State Farm Mutual Automobile Insurance Company and Subsidiaries v. Commissioner

126 T.C. No. 2 UNITED 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. - 2 - 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. - 3 - 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 - 4 -

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. - 5 -

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.” - 6 -

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. - 7 -

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 - 8 - $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 - 9 -

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, - 10 -

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. - 11 -

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 - 12 -

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 - 13 -

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...) - 14 -

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.