Host Marriott v. United States

Filed: October 5, 2001
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 00-2488
(CA-99-699-DKC)
Host Marriott Corporation,
Plaintiff - Appellee,
versus
United States of America,
Defendant - Appellant.
O R D E R
The court grants the motion for publication and further amends
its opinion filed July 20, 2001, and amended July 25, 2001, as
follows:
On the cover sheet, section 1 -- “UNPUBLISHED” is changed to
read “PUBLISHED.”
On the cover sheet, section 6 -- the status line is changed to
begin “Affirmed by published opinion....”
On page 2, the reference to use of unpublished opinions as
precedent is deleted.
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
Filed: July 25, 2001
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 00-2488
(CA-99-699-DKC)
Host Marriott Corporation,
Plaintiff - Appellee,
versus
United States of America,
Defendant - Appellant.
O R D E R
The court amends its opinion filed July 20, 2001, as follows:
On page 2, section 1, line 4 -- “Hartman E. Blanchard, Jr.,
MCKEE, NELSON, ERNST & YOUNG, L.L.P., Washington, D.C.,” is added
as counsel for Appellee in the “On Brief” section.
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
HOST MARRIOTT CORPORATION,
Plaintiff-Appellee,
v.
UNITED STATES OF AMERICA,
No. 00-2488
Defendant-Appellant.
MANUFACTURERS ALLIANCE/MAPI
INCORPORATED,
Amicus Curiae.
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Deborah K. Chasanow, District Judge.
(CA-99-699-DKC)
Argued: June 6, 2001
Decided: July 20, 2001
Before WIDENER, NIEMEYER, and LUTTIG, Circuit Judges.
_________________________________________________________________
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Widener and Judge Luttig joined.
_________________________________________________________________
COUNSEL
ARGUED: Edward T. Perelmuter, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.
John Benjamin Magee, MCKEE, NELSON, ERNST & YOUNG,
L.L.P., Washington, D.C., for Appellee. ON BRIEF: Claire Fallon,
Acting Assistant Attorney General, Stephen M. Schenning, United
States Attorney, Thomas J. Clark, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.
Hartman E. Blanchard, Jr., MCKEE, NELSON, ERNST &
YOUNG, L.L.P., Washington, D.C.;
Dennis P. Bedell, Alan I. Horowitz, Shane T. Hamilton, MILLER &
CHEVALIER, CHARTERED, Washington, D.C.; Richard A. Burton,
Michael Slattery, HOST MARRIOTT CORPORATION, Bethesda,
Maryland, for Appellee. Richard E. Zuckerman, Raymond M.
Kethledge, HONIGMAN, MILLER, SCHWARTZ & COHN, L.L.P.,
Detroit, Michigan, for Amicus Curiae.
_________________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
This is an appeal from the district court's judgment holding that
interest which accrued on a taxpayer's income tax deficiencies quali-
fied as a "specified liability loss" under the 1991 version of 26 U.S.C.
§ 172(f)(1) and therefore could be carried back ten years under the
1991 version of 26 U.S.C. § 172(b)(1)(C). As a result, the district
court awarded Host Marriott Corporation a tax refund in excess of
$22 million.
Host Marriott ("the taxpayer") filed its income tax returns for tax
years 1977, 1978, and 1979 in 1978, 1979, and 1980, respectively.
The Internal Revenue Service ("IRS") began an audit of those returns
in 1981, which it concluded in 1985. At the conclusion of the audit,
the IRS assessed the taxpayer income tax deficiencies for the tax
years 1977-79. The taxpayer challenged the assessments and settled
the deficiencies with the IRS in 1991. In its 1991 tax return, the tax-
payer claimed the interest that accrued on its 1977-79 tax return defi-
ciencies as a "specified liability loss" under 26 U.S.C. § 172(f)(1)
(1991). Relying on the ten-year carry back authorization for a speci-
fied liability loss, the taxpayer amended its 1984 and 1985 tax returns
to claim a refund.
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The IRS argues that the income tax deficiency interest is not eligi-
ble for treatment under § 172(f)(1) (1991) as a specified liability loss.
Although it acknowledges that the strict language of the Tax Code
supports the taxpayer, it relies principally on legislative history to
support its argument. Accordingly, it contends that the taxpayer was
not entitled to a refund.
On the proper interpretation of 26 U.S.C. § 172(f)(1) (1991), we
are persuaded by the reasoning of the district court, and therefore, on
the basis of Host Marriott Corp. v. United States, 113 F. Supp. 2d 790
(D. Md. 2000), we conclude that the interest accrued on the tax defi-
ciencies in this case was a specified liability loss that may be carried
back to "each of the 10 taxable years preceding the taxable year of
such loss," 26 U.S.C. § 172(b)(1)(C) (1991).
The IRS argues additionally that if we allow the specified liability
loss under 26 U.S.C. § 172(f) (1991), the loss should not include
interest accrued after the 1987 tax year because, under
§ 172(f)(1)(B)(i) (1991), the loss arising under a federal or state law
is allowed only if "the act (or failure to act) giving rise to such liabil-
ity occurs at least 3 years before the beginning of the taxable year."
It argues that because interest accrues daily, see 26 U.S.C. § 6622, lia-
bility for the interest after 1987 does not occur "at least 3 years
before" the taxable year.
The taxpayer responds, persuasively, that the parties to this case
stipulated that the taxpayer's interest liability "was imposed under
§ 6601" (imposing interest on unpaid taxes) and that the district court
found that the taxpayer's § 6601 liability occurred upon the filing of
its 1977, 1978, and 1979 tax returns. Section 6622, providing for
daily compounding of interest, provides simply the rate of interest and
the method of calculating the amount of liability, but does not, of its
own force, impose liability. We agree with the taxpayer that the three-
year requirement of § 172(f)(1)(B)(i) (1991) does not operate on the
continuing calculation of a loss from the liability, but on "the act (or
failure to act) giving rise to such liability." Whenever the act has
occurred at least three years before the tax year, the loss may be
claimed. To read the three-year requirement in the manner urged by
the IRS would impose upon taxpayers an implied duty to mitigate
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such losses in contexts where the very existence of a liability is uncer-
tain.
Here, the acts giving rise to interest liability under § 6601 were the
deficiency-producing filings in 1978, 1979, and 1980 for the taxable
years 1977-79. Moreover, the obligation to pay interest on unpaid
taxes could not have been discharged by paying the interest separately
while yet challenging the tax deficiencies. Thus, as long as the defi-
ciencies for tax years 1977-79 were under challenge and existed, the
liability for interest existed by reason of the deficiencies created more
than three years before the relevant tax year, 1991.
Accordingly, we affirm the judgment of the district court.
AFFIRMED
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