Sherwin-Williams v. United States ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0173p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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SHERWIN-WILLIAMS COMPANY, EMPLOYEE HEALTH X
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Plaintiff-Appellant, -
PLAN TRUST, KEYBANK, N.A. TRUSTEE,
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No. 03-3029
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v. >
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Defendant-Appellee. -
UNITED STATES OF AMERICA,
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Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 01-02091—John M. Manos, District Judge.
Submitted: November 2, 2004
Decided and Filed: April 13, 2005
Before: MARTIN and BATCHELDER, Circuit Judges; JORDAN, Senior District Judge.*
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COUNSEL
ON BRIEF: Robert K. Olson, Michael T. Cummins, THE SHERWIN-WILLIAMS COMPANY,
Cleveland, Ohio, for Appellant. Gretchen M. Wolfinger, Kenneth L. Greene, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
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OPINION
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BOYCE F. MARTIN, JR., Circuit Judge. Sherwin-Williams Company, Employee Health
Plan Trust, Keybank, N.A. Trustee, appeals the district court’s award of summary judgment in favor
of the United States on the Trust’s claim for a refund of claimed overpayment of federal income
taxes. For the reasons that follow, and for those expressed in the district court’s well-reasoned
opinion, we AFFIRM.
*
The Honorable R. Leon Jordan, Senior United States District Judge for the Eastern District of Tennessee,
sitting by designation.
1
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I.
The facts of this case are generally undisputed. The Trust is a Voluntary Employees’
Beneficiary Association, which is exempt from federal income tax pursuant to sections 501(a) and
501(c)(9) of the Internal Revenue Code. Despite its exempt status, the Trust is still subject to
taxation on its “unrelated business taxable income” pursuant to sections 511 and 512 of the Code.
Unrelated business taxable income is defined as gross income derived from any unrelated trade or
business activity regularly carried on by the entity in question. See 26 U.S.C. § 512(a)(1). The
parties agree that the Trust’s investment income constitutes unrelated business taxable income that
is subject to taxation. The sole issue in this case is at what rate that investment income should be
taxed. The Trust argues that the lower “corporate” rate of taxation applies, see 26 U.S.C. § 11(providing rate schedule applicable to the taxable income of corporations), whereas the United States
argues that the higher “trust” rate of taxation applies, see 26 U.S.C. § 1(e) (providing rate schedule
applicable to the taxable income of trusts and estates).
The tax returns for which the Trust seeks a refund were filed for tax years 1994, 1995 and
1996. When filing those tax returns, the Trust calculated its liabilities utilizing the trust rate of
taxation. The Trust alleges that during an audit of an earlier tax period (1991 and 1992), an
examining Internal Revenue Service agent suggested that the applicable tax rate for the Trust’s
investment income should be assessed at corporate rates rather than trust rates. The Trust alleges
that its tax counsel concurred with the agent’s position. Accordingly, on May 13, 1998, the Trust
filed amended tax returns for the 1994, 1995 and 1996 years using the lower corporate tax rate, and
sought a refund for what it perceived was an overpayment of taxes for those years. On March 2,
2002, the Service denied the Trust’s refund claims.
This lawsuit followed. On October 2, 2002, the district court granted the United States’
motion for summary judgment, holding that the trust rate of taxation applied to the Trust’s
investment income and that, accordingly, the Trust was not entitled to a refund of any portion of the
taxes it paid for the 1994, 1995 or 1996 tax years. The Trust filed this timely appeal.
II.
The sole issue presented in this appeal is whether the unrelated business taxable income of
a section 501(c)(9) Voluntary Employees’ Beneficiary Association, organized as a trust, should be
taxed at the trust rate set forth in section 1(e) of the Code, as the United States argues, or at the
corporate rate set forth in section 11, as the Trust argues. We review de novo the district court’s
award of summary judgment in favor of the United States. Detroit Water Team Joint Venture v.
Agricultural Ins. Co., 371 F.3d 336, 338 (6th Cir. 2004). Summary judgment should be granted
when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). In determining whether
a genuine issue of material fact exists, we must draw all reasonable inferences in favor of the
nonmoving party. Detroit Water Team Joint Venture, 371 F.3d at 338.
In tax refund cases, “the taxpayer bears the burden of proving the amount he is entitled to
recover.” United States v. Janis, 428 U.S. 433, 440 (1976). The Service’s tax liability determination
is presumed correct. Welch v. Helvering, 290 U.S. 111 (1933). “[T]he presumption is that taxes
paid are rightly collected upon assessments correctly made by the [Service], and in a suit to recover
them the burden rests upon the taxpayer to prove all the facts necessary to establish the illegality of
the collection.” Niles Bement Pond Co. v. United States, 281 U.S. 357, 361 (1930) (citation
omitted). The taxpayer must prove its entitlement to a tax refund by a preponderance of the
evidence. See, e.g., United States v. Lease, 346 F.2d 696, 700 (2d Cir. 1965); Seminole Thriftway,
Inc. v. United States, 42 Fed. Cl. 584 (1998).
No. 03-3029 Sherwin-Williams Co. v. United States Page 3
In determining the proper rate of taxation, we must consult several sections of the Internal
Revenue Code. The logical starting point is section 511, which imposes a tax on the unrelated
business taxable income of exempt organizations. Section 511(a) provides that the corporate tax rate
generally applies to tax-exempt organizations, but not to “a trust described in subsection (b).”
Section 511(b)(1) provides that the trust tax rate applies to “trusts described in section 511(b)(2).”
Thus, we must determine whether the Trust in this case qualifies as a “trust[] described in section
511(b)(2).”
Section 511(b)(2) provides as follows:
Charitable, Etc., Trusts Subject to Tax. -
The tax imposed by paragraph (1) shall apply in the case of any trust which is
exempt, except as provided in this part or part II (relating to private foundations),
from taxation under this subtitle by reason of section 501(a) and which, if it were not
for such exemption, would be subject to subchapter J (sec. 641 and following,
relating to estates, trusts, beneficiaries, and decedents).
Beginning with section 641, subchapter J provides that “[t]he tax imposed by section 1(e) [i.e., the
rate applicable to trusts and estates] shall apply to the taxable income of estates or of any kind of
property held in trust.” (Emphasis added.) The district court held that the Trust was, in fact, a
“trust[] described in section 511(b)(2)” because, but for its exempt status, it “would be subject to
subchapter J.” Sherwin-Williams Co. Employee Health Plan Trust v. United States, 1:01-CV-2091,
2002 WL 31476911, at * 3 (N.D. Ohio Oct. 2, 2002).
In its attempt to prove that it is not subject to subchapter J—and, therefore, is not subject to
the trust tax rate—the Trust relies heavily upon Treasury Regulation § 1.641(a)-0, entitled “Scope
of Subchapter J.” In particular, the Trust cites the last sentence of Regulation § 1.641(a)-0(a), which
states that “the provisions of Subchapter J do not apply to employee trusts subject to Subchapters
D and F, Chapter 1 of the Code, and common trust funds subject to Subchapter H, Chapter 1 of the
Code.” The Trust argues that it is not subject to subchapter J because it is subject to both subchapter
D and subchapter F. Subchapter D includes Code sections dealing with deferred compensation,
while Subchapter F includes Code sections, including section 501, providing for tax exemption. It
is undisputed that the Trust is subject to Subchapter F, simply by virtue of its tax exempt status
under section 501 for being a section 501(c)(9) Voluntary Employees’ Beneficiary Association. As
the district court explained, however, that fact is irrelevant for purposes of determining the proper
rate at which to tax the Trust’s unrelated business taxable income. Section 511(b)(2) instructs that,
in analyzing whether the trust rate or the corporate rate applies, we must determine whether the tax
exempt trust would be subject to subchapter J for some reason other than the fact of its tax exempt
status. The Trust has failed to establish that it is subject to subchapter F for a reason other than its
tax exempt status, nor has it proven that it is subject to subchapter D. An employee trust must be
subject to both subchapters D and F in order to avoid being subject to subchapter J, see Treas.
Reg.§ 1.641(a)-0(a), and the Trust in this case has failed to prove that it is subject to either provision.
The Trust also argues that its position is supported by Treasury Regulation § 1.511-2. The
Trust points out that section 501(c)(9) organizations—of which the Trust, as a Voluntary
Employees’ Beneficiary Association, is a type—are specifically mentioned in Treasury Regulation
§ 1.511-2(a), which describes those entities subject to the corporate rate (“In the case of an
organization described in section 501(c) . . . (9) . . . , the taxes imposed by section 511(a)(1) [the
corporate rate] apply only for taxable years beginning after December 31, 1969.”), but not in
§ 1.511-2(b), the parallel Treasury Regulation describing those entities subject to the trust rate.
According to the Trust, “if the drafters of the regulation actually intended for 501(c)(9)
organizations to be taxed as either trusts or corporations depending on their organizational structure,
No. 03-3029 Sherwin-Williams Co. v. United States Page 4
they would have identified 501(c)(9) [Voluntary Employees’ Beneficiary Associations] under both
sections just as they did with section 501(c)(18) organizations. Yet they did not.”
The district court persuasively rejected this argument. It reasoned that the mention of section
501(c)(9) organizations in § 1.511-2(a) but not in § 1.511-2(b) is of no consequence here because,
in any event, it is clear that § 1.511-2(b), and not § 1.511-2(a), applies to the Trust. It is undisputed
that Voluntary Employees’ Beneficiary Associations can exist in different forms. They can be trusts
or other organizations. Treasury Regulation § 1.511-2(a) applies only to “[o]rganizations other than
trusts,” whereas § 1.511-2(b) applies specifically to “[t]rusts.” Accordingly, as the district court
explained, Voluntary Employees’ Beneficiary Associations that are organized as trusts—like the
Trust in this case—are governed by § 1.511-2(b), and those that exist in organizational forms other
than trusts are governed by § 1.511-2(a). Therefore, the Trust’s reliance upon the Treasury
Regulations is misplaced.
The Trust also invokes legislative history in support of its argument. Because the relevant
Code provisions are unambiguous, however, there is no need to consult legislative history. See, e.g.,
Meyers v. Columbia v. HCA Healthcare Corp., 341 F.3d 461, 472 (6th Cir. 2003) (“Where the
language of the statute is not ambiguous, it is unnecessary to resort to legislative history.”).
Finally, the Trust raises a claim of disparate treatment. There is no dispute that, as a general
matter, similarly situated taxpayers should not be treated differently. See Oshkosh Truck Corp. v.
United States, 123 F.3d 1477, 1481 (Fed. Cir. 1997) (holding that, absent a rational reason for
disparate treatment, similarly-situated taxpayers should be treated in a similar fashion). The Trust
asserts that it is the victim of disparate treatment because the unrelated business taxable income of
a taxpayer called CP&L Employee Benefits Trust was taxed several years ago at the corporate rate.
To avoid such disparate treatment, the Trust argues, its unrelated business taxable income should
be taxed at the same rate imposed on the CP&L Trust.
The only available information about the CP&L matter is a tax court petition filed in a
deficiency proceeding captioned CP&L Employee Benefits Trust v. Commissioner (Tax Court
Docket No. 2273-01). Although it does appear from that petition that the CP&L Trust’s unrelated
business taxable income was taxed at the corporate rate, rather than the trust rate, that fact alone is
insufficient to prove disparate treatment. First, the CP&L matter is distinguishable from the present
case because it involved a deficiency proceeding rather than a refund suit, and because the issue
presented concerned the amount of income that was subject to tax, not the rate at which that income
should be taxed. Second, we cannot discern from the CP&L petition alone whether the CP&L Trust
is similarly situated in all relevant respects to the Trust in this case. Finally, even assuming that the
two trusts are similarly situated, the fact that the CP&L Trust’s unrelated business taxable income
was taxed at the corporate rate, rather than the trust rate, appears to have been an isolated—and, as
illustrated by the foregoing analysis, erroneous—occurrence. See Vons Cos., Inc. v. United States,
51 Fed. Cl. 1, 10 n.10 (2001) (“the manifest weight of precedent rejects a ‘least common
denominator’ notion of federal taxation, in which the law that Congress actually enacts can be short-
circuited and disregarded any time the IRS has afforded a single taxpayer or even a group of
taxpayers treatment more favorable than the law provides”). Therefore, the Trust’s disparate
treatment argument lacks merit.
III.
For these reasons, and those expressed by the district court, we AFFIRM.