United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
April 10, 2007
For the Fifth Circuit
___________________________
Charles R. Fulbruge III
Clerk
No. 06-60276
___________________________
EXXON MOBIL CORPORATION AND AFFILIATED COMPANIES,
Petitioner,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
Appeal from a Decision of the United States Tax Court
Before DAVIS, DENNIS and PRADO, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Overpayments of tax to the Internal Revenue Service earn interest (compounded daily)
from the date paid to the IRS until refunded to the taxpayer. Effective January 1, 1995, section
6621(a)(1) of the Internal Revenue Code was amended to provide that “to the extent that an
overpayment of tax by a corporation for any taxable period . . . exceeds $10,000,” the rate at
which the government pays interest on the overpayment is reduced. The issue in this case is
whether the Tax Court correctly held that interest that had accrued1 on taxpayer’s overpayments
of tax as of December 31, 1994, compounds thereafter at this lower rate. Based on the plain
language of the statute, we conclude that the reduced rate applies and affirm.
1
The word “accrue” is an accounting term that means to record or calculate an item of
income or expense that has not yet been paid. http://en.wikipedia.org/wiki/Accrual (accessed: March
23, 2007). Accrued interest is interest that is due or earned as of a certain calculation date but which
has not yet been paid. Because of interest compounding, accrued interest continues to earn interest,
just as does the principal amount of the tax overpayment.
I.
Section 6611 of the Internal Revenue Code provides that interest is allowed and paid on
any overpayment of tax at the overpayment rate established in § 6621.2 Section 6622, added in
1982, states that interest shall be compounded daily. 26 U.S.C. § 6622.
Prior to 1995 when the amendment at issue became effective, section 6621 set the interest
rate on overpayments of tax by corporations at 2 points higher than the federal short-term interest
rate (the “regular rate”). 26 U.S.C. § 6621(a), (b). In 1994, section 6621 was amended to
implement the Uruguay Round trade agreements concerning the GATT tariff regime. The
amendment reduced the interest rate the government pays on certain corporate tax overpayments.
The amendment took the form of a sentence added to the end of section 6621(a)(1) and applies
“for purposes of determining interest for periods after December 31, 1994.” Uruguay Round
Agreements Act, Pub.L.No. 103-465, § 713(b), 108 Stat. 4809, 5002 (1994).
As amended, section 6621 reads as follows:
§ 6621. Determination of rate of interest.
(a) General rule.
(1) Overpayment rate. The overpayment rate established under this section
shall be the sum of--
(A) the Federal short-term rate determined under subsection (b),
plus
(B) 3 percentage points (2 percentage points in the case of a
corporation).
2
§ 6611. Interest on overpayments.
(a) Rate. Interest shall be allowed and paid upon any overpayment in respect of
any internal revenue tax at the overpayment rate established under section
6621.
26 U.S.C. § 6611.
2
To the extent that an overpayment of tax by a corporation for any taxable period (as
defined in subsection (c)(3), applied by substituting “overpayment” for “underpayment”)
exceeds $ 10,000, subparagraph (B) shall be applied by substituting "0.5 percentage
point" for "2 percentage points".
26 U.S.C. § 6621. The GATT amendment is in italics.
II.
The parties stipulated to the following facts before the Tax Court.
Petitioners' corporate Federal income tax returns for 1979 through 1985
were timely filed with respondent. On each of those tax returns as filed, petitioners
reported tax overpayments in excess of $ 10,000 and claimed refunds or credit
transfers of the tax overpayments, which respondent allowed and credited in favor
of petitioners.
Upon audit, respondent determined substantial deficiencies in petitioners'
Federal income taxes for 1979 through 1985.
During the course of respondent's audits, petitioners' administrative
appeals, and the litigation of these and related cases, [footnote omitted] petitioners
made a number of substantial advance payments to respondent of taxes and of
interest with respect to each of the tax deficiencies determined by respondent
against petitioners for 1979 through 1985.
As of the January 1, 1995, effective date of the above GATT amendment
to section 6621(a)(1), with respect to each of the years 1979 through 1985,
petitioners had received from respondent refunds of tax overpayments far in excess
of $ 10,000, and petitioners still had outstanding with respondent overpayments of
tax in excess of $ 10,000.
After the litigation and after settlement between the parties of many issues,
all underlying tax issues relating to the Federal income taxes of petitioners for
1979 through 1985 have been resolved, and decisions have been entered in each of
these consolidated cases.
Exxon Mobil Corp. v. Comm'r, 126 T.C. 36, 37-38 (T.C. 2006). In summary, Exxon’s tax
overpayment related to tax years 1979 to 1985 was over $567 million. Interest due from the IRS
to Exxon on the $567 million tax overpayment on December 31, 1994 was over $491 million
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(referred to herein as “overpayment interest”).
In July 2005, the Commissioner refunded all overpayments with interest computed at the
GATT rate on all amounts due to Exxon after January 1, 1995 (in total over $1.75 billion). The
case came before the Tax Court on Exxon’s motion for a redetermination of interest computed on
the overpayment. Exxon asserted that starting on January 1, 1995 interest due to them on the
$491 million of overpayment interest as of December 31, 1994, should have been computed at the
regular rate, as opposed to the lower GATT rate, for the period between January 1, 1995 (the
effective date of the GATT Amendment) and July, 2005, the date of the refund. The additional
interest Exxon is claiming was approximately $140 million as of July 2005.
The Tax Court denied the motion. Id. Exxon appeals.
III.
This case concerns the proper rate of interest to be applied to overpayment interest after
January 1, 1995, the effective date of the GATT Amendment, and until refunded to the taxpayer.
The resolution of this issue requires interpretation of the statute, which is an issue of law subject
to de novo review. Compaq Computer Corp. v. Comm’r, 277 F.3d 778, 780 (5th Cir. 2001).
Exxon recognizes that prior to the GATT Amendment, § 6621 provided a single interest
rate applicable to an overpaying taxpayer’s entire overpayment, that is both the overpaid taxes
and interest thereon. It reads § 6621 following the adoption of the GATT Amendment as
introducing the possibility of having different interest rates apply to different portions of the total
amount owed by the government to a taxpayer.
The parties agree that because the GATT Amendment contains the language “to the extent
that an overpayment of tax . . . exceeds $10,000, " the first $10,000 of overpaid taxes earns
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interest at the old regular rate. They also agree that an overpayment of tax in excess of $10,000
accrues interest at the new GATT rate. But because the GATT Amendment refers only to “an
overpayment of tax”, Exxon argues that earned but unpaid interest as of the effective date of the
amendment should also draw interest at the old regular rate.
As explained by the Tax Court, Exxon reads the language of section 6621(a)(1) (“to the
extent that an overpayment of tax . . . exceeds $10,000") as limiting the application of the GATT
rate to only the “overpaid taxes” and interest accruing on the overpaid taxes after December 31,
1994, because the overpayment interest on the transition date is neither a “tax” nor something that
was “overpaid.” Exxon, 126 T.C. at 40. As interpreted by the Tax Court, Exxon would place
their overpayment into three baskets as of January 1, 1995: (1) interest on their overpayment of
tax up to $10,000, (2) interest on their overpayment of tax over $10,000 ($567 million less
$10,000), and (3) accrued overpayment interest as of December 31, 1994 ( $491 million). Id.
Under Exxon’s interpretation, the lower GATT rate would apply only to basket (2); the higher
regular rate would apply to everything else.
This is a misreading of § 6621. The first line of § 6621(a)(1) states “The overpayment
rate established under this section shall be the sum of . . .” Use of the definitive article “the” in
the statute supports a conclusion that there is one overpayment rate for each overpayment
situation. The rest of the section, in subparts (A) and (B) preceding the GATT Amendment
language, states that the rate is the Federal short term rate plus either 3 percentage points or 2
percentage points for corporations.
(1) Overpayment rate. The overpayment rate established under this section shall be the
sum of--
(A) the Federal short-term rate determined under subsection (b), plus
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(B) 3 percentage points (2 percentage points in the case of a corporation).
26 U.S.C. § 6621(a)(1).
The GATT amendment follows. A close reading of its language reveals that it merely
provides a substitute for the corporate add-on to the Federal short term rate if the overpayment of
tax exceeds $10,000. It does not create a new overpayment rate only applicable to the principal
amount of the tax overpayment and another rate for overpayment interest. The GATT
Amendment reads -
To the extent that an overpayment of tax by a corporation for any taxable period (as
defined in subsection (c)(3), applied by substituting “overpayment” for “underpayment”)
exceeds $ 10,000, subparagraph (B) shall be applied by substituting "0.5 percentage point"
for "2 percentage points".
26 U.S.C. § 6621. The first phrase “to the extent that an overpayment of tax by a corporation . .
. exceeds $10,000" defines when the new GATT rate becomes applicable to a corporation for a
tax year, i.e. if its overpayment for a particular tax period exceeds $10,000. The rate in the
GATT Amendment applies only if the corporate taxpayer overpays taxes by more than $10,000 in
any tax year. The use of the phrase “overpayment of tax” does not mean that the GATT rate only
applies to the tax principal and does not apply to any accrued interest on that amount at the
effective date. It means that the $10,000 threshold amount is based on the original tax
overpayment without regard to any accrued interest. There is no question in this case that
Exxon’s overpayment of tax exceeded $10,000 in each of the tax years at issue. The rest of the
GATT Amendment explicitly refers back to § 6621(a)(1)(B) and simply changes the add-on rate
for corporations from 2% to 0.5% for overpayments of tax meeting the $10,000 trigger.
Two courts which have addressed this issue have reached the same conclusion with slight
6
variations in reasoning. See State Farm Mut. Auto. Ins. Co. v. Comm’r, 126 T.C. 28 (T. C.
2006); Gen. Elec. Co. v. United States, 384 F.3d 1307 (Fed. Cir. 2004). In General Electric, the
entire amount of G.E.’s 1978 overpayment of over $15 million had been repaid as of the effective
date of the GATT amendment, but $810,000 in accrued interest remained unpaid. G.E. argued
that the unpaid interest should continue to accrue interest at the regular rate until paid. Id. at
1308. G.E. argued that the phrase “overpayment of tax” in § 6621(a) limits the scope of the
change in corporate interest rates by the GATT amendment to the overpayment itself, not any
accrued interest. Id. at 1310. The Federal Circuit concluded that because §§ 6621 and 6611 are
integrally related - one establishing the right to interest on overpayments and the other setting the
applicable interest rate - the term overpayment must mean the same thing in both sections. If the
accrued interest remaining owing to G.E. at January 1, 1995 is not part of the “overpayment,”
then there would be no statutory right to interest on that sum under § 6611. Id. at 1311.
In State Farm, the taxpayer had an overpayment of tax in 1987 of over $56 million. 126
T.C. at 29. The commissioner refunded that amount with interest on December 15, 2004, but
State Farm challenged the calculation of interest at the lower GATT rate. Id. State Farm, like
G.E. and Exxon in this case, argued that its accrued interest on the effective date of the GATT
Amendment should continue to accrue interest at the regular rate. The Tax Court found that -
The role of the phrase “overpayment of tax” is central to this dispute. We find the
phrase in question is a device to describe the occasion when the GATT rate is
triggered for all interest computational purposes including compounding under
section 6622. We do not read the phrase “overpayment of tax” as a limitation on
the scope of the applicability of the changed rate once triggered.
Id. at 32-33. The court further found no support to bifurcate the interest rate between
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compounding and original tax overpayment. Id. at 33-34.
IV.
Based on the plain language of the GATT Amendment, the Tax Court correctly concluded
that the GATT rate applies to accrued interest on tax overpayments over $10,000, as well as to
the principal tax overpayment, after the effective date of the amendment. For the foregoing
reasons, the judgment of the Tax Court is affirmed.
AFFIRMED.
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