United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 15, 2002 Decided July 12, 2002
No. 01-1121
Riggs National Corporation and Subsidiaries,
Appellant
v.
Commissioner of Internal Revenue,
Appellee
Appeal from the United States Tax Court
(No. 24368-89)
Thomas C. Durham argued the cause for appellant. With
him on the briefs were Joel V. Williamson, Russell R. Young,
Kim Marie Boylan, Charles W. Hall and Stephen M. Fel-
dhaus.
Stephen D. Gardner was on the brief for amicus curiae
National Foreign Trade Council, Inc. in support of appellant.
Charles Bricken, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief was
David English Carmack, Attorney.
Before: Sentelle, Henderson and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Sentelle.
Sentelle, Circuit Judge: This case returns to us after
decision on remand by the United States Tax Court. Riggs
Bank, asserting that the Central Bank of Brazil paid taxes to
the Brazilian government on its behalf with respect to inter-
est income on loans it had made to the Central Bank, claimed
foreign tax credits under section 901 of the Internal Revenue
Code. The Commissioner disallowed the credits and the Tax
Court denied Riggs's petition for relief. Upon review, we
conclude that official tax receipts that the Central Bank
submitted on behalf of Riggs Bank are entitled to the pre-
sumption of regularity. Holding that the Commissioner
failed to rebut this presumption through clear and specific
evidence that the taxes had not, in fact, been paid, we reverse
the decision of the Tax Court and hold that Riggs is entitled
to the tax credits. We remand to the Tax Court for determi-
nation of whether the tax credits owed to Riggs should be
reduced by offsetting subsidies reportedly paid to the Central
Bank.
I. Background and Prior Proceedings
The origins of this case are set out more fully in our prior
opinion Riggs National Corporation & Subsidiaries v. Com-
missioner, 163 F.3d 1363 (D.C. Cir. 1999) (Riggs II), and will
not be repeated at length here. We instead provide an
overview of this case's prior history with a recitation of the
facts giving rise to the issues now before us.
Riggs National Corporation's subsidiary, Riggs Bank
("Riggs"), made loans to the Central Bank of Brazil during
the early to mid-1980's. These loans were of the "net loan"
variety. In a net loan, the borrower contractually agrees to
pay both the interest on the loan to the lender and any local
(in this case, Brazilian) tax that the lender incurs as a result
of the interest income. The attractiveness of such a loan is
obvious: the lender receives the agreed upon interest income
while the borrower is obligated to pay any tax that the lender
owes on that interest. Making these types of loans even
more appealing is an added benefit resulting from the United
States's Internal Revenue Code ("IRC"). Under section 901
of the IRC, a United States taxpayer is able to take a credit
against his U.S. tax liability on income earned in a foreign
country equal to the amount of foreign tax paid on that
income. 26 U.S.C. s 901. Thus, by providing ordinary net
loans (i.e., net loans to individual foreign borrowers), Riggs
could take a credit equal to the amount of taxes that Brazilian
borrowers paid to Brazil on Riggs's behalf without running
afoul of the IRC. See Riggs II, 163 F.3d at 1365; Continen-
tal Illinois Corp. v. Commissioner, 998 F.2d 513, 516-17 (7th
Cir. 1993).
At issue in Riggs II was the fact that the borrower was the
Central Bank of Brazil, a government entity that is ordinarily
immune from tax on its own income under the Federal
Constitution of Brazil. Despite its tax immune status, and
possibly because of pressure from foreign lenders who fa-
vored the tax credits under section 901, Brazil's Minister of
Finance--the highest ranking Brazilian tax authority--ruled
that the Central Bank was required under Brazilian law to
pay the tax obligation it assumed from foreign lenders. The
Minister of Finance justified his ruling under the rationale
that the funds were available for "re-lending" by the Central
Bank to private Brazilian borrowers. See Riggs Nat'l Corp.
v. Commissioner, 107 T.C. 301, 331 (1996) (Riggs I). The
Minister concluded that the Central Bank must, "as a substi-
tute for such borrowers [to-be,] pay the income tax incident
on the interest from January 1, 1984 to the end of the period
of availability for such funds to be relent." Riggs II, 163
F.3d at 1366 (quoting Riggs I, 107 T.C. at 331). In response,
the Central Bank issued official tax receipts, called
"DARFs,"1 to the foreign lenders which purportedly indicat-
__________
1 Documento de Arrecadacao de Receitas Federais. DARFs are
official forms authorized by the Brazilian government as the only
form to pay taxes and prove payment of those taxes within Brazil.
ed the amount of tax paid on the lender's behalf. This
comported with the standard practice in Brazil: taxpayers
submit DARFs and the accompanying tax payment to com-
mercial banks, which then transfer the payments to the
Banco do Brasil, a quasi-public, quasi-private bank that col-
lects taxes on behalf of Brazil's National Treasury.
Despite the Minister's ruling that the Central Bank was
required to pay the taxes, and despite the receipt of DARFs
indicating that the taxes had been paid, the Commissioner
rejected the DARFs as sufficient proof that the taxes were
paid, reasoning instead that because the Central Bank was a
tax immune entity, any tax payments made by the Central
Bank were voluntary and not "taxes paid or accrued ... to
any foreign country." 26 U.S.C. s 901(b)(1). The Commis-
sioner consequently assessed a deficiency against Riggs. Be-
fore the Tax Court, Riggs submitted its DARFs as proof that
the Central Bank paid the foreign taxes on Riggs's behalf.
Riggs also provided the Tax Court with entries from the
Banco do Brasil which purportedly showed that the Central
Bank paid to the National Treasury the taxes withheld from
its payments of interest to Riggs. The Tax Court, however,
agreed with the Commissioner that the Central Bank was not
obligated to pay the taxes and therefore disallowed the tax
credits. Riggs I, 107 T.C. at 360. Riggs appealed.
On appeal, we held that the Minister of Finance's ruling
that the Central Bank was obligated to pay the taxes was an
act of state, which precluded the Commissioner from inquir-
ing into its validity. We remanded "so that the Tax Court
may determine in the first instance ... whether the taxes
were in fact paid by the Central Bank" on Riggs's behalf, and
whether any of the potential tax credits must be reduced by
pecuniary benefits, or subsidies, paid to the Central Bank.
Riggs II, 163 F.3d at 1369. Pecuniary benefits were original-
ly instituted in 1975 and allowed Brazilian borrowers who
paid interest to foreign lenders to receive a benefit, or
subsidy, equal to a percentage of the amount of the tax paid
with respect to the interest. The amount of the pecuniary
benefit was originally 85 percent of the amount of the tax
paid. It was reduced to 50 percent of the tax in July 1979,
increased to 95 percent of the tax in December 1979, reduced
to 40 percent of the tax in May 1980, and reduced to zero in
June 1985. See Riggs I, 107 T.C. at 308.
On remand, the Tax Court ruled that Riggs failed to
establish that the Central Bank had, in fact, paid the taxes at
issue on Riggs's behalf. Riggs Nat'l Corp. & Subs. v. Com-
missioner, T.C. Memo. 2001-12, 81 T.C.M. 1023, 2001 Tax Ct.
Memo LEXIS 20, *66 (Jan. 22, 2001) (Riggs III). Specifical-
ly, the Tax Court noted that letters and spreadsheets the
Central Bank submitted with the DARFs reported that, for
some of the payments, a pecuniary benefit had been reported
as received after June 28, 1985. That is, the Central Bank
continued to report pecuniary benefit information in docu-
ments submitted to Morgan Bank, the Central Bank's agent
to foreign lenders such as Riggs, after Brazil stopped provid-
ing the pecuniary benefits. Reasoning that errors of this sort
would not have been made if payment of the taxes had
actually occurred (in other words, had the Central Bank
actually paid the taxes, it would know that it did not receive a
pecuniary benefit for those tax payments after June 28, 1985
and would therefore not report the receipt of such), the Tax
Court found that the DARFs issued by the Central Bank
were not reliable proof that the withholding taxes in issue had
actually been paid by the Central Bank. Id. The Tax Court
also disagreed with secondary accounting evidence relied on
by Riggs to indicate that the taxes had been paid. Id.
Consequently, the Tax Court ruled that Riggs was not enti-
tled to the foreign tax credits at issue. Id. After ruling that
Riggs was ineligible for the tax credits, the Tax Court had no
occasion to reach the issue of whether Riggs's tax credits
should be reduced by the value of any pecuniary benefits paid
to the Central Bank. Id.
In this appeal, Riggs asserts that the Commissioner acted
contrary to Treasury Regulations by refusing to accept the
DARFs as definitive proof that the foreign taxes were paid.
Riggs also contends that the DARFs are entitled to the
presumption of administrative regularity and must be deemed
reliable. Finally, Riggs argues that its foreign tax credits
should not be reduced by the offsetting pecuniary benefits
paid to the Central Bank. The Commissioner, however,
contends that Riggs has the burden of proving its entitlement
to the foreign tax credits. The Commissioner relies on the
language of IRC s 905(b), which allows foreign tax credits
only to the extent "the taxpayer establishes to the satisfaction
of the Secretary" the amount of foreign tax paid. 26 U.S.C.
s 905(b). The Commissioner argues that this section autho-
rizes him to require more satisfactory proof that foreign taxes
were, in fact, paid. The Commissioner also contends that
Riggs waived its "presumption of regularity" argument by not
raising it before the Tax Court, but that even if a presump-
tion of regularity exists with respect to the DARFs, irregular-
ities accompanying the issuance and submission of the
DARFs rebut that presumption. The Commissioner further
contends that Riggs's secondary accounting evidence is un-
persuasive to show that the taxes were actually paid to the
National Treasury by the Central Bank.
II. Analysis
A. Availability of Foreign Tax Credits
When we remanded this case to the Tax Court for it to
determine "whether the taxes were in fact paid by the
Central Bank," Riggs II, 163 F.3d at 1369, the Tax Court was
required to determine whether the taxes were paid within the
meaning of section 901 of the Internal Revenue Code. Deter-
mining whether taxes for which a credit is sought under
section 901 have been paid is governed by section 905 of the
IRC. Section 905 reads in applicable part that the foreign
tax credit "shall be allowed only if the taxpayer establishes to
the satisfaction of the Secretary ... the tax paid...." I.R.C.
s 905(b)(2). The amount the taxpayer claims as having been
paid, and thus the amount of the credit sought, shall "be
determined under regulations prescribed by the Secretary."
Id. For the type of credit at issue in this case, Treasury
Regulation s 1.905-2 requires that if a taxpayer corporation,
like Riggs, seeks to claim a foreign tax credit, the taxpayer
must submit a Form 1118, Computation of Foreign Tax
Credit--Corporations. See Treas. Reg. s 1.905-2(a)(1). This
form "must be carefully filled in with all the information
called for and with the calculations of credits indicated.
Except where it is established to the satisfaction of the
district director that it is impossible for the taxpayer to
furnish such evidence, the taxpayer must provide upon re-
quest the receipt for each such tax payment if credit is sought
for taxes already paid.... This receipt ... must be either
the original, a duplicate original, a duly certified or authenti-
cated copy, or a sworn copy." Treas. Reg. s 1.905-2(a)(2).
In this case, while Riggs must in the first instance submit
direct evidence of foreign tax withholding and payment where
possible (i.e., "the receipt for each ... tax payment"), the
district director has the discretion to accept secondary evi-
dence. See id. s 1.905-2(b). Regardless of the evidence
upon which the Commissioner ultimately relies, the taxpayer
"must plainly establish his right [to the foreign tax credit] by
showing that he has fulfilled all the conditions upon which the
allowance of the credit is made to depend." Irving Air Chute
Co. v. Commissioner, 143 F.2d 256, 259 (2d Cir. 1944).
Riggs contends that it provided the Commissioner with
both direct and secondary evidence that the taxes were paid
on its behalf. It is undisputed that Riggs provided the
Commissioner with a DARF, or tax receipt, for each tax
payment credit that it sought, and that it recorded the
amount of taxes paid on an accompanying Form 1118.2 Riggs
thus insists before this Court that the Commissioner failed to
comply with Treas. Reg. s 1.905-2(a)(2) by not accepting the
submission of the DARFs as definitive proof that the Central
Bank paid the foreign taxes on Riggs's behalf. We disagree,
although our disagreement is not fatal to Riggs's position.
The regulations do not require the Commissioner to accept
foreign tax receipts at face value. It follows that the regula-
tions do not require the Commissioner to allow foreign tax
credits without scrutinizing the tax receipts on which the
__________
2 Indeed, the Tax Court accepted Riggs's DARFs into evidence as
authenticated copies of the original tax receipts and agreed the
receipts were official records of the Brazilian government.
claim for credits is premised. In fact, the regulations do not
require the Commissioner to take any action at all. Rather,
the regulations only set forth the necessary evidence a tax-
payer must provide, upon request, to the Commissioner if
that taxpayer intends to claim a foreign tax credit. This
evidentiary requirement does not require the Commissioner
to accept the tax receipts as sufficient proof that the taxes
were paid. Indeed, if, as here, the Commissioner questions
the legitimacy of the accompanying receipts, section 1.905-2
in no way compels the Commissioner to ignore a perceived
inconsistency and accept the receipts as unquestionable proof
of payment. We conclude, therefore, that mere submission of
a DARF is not absolute proof that the taxes reported therein
were paid.
Although we hold that the submission of DARFs, as re-
quired under section 1.905-2, is not conclusive proof of a
foreign tax payment, we nonetheless conclude that the
DARFs are entitled to a presumption of regularity. Common
law has long recognized a presumption of regularity for
actions and records of public officials. See United States v.
Chemical Foundation, 272 U.S. 1, 14-15 (1926); American
Federation of Government Employees v. Reagan, 870 F.2d
723, 727-28 & n.33 (D.C. Cir. 1989). The presumption also
applies to the actions of tax officials and in applying United
States tax law. See R.H. Stearns Co. v. United States, 291
U.S. 54, 62-63 (1934); cf. Utah Power & Light Co. v. Pfost,
286 U.S. 165, 190 (1932). Most pertinently, it applies to the
actions and records of foreign public officials. See United
States v. King, 44 U.S. (3 How.) 773, 785-86 (1845); Murarka
v. Bachrack Bros., Inc., 215 F.2d 547, 552-53 (2d Cir. 1954).
We therefore conclude that a DARF, as an official tax receipt
of the Brazilian government, is entitled to a presumption of
regularity. While not irrebuttable, this presumption may
only be rebutted through clear or specific evidence. "The
presumption of regularity supports the official acts of public
officers and, in the absence of clear evidence to the contrary,
courts presume that they have properly discharged their
official duties." Chemical Foundation, 272 U.S. at 14-15; see
also United States v. Studevent, 116 F.3d 1559, 1563 (D.C.
Cir. 1997). Thus the Commissioner must provide clear and
specific evidence that the DARFs submitted on behalf of
Riggs were inaccurate representations of the amount of tax
paid by the Central Bank in order to justify its denial of
Riggs's claimed tax credit.
The Commissioner argues that Riggs waived its "presump-
tion of regularity" argument by not raising it before the Tax
Court. We disagree. Riggs clearly argued before the Tax
Court that the Commissioner had the burden of proving that
the DARFs were inaccurate accountings of the amount of
foreign tax paid on Riggs's behalf. Riggs's argument before
this Court--that the DARFs must be given a presumption of
regularity--is merely an improved articulation of that previ-
ously raised argument. Riggs is not raising a novel issue or
argument before us that it failed to first bring before the Tax
Court. Riggs is instead reasserting and restating its earlier
position--that the Commissioner has the burden of disproving
the accuracy of the DARFs, and the Commissioner failed to
meet that burden.
The Commissioner argues next that inconsistencies in docu-
ments accompanying the submission of the DARFs "call into
question" the accuracy and validity of the DARFs. Specifi-
cally, the Commissioner relies on the finding of the Tax Court
that schedules, or spreadsheets, that accompanied letters
from the Central Bank and that were submitted along with
the DARFs indicated that the Central Bank had received a 40
percent pecuniary benefit with respect to the tax payments,
even though the pecuniary benefit had by then been repealed.
The Tax Court reasoned that:
If, as [taxpayer] asserts, the Central Bank actually had
paid withholding taxes on [taxpayer's] ... behalf ..., we
then find inexplicable the Central Bank's erroneous ac-
tions well after June 28, 1985, in continuing to report its
having received a nonexistent "pecuniary benefit."
Riggs III, 2001 Tax Ct. Memo LEXIS 20, at *65. Thus when
making its finding that the foreign tax had not been paid, the
Tax Court relied on the reported receipt of a pecuniary
benefit after the benefits were reduced to zero. In the first
instance, we note that an inconsistency that merely "call[s]
into question" the validity of an official document is not "clear
evidence" of that document's invalidity, or "clear evidence" of
anything, for that matter. That being so, we are not con-
vinced that the erroneous reporting of a pecuniary benefit in
a document that accompanied the submission of an official
government record entitled to a presumption of regularity, is
clear and specific evidence that the official government record
is itself erroneous. The spreadsheets and transmittal letters
indicated the receipt of a nonexistent pecuniary benefit. The
obvious irregularities in the accompanying documents do not,
however, indicate clear and specific evidence that taxes re-
ported as paid in the DARFs were not paid. At best, the
accompanying documents reflect clerical errors; at worst,
they reflect the erroneous receipt of a disallowed pecuniary
benefit. Neither scenario, however, is clear evidence that the
Central Bank failed to remit foreign tax payments on behalf
of Riggs, as indicated by the DARFs. Therefore, we con-
clude that the Commissioner did not rely on clear and specific
evidence necessary to rebut the presumption of regularity
that attaches to the DARFs.
We understand that the payment of foreign taxes and the
receipt of a pecuniary benefit are necessarily related: while
the pecuniary benefits were in effect, the pecuniary benefit
was dependent on the payment of foreign taxes. As we
understand the Brazilian tax system, a borrower paid the
entire amount of interest owed on a foreign debt and then
later received a credit equal to the amount of the pecuniary
benefit. Such a system necessitates two separate and inde-
pendent transactions. Perhaps if the payment of taxes and
the receipt of the pecuniary benefits had taken place through
one transaction (e.g., the borrower made interest payments
that were already reduced by the amount of the pecuniary
benefit), evidence of one (payment of the tax or receipt of the
pecuniary benefit) might bear strongly upon the other. But
given that the receipt of a pecuniary benefit was the result of
a separate transaction, we are altogether unconvinced that
the impossibility of one establishes the impossibility of the
other. Thus the Central Bank's reported receipt of a nonex-
istent pecuniary benefit is not clear and specific evidence that
the DARF, an official government document otherwise enti-
tled to a presumption of regularity, is erroneous.
Inconsistencies or inaccuracies in documents accompanying
official government records do not inherently rebut the pre-
sumption of regularity attaching to those official records,
especially when the accompanying documents do not directly
address the matter sought to be proved by the official rec-
ords. Because the DARFs are entitled to a presumption of
regularity, and because the Tax Court based its decision on
inconsistencies in accompanying documents rather than the
DARFs themselves, and because the accompanying docu-
ments did not in fact address the issue of whether the foreign
taxes had, in fact, been paid, we conclude that the Commis-
sioner did not have clear and specific evidence that the
DARFs were themselves erroneous representations of
Riggs's claimed tax credits.
As the Tax Court erroneously based its decision to reject
the DARFs on the wrongly reported pecuniary benefit, we
need not consider the other arguments, such as inconsisten-
cies in Riggs's secondary accounting evidence, now offered by
the Commissioner to explain the Tax Court's decision. We
therefore reverse the decision of the Tax Court and hold that
the foreign tax credits should have been allowed.
B. Offsetting Subsidies
In our initial remand of this case to the Tax Court, we
directed it to determine whether any of Riggs's potential tax
credits should be reduced by the pecuniary benefits, or
subsidies, reportedly paid to the Central Bank. Riggs II, 163
F.3d at 1369. Given the Tax Court's decision in favor of the
Commissioner, the Tax Court never reached this issue. As
we now hold that the foreign tax credits should have been
allowed, this issue is ripe for consideration. However, rather
than decide this issue for the first time on appeal, we remand
this case to the Tax Court solely to determine whether any of
the tax credits owed to Riggs must be reduced by the
subsidies reportedly paid to the Central Bank.
III. Conclusion
The official actions of foreign governments are entitled to a
presumption of regularity. While this presumption is not
absolute, it may be rebutted only through clear and specific
evidence. The DARFs submitted by the Central Bank indi-
cating that it had paid taxes on Riggs's behalf are entitled to
the presumption of regularity unless rebutted by the Com-
missioner. We conclude that irregularities in documents
accompanying the DARFs that do not specifically pertain to
whether the taxes had, in fact, been paid do not rise to the
level of clear and specific evidence showing that the taxes
were never remitted. We therefore reverse the decision of
the Tax Court disallowing Riggs's tax credits for the taxes
paid by the Central Bank on Riggs's behalf with respect to
interest income on loans Riggs made to the Central Bank.
We remand the case solely for the Tax Court to determine
whether the tax credits should be reduced by any subsidies
that may have been paid to the Central Bank.