Riggs National Corp. & Subsidiaries v. Commissioner

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 15, 2002 Decided July 12, 2002

No. 01-1121

Riggs National Corporation and Subsidiaries,

Appellant

v.

Commissioner of Internal Revenue,

Appellee

Appeal from the United States Tax Court

(No. 24368-89)

Thomas C. Durham argued the cause for appellant. With

him on the briefs were Joel V. Williamson, Russell R. Young,

Kim Marie Boylan, Charles W. Hall and Stephen M. Fel-

dhaus.

Stephen D. Gardner was on the brief for amicus curiae

National Foreign Trade Council, Inc. in support of appellant.

Charles Bricken, Attorney, U.S. Department of Justice,

argued the cause for appellee. With him on the brief was

David English Carmack, Attorney.

Before: Sentelle, Henderson and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: This case returns to us after

decision on remand by the United States Tax Court. Riggs

Bank, asserting that the Central Bank of Brazil paid taxes to

the Brazilian government on its behalf with respect to inter-

est income on loans it had made to the Central Bank, claimed

foreign tax credits under section 901 of the Internal Revenue

Code. The Commissioner disallowed the credits and the Tax

Court denied Riggs's petition for relief. Upon review, we

conclude that official tax receipts that the Central Bank

submitted on behalf of Riggs Bank are entitled to the pre-

sumption of regularity. Holding that the Commissioner

failed to rebut this presumption through clear and specific

evidence that the taxes had not, in fact, been paid, we reverse

the decision of the Tax Court and hold that Riggs is entitled

to the tax credits. We remand to the Tax Court for determi-

nation of whether the tax credits owed to Riggs should be

reduced by offsetting subsidies reportedly paid to the Central

Bank.

I. Background and Prior Proceedings

The origins of this case are set out more fully in our prior

opinion Riggs National Corporation & Subsidiaries v. Com-

missioner, 163 F.3d 1363 (D.C. Cir. 1999) (Riggs II), and will

not be repeated at length here. We instead provide an

overview of this case's prior history with a recitation of the

facts giving rise to the issues now before us.

Riggs National Corporation's subsidiary, Riggs Bank

("Riggs"), made loans to the Central Bank of Brazil during

the early to mid-1980's. These loans were of the "net loan"

variety. In a net loan, the borrower contractually agrees to

pay both the interest on the loan to the lender and any local

(in this case, Brazilian) tax that the lender incurs as a result

of the interest income. The attractiveness of such a loan is

obvious: the lender receives the agreed upon interest income

while the borrower is obligated to pay any tax that the lender

owes on that interest. Making these types of loans even

more appealing is an added benefit resulting from the United

States's Internal Revenue Code ("IRC"). Under section 901

of the IRC, a United States taxpayer is able to take a credit

against his U.S. tax liability on income earned in a foreign

country equal to the amount of foreign tax paid on that

income. 26 U.S.C. s 901. Thus, by providing ordinary net

loans (i.e., net loans to individual foreign borrowers), Riggs

could take a credit equal to the amount of taxes that Brazilian

borrowers paid to Brazil on Riggs's behalf without running

afoul of the IRC. See Riggs II, 163 F.3d at 1365; Continen-

tal Illinois Corp. v. Commissioner, 998 F.2d 513, 516-17 (7th

Cir. 1993).

At issue in Riggs II was the fact that the borrower was the

Central Bank of Brazil, a government entity that is ordinarily

immune from tax on its own income under the Federal

Constitution of Brazil. Despite its tax immune status, and

possibly because of pressure from foreign lenders who fa-

vored the tax credits under section 901, Brazil's Minister of

Finance--the highest ranking Brazilian tax authority--ruled

that the Central Bank was required under Brazilian law to

pay the tax obligation it assumed from foreign lenders. The

Minister of Finance justified his ruling under the rationale

that the funds were available for "re-lending" by the Central

Bank to private Brazilian borrowers. See Riggs Nat'l Corp.

v. Commissioner, 107 T.C. 301, 331 (1996) (Riggs I). The

Minister concluded that the Central Bank must, "as a substi-

tute for such borrowers [to-be,] pay the income tax incident

on the interest from January 1, 1984 to the end of the period

of availability for such funds to be relent." Riggs II, 163

F.3d at 1366 (quoting Riggs I, 107 T.C. at 331). In response,

the Central Bank issued official tax receipts, called

"DARFs,"1 to the foreign lenders which purportedly indicat-

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1 Documento de Arrecadacao de Receitas Federais. DARFs are

official forms authorized by the Brazilian government as the only

form to pay taxes and prove payment of those taxes within Brazil.

ed the amount of tax paid on the lender's behalf. This

comported with the standard practice in Brazil: taxpayers

submit DARFs and the accompanying tax payment to com-

mercial banks, which then transfer the payments to the

Banco do Brasil, a quasi-public, quasi-private bank that col-

lects taxes on behalf of Brazil's National Treasury.

Despite the Minister's ruling that the Central Bank was

required to pay the taxes, and despite the receipt of DARFs

indicating that the taxes had been paid, the Commissioner

rejected the DARFs as sufficient proof that the taxes were

paid, reasoning instead that because the Central Bank was a

tax immune entity, any tax payments made by the Central

Bank were voluntary and not "taxes paid or accrued ... to

any foreign country." 26 U.S.C. s 901(b)(1). The Commis-

sioner consequently assessed a deficiency against Riggs. Be-

fore the Tax Court, Riggs submitted its DARFs as proof that

the Central Bank paid the foreign taxes on Riggs's behalf.

Riggs also provided the Tax Court with entries from the

Banco do Brasil which purportedly showed that the Central

Bank paid to the National Treasury the taxes withheld from

its payments of interest to Riggs. The Tax Court, however,

agreed with the Commissioner that the Central Bank was not

obligated to pay the taxes and therefore disallowed the tax

credits. Riggs I, 107 T.C. at 360. Riggs appealed.

On appeal, we held that the Minister of Finance's ruling

that the Central Bank was obligated to pay the taxes was an

act of state, which precluded the Commissioner from inquir-

ing into its validity. We remanded "so that the Tax Court

may determine in the first instance ... whether the taxes

were in fact paid by the Central Bank" on Riggs's behalf, and

whether any of the potential tax credits must be reduced by

pecuniary benefits, or subsidies, paid to the Central Bank.

Riggs II, 163 F.3d at 1369. Pecuniary benefits were original-

ly instituted in 1975 and allowed Brazilian borrowers who

paid interest to foreign lenders to receive a benefit, or

subsidy, equal to a percentage of the amount of the tax paid

with respect to the interest. The amount of the pecuniary

benefit was originally 85 percent of the amount of the tax

paid. It was reduced to 50 percent of the tax in July 1979,

increased to 95 percent of the tax in December 1979, reduced

to 40 percent of the tax in May 1980, and reduced to zero in

June 1985. See Riggs I, 107 T.C. at 308.

On remand, the Tax Court ruled that Riggs failed to

establish that the Central Bank had, in fact, paid the taxes at

issue on Riggs's behalf. Riggs Nat'l Corp. & Subs. v. Com-

missioner, T.C. Memo. 2001-12, 81 T.C.M. 1023, 2001 Tax Ct.

Memo LEXIS 20, *66 (Jan. 22, 2001) (Riggs III). Specifical-

ly, the Tax Court noted that letters and spreadsheets the

Central Bank submitted with the DARFs reported that, for

some of the payments, a pecuniary benefit had been reported

as received after June 28, 1985. That is, the Central Bank

continued to report pecuniary benefit information in docu-

ments submitted to Morgan Bank, the Central Bank's agent

to foreign lenders such as Riggs, after Brazil stopped provid-

ing the pecuniary benefits. Reasoning that errors of this sort

would not have been made if payment of the taxes had

actually occurred (in other words, had the Central Bank

actually paid the taxes, it would know that it did not receive a

pecuniary benefit for those tax payments after June 28, 1985

and would therefore not report the receipt of such), the Tax

Court found that the DARFs issued by the Central Bank

were not reliable proof that the withholding taxes in issue had

actually been paid by the Central Bank. Id. The Tax Court

also disagreed with secondary accounting evidence relied on

by Riggs to indicate that the taxes had been paid. Id.

Consequently, the Tax Court ruled that Riggs was not enti-

tled to the foreign tax credits at issue. Id. After ruling that

Riggs was ineligible for the tax credits, the Tax Court had no

occasion to reach the issue of whether Riggs's tax credits

should be reduced by the value of any pecuniary benefits paid

to the Central Bank. Id.

In this appeal, Riggs asserts that the Commissioner acted

contrary to Treasury Regulations by refusing to accept the

DARFs as definitive proof that the foreign taxes were paid.

Riggs also contends that the DARFs are entitled to the

presumption of administrative regularity and must be deemed

reliable. Finally, Riggs argues that its foreign tax credits

should not be reduced by the offsetting pecuniary benefits

paid to the Central Bank. The Commissioner, however,

contends that Riggs has the burden of proving its entitlement

to the foreign tax credits. The Commissioner relies on the

language of IRC s 905(b), which allows foreign tax credits

only to the extent "the taxpayer establishes to the satisfaction

of the Secretary" the amount of foreign tax paid. 26 U.S.C.

s 905(b). The Commissioner argues that this section autho-

rizes him to require more satisfactory proof that foreign taxes

were, in fact, paid. The Commissioner also contends that

Riggs waived its "presumption of regularity" argument by not

raising it before the Tax Court, but that even if a presump-

tion of regularity exists with respect to the DARFs, irregular-

ities accompanying the issuance and submission of the

DARFs rebut that presumption. The Commissioner further

contends that Riggs's secondary accounting evidence is un-

persuasive to show that the taxes were actually paid to the

National Treasury by the Central Bank.

II. Analysis

A. Availability of Foreign Tax Credits

When we remanded this case to the Tax Court for it to

determine "whether the taxes were in fact paid by the

Central Bank," Riggs II, 163 F.3d at 1369, the Tax Court was

required to determine whether the taxes were paid within the

meaning of section 901 of the Internal Revenue Code. Deter-

mining whether taxes for which a credit is sought under

section 901 have been paid is governed by section 905 of the

IRC. Section 905 reads in applicable part that the foreign

tax credit "shall be allowed only if the taxpayer establishes to

the satisfaction of the Secretary ... the tax paid...." I.R.C.

s 905(b)(2). The amount the taxpayer claims as having been

paid, and thus the amount of the credit sought, shall "be

determined under regulations prescribed by the Secretary."

Id. For the type of credit at issue in this case, Treasury

Regulation s 1.905-2 requires that if a taxpayer corporation,

like Riggs, seeks to claim a foreign tax credit, the taxpayer

must submit a Form 1118, Computation of Foreign Tax

Credit--Corporations. See Treas. Reg. s 1.905-2(a)(1). This

form "must be carefully filled in with all the information

called for and with the calculations of credits indicated.

Except where it is established to the satisfaction of the

district director that it is impossible for the taxpayer to

furnish such evidence, the taxpayer must provide upon re-

quest the receipt for each such tax payment if credit is sought

for taxes already paid.... This receipt ... must be either

the original, a duplicate original, a duly certified or authenti-

cated copy, or a sworn copy." Treas. Reg. s 1.905-2(a)(2).

In this case, while Riggs must in the first instance submit

direct evidence of foreign tax withholding and payment where

possible (i.e., "the receipt for each ... tax payment"), the

district director has the discretion to accept secondary evi-

dence. See id. s 1.905-2(b). Regardless of the evidence

upon which the Commissioner ultimately relies, the taxpayer

"must plainly establish his right [to the foreign tax credit] by

showing that he has fulfilled all the conditions upon which the

allowance of the credit is made to depend." Irving Air Chute

Co. v. Commissioner, 143 F.2d 256, 259 (2d Cir. 1944).

Riggs contends that it provided the Commissioner with

both direct and secondary evidence that the taxes were paid

on its behalf. It is undisputed that Riggs provided the

Commissioner with a DARF, or tax receipt, for each tax

payment credit that it sought, and that it recorded the

amount of taxes paid on an accompanying Form 1118.2 Riggs

thus insists before this Court that the Commissioner failed to

comply with Treas. Reg. s 1.905-2(a)(2) by not accepting the

submission of the DARFs as definitive proof that the Central

Bank paid the foreign taxes on Riggs's behalf. We disagree,

although our disagreement is not fatal to Riggs's position.

The regulations do not require the Commissioner to accept

foreign tax receipts at face value. It follows that the regula-

tions do not require the Commissioner to allow foreign tax

credits without scrutinizing the tax receipts on which the

__________

2 Indeed, the Tax Court accepted Riggs's DARFs into evidence as

authenticated copies of the original tax receipts and agreed the

receipts were official records of the Brazilian government.

claim for credits is premised. In fact, the regulations do not

require the Commissioner to take any action at all. Rather,

the regulations only set forth the necessary evidence a tax-

payer must provide, upon request, to the Commissioner if

that taxpayer intends to claim a foreign tax credit. This

evidentiary requirement does not require the Commissioner

to accept the tax receipts as sufficient proof that the taxes

were paid. Indeed, if, as here, the Commissioner questions

the legitimacy of the accompanying receipts, section 1.905-2

in no way compels the Commissioner to ignore a perceived

inconsistency and accept the receipts as unquestionable proof

of payment. We conclude, therefore, that mere submission of

a DARF is not absolute proof that the taxes reported therein

were paid.

Although we hold that the submission of DARFs, as re-

quired under section 1.905-2, is not conclusive proof of a

foreign tax payment, we nonetheless conclude that the

DARFs are entitled to a presumption of regularity. Common

law has long recognized a presumption of regularity for

actions and records of public officials. See United States v.

Chemical Foundation, 272 U.S. 1, 14-15 (1926); American

Federation of Government Employees v. Reagan, 870 F.2d

723, 727-28 & n.33 (D.C. Cir. 1989). The presumption also

applies to the actions of tax officials and in applying United

States tax law. See R.H. Stearns Co. v. United States, 291

U.S. 54, 62-63 (1934); cf. Utah Power & Light Co. v. Pfost,

286 U.S. 165, 190 (1932). Most pertinently, it applies to the

actions and records of foreign public officials. See United

States v. King, 44 U.S. (3 How.) 773, 785-86 (1845); Murarka

v. Bachrack Bros., Inc., 215 F.2d 547, 552-53 (2d Cir. 1954).

We therefore conclude that a DARF, as an official tax receipt

of the Brazilian government, is entitled to a presumption of

regularity. While not irrebuttable, this presumption may

only be rebutted through clear or specific evidence. "The

presumption of regularity supports the official acts of public

officers and, in the absence of clear evidence to the contrary,

courts presume that they have properly discharged their

official duties." Chemical Foundation, 272 U.S. at 14-15; see

also United States v. Studevent, 116 F.3d 1559, 1563 (D.C.

Cir. 1997). Thus the Commissioner must provide clear and

specific evidence that the DARFs submitted on behalf of

Riggs were inaccurate representations of the amount of tax

paid by the Central Bank in order to justify its denial of

Riggs's claimed tax credit.

The Commissioner argues that Riggs waived its "presump-

tion of regularity" argument by not raising it before the Tax

Court. We disagree. Riggs clearly argued before the Tax

Court that the Commissioner had the burden of proving that

the DARFs were inaccurate accountings of the amount of

foreign tax paid on Riggs's behalf. Riggs's argument before

this Court--that the DARFs must be given a presumption of

regularity--is merely an improved articulation of that previ-

ously raised argument. Riggs is not raising a novel issue or

argument before us that it failed to first bring before the Tax

Court. Riggs is instead reasserting and restating its earlier

position--that the Commissioner has the burden of disproving

the accuracy of the DARFs, and the Commissioner failed to

meet that burden.

The Commissioner argues next that inconsistencies in docu-

ments accompanying the submission of the DARFs "call into

question" the accuracy and validity of the DARFs. Specifi-

cally, the Commissioner relies on the finding of the Tax Court

that schedules, or spreadsheets, that accompanied letters

from the Central Bank and that were submitted along with

the DARFs indicated that the Central Bank had received a 40

percent pecuniary benefit with respect to the tax payments,

even though the pecuniary benefit had by then been repealed.

The Tax Court reasoned that:

If, as [taxpayer] asserts, the Central Bank actually had

paid withholding taxes on [taxpayer's] ... behalf ..., we

then find inexplicable the Central Bank's erroneous ac-

tions well after June 28, 1985, in continuing to report its

having received a nonexistent "pecuniary benefit."

Riggs III, 2001 Tax Ct. Memo LEXIS 20, at *65. Thus when

making its finding that the foreign tax had not been paid, the

Tax Court relied on the reported receipt of a pecuniary

benefit after the benefits were reduced to zero. In the first

instance, we note that an inconsistency that merely "call[s]

into question" the validity of an official document is not "clear

evidence" of that document's invalidity, or "clear evidence" of

anything, for that matter. That being so, we are not con-

vinced that the erroneous reporting of a pecuniary benefit in

a document that accompanied the submission of an official

government record entitled to a presumption of regularity, is

clear and specific evidence that the official government record

is itself erroneous. The spreadsheets and transmittal letters

indicated the receipt of a nonexistent pecuniary benefit. The

obvious irregularities in the accompanying documents do not,

however, indicate clear and specific evidence that taxes re-

ported as paid in the DARFs were not paid. At best, the

accompanying documents reflect clerical errors; at worst,

they reflect the erroneous receipt of a disallowed pecuniary

benefit. Neither scenario, however, is clear evidence that the

Central Bank failed to remit foreign tax payments on behalf

of Riggs, as indicated by the DARFs. Therefore, we con-

clude that the Commissioner did not rely on clear and specific

evidence necessary to rebut the presumption of regularity

that attaches to the DARFs.

We understand that the payment of foreign taxes and the

receipt of a pecuniary benefit are necessarily related: while

the pecuniary benefits were in effect, the pecuniary benefit

was dependent on the payment of foreign taxes. As we

understand the Brazilian tax system, a borrower paid the

entire amount of interest owed on a foreign debt and then

later received a credit equal to the amount of the pecuniary

benefit. Such a system necessitates two separate and inde-

pendent transactions. Perhaps if the payment of taxes and

the receipt of the pecuniary benefits had taken place through

one transaction (e.g., the borrower made interest payments

that were already reduced by the amount of the pecuniary

benefit), evidence of one (payment of the tax or receipt of the

pecuniary benefit) might bear strongly upon the other. But

given that the receipt of a pecuniary benefit was the result of

a separate transaction, we are altogether unconvinced that

the impossibility of one establishes the impossibility of the

other. Thus the Central Bank's reported receipt of a nonex-

istent pecuniary benefit is not clear and specific evidence that

the DARF, an official government document otherwise enti-

tled to a presumption of regularity, is erroneous.

Inconsistencies or inaccuracies in documents accompanying

official government records do not inherently rebut the pre-

sumption of regularity attaching to those official records,

especially when the accompanying documents do not directly

address the matter sought to be proved by the official rec-

ords. Because the DARFs are entitled to a presumption of

regularity, and because the Tax Court based its decision on

inconsistencies in accompanying documents rather than the

DARFs themselves, and because the accompanying docu-

ments did not in fact address the issue of whether the foreign

taxes had, in fact, been paid, we conclude that the Commis-

sioner did not have clear and specific evidence that the

DARFs were themselves erroneous representations of

Riggs's claimed tax credits.

As the Tax Court erroneously based its decision to reject

the DARFs on the wrongly reported pecuniary benefit, we

need not consider the other arguments, such as inconsisten-

cies in Riggs's secondary accounting evidence, now offered by

the Commissioner to explain the Tax Court's decision. We

therefore reverse the decision of the Tax Court and hold that

the foreign tax credits should have been allowed.

B. Offsetting Subsidies

In our initial remand of this case to the Tax Court, we

directed it to determine whether any of Riggs's potential tax

credits should be reduced by the pecuniary benefits, or

subsidies, reportedly paid to the Central Bank. Riggs II, 163

F.3d at 1369. Given the Tax Court's decision in favor of the

Commissioner, the Tax Court never reached this issue. As

we now hold that the foreign tax credits should have been

allowed, this issue is ripe for consideration. However, rather

than decide this issue for the first time on appeal, we remand

this case to the Tax Court solely to determine whether any of

the tax credits owed to Riggs must be reduced by the

subsidies reportedly paid to the Central Bank.

III. Conclusion

The official actions of foreign governments are entitled to a

presumption of regularity. While this presumption is not

absolute, it may be rebutted only through clear and specific

evidence. The DARFs submitted by the Central Bank indi-

cating that it had paid taxes on Riggs's behalf are entitled to

the presumption of regularity unless rebutted by the Com-

missioner. We conclude that irregularities in documents

accompanying the DARFs that do not specifically pertain to

whether the taxes had, in fact, been paid do not rise to the

level of clear and specific evidence showing that the taxes

were never remitted. We therefore reverse the decision of

the Tax Court disallowing Riggs's tax credits for the taxes

paid by the Central Bank on Riggs's behalf with respect to

interest income on loans Riggs made to the Central Bank.

We remand the case solely for the Tax Court to determine

whether the tax credits should be reduced by any subsidies

that may have been paid to the Central Bank.