# Overseas Thread Industries, Ltd. v. United States

> United States Court of Federal Claims · November 9, 2000 · 48 Fed. Cl. 221

URL: https://www.frixlaw.com/law-library/cases/6648809

## Case

- **Full name:** OVERSEAS THREAD INDUSTRIES, LTD. v. United States
- **Court:** United States Court of Federal Claims
- **Decided:** November 9, 2000
- **Citations:** 48 Fed. Cl. 221; 86 A.F.T.R.2d (RIA) 6887; 2000 U.S. Claims LEXIS 238; 2000 WL 1704465
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Bush
- **Judges:** Bush
- **Cited by:** 2 later opinions in the Frix Law Library

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## Opinion text

OPINION
BUSH, Judge.
This matter is before the court on the parties’ cross motions for summary judgment. During the taxable years 1987, 1988, and 1989, the taxpayer-plaintiff, Overseas Thread, Inc. (OTI) made overpayments to the Internal Revenue Service (IRS). The IRS refunded the amount of the overpay-ments, but the parties differ on the amount of statutory interest due OTI. Therefore, the sole issue for the court to determine is the date that interest starts to accrue, under section 6611 of the Internal Revenue Code (I.R.C.) and the relevant Treasury Regulations. 1 The court rules that section 6611(d), rather than section 6611(b)(3) governs the interest accrual date; and therefore, the court grants plaintiffs motion and denies the Government’s cross-motion.
BACKGROUND
Plaintiff-taxpayer, OTI, is a foreign corporation, organized under the laws of the United Kingdom with its principal offices and headquarters in Manchester, England. It has a United States subsidiary, Tootal Finance, Inc. (TFI). During the taxable years 1987, 1988, and 1989, TFI made distributions to its parent, OTI. At the time of these distributions, both TFI and OTI believed that the distributions consisted of taxable dividends. Pursuant to the United States-United Kingdom Income Tax Convention, TFI withheld five percent of the gross amount of these distributions and deposited this amount with the IRS as income tax withholding. TFI filed Form 1042 “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons” for each of the three taxable years. OTI, however, did not file a tax return for taxable years 1987, 1988, and 1989.
During the last quarter of fiscal year 1990, 2 OTI discovered that the distributions in question partially consisted of returns of capital, which are nontaxable. On or about January 31, 1991, TFI filed amended tax forms to reflect the fact that it now considered portions of the distributions to be nontaxable returns of capital. On February 15, *223 1991, OTI filed Forms 1120-F “U.S. Income Tax Return of a Foreign Corporation” for each of the taxable years in question. 3 The IRS acknowledged receipt of these forms on February 22, 1991. In each of these forms, OTI reported the amounts of overpayments.
On January 6, 1992, the IRS refunded the overpaid taxes to OTI with respect to the 1988 and 1989 taxable years. On April 14, 1992, the IRS refunded the overpaid taxes to OTI with respect to the 1987 year. Subsequently, the IRS reconsidered the amount of its refunds and demanded that OTI repay a portion of the interest that the IRS had paid to OTI. OTI repaid the IRS the portion of the refund that the IRS demanded. OTI then sought to persuade the IRS that its position was erroneous regarding the amount of interest to which OTI was entitled. In a letter dated February 17,1994, the IRS notified OTI that it would not pay the interest that OTI had demanded. The letter cited I.R.C. § 6611(b)(3) as the grounds for the disallowance. This section mandates that, in the event that a taxpayer files a tax return after the date that it is due, interest will not be paid for any period prior to the date that the late return is actually filed. I.R.C. § 6611(b)(3). The IRS computed interest to be due from the date of OTI’s filing of the Forms 1120-F, thereby treating these as “late returns,” and refused to pay interest in an amount greater than its computation.
On May 17, 1994, OTI filed suit in this court seeking $21,020.44, the amount of interest which it had repaid to the IRS as of April 29, 1994. This court has jurisdiction to entertain claims for the allowance of statutory interest on tax refunds. See 28 U.S.C.A. § 1491 (a)(1) (1994); see also Brown & Williamson, Ltd. v. United States, 231 Ct.Cl. 413 , 688 F.2d 747, 752 (1982) (determining that the Court of Claims has jurisdiction to decide the date of overpayment for the purpose of determining interest under I.R.C. § 6611).
DISCUSSION
I. Summary Judgment Standards
Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. RCFC 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 , 106 S.Ct. 2505 , 91 L.Ed.2d 202 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390 (Fed.Cir.1987). The moving party bears the burden of proof and may discharge its burden by demonstrating an absence of evidence to support the opposing party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548 , 91 L.Ed.2d 265 (1986); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 , 90 S.Ct. 1598 , 26 L.Ed.2d 142 (1970). This court, in deciding whether a genuine issue of material fact exists, resolves doubt over factual issues in favor of the party opposing summary judgment. Mingus Constructors, 812 F.2d at 1390 . Where both parties have moved for summary judgment, as in this ease, the court must evaluate each motion on its own merits and is not required to find for one party or the other. Prineville Sawmill Co. v. United States, 859 F.2d 905, 911 (Fed.Cir.1988). This case is appropriate for summary judgment because the parties do not dispute the material facts, but instead place before the court a purely legal question concerning the proper interpretation of statutory and regulatory provisions. See BP Exploration & Oil Inc. v. United States, 46 Fed.Cl. 526, 529 (2000); Quaker State Oil Ref. Corp. v. United States, 24 Cl.Ct. 64, 67 (1991), aff'd, 994 F.2d 824 (Fed.Cir.1993).
II. Legal Background
A. Statutory and Regulatory Framework
The sole issue in this case is to determine the date that interest starts to accrue on OTI’s overpayment. Thus, the provisions in the I.R.C. and the related regulations pertaining to interest govern the court’s analysis. To place these provisions in their proper context, it is necessary to proceed through the statutory and regulatory provisions governing the (1) tax assessment; (2) tax collection and reporting; and (3) overpayment. *224 These events all preceded OTI’s claim to statutory interest, and quite naturally inform the discussion of OTI’s entitlement to statutory interest.
1. Tax Assessment
To the extent the “amount so received is not effectively connected with the conduct of a trade or business within the United States[,]” dividends paid from sources within the United States to a foreign corporation are taxed at a rate of thirty percent. I.R.C. § 881(a). This thirty percent rate is not absolute, however, because the regulations dictate that the source within the United States, the withholding agent, “determine[s] the appropriate rate [of taxation] pursuant to the applicable tax treaty and the regulations issued thereunder.” Treas. Reg. § 1.1441-6 (a). The applicable United States-United Kingdom treaty establishes a five percent tax rate on dividends paid by United States’ subsidiaries to their parent corporations in the United Kingdom. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, Dec. 31, 1975, U.S.-U.K. art. 10, para. 2(b)(1), 31 U.S.T. 5668, 5678. TFI applied the five percent rate, established by this treaty, to the dividends it distributed to OTI.
2. Tax Collection and Reporting
The I.R.C. and regulations create a system in which tax on a foreign corporation is withheld at the source by the foreign corporation’s withholding agent and deposited with the IRS. See I.R.C. § 1442 (requiring withholding at source); see also id. § 7701(a)(16) (defining withholding agent for purposes of I.R.C. § 1442). The withholding agent must file Form 1042 “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.” 4 Different reporting requirements apply to the foreign corporation whose income is withheld. Section 6012(a) generally creates the requirement for corporations to file a tax return, but gives the Secretary the authority to exempt foreign corporations that are subject to the tax imposed by section 881. Treasury Regulation section 1.6012-2(g) governs the tax return filing requirements of foreign corporations. Except as provided in subparagraph (2) (which will be discussed infra), a foreign corporation is required to file a return on Form 1120-F, if it engaged in trade or business in the United States at any time during the taxable year, or received income subject to taxation under the I.R.C. Treas. Reg. § 1.6012 — 2(g)(l)(i). However, a foreign corporation is not required to file a return (Form 1120-F), if (1) it did not engage in trade or business in the United States at any time during the taxable year; and (2) its tax liability for the taxable year is fully satisfied by withholding at the source [under Chapter 3 (i.e., I.R.C. § 1442) ]. Id. § 1.6012-2(g)(2 )(i)(a).
3. Overpayment
The Government has the authority to refund an overpayment. I.R.C. § 6402(a). Generally, the taxpayer’s claim for a refund of overpayment is made on the original income tax return. Treas. Reg. §§ 301.6402-3 (a)(1); 301.6402-3(a)(5). However, amended forms are acceptable. For instance, if the taxpayer filed Form 1120-F for the tax year in question, the regulations require the taxpayer to file an amended Form 1120-F to claim a refund of overpayment. Treas. Reg. § 301.6402-3 (a)(3). The information included in such a filing is dictated by Treas. Reg. § 301.6402-3 (e), which specifically covers foreign corporations. Typically, the withholding agent would be entitled to the overpayment, but in the event that the withholding agent, as in this ease, actually withholds the amount of the tax that results in the overpayment, the withholding agent does not have a right to the amount of overpayment. See, e.g., I.R.C. § 1464; Treas. Reg. § 1.6414 -l(e); 13 *225 JACOB MERTENS, JR., THE LAW OF FEDERAL INCOME TAXATION § 47B:83 (1997).
4. Interest
A refund claim implicitly carries with it a claim for statutory interest, and thus no separate claim is required to claim interest. MICHAEL I. SALTZMAN, IRS PRACTICE AND PROCEDURE 116.03, at 6-22 (2d ed.1991). Section 6611 mandates that interest shall be allowed on overpayments. I.R.C. § 6611(a). Generally, the date of interest accrual is the “date of the overpayment.” Id. § 6611(b)(2). In the ease of an advance payment of tax, payment of estimated tax, or credit for income tax withholding, the “date of overpayment” is determined by the provisions of section 6513. Id. § 6611(d). Germane to this case, section 6513(b)(3) determines that
[a]ny tax withheld at the source under chapter 3 [i.e., section 1442] shall, in respect of the recipient of the income, be deemed to have been paid by such recipient on the last day prescribed for filing the return under section 6012 of the taxable year (determined without regard to any extension of time for filing) with respect to which such tax is allowable as a credit under section 1462. 5 For this purpose, any exemption granted under 6012 from the requirement of filing a return shall be disregarded.
Id. § 6513(b)(3) (emphasis added) (footnote not in original). The time for filing in § 6012 is established by I.R.C. § 6072. Foreign corporations must file returns on or before either (1) June 15th following the close of the calendar year; or (2) if the corporation files its returns based on a fiscal year, the 15th day of the sixth month following the end of the fiscal year. Id. § 6072(e). For example, because OTI follows a fiscal year that ends on or about January 31st, the deadline for filing its tax return, and consequently the date that its withholding tax is deemed paid under I.R.C. § 6513(b)(3), would be July 15th.
The exception to the general rule employing the date of overpayment as the interest accrual date is “in the case of a return of tax which is filed after the last date prescribed for filing such return____” Id. § 6611(b)(3). Under this exception, the date of the filing of the late return marks the date of interest accrual. Id. No interest accrues until the date of the filing of the late return. Id. In addition, the taxpayer is not entitled to interest on an overpayment of tax if the I.R.S. refunds the overpayment within 45 days of the last day prescribed for filing a return for such tax or within 45 days of the actual date of filing, if the taxpayer files a late return. Id. § 6611(e); Treas. Reg. § 301.6611 -l(j). Lastly, after ascertaining the proper period of interest accrual, the amount of interest is calculated using the interest rate provided in section 6621. I.R.C. § 6611(a).
B. The Federal Circuit’s MNOPF Decision
During the parties’ briefing in support of them cross motions, the Federal Circuit issued MNOPF Trustees Ltd. v. United States, 123 F.3d 1460 (Fed.Cir.1997), which addressed an issue very similar to the one presented in this case. In MNOPF, the Federal Circuit clarified the application of the above-described statutory and regulatory provisions to a foreign entity. The plaintiff in MNOPF was a foreign labor organization that invested in the securities of corporations in the United States. Id. at 1461-62 . As a labor organization, plaintiff was tax-exempt under the I.R.C. Id. at 1465 . Despite MNOPF’s tax exempt status, the United States banks, which acted as custodians for the foreign labor organization and received its dividends, withheld a percentage from these dividends and transmitted the withheld amount to the IRS. Id. at 1462 . These banks filed Form 1042 (“Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”), see id., but the plaintiff did not file a tax return for the years in which withholding occurred. Id. at 1461, 1464 . As a tax exempt organization, MNOPF was entitled to *226 a full refund of the withheld amount, including appropriate interest. Id. at 1462 . The IRS advised MNOPF to file a claim for refund on Form 1120-F, but plaintiff instead opted to file Form 990-T “Exempt Organization Business Income Tax Return.” Id. The Service treated these forms as late returns, and therefore, computed interest from the date that it received them. Id.
Before the Court of Federal Claims, the Government asserted that interest accrued on the date of the actual filing of MNOPF’s Form 990-T, because this form represented a late return. MNOPF Trustees Ltd. v. United States, 33 Fed.Cl. 755, 757-58 (1995), modified and remanded, 123 F.3d 1460 (Fed. Cir.1997). MNOPF countered that it was exempt from filing a return and thus the “late return” interest accrual provision could not apply to it. Instead, it asserted that interest accrued from the “date the [custodian] banks made the overpayment or the date the banks’ payments (returns) were due[.]” MNOPF, 33 Fed.Cl. at 757 . The court rejected both parties’ arguments, and held that, because plaintiffs made an advance payment of tax, section 6611(d) and section 6513, which section 6611(d) invokes, determined MNOPF’s interest accrual date. Id. at 758 . The court held that, although MNOPF was exempt from filing a tax return for the years in question, section 6513 dictated that the filing deadline (i.e., the fifteenth day of the sixth month) that would have applied (had MNOPF not been exempt from filing) marked the date that interest began to accrue on MNOPF’s overpayment. Id. at 759 .
The Federal Circuit agreed with the Court of Federal Claims’ ruling that MNOPF’s filing of Form 990-T should not be considered a late return, because MNOPF had no obligation to file a tax return in the first place. MNOPF, 123 F.3d at 1464 . The Federal Circuit, however, modified the Court of Federal Claims’ holding that section 6513 provided the applicable interest accrual date. The court ruled that section 6513, by its terms, did not apply, because MNOPF was not required to file a tax return, as a non-taxable foreign entity. Id. at 1465 . Instead, the Federal Circuit focused its analysis on the actual or deemed date that the custodian banks deposited the overpayment with the IRS. Under the Treasury Regulations, the withholding was deemed paid on the last day prescribed for the custodians to file Form 1042. Accordingly, the court concluded that March 15th represented the date of overpayment for purposes of section 6611, and thus marked the interest accrual date. Id.
III. Merits
The Government argues that OTI was required to file income tax returns for the taxable years 1987, 1988, and 1989. Consequently, when OTI filed Forms 1120-F for these years on February 15, 1991 to claim a refund of its overpayment, the Government asserts that OTI filed “late returns.” Pursuant to section 6611(b)(3), no interest accrues prior to the date of filing late returns; and accordingly the Government asserts that February 15, 1991 represents the interest accrual date in this case.
OTI challenges the Government’s argument on the grounds that its filing Forms 1120-F to obtain the refund of its overpay-ments could not have been considered late returns, because there was no initial requirement to file a tax return for the taxable years 1987, 1988, and 1989. To support its assertion that it was excepted from filing a return, OTI cites Treasury Regulation section 1.6012-2(g)(2)(i)(a), which excuses a foreign corporation from filing a return if its tax is fully paid at the source, and it did not engage in any trade or business in the United States during the year. Treas. Reg. § 1.6012-2 (g)(2)(i)( )(2 ).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/6648809. Public record. Not legal advice.