1990). However, we will not force a settlement on the parties where no settlement was intended. See Autera v. Robinson, 136 U.S. App. D.C. 216">136 U.S. App. D.C. 216, 419 F.2d 1197">419 F.2d 1197 (D.C. Cir. 1969).2000 Tax Ct. Memo LEXIS 442">*458 B. ANALYSIS OF SETTLEMENT AGREEMENTSThe issue before us is whether the subsequent tentative refund should be subtracted from the tax assessed and paid for 1985, the result of which is a deficiency. When we examine the language used in the 1999 stipulation, we find that it does not specifically provide for the tax assessed and paid for the 1985 year to be reduced by the subsequent tentative refund. The relevant portion of the 1999 stipulation does state that the "income tax at issue" for the 1985 year should be computed according to the 1996 stipulation.  15The 1996 stipulation provides that as to the 1983, 1984, and 1985 tax years, petitioner should not be given credit for carrybacks which are not in issue (i.e., the carrybacks should not be considered in determining taxable income and the corresponding tax2000 Tax Ct. Memo LEXIS 442">*459  liability). The 1996 stipulation also states that the 1983 and 1984 tax assessed and paid should be reduced by tentative refunds. In computing the deficiency and overpayment for 1985, however, the parties did not address in the 1996 stipulation whether a tentative refund for 1985 was to be treated as a reduction to the tax assessed and paid for 1985.Although it is evident from both stipulations that the 1985 tax liability should be computed without considering the carrybacks not in issue, it is unclear from the stipulations whether the parties also meant for a tentative refund for 1985 to reduce the tax assessed and paid. Because the parties have not clearly set forth the substance of their agreement and since we cannot discern the intent of the parties from the ambiguous language of the stipulations, we will not construe an agreement to exist with regard to the disputed issue.Having concluded that the 1996 and 1999 stipulations do not address the issue of whether to treat the subsequent tentative refund as a reduction to the tax assessed and paid, we would normally look to relevant statutory and case law to determine how to treat the subsequent tentative refund in the deficiency2000 Tax Ct. Memo LEXIS 442">*460  computation. However, because respondent has conceded an overpayment of $ 36,441,904 in the event that the Court does not sustain his interpretation of the settlement agreements, we hold that petitioner is entitled to a refund of $ 36,441,904.  16II. DECISION DOCUMENTAdditionally, respondent requests that if the Court concludes that petitioner is entitled to a refund, the Court include language in the decision document protecting respondent's right to challenge the validity of the carrybacks that resulted in the subsequent tentative refund for 1985. Respondent's request arises from an unpublished opinion of the U.S. Court of Appeals for the Eighth Circuit that upheld a U.S. District Court's decision that the United States was barred under res judicata principles from subsequently recovering a tentative refund pursuant to section 6213(b)(3). See Bradley v. United States, 106 F.3d 405">106 F.3d 405 (8th Cir. 1997), affg. Civil No. 3-94-1514 (D. 2000 Tax Ct. Memo LEXIS 442">*461 Minn., Jan. 30, 1996). Because petitioner does not object to the language itself, 17 the parties are directed to include the language in a stipulation drafted by the parties to accompany the decision document.To the extent not herein discussed, we have considered the parties' other arguments and found them to be irrelevant or without merit.To reflect the foregoing,An appropriate order directing the parties to file revised computations will be issued.APPENDIX: FLOWCHART SUMMARIZING LITIGATION[Flowchart omitted] Footnotes1. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years in issue (or the Internal Revenue Code in effect for years in which carrybacks were generated).↩2. Although we discuss petitioner's 1983 and 1984 tax years herein, we dispose of those tax years separately in an accompanying order.↩3. During 1985, Carnation was acquired by and became a subsidiary of Nestle Enterprises, Inc., petitioner's predecessor. For 1985, Nestle Enterprises, Inc., and Carnation filed a consolidated return. Petitioner has filed its petition as a successor in interest to Nestle Enterprises, Inc.↩4. As explained infra in the 1996 stipulation, the parties agreed that the decision of the Court would not serve as res judicata with regard to this issue.↩5. The overpayment of $ 28,640,516 resulted from the difference between petitioner's $ 86,651,835 tax liability (consisting of a $ 328,175 tax shown on petitioner's tax return plus the $ 86,323,660 deficiency established by the Court) and the combination of a $ 328,175 payment made with petitioner's 1985 tax return and the $ 114,964,176 advance tax payment for the 1985 tax year.↩6. Because respondent did not assess the advance tax payments as a deficiency until Dec. 30, 1996, they were not part of the deficiency computations. See sec. 6211(a)↩.7. Sec. 172(b)(1)(C) provides that if a taxpayer has a "specified liability loss", the specified liability loss can serve as a carryback to the preceding 10 taxable years. The definition of a specified liability loss, however, has materially changed between 1995 (the year in which the NOL carrybacks were generated) and today. See sec. 172(f) before and after amendment by the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999, Pub. L. 105-277, sec. 3004(a), 112 Stat. 2681-905 (which applies to NOL's arising in taxable years ending after Oct. 21, 1998).↩8. A part of the refunds for 1983 and 1984 resulted from carrying back business credits generated in 1986 and 1987.↩9. The advance tax payments for 1983 and 1984 did not cover the entire deficiency assessed for 1983 and 1984 by respondent pursuant to the Court's decision. In order to cover the shortfall, respondent credited $ 6,226 and $ 1,995,285 to petitioner's 1983 and 1984 tax accounts, respectively. Those funds came from interest overpaid by petitioner for the years in issue.↩10. The valuation of the Carnation assets affected the amount of capital gains petitioner had to recognize for the 1985 tax year.↩11. Sec. 6211(a) defines a deficiency as the amount by which the taxpayer's tax liability exceeds the excess of:     (1) the sum of        (A) the amount shown as the tax by the taxpayer upon     his return, * * * plus        (B) the amounts previously assessed (or collected     without assessment) as a deficiency, over --     (2) the amount of rebates, as defined in subsection (b)(2),   made.In describing their respective positions, the parties characterize the sum of the amount shown as a tax on the return and the amounts previously assessed as a deficiency as the "tax assessed and paid" by petitioner. We use the same terminology in this opinion as a shorthand reference to the sec. 6211(a)(1) figure. Using a computational format, a deficiency may therefore be expressed as follows:Tax liability -- (tax assessed and paid -- rebates).↩1. We have slightly altered respondent's and petitioner'spresentations for comparison purposes.↩2. Petitioner made a $ 328,175 payment with its 1985 tax returnand a $ 114,964,176 payment in anticipation of our 1996 decision.Petitioner's tax assessed and paid of $ 86,323,660 is net of$ 28,640,516 returned to petitioner by respondent (i.e., $ 328,175 +$ 114,964,176 - $ 28,640,516).↩12. Both parties agree that the NOL carrybacks, which resulted in the subsequent tentative refunds, are also not in issue before the Court.↩13. Our use of the singular form of the term "subsequent tentative refunds" refers to the subsequent tentative refund for the 1985 tax year.↩14. In addition, petitioner also argues that respondent's own Internal Revenue Manual instructs its employees not to take into account tentative refunds (resulting from NOL carrybacks not in issue) in the computation of a deficiency. See Internal Revenue Manual, Part XXXV-Chief Counsel Directives Manual Exhibit (35)(10)00- 28 (July 11, 1991). In response, respondent only argues that "regardless of the interpretation" of the Internal Revenue Manual, statements "issued to guide the [Internal Revenue] Service's employees in performing their duties have a directory nature and do not bind Respondent."↩15. We believe that the reference in par. 3 of the 1999 stipulation indicating that the deficiency be computed according to par. 1 refers to par. 1 of the 1999 stipulation and not the 1996 stipulation.↩16. Petitioner agrees that the cash or credit refund should be $ 36,441,904.↩17. Petitioner objects only to the language being placed in the decision document itself instead of in a stipulation to the decision document.↩