PNC Financial Services Group, Inc. v. Commissioner of Internal Revenue Service

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 14, 2006 Decided August 24, 2007

No. 06-1034

PNC FINANCIAL SERVICES GROUP, INC., D/B/A RIGGS

NATIONAL BANK, AND SUBSIDIARIES,

APPELLANT

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,

APPELLEE

Appeal from the United States Tax Court

(No. IRS-24368-89)

Thomas C. Durham argued the cause for appellant. With

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

Frank P. Cihlar, Attorney, U.S. Department of Justice,

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

Bridget M. Rowan, Attorney.

Before: ROGERS, BROWN and GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

Dissenting opinion filed by Circuit Judge GRIFFITH.

2

BROWN, Circuit Judge: In prior litigation, PNC Financial

successfully claimed a foreign tax credit for taxes paid on its

behalf in Brazil. That credit, the Internal Revenue Service

argues, must be reduced by the amount of an indirect subsidy

PNC received from the Brazilian government. The Tax Court

agreed, and we now affirm.

I

In an international tax case as complicated, economically

and litigiously, as this one, we do well to start with the basics.

When a U.S. bank makes a loan abroad, the interest income is

susceptible to tax in both the United States and the foreign state.

Congress avoids double-taxing international business by giving

a credit for taxes paid to the foreign government, less any credit,

refund, or subsidy given the taxpayer by the foreign govern-

ment. I.R.C. § 901; Treas. Reg. § 1.901-2(e). Interest income

of $100,000, for example, where the relevant tax rate in the U.S.

was 50% and in the foreign country was 25% with a 10%

refund, would work out to $15,000 to the foreign country and

$35,000 to the IRS. Were the foreign rate 50% with no refund,

$50,000 would flow to that country and nothing to the IRS.

Thus the two countries are on a see-saw: When one country’s

tax revenue goes up, the other’s goes down.

This case, or rather this iteration of this case (for it is the

third time we have heard an appeal from the Tax Court concern-

ing the same transaction), is a peculiar elaboration of these

simple principles.1 During the 1970s and early 1980s, in an

1

The previous iterations of this case are, in order: Riggs Nat’l

Corp. & Subsidiaries v. Comm’r, 107 T.C. 301, 1996 U.S. Tax Ct.

LEXIS 49 (Riggs I); Riggs Nat’l Corp. & Subsidiaries v. Comm’r, 163

F.3d 1363 (D.C. Cir. 1999) (Riggs II); Riggs Nat’l Corp. &

Subsidiaries v. Comm’r, 81 T.C.M. (CCH) 1023, 2001 Tax Ct. Memo

3

effort to increase its reserves of foreign currency, Brazil’s

government borrowed and (using tax breaks) encouraged its

people to borrow substantial amounts from foreign lenders. In

1982, fiscal crisis led nearly to default on the loans, and Brazil

embarked on a debt restructuring plan with an international

consortium of banks. According to the plan, Brazil’s

government-controlled Central Bank stepped in as common

debtor for the foreign banks, becoming a middleman on the old

loans (paying the creditors what was owed to them from the

original borrowers and in turn receiving payments from the

original borrowers) and, since Brazil still needed foreign credit

to function, borrowing billions of dollars in additional funds.

Appellant PNC Financial Services Group, Inc. (formerly Riggs

National Corporation and Subsidiaries) lent a portion of those

additional funds. In 1984 and 1985, Brazil taxed PNC’s interest

income at a 25% rate, which came to $166,415 in 1984 and

$181,272 in 1985. But a provision of Brazilian law, hanging on

from happier economic days when the Brazilian government

incentivized borrowing from foreign lenders, gave subsidies for

these taxes worth 40% of the total—$66,566 in 1984, and

$72,509 in 1985. This appeal is about the U.S. tax treatment of

that $139,075 in subsidies. At first glance, it seems obvious

enough that PNC should receive a credit of $166,415 less

$66,566 toward its 1984 U.S. income tax, and $181,272 less

$72,509 toward its 1985 U.S. income tax. But three factors

complicate the picture.

LEXIS 20 (Riggs III); Riggs Nat’l Corp. & Subsidiaries v. Comm’r,

295 F.3d 16 (D.C. Cir. 2002) (Riggs IV); Riggs Nat’l Corp. &

Subsidiaries v. Comm’r, 87 T.C.M. (CCH) 1276, 2004 Tax Ct. Memo

LEXIS 110 (Riggs V). PNC Financial Services Group, Inc., merged

with Riggs National Corporation and Subsidiaries and replaced its

name in 2005—else this case would be Riggs VI. For convenience, we

will refer to appellant as PNC even when speaking of the Riggs I

through V period.

4

First, PNC’s loans to the Central Bank were “net,” not

“gross.” Riggs II gives a matchless explanation of the differ-

ence, which we will not belabor here. Suffice it to say that in a

gross loan agreement, the lender pays local (Brazilian) taxes on

his interest income (or the borrower withholds it), while in a net

loan, the borrower “contractually agrees not only to pay interest

to the lender, but also to pay any local (Brazilian) tax that the

lender owes on that interest income.” Riggs II, 163 F.3d at

1364. This is not necessarily a boon to lenders, for all else being

equal, lenders must compensate borrowers for paying lenders’

taxes with lowered interest rates. “The real difference between

gross loans and net loans,” Riggs II explains, “lies not in who

licks the stamp on the envelope to the Brazilian government, but

in who bears the economic burden of the tax.” Id. With a net

loan, the borrower bears that burden, for the borrower faces the

risk of change in local tax rates, while the lender’s net income

(the interest payments) is stable. With a gross loan, the lender

suffers the loss or reaps the benefit of change; it is his net

income that might vary with taxes. Either way, however, the

foreign government imposes legal liability for the local tax on

the lender, and so either way the IRS credits the foreign tax

payments. Treas. Reg. § 1.901-2(f).2

2

Working out the numbers in any particular example gets

complicated. Ever since Old Colony Trust Co. v. Commissioner, 279

U.S. 716, 729 (1929), U.S. tax law has held that paying taxes on

behalf of another person constitutes income to that person: If an

employer, for example, promised to pay an employee $100,000 net,

where the tax rate is a flat 50%, the IRS would view the employee as

receiving more than $100,000 in income. It would view him, in fact,

as receiving $200,000 in income, since 50% of $200,000 is $100,000

(a natural mistake is to regard the employee as receiving

$150,000—the $100,000 in salary plus 50%); the employer would pay

$100,000 to the employee and another $100,000 to the IRS on the

employee’s behalf. In other words, one must generate a notional

income figure to calculate the tax owed where one party pays on

5

Second, the Central Bank is, as Riggs II put it, “no ordinary

Brazilian borrower.” 163 F.3d at 1366. Created by law to

implement Brazil’s monetary and fiscal policies (including

issuing currency), required to act on behalf of Brazil’s govern-

ment and prohibited from acting on behalf of anyone else, able

to contract in the name of the National Treasury, responsible for

managing foreign lending to Brazilian borrowers, and under the

control of the Minister of Finance, the Central Bank is 100% a

part of Brazil’s federal government, as all parties agree. The

Federal Constitution of Brazil makes the Central Bank immune

from tax on its own income, and in fact until 1988 the Central

Bank operated, along with the National Treasury and the Banco

de Brasil (in which Brazil’s government held a controlling

share), a centralized system for funding Brazil’s government

that jointly controlled Brazil’s tax revenue (although it was the

Banco de Brasil that actually held the government’s tax revenue

in its coffers). Thus, if it were legally possible for the Brazilian

government to impose a tax on its Central Bank, it is not clear

how it would be economically possible for the Central Bank to

pay it: At most, the money would go from the Brazilian govern-

ment’s right pocket to its left. And so when the Central Bank

takes out net loans from a U.S. lender, certain questions arise:

Will Brazilian law, in keeping with the principle that tax

another’s behalf—whether in the United States or in Brazil, where the

procedure is called “grossing-up.” Thus, if a U.S. lender contracts for

$100,000 in interest income on a net loan, with a 20% foreign tax and

a 50% U.S. tax, the Brazilian government would construe the lender’s

income to be $125,000 (the amount which, less 20%, would be

$100,000) and charge $25,000 in taxes (with the borrower remitting

that $25,000). The IRS would also construe the income as $125,000

and levy a 50%, $62,500 tax, minus a $25,000 foreign tax credit,

which comes to $37,500 in U.S. taxes. Having paid that amount from

its $100,000 in actual interest income, the U.S. lender is left with

$62,500—which makes sense, being 50% of the lender’s notional

income without the dual complications of a net loan and a foreign tax.

6

payments incidental to net loans are payments on behalf of

lenders, require the Central Bank to pay despite the Bank’s

constitutional immunity from taxes? If so, should the IRS credit

those payments? If the Brazilian government refunds a portion

of them to the Central Bank, should the IRS subtract some of the

refund from the credit?

We must pause at this point to understand PNC’s and the

Central Bank’s (or rather, Brazil’s) interests on the eve of their

lending arrangement. Only if the Central Bank was subjected to

compulsory tax payments on PNC’s behalf could PNC qualify

for the § 901 credit. See Riggs II, 163 F.3d at 1365–66. And

such payments would represent no economic burden for Brazil

even if the Central Bank actually moved cash from its

(government-controlled) vaults to the Banco de Brasil’s

(government-controlled) vaults. See id. at 1369. So both PNC

and Brazil had an interest in seeing the Central Bank subjected

to the compulsory payments. For PNC, every cent thus paid to

the Brazilian government was money PNC would not have to

pay to the IRS,3 and for Brazil, the “tax” just meant, so far as we

can tell, more credit at a lower interest rate. The only loser in

the arrangement was the IRS, which, economically speaking,

would simply have transferred wealth to Brazil for Brazil and

PNC to split. See id. The IRS ends up on the wrong end of the

see-saw.

Only the Central Bank’s constitutional immunity from taxes

stood in the way, and the third complexity in this case concerns

3

As footnote two discusses, those payments from the Central

Bank to the Brazilian government would also swell PNC’s income in

the IRS’s eyes, which of course means higher U.S. taxes. But the

value of the credit would exceed the detriment of the larger

income—and always would, so long as the U.S. tax rate was below

100%.

7

how that immunity was overcome. Given their interest in the

foreign tax credit, PNC and other banks went to Brazil’s highest

ranking authority on tax matters, the Minister of Finance, to

request definitive guidance on whether the Central Bank would

be subjected to the compulsory tax payments on their behalf.

The most natural way for the Minister to answer “Yes” would

have been to hold the Central Bank’s tax immunity inapplicable

in net loan arrangements, since the tax-immune entity pays

standing in the lender’s shoes. But this way was closed:

Brazilian law already had authority for the opposite proposition.

Id. at 1366. Another way, however, was open, for the money

PNC loaned the Central Bank was available and officially

intended for re-lending to private borrowers in Brazil. If the

Central Bank could not stand in for the private lenders, perhaps

it could stand in for these private borrowers. The Minister

issued a private letter ruling, not available to the public but

binding on the parties under Brazilian law, which Riggs II

describes:

The Minister deemed it appropriate to “look through”

the Central Bank to those ultimate private

borrowers—so-called “borrowers-to-be”—for purposes

of deciding the proper tax treatment of the loans. And it

was settled Brazilian law that a private borrower in a net

loan was required to pay the tax obligation it had con-

tractually assumed from the lender. The Minister

concluded that the “borrowers-to-be” aspect of the loans

compelled an analogy to the garden variety private

borrower situation, and that the Central Bank must “as

a substitute for such borrowers [to-be] pay the income

tax incident on the interest . . . .”

Id. (first alteration in original). This reasoning further compli-

cates the IRS’s § 901 question. If the Brazilian Revenue Service

looks through the Central Bank’s tax-immune status because the

8

Central Bank stands in for borrowers-to-be, should the IRS

follow suit in granting credits and subtracting subsidies? Should

it matter that, in the event, none of the money ever was re-

loaned?

As a statutory matter, these questions shape up as interpre-

tations of I.R.C. § 901 and associated portions of the 1984 and

1985 Tax Code and regulations. In Riggs I, the issue was

whether to permit the foreign tax credit at all, and it turned on

whether the Central Bank’s tax payments were compulsory, as

the Minister had ruled, or voluntary. The Tax Court, viewing

the Minister’s private letter ruling as nothing more than

“perhaps an administrative advisory opinion,” conducted its own

analysis of Brazilian law, concluded that the payments were

voluntary, and denied PNC the credit. 1996 U.S. Tax Ct. LEXIS

49, at *119. We reversed in Riggs II. As we saw it, the Tax

Court had sat in judgment on and effectively declared invalid the

Minister’s order to the Central Bank to pay taxes—a foreign

sovereign’s official act within its own territory. The act of state

doctrine shields such acts from American courts’ review. 163

F.3d at 1367–68. We remanded “so that the Tax Court may

determine in the first instance . . . whether the taxes were in fact

paid by the Central Bank, and whether Riggs’ credits must be

reduced by the amount of any subsidies that the Central Bank

may have received.” Id. at 1369.

Riggs III and IV resolved the first of those two questions.

In Riggs III, citing accounting irregularities, the Tax Court held

that PNC “failed to establish that the withholding taxes in issue

were paid by the Central Bank on petitioner’s behalf.” 2001 Tax

Ct. Memo LEXIS 20, at *66. Since PNC was (again) ineligible

for the credit, the Tax Court did not reach the subsidies issue.

But in Riggs IV, we reversed. PNC had submitted official

Brazilian receipts stating that the tax had been paid. These

receipts were entitled to the common law’s “presumption of

9

regularity” for “the official acts of public officers,” and while

this presumption was rebuttable, the accounting irregularities

that moved the Tax Court weren’t the sort of “clear or specific

evidence” needed to rebut it. Riggs IV, 295 F.3d at 21 (internal

quotation marks omitted). There could no longer be any

question that PNC was entitled to a foreign tax credit. Riggs IV

remanded “to determine whether the tax credits should be

reduced by any subsidies that may have been paid to the Central

Bank.” Id. at 23.

Riggs V takes up this last issue. In 1984 and 1985, recall,

Brazil had a subsidies system (sometimes called a “pecuniary

benefits” system in this litigation) that effectively returned 40%

of any tax payment Brazilian borrowers in international net

loans made on their foreign lenders’ behalf. Mechanically, the

two halves of the transaction—making the tax payments and

receiving the subsidy—were “simultaneous[],” both occurring

“before paying the interest to the foreign lender” and in such a

way as to credit Brazil’s national treasury “‘only with the

amount by which the withholding tax exceeded the subsidy.’”

Riggs V, 2004 Tax Ct. Memo LEXIS 110, at *34–36 (quoting

Nissho Iwai Am. Corp. v. Comm’r, 89 T.C. 765, 770, 1987 U.S.

Tax Ct. LEXIS 142, at *11). In the Tax Court, no one doubted

that this arrangement would have amounted to an indirect

subsidy and properly reduced PNC’s foreign tax credit had the

borrower been a private party; past litigation in what have come

to be called “the Brazilian tax cases,” Amoco Corp. v. Comm’r,

138 F.3d 1139, 1145 (7th Cir. 1998), laid that question to rest.

See Norwest Corp. v. Comm’r, 69 F.3d 1404, 1407–10 (8th Cir.

1995) (finding an indirect subsidy to the extent that the Brazilian

government rebated a portion of the taxes Brazilian borrowers

paid on U.S. lenders’ behalf); Cont’l Ill. Corp. v. Comm’r, 998

F.2d 513, 519–20 (7th Cir. 1993) (same); First Chi. Corp. v.

Comm’r, 61 T.C.M. (CCH) 1774, 1991 Tax Ct. Memo LEXIS

63, at *18–19, *21 (same); Nissho Iwai, 1987 U.S. Tax Ct.

10

LEXIS 142, at *24, *27 (same). What makes this case unique

is the presence of and role played by the Central Bank standing

in for private borrowers. The financial identity between the

Central Bank and the Brazilian government, the same thing that

had made it puzzling to think of the Central Bank making

compulsory tax payments, also makes it puzzling to think of the

Central Bank receiving governmental subsidies. But taking its

cue from the Brazilian Minister of Finance’s private letter

ruling, the Tax Court held that the Central Bank received the

subsidy “not . . . as an agent of the Brazilian Government, but

rather on behalf of the borrowers-to-be,” so that it was “proper

to treat the Central Bank as separate from the Brazilian Govern-

ment” for purposes of the subsidy regulation. Riggs V, 2004

Tax Ct. Memo LEXIS 110, at *56.

PNC has appealed and now the issue of the subsidy is

before us.

II

PNC’s position in this appeal is that the Brazilian govern-

ment cannot give its Central Bank a subsidy because the two are,

for tax purposes, one and the same. The subsidy regulation

applicable at the time, Treas. Reg. § 1.901-2(e)(3) (1984),4 has,

functionally, three parts. First, it defines a foreign subsidy as a

payment “by any means (such as through a refund or credit),” by

the foreign country to the taxpayer or someone engaged in a

transaction with the taxpayer, where the payment “is deter-

mined, directly or indirectly, by reference to the amount of

income tax.” Second, it regulates direct subsidies: If a foreign

country pays a subsidy directly to a taxpayer, that amount must

4

In 1986, Congress codified Treas. Reg. § 1.901-2(e)(3), with

some changes, at I.R.C. § 901(i), and the IRS followed up with a

revised Treas. Reg. § 1.901-2(e)(3). We discuss these changes below.

11

be subtracted from the taxpayer’s foreign tax credit. Third,

distinguishing indirect subsidies, it states that “[a] foreign

country is considered to provide a subsidy to a taxpayer if the

country provides a subsidy to another person that . . . [e]ngages

in a transaction with the taxpayer”; here too the subsidy must be

subtracted from the credit. The Brazilian government’s pay-

ments to its Central Bank, calculated by taking 40% of the

income tax PNC owed Brazil, fit the definition of a subsidy but

clearly are not direct subsidies, as all parties agree. The

question is whether those payments qualify as indirect subsidies.

PNC claims they do not because “[t]he Central Bank is part of

the Brazilian government; indeed, as far as Brazil’s finances are

concerned, the Central Bank is the Brazilian government.”

Appellant’s Reply Br. 1 (emphasis in original). Therefore “the

Brazilian government paid the subsidy in question to itself,”

which, PNC argues, puts the payments outside the indirect

subsidy regulation. The sole issue before us is whether, in the

circumstances of this case, the Brazilian government’s subsidy

was paid “to another person” within the meaning of Treasury

Regulation § 1.901-2(e)(3).

As a threshold matter, we must determine what it means for

the recipient of a subsidy to be “another person”: Does this

mean a person other than the foreign country, or other than the

taxpayer? Read in isolation, § 1.901-2(e)(3), with its careful

distinction between direct and indirect subsidies, appears to ask

whether the recipient is the taxpayer. However, because the

indirect subsidy regulation seems on the whole to contemplate

a transaction with three parties (foreign government, U.S.

taxpayer, and U.S. taxpayer’s local partner), the opposite

approach—which PNC advocates—is also plausible, especially

as it avoids the notion of a government paying a subsidy to

itself. As the Commissioner has not opposed PNC’s reading, we

12

shall assume for purposes of this appeal5 that PNC’s § 901 credit

should be reduced if and only if the recipient of the subsidy (the

Central Bank) is a person other than the Brazilian government.

PNC points to evidence that “the Central Bank is part of the

foreign country,” Appellant’s Reply Br. 6, and hence cannot be

“another person.” If we faced this question in a vacu-

um—without the borrowers-to-be arrangement, without the

Minister of Finance’s private letter ruling, and without the five

hearings, appeals, and remands that preceded this appeal—we

might well answer it as PNC proposes. There is, after all, no

denying the Central Bank’s part-to-whole relationship to the

Brazilian government. But we do not operate in a vacuum; we

are bound by determinations in earlier iterations of this case.

PNC’s factual argument, however convincing it might be, was

properly before the court in Riggs II, not here. We cannot

ignore the holding in that case and consider the facts de novo.

See K.N. LLEWELLYN, THE BRAMBLE BUSH 29, 35 (Oceana

Publications 1981) (1930) (explaining how, depending on legal

context or posture, the facts in a case can be far “from the reality

of raw events” and “miles away from life”).

5

A subsequent change in the law has rendered this analysis

academic except as regards legacy cases such as this one. In 1986,

Congress codified a rephrased version of Treas. Reg. § 1.901-2(e)(3)

at I.R.C. § 901(i). See Tax Reform Act of 1986, Pub. L. No. 99-514,

§ 1204, 100 Stat. 2085, 2532. The new statutory provision eliminated

the words “another person,” recognizing subsidies delivered directly

or indirectly to “any party” to a transaction with the taxpayer. See

also Denial of Foreign Tax Credits for Government Provided

Subsidies, 56 Fed. Reg. 56,007 (Oct. 31, 1991) (similarly eliminating

“another person” from the treasury regulation). As the Central Bank

was a party to the net loan transaction, the reduction in the § 901

credit would be clear under the current statute.

13

PNC’s proposed outcome would make a virtue of inconsis-

tency, applying disparate treatment to two legs of a simultaneous

transaction. Had the Central Bank handed $10 to the Brazilian

government and the Brazilian government handed $5 back—or,

even more accurately, had the Central Bank netted the transac-

tion out itself and only handed over $5 in the first place—PNC

would have us take legal account of the $10 and ignore the $5

given back.

“Inconsistency is the antithesis of the rule of law.”

LaShawn A. v. Barry, 87 F.3d 1389, 1393 (D.C. Cir. 1996) (en

banc). Of the various doctrines, principles, and practices we use

to police inconsistency, some of which go to the root of what

law is, law-of-the-case doctrine is most applicable here: “[T]he

same issue presented a second time in the same case in the same

court should lead to the same result.” Id. (emphasis in original);

see also Arizona v. California, 460 U.S. 605, 618 (1983) (“As

most commonly defined, the doctrine posits that when a court

decides upon a rule of law, that decision should continue to

govern the same issues in subsequent stages in the same case.”);

Crocker v. Piedmont Aviation, Inc., 49 F.3d 735, 739 (D.C. Cir.

1995) (“When there are multiple appeals taken in the course of

a single piece of litigation, law-of-the-case doctrine holds that

decisions rendered on the first appeal should not be revisited on

later trips to the appellate court.”). Law-of-the-case doctrine

encompasses issues decided both explicitly and “‘by necessary

implication.’” LaShawn A., 87 F.3d at 1394 (quoting Crocker,

49 F.3d at 739). The identity or non-identity of the Central

Bank and the Brazilian government for purposes of the tax

arrangement in this case was decided by necessary implication

in Riggs II.

Riggs II was a subtle case. The issue was whether the

Central Bank’s payments to the Brazilian government on PNC’s

behalf should be regarded as voluntary or compulsory in light of

14

the Foreign Minister’s private letter ruling stating that the

payments were compulsory. The court applied the act of state

doctrine, which in its classic formulation holds that “the courts

of one country will not sit in judgment on the acts of the

government of another done within its own territory,” Underhill

v. Hernandez, 168 U.S. 250, 252 (1897), and in its modern

formulation “precludes the courts of this country from inquiring

into the validity of the public acts a recognized foreign sover-

eign power committed within its own territory,” Banco Nacional

de Cuba v. Sabbatino, 376 U.S. 398, 401 (1964). Since Banco

Nacional, the doctrine has been understood to arise from the

separation of powers, reflecting “the strong sense of the Judicial

Branch that its engagement in the task of passing on the validity

of foreign acts of state may hinder the conduct of foreign

affairs.” W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int’l,

493 U.S. 400, 404 (1990) (internal quotation marks omitted).

Applying this doctrine to the Minister of Finance’s private

letter ruling was not straightforward. For one thing, the doctrine

is typically applied to tangible acts, like the expropriation of

property, rather than the ruling of a government official. See

Riggs II, 163 F.3d at 1368. For another, applying the doctrine

to a foreign official’s ruling might run contrary to Federal Rule

of Civil Procedure 44.1, directing courts to independently

determine issues of foreign law, and its tax law equivalent, U.S.

Tax Court Rule 146. In a crucial passage threading these

obstacles, the Riggs II court reasoned that

whether or not it can be said that the Brazilian Minister

of Finance’s interpretation of Brazilian law qualifies as

an act of state, the Minister’s order to the Central Bank

to withhold and pay the income tax on the interest paid

to the Bank goes beyond a mere interpretation of law.

The Minister, after all, ordered that the Central Bank

“must, in substitution of the future not yet identified

15

debtors of the tax [i.e., the borrowers-to-be], pay the

income tax . . . .” Such an order has been treated as an

act of state. The Tax Court’s conclusion on Brazilian

law—that no tax is imposed on a net loan transaction

involving a governmental entity as borrower—implicitly

declared “non-compulsory,” i.e., invalid, the Minister’s

order to the Central Bank to pay the taxes. The act of

state doctrine requires courts to abstain from even

engaging in such an inquiry.

Id. (bracketed text in original) (internal citations omitted). Put

in the affirmative, the holding here is that American courts must

accept as given that the Brazilian government levied a compul-

sory tax payment on the Central Bank, where the Central Bank

stood in for borrowers-to-be. Thus what Riggs II resolved by

necessary implication was the status of or role played by the

Central Bank with respect to the PNC transaction. That resolves

the present appeal, for if the Central Bank stood in for

borrowers-to-be when it paid PNC’s taxes, it also stood in for

them when it received 40% of those tax payments back in

subsidies.

PNC tries to avoid this conclusion by arguing that the Riggs

II court disavowed the borrowers-to-be rationale when it refused

to hold that the “Minister of Finance’s interpretation of Brazilian

law qualifies as an act of state.” The act of state at issue in

Riggs II, as PNC interprets the case, was solely the Minister’s

order, the bare imperative to the Central Bank to pay taxes.

Indeed, as PNC sees it, the act of state doctrine cannot encom-

pass the rationale behind a foreign government’s acts. The

holding of Riggs II, on this argument, would be that American

courts must accept as given that the Brazilian government levied

a compulsory payment on the Central Bank—period.

16

But the borrowers-to-be rationale and the Minister’s

interpretation of Brazilian law are not one and the same, and the

court’s refusal to call one an act of state in no way implies

rejection of the other. The Minister’s private letter ruling has

three parts: the bare imperative, the borrowers-to-be rationale,

and a broader discussion of the Central Bank’s legal situation in

various types of financial transactions. The last of these is the

likely antecedent for Riggs II’s reference to an interpretation of

Brazilian law—which makes good sense when one notices that

the borrowers-to-be rationale is not an interpretation of law at

all. Far from rejecting the borrowers-to-be logic, Riggs II in fact

repeated that rationale—indeed, restated the Minister’s order in

such a way as to incorporate it—immediately after disclaiming

the Minister’s interpretation of Brazilian law as an act of state:

“[W]hether or not it can be said that the Brazilian Minister of

Finance’s interpretation of Brazilian law qualifies as an act of

state . . . [t]he Minister . . . ordered that the Central Bank must,

in substitution of the . . . [borrowers-to-be], pay the income tax

. . . .” Id. (internal quotation marks omitted).

In concluding that the Central Bank is “another person” in

the sense of the treasury regulation, we need not apply the act of

state doctrine. Rather, in the interest of consistency, we need

only adhere, as a law-of-the-case matter, to the necessary

implications of Riggs II. There, the court held that, based on the

act of state doctrine, American courts had to accept the Minis-

ter’s determination that the Brazilian government had compelled

the Central Bank to remit tax payments on PNC’s behalf,

standing in for the borrowers-to-be. In that role, the Central

Bank was distinct from the Brazilian government. Thus, as the

payment and the subsidy are both part of the same indivisible

transaction, Riggs II necessarily implies the Central Bank is

likewise distinct for purposes of the subsidy.

17

Two last points round out this argument. First, law-of-the-

case doctrine is prudential; the Supreme Court has instructed

that courts may “reopen what has been decided,” though they

should “as a rule . . . be loath[] to do so in the absence of

extraordinary circumstances such as where the initial decision

was clearly erroneous and would work a manifest injustice.”

Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817

(1988) (quoting Messinger v. Anderson, 225 U.S. 436, 444

(1912))(internal quotation marks omitted), and Arizona, 460

U.S. at 618 n.8); see also LaShawn A., 87 F.3d at 1393. PNC

has failed to persuade us that there is error or injustice, particu-

larly when every previous court to address the issue has re-

garded PNC’s tax arrangement in Brazil as a stratagem for

avoiding U.S. taxes. See Riggs I, 1996 U.S. Tax Ct. LEXIS 49,

at *41; Riggs II, 163 F.3d at 1369; Riggs III, 2001 Tax Ct.

Memo LEXIS 20, at *64–66.

Second, the root principles at work here—the principle that

courts must be consistent with one another and the principle that

governmental entities may in some circumstances be treated as

private when taking on a private role or function—have a

venerable lineage. See Republic of Argentina v. Weltover, Inc.,

504 U.S. 607, 611, 614 (1992) (putting a distinction between a

government’s exercises of uniquely sovereign power and

ordinary private power at the heart of foreign sovereign immu-

nity); Alfred Dunhill of London, Inc. v. Republic of Cuba, 425

U.S. 682, 695 (1976) (plurality opinion) (recognizing a tradi-

tional distinction “between the public and governmental acts of

sovereign states on the one hand and their private and commer-

cial acts on the other”); Bank of the U.S. v. Planters’ Bank of

Ga., 22 U.S. (9 Wheat) 904, 907 (1824) (Marshall, C.J.)

(“[W]hen a government becomes a partner in any trading

company, it devests itself, so far as concerns the transactions of

that company, of its sovereign character, and takes that of a

private citizen.”); Henry J. Friendly, Indiscretion About Discre-

18

tion, 31 EMORY L.J. 747, 758 (1982) (“[T]he most basic

principle of jurisprudence [is] that we must act alike in all cases

of like nature.” (internal quotation marks omitted)).

III

In place of the analysis above, PNC asks us to follow the

Seventh Circuit’s approach from Amoco Corp. v. Commissioner,

138 F.3d 1139 (7th Cir. 1998). But as described below, Amoco

shares none of the factual circumstances we find dispositive

here, for which reason we decline to follow it in the instant case.

Virtually every page of PNC’s briefs is studded with

references to Amoco, which involved the tax consequences of a

complicated oil exploration arrangement between Amoco, a U.S.

oil company operating in Egypt, and the Egyptian General

Petroleum Corporation, an entity owned and controlled by the

Egyptian government for the purpose of managing Egypt’s oil

wealth. EGPC contracted to pay Amoco’s Egyptian income tax

on Amoco’s behalf—as in a net loan arrangement—and then

took a credit on its own Egyptian taxes exactly equal to what it

paid for Amoco. (EGPC had no tax immunity and ordinarily

paid income taxes as if a commercial entity.) The question for

the Seventh Circuit was whether Amoco should be permitted a

foreign tax credit on its U.S. taxes under § 901, or whether the

credit EGPC took in Egypt should, under the same subsidy

regulation at issue in our case, count as an indirect subsidy,

reducing Amoco’s U.S. credit to zero. The Tax Court had found

no indirect subsidy because “EGPC was part of the Egyptian

government, and thus by definition it was incapable of receiving

a subsidy from itself.” Id. at 1146. The Seventh Circuit

affirmed, but on somewhat more modest reasoning. Finding

“[t]he question of how to treat state-owned enterprises . . .

exceedingly complicated,” the court favored a “functional

approach” over “bright-line rules” and refused to decide

19

“whether it is impossible in all circumstances for a government

to grant a subsidy to one of its wholly or majority owned

enterprises.” Id. at 1146–47. In Amoco’s case, the court found

no indirect subsidy for two reasons: first was EGPC’s economic

identity with the Egyptian government (“EGPC’s profits go

straight to the treasury, and it would never feel any losses,

because the treasury would absorb them.”), and second was the

fact that, as an economic matter, EGPC alone received the

benefit of the credit while “Amoco unquestionably bore the

economic burden of the taxes imposed on its operations by

Egypt.” Id. at 1148–49.

PNC argues that its situation is identical to the one in

Amoco: It too contracted with a foreign governmental entity that

agreed to pay its American partner’s local taxes, received some

of the tax money back, and shares an economic identity with the

foreign government. Thus it too should benefit from the idea

that, as PNC characterizes Amoco’s holding, “when the benefit

of the subsidy is provided to the foreign government, there is no

subsidy within the meaning of the regulations since it is impossi-

ble for the foreign government to subsidize itself.” Appellant’s

Br. 21.

But to start with, that isn’t Amoco’s holding—or rather, it

is only half of Amoco’s holding. The other half is the economic

analysis concluding that the U.S. taxpayer bore all the burden of

the foreign tax and received no benefit from the foreign

credit—whereas in our case, the tax Brazil formally levied on its

Central Bank represented only a benefit to PNC. Even more

importantly, Amoco lacked every factual feature we have found

decisive in this appeal: no tax immunity, no private letter ruling

or equivalent, no borrowers-to-be or analogue for them, and no

controlling precedent. Unless we ignore the facts and the

history of this case, we are bound to regard the Central Bank as

standing in for private parties. Indeed, PNC’s comparisons

20

between the Central Bank in this case and EGPC in Amoco are

premature: Logically prior to any such comparison—indeed the

first analytic step in many cases that turn on someone’s or

something’s governmental status—is fixing on the role that

person or entity played in the particular circumstances of the

case. The Seventh Circuit itself said as much (“[T]he kind of

legal issue presented and the context of the suit has been more

important than the label ‘governmental’ or ‘non-governmental,’”

Amoco Corp., 138 F.3d at 1147) and was careful to cabin its

conclusions accordingly.

IV

Both PNC and the dissent would have us answer the

question of the Central Bank’s status as if indifferent to all

context and background. This we cannot do. As we agree with

the Tax Court that, under the facts of this case, it is “proper to

treat the Central Bank as separate from the Brazilian govern-

ment” and deem the bank “another person” within the meaning

of the subsidy regulation, the judgment of the Tax Court is

Affirmed.

1

GRIFFITH, Circuit Judge, dissenting:

I share the majority’s frustration with this, the latest of

what seems to have become a judicial mini-series, “Riggs VI:

Return of the Subsidy.” We are unanimous in the hope that it is

the last of the sequels. We disagree, however, about what our

role in this case should be, and I think it a disagreement worthy

of some discussion. While I share my colleagues’ unease over

PNC’s “stratagem for avoiding U.S. taxes,” Op. at 17, such

discomfort alone cannot determine the outcome of a case. Both

facts and law are fundamental to our conclusions, and although

the facts of this case are complicated, the law is simple. This

case turns entirely on the plain language of controlling U.S. tax

regulations. That language is clear, unambiguous, and

dispositive. Its effects—whatever they may be—are not within

our power to forestall, and its neutral application does not, as the

majority suggests, create any inconsistency. On the contrary, our

abandonment of a textual approach creates inconsistencies

galore, putting us conspicuously at odds with the text of both

U.S. and relevant Brazilian law, our own precedent, and the

reasoned decision of a sister circuit. The court’s analysis also

obscures two important principles it seeks to clarify: the act of

state doctrine and the law-of-the-case doctrine. Accordingly, I

dissent.

I.

The text of controlling law requires our disposition in

favor of PNC. We are reluctant to disregard an agency’s

interpretation of its own regulation “unless an alternative

reading is compelled by the regulation’s plain language . . . .”

Air Transp. Ass’n of Am., Inc. v. F.A.A., 291 F.3d 49, 53 (D.C.

Cir. 2002) (quoting Thomas Jefferson Univ. v. Shalala, 512 U.S.

504, 512 (1994)) (internal quotation marks omitted). In this case,

the plain language of the relevant Treasury regulation is

2

sufficient to compel an alternative reading. The question for the

court is whether foreign tax credits properly claimed by PNC

should be reduced by the amount of subsidy payments made by

the Brazilian government to the Central Bank of Brazil. See

Riggs Nat’l Corp. & Subsidiaries v. Comm’r, 295 F.3d 16, 22-23

(D.C. Cir. 2002) (Riggs IV) (remanding this issue to the Tax

Court). The controlling provision of law is Treas. Reg. § 1.901-

2(e)(3)(ii) (1984),1 which provides in relevant part that a

payment constitutes a “subsidy” only if it is paid by a “foreign

country” to “another person.” The resolution of this appeal thus

depends on whether the Brazilian government (a “foreign

country”) has made payments to “another person” within the

meaning of Treas. Reg. § 1.901-2(e)(3)(ii). Our sole task is to

determine whether the Central Bank is “another person” for the

purpose of the relevant regulation. See Op. at 11.

Given the ample amount of judicial ink put to paper

concerning the relationship between and among Riggs Bank, the

Central Bank of Brazil, and the government of Brazil, our

analysis need not be labored. It is uncontested, as the court

observes, that the Central Bank is “100% a part of Brazil’s

federal government,” id. at 5, “government-controlled,” id. at 3,

and “required [by Brazilian law] to act on behalf of Brazil’s

government and prohibited from acting on behalf of anyone

else,” id. at 5. And yet the court simultaneously contends that

the Brazilian government and the Central Bank of Brazil are

“distinct,” see id. at 16, and concludes that the Central Bank

“stood in for [borrowers-to-be] when it received . . . tax

payments back in subsidies,” id. at 14. I disagree. The answer to

the question before us is apparent: The Central Bank is

unquestionably part of a “foreign country” and therefore not

1

“A foreign country is considered to provide a subsidy to a

taxpayer if the country provides a subsidy to another person that . . .

[e]ngages in a transaction with the taxpayer.” Treas. Reg. § 1.901-

2(e)(3)(ii).

3

“another person.” No one disputes that Riggs’s taxes have been

retained by the Brazilian government. The functional transfer of

funds within a government is not a transfer to “another person.”

The regulations confirm this conclusion by clarifying that when

a subsidy is paid to a “political subdivision” of a foreign state

issuing the subsidy, the subsidy is paid to the “foreign country”

itself. Treas. Reg. § 1.901-2(g)(2). I fail to see ambiguity in this

text that would permit any alternative conclusion.

Even my colleagues agree that, “in a vacuum,” our

disposition ought to be self-evident. See Op. at 12 (“[W]e might

well answer [the question] as PNC proposes. There is, after all,

no denying the Central Bank’s part-to-whole relationship to the

Brazilian government.”). But the court, perhaps frustrated by

the outcome that this straightforward analysis of the text and

neutral application of law requires,2 struggles to justify the

opposite result. Observing that “we do not operate in a vacuum,”

id. at 12, the court concludes that a decision in favor of PNC

would ratify an intolerable inconsistency, see id. at 13. Again,

I disagree. On the contrary, the court, in trying to restore clarity

to the confusing legal interpretation of a foreign minister (and,

perhaps, in its attempt to reach what it deems a just end to a

troubling case), has contorted what precious little logic remains

available to us and, in so doing, has overstepped the limits of its

authority.

2

“[E]very previous court to address [this] issue has regarded

PNC’s tax arrangement in Brazil as a stratagem for avoiding U.S.

taxes.” Op. at 17. Although I am sympathetic to the court’s reluctance

to tolerate what it senses to be unfair play, we do not referee fairness.

We construe law. As Thomas More observed in A Man for All

Seasons, “I know what’s legal not what’s right. And I’ll stick to

what’s legal.” ROBERT BOLT, A MAN FOR ALL SEASONS 65 (Vintage

International Ed. 1990).

4

II.

The majority’s error flows from its mistaken effort to

impose consistency on the reasoning of a foreign

state—specifically, the dubious conclusion that the Central Bank

stood in for borrowers-to-be when it paid PNC’s taxes, see id. at

15. From my colleagues’ perspective, it is not possible to

conclude that the Central Bank was compelled to pay taxes to

the government of Brazil without also concluding that the

Central Bank acted in the place of borrowers-to-be and is,

therefore, “another person” for the purpose of our tax law. The

majority observes that “[when it was compelled to] remit tax

payments on PNC’s behalf, standing in for the borrowers-to-be

. . . the Central Bank was distinct from the Brazilian

government. Thus, as the payment and the subsidy are both part

of the same indivisible transaction, Riggs II necessarily implies

the Central Bank is likewise distinct for purposes of the

subsidy.” Id. at 16 (emphasis in original). But in fact we

specifically held otherwise in Riggs National Corp. &

Subsidiaries v. Commissioner, 163 F.3d 1363 (D.C. Cir. 1999)

(Riggs II), declining to conclude that the Central Bank of Brazil

was distinct from the government of Brazil, much less that it

acted in the place of borrowers-to-be. Such a conclusion would

not have been supported by law, nor by logic. As the court itself

notes, the Central Bank is “required to act on behalf of Brazil’s

government and prohibited from acting on behalf of anyone

else.” Op. at 5.

Ironically, my colleagues’ disregard for the logical flaws

in the Minister’s reasoning is animated by their desire to

circumvent what they misconceive to be another logical

problem: how this court, in Riggs II, could have deferred to a

conclusion if that conclusion were based on a false premise. In

other words, how could we have deferred to an act of state (i.e.,

the order that the Central Bank pay taxes on PNC’s income)

5

without having accepted, “by necessary implication,” see Op. at

13, 15-16, the reasoning offered to justify the state act (i.e., that

the Central Bank stood in for borrowers-to-be)? But this is no

logical problem at all. We deferred to the act because the act of

state doctrine compelled us, regardless of the underlying

premise. That is the purpose of the doctrine, which precludes us

from “inquiring into the validity of the public acts a recognized

foreign sovereign power committed within its own territory,”

Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 401

(1964), and the nature of deference, which precludes us from

“sit[ting] in judgment on the acts of the government of another

done within its own territory,” Underhill v. Hernandez, 168 U.S.

250, 252 (1897). The fact that the Minister of Finance “looked

through” the Central Bank for the purposes of deciding the

proper tax treatment of loans, see Riggs II, 163 F.3d at 1366,

does not require that we base our own conclusions on the result

of that awkward analysis. Had the Minister of Finance based an

order on his observation that the sky is orange, we would still

defer to the order, regardless of the reasoning. No implications,

therefore, “necessary” or otherwise, fell out of our decision that

the Central Bank paid taxes on behalf of PNC other than the fact

that PNC could claim foreign tax credits in the amount of those

taxes.

I agree that “in the interest of consistency, we need [to]

adhere . . . to the necessary implications of Riggs II.” Op. at 16.

But that is not what the court has done. Instead—and contrary

to its own representation (“We cannot ignore the holding in [a

previous case] and consider the facts de novo.” Op. at 12)—the

court has adopted, de novo, the interpretation of a foreign

official that contravenes the text of foreign law (an observation

that both the Commissioner and the tax court have shared).

(“[T]he Central Bank, under Brazilian law, was constitutionally

immune from having to pay withholding tax with respect to its

net loan interest remittances abroad.” Riggs Nat’l Corp. v.

6

Comm’r, 107 T.C. 301, 355 (1996) (Riggs I), rev’d on other

grounds, Riggs II, 163 F.3d 1363.) This is precisely the error we

avoided in our previous holding. (“We are . . . hesitant to treat

an interpretation of law as an act of state, for such a view might

be in tension with rules of procedure directing U.S. courts to

conduct a de novo review of foreign law when an issue of

foreign law is raised. See FED. R. CIV. P. 44.1; TAX COURT R.

146.” Riggs II, 163 F.3d at 1368.) The act of state doctrine did

not compel our deference to the legal interpretation of a foreign

state and therefore offers no support for the majority’s

conclusion. Nor does our holding in Riggs II bolster the court’s

conclusion that we are bound by the law of this case to abandon

our unanimous plain language interpretation of controlling law.

Nor has the court offered any analysis to support its novel

conclusion that the Central Bank should be considered to have

acted on behalf of borrowers-to-be despite the explicit

prohibition against acting on behalf of anyone but the

government of Brazil. See Op. at 5. In fact, the majority admits

to being puzzled (as am I) by how, even “if it were legally

possible for the Brazilian government to impose a tax on its

Central Bank . . . it would be economically possible for the

Central Bank to pay it: At most, the money would go from the

Brazilian government’s right pocket to its left.” Id. Precisely. It

is similarly puzzling to suppose that when the Brazilian

government pays subsidies to the Central Bank, it is doing

anything more than the same motion in reverse. Why then are

these two halves of the same transaction, occurring

simultaneously, treated differently? Because an act of state

compelled us to recognize the first half (i.e., mandatory payment

of tax) while no such act compels our recognition of the second

half (i.e., payment of subsidy). Whereas we were obliged in

Riggs II to accept the fact that the Central Bank had been

compelled to pay taxes (despite all evidence to the contrary), we

were not (nor are we now) obliged to accept the argument that

the Central Bank stood in the place of borrowers-to-be and is

7

therefore “another person” for the purpose of our tax law. It was

our required deference in one case, not required in another, that

accounts for our “disparate treatment to two legs of a

simultaneous transaction,” see id. at 13, which, frustrating

though it may be to those who dislike the outcome, is not at all

inconsistent.

III.

Far from being “indifferent to all context and

background” in this case, Op. at 20, I am mindful of our duty to

respect the effect of our previous holdings and the bounds of our

role in this case. I also share my colleagues’ interest in policing

inconsistency in our jurisprudence, see id. at 13, and therefore

find myself motivated by the same concerns expressed by the

court, but reach the opposite conclusion. I believe that the

court’s analysis has ignored conclusive authority, created

inconsistencies where none need exist, and ultimately put us at

odds with (1) the plain language of U.S. law, (2) our own

precedent in this case, and (3) the reasoned analysis of a sister

circuit.

First, the court’s decision ignores the language of the

controlling U.S. tax regulation. The plain meaning of “another

person” is clear, despite the majority’s initial interpretation of

that dispositive phrase. See id. at 11 (“Read in isolation,

§ 1.901-2(e)(3) . . . appears to ask whether the recipient is the

taxpayer.” (emphasis in original)). The words “another person”

are most naturally read—both in isolation and in the relevant

context—to mean a third party that is neither the foreign

government nor the U.S. taxpayer. Thankfully, this is not a

source of disagreement, as the majority ultimately concludes that

“for purposes of this appeal . . . [another person] is a person

other than the Brazilian government,” and “[t]here is, after all,

8

no denying the Central Bank’s part-to-whole relationship to the

Brazilian government.” Op. at 12.

A textual approach to the case would therefore seem

appealing, not only because of the clarity it offers, but also

because the relevant regulations did not, at the time of their

effect in this case, permit a functional analysis of whether the

“subdivision” of a “foreign country” was in fact part of the

foreign country. Instead, the Internal Revenue Service created

a bright-line rule to govern the categorization of indirect

subsidies. That rule, as our sister circuit has noted, was intended

to save the Service from the “interminable investigation of the

mysteries of public finance.” See Cont’l Ill. Corp. v. Comm’r,

998 F.2d 513, 520 (7th Cir. 1993) (Posner, J.). If an alternative

mechanism were preferable, it was for the Service to create, not

for us to impose. There is nothing in the regulations to support

the view that a “subdivision” of a “foreign state” can be part of

the “foreign country” in some cases but not others. Indeed, the

regulations state the contrary, defining “foreign country” as “any

foreign state . . . and any political subdivision of any foreign

state . . . .” Treas. Reg. § 1.901-2(g)(2); see also Amoco Corp.

v. Comm’r, 138 F.3d 1139, 1147 (7th Cir. 1998).

The decision of this court is therefore at odds with the

plain language of relevant law, creating a troubling

inconsistency between our jurisprudence and the controlling text

of a regulation. If the Commissioner is frustrated by a loophole

that exists in the agency’s regulations, he need only correct it or

request that Congress amend the statute.3 We may not enforce

3

Indeed, it would appear that the loophole that gave rise to

Riggs’s petition in this case has been appropriately remedied by

Congress. The current regulations, revised in 1991, eliminate the

phrase “another person” and provide that an amount is a subsidy if it

is provided “to any person (governmental or not).” Treasury Decision

8372, 1991-2 C.B. 338 (emphasis added); see also Op. at 12 n.5.

9

such corrections retroactively. See Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 208 (1988) (“Retroactivity is not favored

in the law. Thus . . . a statutory grant of legislative rulemaking

authority will not, as a general matter, be understood to

encompass the power to promulgate retroactive rules unless that

power is conveyed by Congress in express terms.”).

Second, the court’s analysis is inconsistent with our own

precedent in this case. The majority asserts that we are bound by

the law-of-the-case doctrine (“[T]he same issue presented a

second time in the same case in the same court should lead to

the same result.” Op. at 13 (quoting LaShawn A. v. Barry, 87

F.3d 1389, 1393 (D.C. Cir. 1996) (en banc) (emphasis in

original))) and that “[t]he identity or non-identity of the Central

Bank and the Brazilian government for purposes of the tax

arrangement in this case was decided by necessary implication

in Riggs II.” Op. at 13. I disagree and believe that the majority

has misinterpreted our decision in Riggs II, which was

specifically and explicitly limited to address whether or not the

Central Bank had been compelled to pay taxes on Riggs’s

income. The issue in that case was whether Riggs was “legally

liable for the tax under Brazilian law.” Riggs II, 163 F.3d at

1363 (internal quotation marks omitted). The result in that case

was that the Minister’s order to the Central Bank to make tax

payments on behalf of Riggs was presumptively valid, see id. at

1368; Riggs IV, 295 F.3d at 18, or as the majority puts it,

“American courts must accept as given that the Brazilian

government levied a compulsory payment on the Central

Bank—period.” Op. at 15. That is the extent of the result in that

case. The law-of-the-case doctrine compels our deference only

to that previous judicial conclusion, and not to the incongruous

legal interpretations of a foreign state that we have previously

disavowed. See Riggs II, 163 F.3d at 1368 (declining to apply

the act of state doctrine to a foreign state’s interpretation of law

in light of our obligation to interpret law de novo).

10

In support of its law-of-the-case argument, the court

suggests that Riggs II can be read to include the Minister’s

“borrowers-to-be” rationale as part of its holding because it

“restated the Minister’s order in such a way as to incorporate [its

rationale . . . .” Op at 16. It then quotes Riggs II as evidence of

its theory: “[T]he Minister . . . ordered that the Central Bank

must, in substitution of the . . . [borrowers-to-be], pay the

income tax . . . .” Id. (internal quotation marks omitted) (citing

Riggs II, 167 F.3d at 1368). But the original language of Riggs

II is as follows:

[W]hether or not it can be said that the Brazilian

Minister of Finance’s interpretation of Brazilian law

qualifies as an act of state, the Minister’s order to the

Central Bank to withhold and pay the income tax on the

interest paid to the Bank goes beyond a mere

interpretation of law. The Minister, after all, ordered

that the Central Bank “must, in substitution of the future

not yet identified debtors of the tax . . . pay the income

tax on the interest paid during the period in which the

funds remained available for relending.” Riggs, 107

T.C. at 331. Such an order has been treated as an act of

state.

Riggs II, 163 F.3d at 1368 (emphasis added). The language we

quoted in Riggs II was not even the Minister’s language. It was

excerpted from the Opinion of the Acting Secretary of the

Brazilian tax authority, upon which the Minister based his order.

In fact, the actual language of the Minister’s order was much

more concise:

I agree fully with the conclusions of the attached

opinion of the . . . [Brazilian IRS]. In view of item 13 of

said opinion, I direct the Central Bank of Brazil to

11

implement the payment of income tax on or before the

last business day of the month following the month in

which the withholding is made.

Riggs I, 107 T.C. at 329. Our decision in Riggs II to quote

language from the opinion upon which the Minister’s order was

based does not imply, much less demonstrate, that our deference

in that case extended to the reasoning behind the act of state. The

court errs when it fixes its attention on the contents of a state

authority’s legal opinion, see Op. at 16 (“[The foreign ruling] has

three parts: the bare imperative, the borrowers-to-be-rationale,

and a broader discussion of the Central Bank’s legal situation in

various types of financial transactions.”), rather than the state’s

act (“I direct the Central Bank of Brazil to implement . . .

payment . . . .” Riggs I, 107 T.C. at 330 (internal quotation marks

omitted)). The act of state has only one part: the official demand

of payment. Particularly in light of our own language in Riggs II

describing the Minister’s order “to withhold and pay the income

tax on the interest paid,” id. at 1368, as well as the surrounding

discussion, which I read to be contemplative of the very scenario

now before us, I cannot agree with the majority that we ever

intended to include the borrowers-to-be reasoning in our

understanding of what the act of state included. Our language in

Riggs IV further confirms my view when it describes our holding

in Riggs II, in which “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

inquiring into its validity.” Riggs IV, 295 F.3d at 18 (emphasis

added).

The court’s conclusion that the Central Bank’s role (i.e.,

“standing in for the borrowers-to-be,” Op. at 16) is defined by

the “necessary implication” of our previous limited holding is

therefore unsupported and the majority now rests its entire

decision on the faulty reasoning we have hitherto disclaimed. In

12

so doing, the court turns the Tax Court’s error in Riggs I on its

head. In Riggs I, the Tax Court ignored the Minister’s ruling and

instead conducted its own investigation of Brazilian tax law. We

corrected the error by clarifying that a U.S. court may not

invalidate a foreign sovereign’s official act within its own

territory. The tax court had not been appropriately deferential.

The approach advocated today by the majority goes too far in the

opposite direction by requiring our deference not only to a

sovereign’s official act, but also to the underlying reasoning.

This is a misapplication of the act of state doctrine, which is

meant to prevent the courts of one sovereign from examining the

validity of the acts of another because doing so “would very

certainly imperil the amicable relations between governments

and vex the peace of nations.” Oetjen v. Cent. Leather Co., 246

U.S. 297, 304 (1918) (internal quotation marks omitted). As the

Court made clear in Underhill v. Hernandez, “[r]edress of

grievances by reason of [acts of state] must be obtained through

the means open to be availed of by sovereign powers as between

themselves.” 168 U.S. at 252. Just as the appropriate audience

for frustration at the controlling language of the Treasury

regulations is Congress and the Internal Revenue Service, the

appropriate audience for frustration at Brazil’s order is the

Executive.

Third, and finally, the majority’s analysis is inconsistent

with the decision of our sister circuit, and therefore creates a split

from the Seventh Circuit’s determination in Amoco. In that case,

both the Tax Court and the Seventh Circuit held that a

government entity could not receive a subsidy from that same

government. See Amoco, 138 F.3d at 1146 (citing Tax Court’s

interpretation of Treas. Reg. § 1.901-2(e)(3)(ii), “which indicates

that indirect subsidies to the U.S. taxpayer occur when a foreign

nation provides a subsidy to another person” (emphasis in

original)). The Amoco court based its conclusion on the

seemingly uncontroversial observation that it is impossible for a

13

foreign government to subsidize itself. See id. at 1148-49.

Although we are not bound by the Seventh Circuit’s holding,

“we avoid creating circuit splits when possible.” United States v.

Philip Morris USA Inc., 396 F.3d 1190, 1201 (D.C. Cir. 2005).

This may be particularly true in a case involving federal tax law,

where “uniformity among the circuits is particularly

desirable . . . to ensure equal application of the tax system,”

Wash. Energy Co. v. United States, 94 F.3d 1557, 1561 (Fed. Cir.

1996) (internal quotation marks omitted), and to further maintain

consistency.

Of greater concern than our departure from the views of

a sister circuit in a similar case, however, is our departure from

the logic that undergirds both Amoco and the case before us.

Key to the Amoco court’s analysis of whether a subsidy was paid

to “another person” was whether the “benefit” of the subsidy was

retained by the foreign government that had paid it. See Amoco,

138 F.3d at 1148-49; see also Riggs Nat’l Corp. & Subsidiaries

v. Comm’r, No. 24368-89, slip op. at 38 n.12 (T.C. May 3, 2004)

(recognizing the necessity of a benefit analysis in determining

whether a subsidy is an “indirect subsidy” for the purposes of the

Treasury regulations).4 If the benefit of the subsidy is retained by

the foreign government, then it should not be treated as a subsidy

for the purpose of the Treasury regulations.

My colleagues acknowledge that the purpose of the

subsidy provision in U.S. tax law is to avoid double taxation. See

Op. at 2. They fail to demonstrate, however, how a decision in

favor of PNC would offend this purpose. They claim that “[t]he

IRS ends up on the wrong end of the see-saw.” Id. at 6. But

whether or not the IRS ends up on the wrong end of the see-saw

4

Although I have noted that a functional approach to the

relevant regulatory language is disfavored in this case, the fact that the

court’s analysis contravenes both textual and functional approaches

bears notice.

14

is not our concern. We have no authority over that playground.

It is undisputed that the Central Bank received and retained the

benefit of the subsidy. The majority has failed to cite any record

evidence to the contrary. If the benefit of the subsidy paid by

Brazil is retained by Brazil, then it should not be treated as a

subsidy for the purposes of the Treasury regulations. See, e.g.,

Amoco, 138 F.3d at 1148.

The court distinguishes Amoco by listing factual

differences between the cases. See Op. at 19 (“Amoco lacked

every factual feature we have found decisive in this appeal: no

tax immunity, no private letter ruling or equivalent, no

borrowers-to-be or analogue for them, and no controlling

precedent.”). None of these features compels a different decision.

If anything, they strengthen the case for PNC. The Central

Bank’s tax immunity demonstrates its economic identity with the

government of Brazil—a characteristic that weighs strongly in

favor of PNC. The private letter ruling explains why in Riggs II

we allowed PNC to claim foreign tax credits—a determination

that would otherwise seem surprising at best. The borrowers-to-

be are irrelevant to the analysis favored by the Amoco court, as

no borrowers-to-be retained the benefit of subsidies. And, as I

have discussed, our precedent in this case does not compel our

endorsement of the suspicious rationale put forth by the Minister

of Finance—indeed, it counsels our reluctance to adopt that

reasoning.

IV.

Our previous holdings in this line of cases allowed Brazil

to place an artificial tax liability on its own Central Bank and

thus exploit a domestic tax loophole for the benefit of Riggs

Bank. Regretful about the consequences of our holding, we

nonetheless recognized that the remedy sought by the

Commissioner was not ours to provide: “Of course, the

15

opportunistic nature of the Brazilian government’s action is

particularly vexing. . . . But although we can visualize

prophylactic regulatory measures . . . the Commissioner has not

yet fashioned a legitimate legal challenge to Riggs’s use of the

foreign tax credit in this case.” Riggs II, 163 F.3d at 1369. PNC’s

attempt to take advantage of the Treasury regulations by virtue

of our previous decision is similarly vexing. And similarly,

although we can easily visualize prophylactic regulatory

measures (which have in fact since been implemented), the

Commissioner has again failed to request relief that a court can

provide. If an act of state is objectionable, it is for the Executive

to contest. If laws are flawed, they are for Congress to improve.

I respectfully dissent.