Georg Schaeffler v. United States ( 2018 )

Case: 17-10719 Document: 00514456433 Page: 1 Date Filed: 05/03/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 17-10719 May 3, 2018
Lyle W. Cayce
GEORG F. W. SCHAEFFLER; BERNADETTE SCHAEFFLER, Clerk
Plaintiffs - Appellants
v.
UNITED STATES OF AMERICA,
Defendant - Appellee
Appeal from the United States District Court
for the Northern District of Texas
Before KING, HAYNES, and HIGGINSON, Circuit Judges.
KING, Circuit Judge:
Georg and Bernadette Schaeffler were previously married and filed a
joint income tax return for the year 2002 on October 15, 2003. They later
amended their 2002 tax return in April 2013 and claimed a refund for their
overpayment. The Internal Revenue Service denied their claim as untimely.
The Schaefflers then initiated this action, seeking the refund. The Government
filed a motion to dismiss, arguing that the claim was filed after the general
limitations period in I.R.C. § 6511(a) and that the special limitations period in
I.R.C. § 6511(d)(3)(A) did not apply as the overpayment was not attributable
to foreign taxes for which credit was allowed. The district court agreed with
the Government that the refund claim was untimely and dismissed the suit.
We AFFIRM.
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I.
Georg and Bernadette Schaeffler were previously married and filed a
joint income tax return for 2002 on October 15, 2003. Afterwards, they filed
multiple amended returns for 2002. As relevant here, they filed a second
amended return for 2002 on or around April 10, 2013. This return reflected two
changes: a net decrease in foreign tax credit of $1,592,765 and an increase in
minimum tax credit of $6,763,525. The net reduction in foreign tax credit
resulted from three changes to their German tax liabilities: (1) an increase of
$142,902 in German tax liabilities for an entity through which Mr. Schaeffler
was conducting foreign rental activity; (2) an increase of $1,166,186 in German
personal income tax liabilities; and (3) a decrease of $2,901,853 in German tax
liabilities for a foreign partnership with which Mr. Schaeffler was involved.
The increase in minimum tax credit of $6,763,525 was due to changes
made in the Schaefflers’ third amended tax return for 2001. The original tax
return for 2001 showed that they paid only a regular income tax. On or around
April 7, 2012, they filed their third amended return for 2001. The revisions
made in this return reflected a net increase in foreign tax credit of $5,621,448
and a reduction in minimum tax credit of $3,146,597. These changes resulted
in the Schaefflers being subject to an alternative minimum tax in the amount
of $2,474,851. 1 The Schaefflers alleged that the changes in the third amended
return for 2001 “did not cause any additional tax liability or payments” for that
year. Consequently, as reflected in the second amended return for 2002, the
1 The alternative minimum tax is a tax that is “separate from and in addition to the
regular income tax.” Merlo v. Comm’r, 492 F.3d 618, 620 (5th Cir. 2007) (citing I.R.C. § 55(a)).
“Congress enacted the [alternative minimum tax] to ensure that high-income taxpayers
cannot avoid significant tax liability through the use of exclusions, deductions, and credits.”
Id. The alternative minimum tax is “imposed at a lower rate than the regular income tax,”
but applied to an expanded income base that “eliminat[es] tax-breaks given to the taxpayer
under the regular income tax regime.” Id.
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minimum tax credit for 2002 increased by $6,763,525—the sum of $2,474,851
(i.e., the minimum tax credit generated by the alternative minimum tax in
2001) and $4,288,674 (i.e., the minimum tax credit carried forward from years
prior to 2001). 2
The second amended return for 2002 showed that the net decrease in
foreign tax credit of $1,592,765 absorbed a portion of the $6,763,525 increase
in minimum tax credit, resulting in an overpayment of $5,170,760. The
Schaefflers requested a refund for this overpayment. On January 6, 2014, the
Internal Revenue Service (“IRS”) denied their refund claim as untimely. On
December 30, 2015, the Schaefflers initiated this action, seeking their refund
for 2002. In its answer, the Government asserted that the court lacked subject
matter jurisdiction because the refund claim was untimely. The district court
ordered the Government to file a motion to dismiss so that the issue of
jurisdiction could be addressed early in the litigation.
The Government complied and filed a motion to dismiss for lack of
subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1) on
September 9, 2016. It argued that (1) the refund claim was subject to and filed
after the limitations period in I.R.C. § 6511(a) and therefore untimely and
(2) the overpayment was not attributable to the allowance of a foreign tax
credit and so the special ten-year limitations period in § 6511(d)(3)(A) did not
apply. The Schaefflers then filed an amended complaint with no major
changes. On April 25, 2017, the district court dismissed the Schaefflers’ refund
claim, agreeing with the Government that the claim was untimely. The
Schaefflers appealed.
2 A taxpayer who pays alternative minimum tax can use some or all of that amount to
reduce regular income tax in future years; this is referred to as the “minimum tax credit.”
See I.R.C. § 53(b). The minimum tax credit may be carried forward to future tax years. See
id. § 53(b)(2).
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II.
We review de novo a district court’s dismissal under Rule 12(b)(1). See
Lane v. Halliburton, 529 F.3d 548, 557 (5th Cir. 2008). “The district court []
has the power to dismiss for lack of subject matter jurisdiction on any one of
three separate bases: (1) the complaint alone; (2) the complaint supplemented
by undisputed facts evidenced in the record; or (3) the complaint supplemented
by undisputed facts plus the court’s resolution of disputed facts.” Williamson
v. Tucker, 645 F.2d 404, 413 (5th Cir. 1981). “In the instant case, the district
court dismissed based upon the complaint and the undisputed facts evidenced
in the record . . . .” Barrera-Montenegro v. United States, 74 F.3d 657, 659 (5th
Cir. 1996). “[O]ur review is limited to determining whether the district court’s
application of the law is correct and, if the decision is based on undisputed
facts, whether those facts are indeed undisputed.” Williamson, 645 F.2d at 413.
This case involves statutory interpretation of the Internal Revenue Code,
which is a matter of law that we review de novo. See Howard Hughes Co.,
L.L.C. v. Comm’r, 805 F.3d 175, 180 (5th Cir. 2015). We begin “by examining
the plain language of the relevant statute.” Stanford v. Comm’r, 152 F.3d 450,
455–56 (5th Cir. 1998) (citing G.M. Trading Corp. v. Comm’r, 121 F.3d 977,
981 (5th Cir. 1997)). “In the absence of any ambiguity, our examination is
confined to the words of the statute, which are assumed to carry their ordinary
meaning.” Id. at 456 (citing G.M. Trading, 121 F.3d at 981). “We are authorized
to deviate from the literal language of a statute only if the plain language
would lead to absurd results, or if such an interpretation would defeat the
intent of Congress.” Kornman & Assocs., Inc. v. United States, 527 F.3d 443,
451 (5th Cir. 2008) (first citing Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004);
then citing Johnson v. Sawyer, 120 F.3d 1307, 1319 (5th Cir. 1997)). “Only after
application of the principles of statutory construction, including the canons of
construction, and after a conclusion that the statute is ambiguous may the
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court turn to the legislative history.” Id. (quoting Carrieri v. Jobs.com, Inc.,
393 F.3d 508, 518–19 (5th Cir. 2004)).
III.
There are two issues in this case: (1) whether the Schaefflers’ refund
claim for 2002 is timely under I.R.C. § 6511(d)(3)(A) because it relates to “an
overpayment attributable to any taxes paid or accrued to any foreign country
. . . for which credit is allowed against [income] tax,” and (2) whether the
Schaefflers’ refund claim for 2002 is timely under I.R.C. § 6511(a) because it
was filed within two years from the time any tax for 2002 was paid. We first
provide a legal background on time limitations for tax refund claims and then
proceed to address the issues.
A.
“The United States, as sovereign, is immune from suit save as it consents
to be sued.” United States v. Sherwood, 312 U.S. 584, 586 (1941). The United
States has consented to be sued for “erroneously or illegally assessed or
collected” taxes. 28 U.S.C. § 1346(a)(1). But the plaintiff must comply with the
jurisdictional requirements in I.R.C. § 7422. See, e.g., United States v.
Clintwood Elkhorn Mining Co., 553 U.S. 1, 4–5 (2008). Such requirements for
tax refund claims are set forth in § 7422(a). See id. Section 7422(a) states that
no suit for improperly assessed or collected taxes shall be maintained “until a
claim for refund . . . has been duly filed with the Secretary.” Section 6511 sets
time limitations for the proper filing of a refund claim. See Duffie v. United
States, 600 F.3d 362, 384 (5th Cir. 2010) (“To overcome sovereign immunity in
a tax refund action, a taxpayer must file a refund claim with the IRS within
the time limits established by the Internal Revenue Code.”). A taxpayer’s
failure to comply with time limitations deprives the court of subject matter
jurisdiction. See id.
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Generally, a tax refund claim “shall be filed by the taxpayer within
3 years from the time the return was filed or 2 years from the time the tax was
paid, whichever of such periods expires the later.” I.R.C. § 6511(a). Section
6511(b) defines two “look-back” periods, incorporating § 6511(a) by reference.
Comm’r v. Lundy, 516 U.S. 235, 240 (1996). If the refund claim is filed within
three years from the time the return was filed, then the refund “shall not
exceed the portion of the tax paid within the [three-year] period, immediately
preceding the filing of the [refund] claim, equal to 3 years plus the period of
any extension of time for filing the return” (“three-year look-back period”).
I.R.C. § 6511(b)(2)(A). If the refund claim is not filed within that three-year
period, the refund “shall not exceed the portion of the tax paid during the
2 years immediately preceding the filing of the claim” (“two-year look-back
period”). Id. § 6511(b)(2)(B).
Section 6511(d)(3) provides an exception to the general rule in § 6511(a).
If the tax refund claim “relates to an overpayment attributable to any taxes
paid or accrued to any foreign country . . . for which credit is allowed against
[income] tax,” then a special ten-year limitations period applies. Id.
§ 6511(d)(3)(A). The amount of the refund may also exceed the refund amount
limits in § 6511(b) by “the amount of the overpayment attributable to the
allowance of a credit for the taxes” accrued to the foreign country. Id.
§ 6511(d)(3)(B).
It is clear that the Schaefflers’ refund claim was not filed within the
three-year look-back period. The Schaefflers undisputedly filed their original
return for 2002 in October 2003 and their refund claim in April 2013. They
argue that their refund claim is timely because (1) the § 6511(d)(3) exception
applies or (2) the second clause in § 6511(a) applies (i.e., the refund claim was
filed within “2 years from the time the tax was paid”).
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B.
The first issue is whether the Schaefflers’ 2002 overpayment was
attributable to foreign taxes for which credit was allowed. We conclude that it
was not and therefore § 6511(d)(3)(A) does not apply to render their refund
claim timely.
The parties focus their argument on the phrase “attributable to” in
§ 6511(d)(3)(A). Though this phrase appears in many provisions of the Internal
Revenue Code, it is “not defined anywhere in the Code and has no special
technical meaning under the tax laws.” Electrolux Holdings, Inc. v. United
States, 491 F.3d 1327, 1330 (Fed. Cir. 2007) (citing Stanford, 152 F.3d at 458).
“A fundamental canon of statutory construction instructs that in the absence
of a statutory definition, we give terms their ordinary meaning.” Kornman, 527
F.3d at 451 (quoting Wallace v. Rogers (In re Rogers), 513 F.3d 212, 224 (5th
Cir. 2008)). In Stanford, we concluded that the plain meaning of “attributable
to” is “due to, caused by, or generated by” in the context of I.R.C.
§ 925(c)(1)(C)(i). 152 F.3d at 459. Other courts interpreting different provisions
of the tax code have come to the same conclusion. See, e.g., Electrolux Holdings,
491 F.3d at 1331 (interpreting “attributable to” in § 6511(d)(2)(A) as “due to,
caused by, or generated by”); Lawinger v. Comm’r, 103 T.C. 428, 435 (1994)
(interpreting “attributable to” in § 108(g)(2)(B) as “due to, caused by, or
generated by”); see also Braunstein v. Comm’r, 374 U.S. 65, 70 (1963)
(interpreting “attributable to” in the phrase “gain attributable to such
property” in § 117(m) of the 1939 tax code as “merely confin[ing] consideration
to that gain caused or generated by the property in question”).
The parties agree that the plain meaning of “attributable to” is “due to,
caused by, or generated by.” They also agree that “attributable to” sets forth a
causation requirement. The parties dispute whether this requirement is
satisfied here. Because, in the United States, individuals are “taxed on [their]
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income [from] all sources, whether domestic or foreign,” they are permitted to
take a foreign tax credit against their U.S. taxes “by the amount of the tax paid
to [a] foreign country” in order to prevent double taxation. Tex. Instruments
Inc. v. United States, 551 F.2d 599, 605 (5th Cir. 1977); see I.R.C. § 901(a). In
their original return for 2002, the Schaefflers elected to claim their foreign tax
credit in the year when their foreign taxes accrued, rather than the year when
they paid such taxes. As such, the Schaefflers were subsequently obligated by
§ 905(c)(1)(A) to notify the Government if “accrued [foreign] taxes when paid
differ from the amounts claimed as credits by the taxpayer.” Practically, this
reporting requirement can be fulfilled by filing an amended tax return and
providing other information specified in 26 C.F.R. § 1.905-4T(b). See IRS Chief
Counsel Advisory 201145015, 2011 WL 5439123 (Nov. 10, 2011).
The Schaefflers’ position is that the changes in their German tax
liabilities for 2002 triggered the notification requirement in § 905(c)(1)(A),
under which they had to file the second amended return for 2002 and
redetermine their U.S. taxes. The redetermination of U.S. taxes involved
incorporating a revised figure for their 2002 minimum tax credit, which then
resulted in an overpayment. Thus, according to the Schaefflers, the changes in
their German tax liabilities for 2002 caused the 2002 overpayment, and the
ten-year statute of limitations in § 6511(d)(3)(A) applies. The Government’s
position is that the changes in German tax liabilities for 2002 resulted in a net
decrease in their foreign tax credit and that such a decrease could not have
caused the 2002 overpayment.
We agree with the Government. The Schaefflers’ overpayment for 2002
must be “attributable to any taxes paid or accrued to any foreign country . . .
for which credit is allowed against [income] tax.” I.R.C. § 6511(d)(3)(A)
(emphasis added). The changes in foreign tax liabilities for 2002 generated a
net reduction in (not an increase in or an allowance of) foreign tax credit for
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2002. This reduction could not have caused the overpayment. The increase in
the 2002 minimum tax credit caused the overpayment. While the changes in
German tax liabilities for 2002 triggered the § 905(c)(1)(A) requirement to
submit an amended tax return that reported the increase in the 2002 minimum
tax credit, § 905(c)(1)(A) is merely a notification provision and did not generate
the increase in the 2002 minimum tax credit. 3
The district court relied on Electrolux Holdings as support for its holding.
In Electrolux Holdings, the Federal Circuit held that the corporate taxpayer’s
refund claim for 1995 was untimely. 491 F.3d at 1333. Pursuant to I.R.C.
§ 1212(a)(1), the taxpayer was permitted to carry back the unused portion of
its 1994 long-term capital loss to each of the three years before 1994 and then
carry over any remaining loss to each of the five years after 1994, treating the
loss as a short-term capital loss each year. Id. at 1328–29. The taxpayer did so
in the years in which the loss could be offset by capital gains, carrying back to
1993 and then carrying over to 1995, 1996, 1997, and 1998. Id. at 1329. The
taxpayer filed the refund claim for 1995 in 1999, past the three-year general
limitations period in § 6511(a). Id. The issue on appeal was whether the 1995
overpayment was “attributable to . . . a carryback” of a long-term capital loss
from 1994; if so, then the special limitations period in § 6511(d)(2)(A) would
apply and render the refund claim timely. Id. at 1330. The court determined
that the plain meaning of “attributable to” is “due to, caused by, or generated
3 The changes in German tax liabilities for 2002 did not trigger a tax liability change
that then caused the change in the minimum tax credit for 2002. The 2001 change in foreign
tax liability, which translated into the net increase in foreign tax credit, arguably did. It
generated a change in 2001 U.S. tax liabilities that arguably then caused the change in the
2002 minimum tax credit. Cf. Electrolux Holdings, 491 F.3d at 1331–32 (rejecting the
plaintiffs’ “tracing” argument based on First Chi. Corp. v. Comm’r, 742 F.2d 1102 (7th Cir.
1984) (per curiam)). The Schaefflers did not make this “tracing” argument to the district court
or on appeal and, thus, have forfeited it. See CenturyTel of Chatham, LLC v. Sprint Commc’ns
Co., L.P., 861 F.3d 566, 573 (5th Cir. 2017), cert. denied, 138 S. Ct. 669 (2018). Consequently,
we need not address it.
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by.” Id. at 1331. It concluded that the “direct cause” of the 1995 overpayment
was the 1994 long-term capital loss “carryover,” not “carryback.” Id. at 1331.
Thus, the special limitations period did not apply, and the refund claim was
untimely. Id. at 1331.
The Schaefflers argue that United States v. Woods, 571 U.S. 31 (2013),
supersedes the reasoning in Electrolux Holdings and, under Woods, the 2002
changes in German tax liabilities and subsequent U.S. tax redetermination
were “inextricably intertwined” causes of the 2002 overpayment. These
contentions are unavailing. Woods concerns whether the valuation-
misstatement penalty in the tax code applies in a situation involving
partnerships that were tax shelters designed “to generate large paper losses”
for their partners so that the partners could “reduce [their] taxable income.”
See 571 U.S. at 33. “A partnership does not pay federal income taxes; instead,
its taxable income and losses pass through to the partners.” Id. at 38 (citing
I.R.C. § 701). Pursuant to I.R.C. § 6662(a) and (b)(3), the portion of a taxpayer’s
underpayment that is “attributable to . . . [a]ny substantial valuation
misstatement” under § 6662(e)(1)(A) is subject to a penalty. Id. at 43.
The IRS had determined that the partnerships involved were shams for
tax purposes because they lacked economic substance. Id. at 36–37. Thus, “no
partner could legitimately claim” a tax basis in a partnership interest (i.e., an
outside basis) that is “greater than zero.” Id. at 44. If a partner did so in order
to generate losses on his tax return and then deducted those losses in order to
underpay his taxes, then the underpayment would be “attributable to” a
substantial valuation misstatement. Id. The taxpayer-partner attempted to
argue that his underpayment was “attributable to” the IRS determination that
the partnerships were shams, not his misstatement. Id. at 46–47. The Supreme
Court rejected his argument, stating that “the partners underpaid their taxes
because they overstated their outside basis [(i.e., the misstatement)], and they
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overstated their outside basis because the partnerships were shams.” Id. at 47.
In other words, the misstatement and the partnerships’ lack of economic
substance were “inextricably intertwined.” Id.
Woods did not supersede the reasoning in Electrolux Holdings and is
inapposite to this case. Nothing in the Supreme Court’s analysis suggests that
Electrolux Holdings is no longer good law. Here, the 2002 changes in German
tax liabilities and subsequent U.S. tax redetermination were not “inextricably
intertwined” causes of the 2002 overpayment. It is true that the 2002 changes
in German tax liabilities triggered the § 905(c)(1)(A) reporting requirement,
but the U.S. tax redetermination under § 905(c)(1)(A) did not cause the 2002
overpayment. As stated above, the overpayment resulted from the increase in
the 2002 minimum tax credit. The U.S. tax redetermination involved the
reporting of this increase, but it did not generate this increase. Therefore, the
changes in German tax liabilities for 2002 did not cause the 2002 overpayment.
Next, the Schaefflers contend that “but for” the U.S. tax redetermination
mandated by § 905(c)(1)(A), the minimum tax credit carryforward would have
instead been carried forward indefinitely to a future year. This contention is
unavailing. The minimum tax credit is defined as the excess of “the adjusted
net minimum tax imposed for all prior taxable years beginning after 1986” over
“the amount allowable as a credit” for all of these prior years. I.R.C. § 53(b).
The minimum tax credit carryforward would have been “allowable,” and
therefore absorbed, as a minimum tax credit in 2002 regardless of whether the
Schaefflers submitted the second amended return for 2002. Thus, per I.R.C.
§ 53(b), the 2002 absorbed amount would automatically be taken into
consideration for all years after 2002.
The Schaefflers also argue that the district court’s construction would
“disallow[] the use of the computational carryforward credit” and affect only
taxpayers whose returns are “computed without being affected by minimum
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tax credits.” This contention is also unmeritorious. There are a variety of
scenarios to which § 6511(d)(3)(A) apply. All of these scenarios involve a change
in foreign tax liability that results in an increase in foreign tax credit that,
perhaps combined with other credits, generates an overpayment. The
difference between these scenarios and the case at hand is that here there was
a net decrease in foreign tax credit. And so, even assuming that the minimum
tax credit for 2002 did not change and affect the amended tax return for 2002,
§ 6511(d)(3)(A) would not apply.
In sum, based on a plain reading of § 6511(d)(3)(A), we conclude that a
reduction in 2002 foreign tax liabilities did not cause the overpayment in 2002.
Accordingly, the Schaefflers’ refund claim is not timely under § 6511(d)(3)(A).
C.
The second issue is whether the Schaefflers’ refund claim for 2002 is
timely under I.R.C. § 6511(a) because it was filed within two years from the
time any tax for 2002 was paid. The parties dispute whether there was a
qualifying payment two years prior to the refund claim.
As the tax code does not define the term “paid” in § 6511(a), it should be
afforded its “ordinary meaning.” See Kornman, 527 F.3d at 451. Dictionaries
define the term “pay” as “to discharge indebtedness for” or “to make a disposal
or transfer of (money).” Pay, Merriam-Webster’s Collegiate Dictionary (11th
ed. 2003); see pay, American Heritage Dictionary (4th ed. 2000) (“to discharge
or settle” or “to give or bestow”); pay, Black’s Law Dictionary (10th ed. 2014)
(“[t]o transfer money that one owes to a person, company, etc.”); see also
payment, Black’s Law Dictionary (10th ed. 2014) (“[t]he money or other
valuable thing so delivered in satisfaction of an obligation”). Thus, the plain
meaning of “tax was paid” in § 6511(a) is that money was transferred to satisfy
a tax liability. Based on a plain reading of § 6511(a), the Schaefflers did not
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pay any tax for 2002 within two years of filing their refund claim for 2002.
They did not transfer money to the Government to satisfy a 2002 tax liability.
The Schaefflers first argue that the processing of the 2001 increase in
foreign tax credit and the 2001 reduction in minimum tax credit in the third
amended return for 2001 constitutes a payment for purposes of § 6511(a). This
contention fails for three reasons. First, the plain language of § 6511(a)
indicates that the payment must be of taxes for the year for which the “refund
of an overpayment” is sought (here, 2002). See I.R.C. § 6511(a) (“Claim for . . .
refund of an overpayment of any tax imposed by this title . . . shall be filed by
the taxpayer within . . . 2 years from the time the tax was paid . . . .” (emphasis
added)). 4 Second, the 2001 increase in foreign tax credit was applied to the
2001 decrease in minimum tax credit. This was an adjustment for a single tax
year. We have held that “the offsetting of adjustments for a single tax year . . .
by the IRS . . . does not constitute payment of tax for the purpose of IRC
§ 6511(a).” Republic Petroleum Corp. v. United States, 613 F.2d 518, 525 (5th
Cir. 1980). Third, the Schaefflers state in their complaint that the changes that
prompted the filing of the third amended return for 2001 “did not cause any
additional tax liability or payments” (emphasis added).
Next, the Schaefflers argue that the carryforward of the “credit” from the
third amended return for 2001, which offset the 2002 reduction in foreign tax
credit, constitutes a payment for purposes of § 6511(a). According to them, this
“credit” is from the alternative minimum tax in 2001 and prior years. Their
contention is unavailing. The Schaefflers point to Dresser Industries, Inc. v.
4 The Schaefflers’ argument may be construed to mean that the offsetting of the
increase in alternative minimum tax by the income tax decrease due to the increase in foreign
tax credit in 2001 (i.e., the offsetting of different types of tax in the same year) constitutes a
payment. Even assuming arguendo this is correct, their contention still fails in the
limitations context because the offsetting occurred in 2001, which is not the year for which
the refund was claimed.
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United States, 73 F. Supp. 2d 682 (N.D. Tex. 1999), aff’d, 238 F.3d 603 (5th Cir.
2001), as support for their argument.
In Dresser, the corporate taxpayer filed refund claims for the years 1980,
1981, 1982, 1984, 1986, and 1987. 238 F.3d at 605. The parties disputed
multiple procedural and substantive issues, which the district court addressed.
See 73 F. Supp. 2d at 685–97. The district court held that the taxpayer’s 1981
refund claim, which was based on the application of a foreign tax credit
carryback from 1983, was procedurally barred by § 6512(a), even though it was
timely under § 6511(a). Id. at 687. In its § 6511(a) discussion, the district court
had concluded that the application of the 1983 foreign tax credit was a payment
under § 6511(a), reasoning that “the application of a [foreign tax] credit is
treated in the same manner and has the same effect as a cash payment.” Id.
On appeal, the taxpayer challenged only the district court’s holdings regarding
the substantive issues. See 238 F.3d at 606. We affirmed the judgment of the
district court on these issues but did not address any of the procedural issues,
including the district court’s statements discussing § 6511(a). See id. at 605
n.4, 616.
We now address whether the application of a foreign tax credit is a
payment under § 6511(a) and reject the Dresser district court’s conclusion that
it is. The district court in Dresser incorrectly interpreted Kingston Products
Corp. v. United States, 368 F.2d 281 (Cl. Ct. 1966), and Republic Petroleum—
the two cases upon which it relied. In Kingston Products, the Court of Claims
held that the application of a corporate taxpayer’s potential refund for 1953
excess profits against its potential income tax deficiency for 1953 did not
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constitute a “payment” under the predecessor statutory provisions to I.R.C.
§§ 7422(d) and 6402(a). 5 See 368 F.2d at 286. The court stated:
The principle of credit allowances, therefore, “applies after the
offsetting amounts are ascertained and not to their
ascertainment.” The principle thus applies only as between
different kinds of tax for a single tax year or against taxes of
different years, so that a tax is deemed to be paid if a cash credit
of the taxpayer is charged against a determined assessment or if
an overpayment of one year is credited against a deficiency of
another year. In sum, the principle has no application to the
present situation which involves not the offsetting of an
overassessment against an existing deficiency, but the offsetting
of an upward adjustment against a downward adjustment to a
single tax liability (income and excess profits) for a single tax year
(1953). Such an offsetting of adjustments does not, it would seem
clear, constitute a “credit” or “payment” within the meaning of [the
statutory provisions at issue].
Id. at 287 (citations omitted). Subsequently, we followed the reasoning of
Kingston Products and held in Republic Petroleum that the offsetting of
adjustments for a single tax year by the IRS does not constitute a payment for
purposes of § 6511(a). See 613 F.2d at 525.
Under Kingston Products and Republic Petroleum, the “credit” that
constitutes a payment under § 6511(a) is the credit of an overpayment under
§§ 7422(d) and 6402(a). Section 7422(d) states that “[t]he credit of an
overpayment of any tax in satisfaction of any tax liability shall . . . be deemed
to be a payment in respect of such tax liability at the time such credit is
allowed.” Section 6402(a) provides that, “[i]n the case of any overpayment, the
Secretary . . . may credit the amount of such overpayment.” The credit of an
5 Section 6402(a) of the current tax code is derived from § 3770(a)(4) of the 1939 tax
code, and § 7422(d) of the current tax code is derived from § 3772(e) of the 1939 tax code. See
U.S. Cong. Joint Comm. on Taxation, Derivations of Code Sections of the Internal Revenue
Codes of 1939 and 1954, at 90, 94 (1992); see also Kingston Prods., 368 F.2d at 286 (discussing
§§ 3770(a)(4) and 3772(e) of the 1939 tax code).
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overpayment, referred to in §§ 7422(d) and 6402(a), is different from the
application of a tax credit that reduces tax liability. 6 It is the credit of an
overpayment, not the application of a tax credit, that constitutes a payment
under § 6511(a). See 15 Mertens Law of Federal Income Taxation § 58:50 (2018)
(“A payment is deemed to be made when a tax liability is satisfied by the credit
of an overpayment of another tax.” (citing I.R.C. § 7422(d))). Accordingly, the
district court in Dresser misinterpreted Kingston Products and Republic
Petroleum, as the case involved the application of the foreign tax credit, not the
credit of an overpayment.
Here, the Schaefflers did not allege that there was an overpayment for
2001 that was credited to them by the Secretary for 2002 taxes. The
carryforward of “credit” from 2001 is not the same as the credit of an
overpayment under §§ 7422(d) and 6402(a). Thus, their second argument fails.
In sum, as the Schaefflers’ refund claim for 2002 was not filed within two
years of the time any tax for 2002 was paid, it is not timely under § 6511(a).
IV.
For the foregoing reasons, we AFFIRM the judgment of the district court.
6 A tax credit can reduce tax liability, but is generally not “refundable” under
§ 6401(b)(1). Section 6401(b)(1) cabins “refundable credits” to those that are listed in
“subpart C of part IV of subchapter A of chapter 1” (i.e., I.R.C. §§ 31–37). Section 6401(b)(1)
states that “[i]f the amount allowable as” refundable credits “exceeds the tax imposed . . . ,
the amount of such excess shall be considered an overpayment.” These refundable credits do
not include the foreign tax credit or the minimum tax credit. See I.R.C. §§ 31–37. Thus,
neither the foreign tax credit nor the minimum tax credit can generate an overpayment under
§§ 7422(d) and 6402(a) that would constitute a payment under § 6511(a).
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