observing that a Delaware court had declined to award plaintiff rescission because of practical difficulties of undoing the merger; the Delaware court had instead awarded plaintiff cash damages
How later courts described this case
- observing that a Delaware court had declined to award plaintiff rescission because of practical difficulties of undoing the merger; the Delaware court had instead awarded plaintiff cash damages
Written by the judges who cited it.
The opinion
Case: 20-30723 Document: 00516040727 Page: 1 Date Filed: 10/04/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
October 4, 2021
No. 20-30723
Lyle W. Cayce
Clerk
William Goldring; Jane Goldring,
Plaintiffs—Appellants,
versus
United States of America,
Defendant—Appellee.
Appeal from the United States District Court
for the Eastern District of Louisiana
USDC No. 2:18-CV-10756
Before Jones, Southwick, and Engelhardt, Circuit Judges.
Kurt D. Engelhardt, Circuit Judge:
In this tax refund action arising under the Internal Revenue Code
(“IRC”), the district court granted summary judgment in favor of the
Government and dismissed William and Jane Goldring’s claims in their
entirety. For the following reasons, we AFFIRM IN PART and
REVERSE IN PART.
I.
In 1997, Jane Goldring (“Mrs. Goldring”) held 120,000 shares of
stock—roughly a 15% stake—in Sunbelt Beverage Corporation (“Sunbelt”),
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No. 20-30723
a privately held Delaware corporation. On August 22, 1997, Sunbelt engaged
in a cash-out merger, which resulted in Mrs. Goldring’s Sunbelt shares being
cancelled as of the merger date and converted into the right to receive $45.83
per share.
On December 12, 1997, Mrs. Goldring filed a petition for appraisal of
her Sunbelt shares in the Delaware Court of Chancery (“Delaware Court”). 1
On August 12, 1999, Mrs. Goldring filed a separate complaint in the Delaware
Court asserting claims for unfair dealing and breach of fiduciary duty against
Sunbelt and its corporate directors. In December 2001, the two actions were
consolidated (“Delaware Litigation”). Mrs. Goldring requested rescissory
relief in the form of restoration of her 15% stake in Sunbelt. In the alternative,
she requested the fair value of her Sunbelt shares as of the merger date,
interest on the fair value of her shares, court costs, attorneys’ fees, and expert
fees.
The Delaware Litigation was stayed for several years, pending the
conclusion of arbitration proceedings. After the stay was lifted, a three-day
bench trial was held in April 2009. The Delaware Court issued a written
opinion on February 15, 2010, which found that Sunbelt and its directors
undervalued Mrs. Goldring’s Sunbelt shares and failed to act with “any
semblance of fair process” during the merger. Applying the “discounted
cash flow” valuation methodology recommended by the parties’ respective
experts, the Delaware Court found that the fair value of Mrs. Goldring’s
Sunbelt shares on the merger date was $114.04 per share. The Delaware
1
See 8 DEL. C. § 262(a). (“Any stockholder of a corporation of [Delaware] who
holds shares of stock on the date of the making of a demand . . . with respect to such shares,
who continuously holds such shares through the effective date of the merger or
consolidation . . . and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing . . . shall be entitled to an appraisal by the Court of Chancery
of the fair value of the stockholder’s shares of stock . . . .”).
2
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No. 20-30723
Court declined to award Mrs. Goldring her requested rescissory relief, based
on practical difficulties in carving out a 15% stake of Sunbelt’s complex
business portfolio and the court’s conclusion that the fair value award of
$114.04 per share was an adequate substitute remedy. The Delaware Court
awarded Mrs. Goldring court costs and expert fees but declined to award
attorneys’ fees. Finally, the Delaware Court exercised its statutory discretion
to award Mrs. Goldring pre- and post-judgment interest for the period
between the merger date and payment of the judgment, calculated at the rate
established under Delaware law. 2 The Delaware Court directed the parties
to agree on a proposed order implementing the terms of its decision.
On March 12, 2010, the parties executed a Forbearance and Payment
Agreement (“Forbearance Agreement”), whereby Sunbelt agreed to pay the
following amounts to Mrs. Goldring by April 15, 2010:
• $13,684,800 ($114.04 x 120,000 shares), the fair value of Mrs.
Goldring’s Sunbelt shares on the merger date;
• $26,067,243.83 in pre-judgment interest at the Delaware statutory
rate from the August 12, 1999 merger date through March 7, 2010;
• $9,820.28 in court costs;
• $841,763 in expert fees; and
• Post-judgment interest at the Delaware statutory rate from March 8,
2010 through the date the judgment was paid.
2
See 8 DEL. C. § 262(h) (“Unless the Court in its discretion determines otherwise
for good cause shown, and except as provided in this subsection, interest from the effective
date of the merger through the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve discount rate . . . as established
from time to time during the period between the effective date of the merger and the date
of payment of the judgment.”).
3
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No. 20-30723
In exchange, Mrs. Goldring agreed to surrender her stock certificates to
Sunbelt and waive her right to appeal the Delaware Court’s decision.
On April 5, 2010, Sunbelt paid Mrs. Goldring the amounts listed in
the Forbearance Agreement, plus $185,497.39 in post-judgment interest—a
total of $40,789,124.50 (“Delaware Litigation Award”); Mrs. Goldring, in
turn, surrendered her stock certificates to Sunbelt. A Judgment and
Satisfaction of Judgment was entered in the Delaware Court on April 6, 2010.
On their joint federal income tax return for 2010, Mrs. Goldring and
her husband, William Goldring (collectively “the Goldrings”), reported the
entire Delaware Litigation Award as income from the disposition of a capital
asset—i.e., Mrs. Goldring’s Sunbelt shares—taxable at the long-term capital
gain rate. Although the Goldrings believed their reporting position was
correct, they recognized that the Internal Revenue Service (“IRS”) might
subsequently determine that the pre- and post-judgment interest portion of
the Delaware Litigation Award (“Interest Award”) was ordinary income
taxable at the higher ordinary income rate, which would render the Goldrings
deficient on their 2010 taxes. In an attempt to avoid assessment of
underpayment interest in the event of a later-determined deficiency, the
Goldrings paid their 2010 taxes as if they had reported the Interest Award as
ordinary income. In other words, the Goldrings overpaid their reported 2010
tax liabilities by an amount sufficient to cover any later-determined
deficiency for the 2010 tax year.
The Goldrings elected on their 2010 tax return to credit the
overpayment forward to their estimated 2011 tax liabilities—an action known
as a “credit-elect overpayment” 3 The Goldrings continued to make credit-
3
A taxpayer that reports an overpayment of income tax may request a refund or
elect to have the reported overpayment applied to his or her estimated tax for the following
year. 26 U.S.C. § 6402(a)–(b); 26 C.F.R. § 301.6402-3(a)(5). “The subject of such an
4
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No. 20-30723
elect overpayments on their tax returns through the 2016 tax year and
consistently maintained overpayment balances with the IRS sufficient to
cover any potential deficiency for the 2010 tax year during this period.
On July 14, 2015, the IRS completed an audit of the Goldrings’ 2010
tax return and determined that the Interest Award should have been reported
as ordinary income taxable at the ordinary income rate. Based on this
determination, the IRS concluded that the Goldrings had underpaid their
2010 taxes by $5,250,549 and issued the couple a deficiency notice on March
30, 2017. The Goldrings consented to immediate assessment of the
deficiency, reserving their right to file a refund claim after the deficiency was
paid.
On August 18, 2017, the IRS assessed the following amounts against
the Goldrings for the 2010 tax year: (1) the principal deficiency of $5,250,549
(“2010 Deficiency”); and (2) underpayment interest of $603,335.27. In the
following manner, the IRS retroactively satisfied the 2010 Deficiency
through application of the Goldrings’ existing credit-elect overpayment
balances and retroactively assessed underpayment interest:
• April 15, 2011 through April 15, 2012: the IRS determined that the
Goldrings’ credit-elect overpayment for the 2010 tax year offset the
2010 Deficiency and suspended the running of underpayment interest
during this period. However, the 2010 credit-elect overpayment was
deemed by the IRS to be applied in payment of the Goldrings’ 2011
tax liabilities on April 15, 2012 and was no longer available for offset
against the 2010 Deficiency moving forward. Therefore, the IRS
determined that underpayment interest would run on the 2010
Deficiency from April 16, 2012 until the deficiency was deemed
satisfied.
election is known as a ‘credit elect overpayment’ or simply a ‘credit elect.’” FleetBoston
Fin. Corp. v. United States, 483 F.3d 1345, 1347 (Fed. Cir. 2007).
5
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No. 20-30723
• April 16, 2012 through April 15, 2015: the IRS assessed $494,110 in
underpayment interest against the Goldrings for this period.
• April 15, 2015: The IRS applied $4,246,848 in overpayment funds
from the 2014 tax year to the 2010 Deficiency. The remaining balance
on the 2010 Deficiency totaled $1,497,811.
• April 16, 2015 through April 15, 2017: the IRS assessed $109,225 in
underpayment interest against the Goldrings for this period.
• April 15, 2017: the remaining balance on the 2010 Deficiency was
deemed satisfied by the IRS through its application of overpayment
funds from the 2016 tax year.
The Goldrings filed a refund claim with the IRS in September 2017
with respect to the principal 2010 Deficiency and underpayment interest
amounts (“Administrative Refund Claim”). When no action had been taken
on the Administrative Refund Claim after six months, the Goldrings filed this
refund lawsuit in federal district court. See 26 U.S.C. § 6532(a)(1).
The Goldrings’ complaint sought the following relief: (1) a refund of
the amounts requested in their Administrative Refund Claim, plus interest
and costs; (2) a declaration that the full Delaware Litigation Award—
including the Interest Award—is properly classified and taxed as a capital
gain; (3) a declaration that the Goldrings are not liable for underpayment
interest; and (4) court costs. The district court disposed of the Goldrings’
claims in two orders following the parties’ two successive rounds of cross-
motions for summary judgment.
In the first round of cross-motions, the district court considered
whether the Interest Award should be classified and taxed as a capital gain,
as argued by the Goldrings, or classified and taxed as ordinary income, as
6
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No. 20-30723
argued by the Government. 4 The district court granted the Government’s
motion and denied the Goldrings’ motion, finding that the Interest Award
was properly classified and taxed as ordinary income. Specifically, the district
court found that the Interest Award served to compensate Mrs. Goldring for
her inability to use the fair value of her Sunbelt shares from the merger date
through the conclusion of the Delaware Litigation, did not reflect a gain to
Mrs. Goldring from the sale of her shares, and was not tied to the value of her
shares.
In the second round of cross-motions, the district court considered
whether the IRS properly assessed underpayment interest on the 2010
Deficiency from April 16, 2012 through April 15, 2017. The Goldrings argued
that underpayment interest should not have accrued, because the IRS
consistently possessed sufficient credit-elect overpayment funds from the
Goldrings to cover the 2010 Deficiency during this period. The Government
countered that underpayment interest was properly assessed, because the
Goldrings opted to apply their initial 2010 credit-elect overpayment toward
their estimated 2011 tax liabilities; those funds were deemed applied on April
15, 2012; and, as a result, those funds were no longer available to suspend the
running of underpayment interest on the 2010 Deficiency from April 16, 2012
until the 2010 Deficiency was deemed satisfied on April 15, 2017. Agreeing
with the Government’s argument, the district court granted the
Government’s motion and denied the Goldrings’ motion.
4
The district court noted that there was no dispute that the Goldrings properly
reported the non-interest components of the Delaware Litigation Award—$14,536,383.28
in court costs, expert fees, and the fair value of Mrs. Goldring’s Sunbelt shares on the
merger date—as capital gains on their 2010 tax return. Likewise, the parties do not dispute
the Goldrings’ tax treatment of these non-interest amounts on appeal.
7
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No. 20-30723
The district court issued a final judgment dismissing the Goldrings’
claims with prejudice. This appeal followed.
II.
We review a grant of a motion for summary judgment de novo, and we
apply the same standard as the district court, viewing the evidence in the light
most favorable to the nonmovant. First Am. Title Ins. Co. v. Continental Cas.
Co., 709 F.3d 1170, 1173 (5th Cir. 2013). Summary judgment is appropriate
where “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). Courts do not
disfavor summary judgment, but, rather, look upon it as an important process
through which parties can obtain a “just, speedy and inexpensive
determination of every action.” Celotex Corp. v. Catrett, 477 U.S. 317, 327
(1986). A party asserting that there is no genuine dispute as to any material
fact must support its assertion by citing to particular parts of materials in the
record. FED. R. CIV. P. 56(c)(1)(A).
III.
A. Tax Treatment of Interest Award from Delaware Litigation
The IRC affords different tax treatment to ordinary income and
capital gains. Income representing gain from the sale or exchange of a capital
asset held by a taxpayer for more than one year is considered a long-term
capital gain and is taxed at a favorable rate. 26 U.S.C. §§ 1(h), 1222(3).
“[N]ot every gain growing out of a transaction concerning capital assets is
allowed the benefits of the capital gains tax provision”—“[t]hose are limited
by definition to gains from the sale or exchange of capital assets.” Dobson v.
Comm’r, 321 U.S. 231, 231–32 (1944) (citation omitted). “Whether or not a
sale or exchange has taken place for income tax purposes must be ascertained
from all relevant facts and circumstances and the form of an agreement is not
of itself determinative of the question of whether payments to the taxpayer
8
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No. 20-30723
should be treated as ordinary income or capital gains.” Brinkley v. Comm’r,
808 F.3d 657, 665 (5th Cir. 2015) (citation omitted). “[A] transaction’s tax
consequences depend on its substance, not its form.” Southgate Master Fund,
L.L.C. ex rel. Montgomery Cap. Advisors, LLC v. United States, 659 F.3d 466,
478–79 (5th Cir. 2011).
Gross or “[o]rdinary income is taxed at a higher rate.” Rodriguez v.
Comm’r, 722 F.3d 306, 309 (5th Cir. 2013). The IRC broadly defines “gross
income” as “all income from whatever source derived.” 26 U.S.C. § 61(a).
“Interest” is included within the definition of “gross income.” Id. §
61(a)(4).
The mere fact that litigation proceeds awarded in a final judgment are
labeled “interest” does not automatically make those proceeds ordinary
income. See Kieselbach v. Comm’r of Internal Revenue, 317 U.S. 399, 403
(1943) (noting that “interest” label was “immaterial” to determining tax
character of pre- and post-judgment interest award in an eminent domain
action). Rather, litigation proceeds are ordinary income when they serve to
indemnify taxpayers for “what they might have earned on the sum found to
be the value of the property on the day the property was taken” if that sum
had been “put in the taxpayers’ hands” on that day. Id. at 403–04; see also
Isaac G. Johnson & Co. v. United States, 149 F.2d 851, 852 (2d Cir. 1945);
Wheeler v. Comm’r of Internal Revenue, 58 T.C. 459, 461 (1972); Drayton v.
United States, 801 F.2d 117, 124–30 (3d Cir. 1986); Leonard v. Comm’r, 94
F.3d 523, 525–26 (9th Cir. 1996), as amended (Sept. 5, 1996).
The parties do not dispute that the portion of the Delaware Litigation
Award comprising the fair value of Mrs. Goldring’s Sunbelt shares is
properly classified and taxed as a capital gain. The Goldrings argue that the
Interest Award should also be classified and taxed as a capital gain, because
it was tied to the fair value of her Sunbelt shares.
9
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We disagree. The Delaware Litigation record illustrates that the
Interest Award was distinct from the fair value award. The Delaware Court
determined that Mrs. Goldring’s shares were worth $114.04 apiece by
applying the “discounted cash flow” valuation methodology recommended
by Mrs. Goldring’s and Sunbelt’s experts. The pre- and post-judgment
interest comprising the Interest Award, on the other hand, was calculated
separately through the Delaware Court’s application of the statutory interest
rate under 8 DEL. C. § 262(h). The Delaware Court’s analysis and valuation
of Mrs. Goldring’s shares made no mention of pre- or post-judgment
interest, and the parties’ Forbearance Agreement itemized the fair value
award and Interest Award separately. In addition, the Delaware Court had
statutory discretion both to award pre- or post-judgment interest and to
select the rate at which interest was computed. 8 DEL. C. § 262(h); Bell v.
Kirby Lumber Corp., 413 A.2d 137, 149 (Del. 1980). Considering that the
Delaware Court could have declined to award any pre- or post-judgment
interest to Mrs. Goldring, it follows that the court’s decision to award
interest was independent from its decision to value Mrs. Goldring’s shares at
$114.04 apiece.
Moreover, the Delaware Litigation record demonstrates that the
Interest Award was properly classified and taxable as ordinary income under
Kieselbach. If Sunbelt had simply offered Mrs. Goldring a fair price to cash-
out her 120,000 shares on the August 22, 1997 merger date, she could have
immediately reaped the benefits of this transaction by investing the proceeds.
Instead, she was offered a significantly undervalued price and had to wait for
the culmination of nearly 13 years of state court litigation before finally
receiving the fair value of her shares. The Delaware Supreme Court has
explained that the purpose of a statutory interest award under 8 DEL. C. §
262(h) is to fairly compensate the stockholder for her inability to use the fair
value of her shares during a certain time period. Bell, 413 A.2d at 149. The
10
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Delaware Court applied 8 DEL. C. § 262(h) to award Mrs. Goldring pre- and
post-judgment interest that covered the period between the merger date and
the date Sunbelt paid the final judgment in full—the time period Mrs.
Goldring was deprived of the fair value of her shares. The Interest Award
thus served to indemnify Mrs. Goldring for “what [she] might have earned”
on the fair value of her shares if that money had been “put in [her] hands”
on the merger date. Kieselbach, 317 U.S. at 403–04.
The Goldrings argue that Kieselbach is distinguishable from this case,
because Mrs. Goldring did not relinquish title to her Sunbelt shares on the
merger date but rather did so on the date the Delaware Litigation Award was
paid, unlike Kieselbach, where a government entity received title to the
taxpayers’ property immediately upon the taking of that property by eminent
domain. The Goldrings further argue that Kieselbach involved a government
payor unable to deduct interest expenses on tax documents, whereas Sunbelt
was a private entity that could advantageously deduct the Interest Award on
its taxes. These distinctions are irrelevant. As stated above, Kieselbach held
that interest awarded in a judgment is ordinary income when it serves to
indemnify a taxpayer for her lost opportunity to earn on the fair value of her
capital asset. Id. The Interest Award in this case served that same purpose.
The Goldrings also argue that the “origin-of-the-claim” doctrine
should determine the tax treatment of the Interest Award. See Woodward v.
Comm’r, 397 U.S. 572, 577 (1970) (test for tax character of litigation expenses
is “whether the origin of the claim litigates is in the process of acquisition
itself”); see also Meade’s Estate v. Comm’r, 489 F.2d 161, 166 (5th Cir. 1974)
(determination of “whether legal expenses are incurred in the process of
disposition of property” depends on “the origin of the particular litigation
involved”). The origin-of-the-claim doctrine directs courts to determine the
tax treatment of judgments by asking the following question: “in lieu of what
was the judgment or litigation settlement awarded?” Srivastava v. Comm’r,
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220 F.3d 353, 365 (5th Cir. 2000) (citation omitted), overruled on other grounds
by Comm’r v. Banks, 543 U.S. 426 (2005)). Under this doctrine, the Goldrings
contend that the Interest Award was taxable as a capital gain because it was
part of a total judgment intended to compensate Mrs. Goldring for the loss of
a capital asset—her Sunbelt shares—and it was paid “in lieu of” her claim
for restoration those shares.
We disagree. As discussed above, the Interest Award portion of the
judgment was awarded “in lieu of” what Mrs. Goldring might have earned
on the fair value of her shares for the 13-year period between the merger and
final judgment in the Delaware Litigation; thus, it qualifies as ordinary
income under the origin-of-the-claim doctrine. See id.
For these reasons, the Interest Award is properly classified and taxable
as ordinary income.
B. Assessment of Underpayment Interest
Citing the “use-of-money” principle, the Goldrings contend that the
IRS improperly assessed underpayment interest from April 16, 2012 through
April 15, 2017, because the IRS had continuous possession of the couple’s
credit-elect overpayment funds sufficient to satisfy the 2010 Deficiency
during this period.
If an amount of tax is not “paid” by the prescribed due date, the IRS
may generally assess underpayment interest from that due date through the
date the deficiency is satisfied. 26 U.S.C. § 6601(a). Under the use-of-money
principle, a taxpayer is liable for interest only when the Government does not
have the use of money it is lawfully due. Manning v. Seeley Tube & Box Co.,
338 U.S. 561, 566 (1950). We previously endorsed the use-of-money principle
in a case involving § 6601(a) underpayment interest. Vick v. Phinney, 414 F.2d
444, 448 (5th Cir. 1969) (stating that “interest is assessed in order to
12
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compensate a creditor, here the government, for the period during which it
was deprived of the use of the money”).
We have not considered the application of the use-of-money principle
to a scenario where, as here, the IRS assessed underpayment interest on a tax
deficiency, even though it possessed credit-elect overpayments funds
sufficient to satisfy that deficiency throughout the interest assessment
period. Several courts outside of our circuit have encountered this issue,
beginning with the Second Circuit in Avon Prod., Inc. v. United States, 588
F.2d 342 (2d Cir. 1978). Noting the “clearly established principle that
interest is not a penalty but is intended only to compensate the Government
for delay in payment of a tax” the Avon court interpreted § 6601(a) to provide
that “interest shall begin running when a tax becomes both due and unpaid.”
Id. at 343–44 (emphasis added). Applying the use-of-money principle, the
Avon court found that a tax is not considered “unpaid” and § 6601(a)
underpayment interest may not run during any period the IRS possesses
enough credit-elect overpayment funds to satisfy a later-determined tax
deficiency. 5 Id. at 343–46. Following Avon, district courts have consistently
applied the use-of-money principle to reach similar holdings. May Dep’t
Stores Co. & Subsidiaries v. United States, 36 Fed. Cl. 680 (1996); Sequa Corp.
v. United States, No. 95 CIV. 2086 (KMW), 1999 WL 628286 (S.D.N.Y. June
8, 1999); In re Vendell Healthcare, Inc., 222 B.R. 564 (Bankr. M.D. Tenn.
1998); Otis Spunkmeyer, Inc. v. United States, No. C 02-05773 MJJ, 2004 WL
5542870 (N.D. Cal. Aug. 10, 2004).
5
Although the court did not explicitly use the phrase “use of money,” the decision
implicitly articulated the concept by finding that underpayment interest began to run on
the date the IRS no longer had use of sufficient overpayment funds to satisfy the tax
deficiency. Avon, 588 F.2d at 343–46.
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The Government does not dispute that the IRS had continuous use of
sufficient credit-elect overpayment funds to satisfy the Goldrings’ 2010
Deficiency from April 16, 2012 through April 15, 2017. However, the
Government argues that 26 U.S.C. §§ 6402(a)–(b) and 6513(d), and their
corresponding Treasury Regulations, 26 C.F.R. §§ 301.6402-3(a)(5) and
301.6513-1(d), permitted the IRS to assess underpayment interest during this
five-year period.
Section 6402(a)–(b) authorizes the IRS to either credit an
overpayment to the taxpayer’s estimated taxes for the following year or
refund the overpayment to the taxpayer. 26 U.S.C. § 6402(a)–(b). If the
taxpayer opts to credit-elect an overpayment forward, then the IRS must
apply those funds to the taxpayer’s estimated taxes for the following year;
however, no overpayment interest is permitted to accrue on the credit-elect
overpayment. 26 C.F.R. § 301.6402-3(a)(5). Section 6513(d) provides that a
credit-elect overpayment is treated as a payment of the taxpayer’s estimated
taxes for the following year and that no credit or refund of that overpayment
is permitted for the year in which the overpayment arises. 26 U.S.C. §
6513(d). Finally, the corresponding Treasury Regulation to Section 6513
explains how to determine the period of limitations applicable to a credit-
elect overpayment. 26 C.F.R. § 301.6513-1(d).
The above-referenced provisions cited by the Government do not
address the IRS’s ability to assess underpayment interest on a later-
determined deficiency during periods where the IRS possesses credit-elect
overpayment funds from the taxpayer sufficient to satisfy that deficiency. In
fact, the provisions relied upon by the Government make no reference
whatsoever to underpayment interest or § 6601(a)—the statute that
empowers the IRS to charge such interest.
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The Government also argues that the assessment of underpayment
interest was proper under FleetBoston Fin. Corp. v. United States, 483 F.3d
1345 (Fed. Cir. 2007). In FleetBoston, a corporate taxpayer overpaid its
reported taxes for the 1984 and 1985 tax years. Id. at 1347. For both of those
tax years, the taxpayer elected to credit the overpayment to the following
year’s tax liabilities. Id. The same pattern continued until 1991, when the
taxpayer requested and received an overpayment refund. Id. The IRS
subsequently determined that the taxpayer’s 1984 and 1985 tax returns were
deficient. Id. at 1347–48. Although the taxpayer’s overpayments exceeded
the 1984 and 1985 deficiencies and were not needed to pay its taxes in
subsequent tax years, the IRS nonetheless charged underpayment interest on
the deficiencies. Id. at 1352–53. The taxpayer contested the interest charges,
arguing that interest should not have been assessed, because sufficient funds
to pay the deficiencies were already in the IRS’s possession during the time
periods at issue. Id. at 1348.
A majority of the Federal Circuit found that because the
overpayments were designated “credit elect overpayments” these funds
could not be credited to any later-determined deficiency for the year of the
overpayment. Id. at 1353. Specifically, the FleetBoston majority relied on
Section 6513(d) and 26 C.F.R. § 301.6402-3(a)(5), which provide that the
IRS must treat and apply credit-elect overpayments as payment of the
taxpayer’s estimated taxes for the following year. Id. at 1349. The majority
interpreted these provisions as providing that a “credit elect overpayment
will be deemed to reside in the tax account for the succeeding year, even if it
is not needed to pay estimated tax in that year.” Id. at 1353. Because the
taxpayer failed to show that “any overpayments of estimated tax or income
tax for later tax years ever resided in its 1984 and 1985 tax accounts; those
overpayments therefore never suspended the underpayment interest due for
1984 and 1985.” Id. at 1354.
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The FleetBoston dissent argued that under the use-of-money principle,
underpayment interest does not accrue for any period the IRS possesses
sufficient funds from the taxpayer to satisfy the later-determined deficiency.
Id. at 1355–58 (Newman, J., dissenting). The dissent noted that the majority
disregarded the fact that, throughout the period for which the IRS assessed
underpayment interest, the IRS possessed funds belonging to the taxpayer in
an amount exceeding the later-determined deficiency. Id. at 1355. The dissent
further cautioned that the majority “diverge[d]” from statutory law and the
rulings of Avon and its progeny by “establish[ing] a new rule that applies even
when the overpayment was not needed and was not used to pay any tax
obligation.” Id.
We agree with the FleetBoston dissent. The FleetBoston majority was
correct that Section 6513(d) and 26 C.F.R. § 301.6402-3(a)(5) provide that
the IRS must treat and apply credit-elect overpayments as payment of the
taxpayer’s estimated taxes for the following year. However, as discussed
above, these provisions do not address the IRS’s ability to charge § 6601(a)
underpayment interest on a later-determined deficiency during periods
where it has use of enough credit-elect overpayment funds to satisfy that
deficiency.
Further, like the FleetBoston majority, the Government’s argument in
this case fixates on theoretical migration of credit-elect overpayment funds
from one tax year to another. See 26 U.S.C. § 6513(d); 26 C.F.R. § 301.6402-
3(a)(5) However, this argument completely ignores the simple, undisputed
fact that the IRS was never deprived of its use of the money the Goldrings
lawfully owed it at any point during the five-year underpayment interest
assessment period.
In the absence of clear statutory authority, we apply the established
use-of-money principle and conclude that the IRS improperly assessed
16
Case: 20-30723 Document: 00516040727 Page: 17 Date Filed: 10/04/2021
No. 20-30723
underpayment interest against the Goldrings from April 16, 2012 to April 15,
2017. Manning, 338 U.S. at 566; Avon, 588 F.2d at 343–46. The Goldrings’
summary judgment evidence shows that the IRS had continuous use of the
Goldrings’ credit-elect overpayment funds in an amount sufficient to satisfy
the 2010 Deficiency throughout that five-year period. Accordingly, the
Goldrings are entitled to a refund of the underpayment interest amount of
$603,335.27.
IV.
For the foregoing reasons, we AFFIRM the grant of the
Government’s first cross-motion for summary judgment and AFFIRM the
denial of the Goldrings’ first cross-motion for summary judgment.
We REVERSE the grant of the Government’s second cross-motion
for summary judgment, REVERSE the denial of the Goldrings’ second
cross-motion for summary judgment, and REMAND to the district court
with an order to enter judgment for the Goldrings as to their claim for refund
of the $603,335.27 underpayment interest amount.
17