United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 14, 2006 Decided August 24, 2007
No. 06-1034
PNC FINANCIAL SERVICES GROUP, INC., D/B/A RIGGS
NATIONAL BANK, AND SUBSIDIARIES,
APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
Appeal from the United States Tax Court
(No. IRS-24368-89)
Thomas C. Durham argued the cause for appellant. With
him on the briefs were Joel V. Williamson and Russell R. Young.
Frank P. Cihlar, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief was
Bridget M. Rowan, Attorney.
Before: ROGERS, BROWN and GRIFFITH, Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
Dissenting opinion filed by Circuit Judge GRIFFITH.
2
BROWN, Circuit Judge: In prior litigation, PNC Financial
successfully claimed a foreign tax credit for taxes paid on its
behalf in Brazil. That credit, the Internal Revenue Service
argues, must be reduced by the amount of an indirect subsidy
PNC received from the Brazilian government. The Tax Court
agreed, and we now affirm.
I
In an international tax case as complicated, economically
and litigiously, as this one, we do well to start with the basics.
When a U.S. bank makes a loan abroad, the interest income is
susceptible to tax in both the United States and the foreign state.
Congress avoids double-taxing international business by giving
a credit for taxes paid to the foreign government, less any credit,
refund, or subsidy given the taxpayer by the foreign govern-
ment. I.R.C. § 901; Treas. Reg. § 1.901-2(e). Interest income
of $100,000, for example, where the relevant tax rate in the U.S.
was 50% and in the foreign country was 25% with a 10%
refund, would work out to $15,000 to the foreign country and
$35,000 to the IRS. Were the foreign rate 50% with no refund,
$50,000 would flow to that country and nothing to the IRS.
Thus the two countries are on a see-saw: When one country’s
tax revenue goes up, the other’s goes down.
This case, or rather this iteration of this case (for it is the
third time we have heard an appeal from the Tax Court concern-
ing the same transaction), is a peculiar elaboration of these
simple principles.1 During the 1970s and early 1980s, in an
1
The previous iterations of this case are, in order: Riggs Nat’l
Corp. & Subsidiaries v. Comm’r, 107 T.C. 301, 1996 U.S. Tax Ct.
LEXIS 49 (Riggs I); Riggs Nat’l Corp. & Subsidiaries v. Comm’r, 163
F.3d 1363 (D.C. Cir. 1999) (Riggs II); Riggs Nat’l Corp. &
Subsidiaries v. Comm’r, 81 T.C.M. (CCH) 1023, 2001 Tax Ct. Memo
3
effort to increase its reserves of foreign currency, Brazil’s
government borrowed and (using tax breaks) encouraged its
people to borrow substantial amounts from foreign lenders. In
1982, fiscal crisis led nearly to default on the loans, and Brazil
embarked on a debt restructuring plan with an international
consortium of banks. According to the plan, Brazil’s
government-controlled Central Bank stepped in as common
debtor for the foreign banks, becoming a middleman on the old
loans (paying the creditors what was owed to them from the
original borrowers and in turn receiving payments from the
original borrowers) and, since Brazil still needed foreign credit
to function, borrowing billions of dollars in additional funds.
Appellant PNC Financial Services Group, Inc. (formerly Riggs
National Corporation and Subsidiaries) lent a portion of those
additional funds. In 1984 and 1985, Brazil taxed PNC’s interest
income at a 25% rate, which came to $166,415 in 1984 and
$181,272 in 1985. But a provision of Brazilian law, hanging on
from happier economic days when the Brazilian government
incentivized borrowing from foreign lenders, gave subsidies for
these taxes worth 40% of the total—$66,566 in 1984, and
$72,509 in 1985. This appeal is about the U.S. tax treatment of
that $139,075 in subsidies. At first glance, it seems obvious
enough that PNC should receive a credit of $166,415 less
$66,566 toward its 1984 U.S. income tax, and $181,272 less
$72,509 toward its 1985 U.S. income tax. But three factors
complicate the picture.
LEXIS 20 (Riggs III); Riggs Nat’l Corp. & Subsidiaries v. Comm’r,
295 F.3d 16 (D.C. Cir. 2002) (Riggs IV); Riggs Nat’l Corp. &
Subsidiaries v. Comm’r, 87 T.C.M. (CCH) 1276, 2004 Tax Ct. Memo
LEXIS 110 (Riggs V). PNC Financial Services Group, Inc., merged
with Riggs National Corporation and Subsidiaries and replaced its
name in 2005—else this case would be Riggs VI. For convenience, we
will refer to appellant as PNC even when speaking of the Riggs I
through V period.
4
First, PNC’s loans to the Central Bank were “net,” not
“gross.” Riggs II gives a matchless explanation of the differ-
ence, which we will not belabor here. Suffice it to say that in a
gross loan agreement, the lender pays local (Brazilian) taxes on
his interest income (or the borrower withholds it), while in a net
loan, the borrower “contractually agrees not only to pay interest
to the lender, but also to pay any local (Brazilian) tax that the
lender owes on that interest income.” Riggs II, 163 F.3d at
1364. This is not necessarily a boon to lenders, for all else being
equal, lenders must compensate borrowers for paying lenders’
taxes with lowered interest rates. “The real difference between
gross loans and net loans,” Riggs II explains, “lies not in who
licks the stamp on the envelope to the Brazilian government, but
in who bears the economic burden of the tax.” Id. With a net
loan, the borrower bears that burden, for the borrower faces the
risk of change in local tax rates, while the lender’s net income
(the interest payments) is stable. With a gross loan, the lender
suffers the loss or reaps the benefit of change; it is his net
income that might vary with taxes. Either way, however, the
foreign government imposes legal liability for the local tax on
the lender, and so either way the IRS credits the foreign tax
payments. Treas. Reg. § 1.901-2(f).2
2
Working out the numbers in any particular example gets
complicated. Ever since Old Colony Trust Co. v. Commissioner, 279
U.S. 716, 729 (1929), U.S. tax law has held that paying taxes on
behalf of another person constitutes income to that person: If an
employer, for example, promised to pay an employee $100,000 net,
where the tax rate is a flat 50%, the IRS would view the employee as
receiving more than $100,000 in income. It would view him, in fact,
as receiving $200,000 in income, since 50% of $200,000 is $100,000
(a natural mistake is to regard the employee as receiving
$150,000—the $100,000 in salary plus 50%); the employer would pay
$100,000 to the employee and another $100,000 to the IRS on the
employee’s behalf. In other words, one must generate a notional
income figure to calculate the tax owed where one party pays on
5
Second, the Central Bank is, as Riggs II put it, “no ordinary
Brazilian borrower.” 163 F.3d at 1366. Created by law to
implement Brazil’s monetary and fiscal policies (including
issuing currency), required to act on behalf of Brazil’s govern-
ment and prohibited from acting on behalf of anyone else, able
to contract in the name of the National Treasury, responsible for
managing foreign lending to Brazilian borrowers, and under the
control of the Minister of Finance, the Central Bank is 100% a
part of Brazil’s federal government, as all parties agree. The
Federal Constitution of Brazil makes the Central Bank immune
from tax on its own income, and in fact until 1988 the Central
Bank operated, along with the National Treasury and the Banco
de Brasil (in which Brazil’s government held a controlling
share), a centralized system for funding Brazil’s government
that jointly controlled Brazil’s tax revenue (although it was the
Banco de Brasil that actually held the government’s tax revenue
in its coffers). Thus, if it were legally possible for the Brazilian
government to impose a tax on its Central Bank, it is not clear
how it would be economically possible for the Central Bank to
pay it: At most, the money would go from the Brazilian govern-
ment’s right pocket to its left. And so when the Central Bank
takes out net loans from a U.S. lender, certain questions arise:
Will Brazilian law, in keeping with the principle that tax
another’s behalf—whether in the United States or in Brazil, where the
procedure is called “grossing-up.” Thus, if a U.S. lender contracts for
$100,000 in interest income on a net loan, with a 20% foreign tax and
a 50% U.S. tax, the Brazilian government would construe the lender’s
income to be $125,000 (the amount which, less 20%, would be
$100,000) and charge $25,000 in taxes (with the borrower remitting
that $25,000). The IRS would also construe the income as $125,000
and levy a 50%, $62,500 tax, minus a $25,000 foreign tax credit,
which comes to $37,500 in U.S. taxes. Having paid that amount from
its $100,000 in actual interest income, the U.S. lender is left with
$62,500—which makes sense, being 50% of the lender’s notional
income without the dual complications of a net loan and a foreign tax.
6
payments incidental to net loans are payments on behalf of
lenders, require the Central Bank to pay despite the Bank’s
constitutional immunity from taxes? If so, should the IRS credit
those payments? If the Brazilian government refunds a portion
of them to the Central Bank, should the IRS subtract some of the
refund from the credit?
We must pause at this point to understand PNC’s and the
Central Bank’s (or rather, Brazil’s) interests on the eve of their
lending arrangement. Only if the Central Bank was subjected to
compulsory tax payments on PNC’s behalf could PNC qualify
for the § 901 credit. See Riggs II, 163 F.3d at 1365–66. And
such payments would represent no economic burden for Brazil
even if the Central Bank actually moved cash from its
(government-controlled) vaults to the Banco de Brasil’s
(government-controlled) vaults. See id. at 1369. So both PNC
and Brazil had an interest in seeing the Central Bank subjected
to the compulsory payments. For PNC, every cent thus paid to
the Brazilian government was money PNC would not have to
pay to the IRS,3 and for Brazil, the “tax” just meant, so far as we
can tell, more credit at a lower interest rate. The only loser in
the arrangement was the IRS, which, economically speaking,
would simply have transferred wealth to Brazil for Brazil and
PNC to split. See id. The IRS ends up on the wrong end of the
see-saw.
Only the Central Bank’s constitutional immunity from taxes
stood in the way, and the third complexity in this case concerns
3
As footnote two discusses, those payments from the Central
Bank to the Brazilian government would also swell PNC’s income in
the IRS’s eyes, which of course means higher U.S. taxes. But the
value of the credit would exceed the detriment of the larger
income—and always would, so long as the U.S. tax rate was below
100%.
7
how that immunity was overcome. Given their interest in the
foreign tax credit, PNC and other banks went to Brazil’s highest
ranking authority on tax matters, the Minister of Finance, to
request definitive guidance on whether the Central Bank would
be subjected to the compulsory tax payments on their behalf.
The most natural way for the Minister to answer “Yes” would
have been to hold the Central Bank’s tax immunity inapplicable
in net loan arrangements, since the tax-immune entity pays
standing in the lender’s shoes. But this way was closed:
Brazilian law already had authority for the opposite proposition.
Id. at 1366. Another way, however, was open, for the money
PNC loaned the Central Bank was available and officially
intended for re-lending to private borrowers in Brazil. If the
Central Bank could not stand in for the private lenders, perhaps
it could stand in for these private borrowers. The Minister
issued a private letter ruling, not available to the public but
binding on the parties under Brazilian law, which Riggs II
describes:
The Minister deemed it appropriate to “look through”
the Central Bank to those ultimate private
borrowers—so-called “borrowers-to-be”—for purposes
of deciding the proper tax treatment of the loans. And it
was settled Brazilian law that a private borrower in a net
loan was required to pay the tax obligation it had con-
tractually assumed from the lender. The Minister
concluded that the “borrowers-to-be” aspect of the loans
compelled an analogy to the garden variety private
borrower situation, and that the Central Bank must “as
a substitute for such borrowers [to-be] pay the income
tax incident on the interest . . . .”
Id. (first alteration in original). This reasoning further compli-
cates the IRS’s § 901 question. If the Brazilian Revenue Service
looks through the Central Bank’s tax-immune status because the
8
Central Bank stands in for borrowers-to-be, should the IRS
follow suit in granting credits and subtracting subsidies? Should
it matter that, in the event, none of the money ever was re-
loaned?
As a statutory matter, these questions shape up as interpre-
tations of I.R.C. § 901 and associated portions of the 1984 and
1985 Tax Code and regulations. In Riggs I, the issue was
whether to permit the foreign tax credit at all, and it turned on
whether the Central Bank’s tax payments were compulsory, as
the Minister had ruled, or voluntary. The Tax Court, viewing
the Minister’s private letter ruling as nothing more than
“perhaps an administrative advisory opinion,” conducted its own
analysis of Brazilian law, concluded that the payments were
voluntary, and denied PNC the credit. 1996 U.S. Tax Ct. LEXIS
49, at *119. We reversed in Riggs II. As we saw it, the Tax
Court had sat in judgment on and effectively declared invalid the
Minister’s order to the Central Bank to pay taxes—a foreign
sovereign’s official act within its own territory. The act of state
doctrine shields such acts from American courts’ review. 163
F.3d at 1367–68. We remanded “so that the Tax Court may
determine in the first instance . . . whether the taxes were in fact
paid by the Central Bank, and whether Riggs’ credits must be
reduced by the amount of any subsidies that the Central Bank
may have received.” Id. at 1369.
Riggs III and IV resolved the first of those two questions.
In Riggs III, citing accounting irregularities, the Tax Court held
that PNC “failed to establish that the withholding taxes in issue
were paid by the Central Bank on petitioner’s behalf.” 2001 Tax
Ct. Memo LEXIS 20, at *66. Since PNC was (again) ineligible
for the credit, the Tax Court did not reach the subsidies issue.
But in Riggs IV, we reversed. PNC had submitted official
Brazilian receipts stating that the tax had been paid. These
receipts were entitled to the common law’s “presumption of
9
regularity” for “the official acts of public officers,” and while
this presumption was rebuttable, the accounting irregularities
that moved the Tax Court weren’t the sort of “clear or specific
evidence” needed to rebut it. Riggs IV, 295 F.3d at 21 (internal
quotation marks omitted). There could no longer be any
question that PNC was entitled to a foreign tax credit. Riggs IV
remanded “to determine whether the tax credits should be
reduced by any subsidies that may have been paid to the Central
Bank.” Id. at 23.
Riggs V takes up this last issue. In 1984 and 1985, recall,
Brazil had a subsidies system (sometimes called a “pecuniary
benefits” system in this litigation) that effectively returned 40%
of any tax payment Brazilian borrowers in international net
loans made on their foreign lenders’ behalf. Mechanically, the
two halves of the transaction—making the tax payments and
receiving the subsidy—were “simultaneous[],” both occurring
“before paying the interest to the foreign lender” and in such a
way as to credit Brazil’s national treasury “‘only with the
amount by which the withholding tax exceeded the subsidy.’”
Riggs V, 2004 Tax Ct. Memo LEXIS 110, at *34–36 (quoting
Nissho Iwai Am. Corp. v. Comm’r, 89 T.C. 765, 770, 1987 U.S.
Tax Ct. LEXIS 142, at *11). In the Tax Court, no one doubted
that this arrangement would have amounted to an indirect
subsidy and properly reduced PNC’s foreign tax credit had the
borrower been a private party; past litigation in what have come
to be called “the Brazilian tax cases,” Amoco Corp. v. Comm’r,
138 F.3d 1139, 1145 (7th Cir. 1998), laid that question to rest.
See Norwest Corp. v. Comm’r, 69 F.3d 1404, 1407–10 (8th Cir.
1995) (finding an indirect subsidy to the extent that the Brazilian
government rebated a portion of the taxes Brazilian borrowers
paid on U.S. lenders’ behalf); Cont’l Ill. Corp. v. Comm’r, 998
F.2d 513, 519–20 (7th Cir. 1993) (same); First Chi. Corp. v.
Comm’r, 61 T.C.M. (CCH) 1774, 1991 Tax Ct. Memo LEXIS
63, at *18–19, *21 (same); Nissho Iwai, 1987 U.S. Tax Ct.
10
LEXIS 142, at *24, *27 (same). What makes this case unique
is the presence of and role played by the Central Bank standing
in for private borrowers. The financial identity between the
Central Bank and the Brazilian government, the same thing that
had made it puzzling to think of the Central Bank making
compulsory tax payments, also makes it puzzling to think of the
Central Bank receiving governmental subsidies. But taking its
cue from the Brazilian Minister of Finance’s private letter
ruling, the Tax Court held that the Central Bank received the
subsidy “not . . . as an agent of the Brazilian Government, but
rather on behalf of the borrowers-to-be,” so that it was “proper
to treat the Central Bank as separate from the Brazilian Govern-
ment” for purposes of the subsidy regulation. Riggs V, 2004
Tax Ct. Memo LEXIS 110, at *56.
PNC has appealed and now the issue of the subsidy is
before us.
II
PNC’s position in this appeal is that the Brazilian govern-
ment cannot give its Central Bank a subsidy because the two are,
for tax purposes, one and the same. The subsidy regulation
applicable at the time, Treas. Reg. § 1.901-2(e)(3) (1984),4 has,
functionally, three parts. First, it defines a foreign subsidy as a
payment “by any means (such as through a refund or credit),” by
the foreign country to the taxpayer or someone engaged in a
transaction with the taxpayer, where the payment “is deter-
mined, directly or indirectly, by reference to the amount of
income tax.” Second, it regulates direct subsidies: If a foreign
country pays a subsidy directly to a taxpayer, that amount must
4
In 1986, Congress codified Treas. Reg. § 1.901-2(e)(3), with
some changes, at I.R.C. § 901(i), and the IRS followed up with a
revised Treas. Reg. § 1.901-2(e)(3). We discuss these changes below.
11
be subtracted from the taxpayer’s foreign tax credit. Third,
distinguishing indirect subsidies, it states that “[a] foreign
country is considered to provide a subsidy to a taxpayer if the
country provides a subsidy to another person that . . . [e]ngages
in a transaction with the taxpayer”; here too the subsidy must be
subtracted from the credit. The Brazilian government’s pay-
ments to its Central Bank, calculated by taking 40% of the
income tax PNC owed Brazil, fit the definition of a subsidy but
clearly are not direct subsidies, as all parties agree. The
question is whether those payments qualify as indirect subsidies.
PNC claims they do not because “[t]he Central Bank is part of
the Brazilian government; indeed, as far as Brazil’s finances are
concerned, the Central Bank is the Brazilian government.”
Appellant’s Reply Br. 1 (emphasis in original). Therefore “the
Brazilian government paid the subsidy in question to itself,”
which, PNC argues, puts the payments outside the indirect
subsidy regulation. The sole issue before us is whether, in the
circumstances of this case, the Brazilian government’s subsidy
was paid “to another person” within the meaning of Treasury
Regulation § 1.901-2(e)(3).
As a threshold matter, we must determine what it means for
the recipient of a subsidy to be “another person”: Does this
mean a person other than the foreign country, or other than the
taxpayer? Read in isolation, § 1.901-2(e)(3), with its careful
distinction between direct and indirect subsidies, appears to ask
whether the recipient is the taxpayer. However, because the
indirect subsidy regulation seems on the whole to contemplate
a transaction with three parties (foreign government, U.S.
taxpayer, and U.S. taxpayer’s local partner), the opposite
approach—which PNC advocates—is also plausible, especially
as it avoids the notion of a government paying a subsidy to
itself. As the Commissioner has not opposed PNC’s reading, we
12
shall assume for purposes of this appeal5 that PNC’s § 901 credit
should be reduced if and only if the recipient of the subsidy (the
Central Bank) is a person other than the Brazilian government.
PNC points to evidence that “the Central Bank is part of the
foreign country,” Appellant’s Reply Br. 6, and hence cannot be
“another person.” If we faced this question in a vacu-
um—without the borrowers-to-be arrangement, without the
Minister of Finance’s private letter ruling, and without the five
hearings, appeals, and remands that preceded this appeal—we
might well answer it as PNC proposes. There is, after all, no
denying the Central Bank’s part-to-whole relationship to the
Brazilian government. But we do not operate in a vacuum; we
are bound by determinations in earlier iterations of this case.
PNC’s factual argument, however convincing it might be, was
properly before the court in Riggs II, not here. We cannot
ignore the holding in that case and consider the facts de novo.
See K.N. LLEWELLYN, THE BRAMBLE BUSH 29, 35 (Oceana
Publications 1981) (1930) (explaining how, depending on legal
context or posture, the facts in a case can be far “from the reality
of raw events” and “miles away from life”).
5
A subsequent change in the law has rendered this analysis
academic except as regards legacy cases such as this one. In 1986,
Congress codified a rephrased version of Treas. Reg. § 1.901-2(e)(3)
at I.R.C. § 901(i). See Tax Reform Act of 1986, Pub. L. No. 99-514,
§ 1204, 100 Stat. 2085, 2532. The new statutory provision eliminated
the words “another person,” recognizing subsidies delivered directly
or indirectly to “any party” to a transaction with the taxpayer. See
also Denial of Foreign Tax Credits for Government Provided
Subsidies, 56 Fed. Reg. 56,007 (Oct. 31, 1991) (similarly eliminating
“another person” from the treasury regulation). As the Central Bank
was a party to the net loan transaction, the reduction in the § 901
credit would be clear under the current statute.
13
PNC’s proposed outcome would make a virtue of inconsis-
tency, applying disparate treatment to two legs of a simultaneous
transaction. Had the Central Bank handed $10 to the Brazilian
government and the Brazilian government handed $5 back—or,
even more accurately, had the Central Bank netted the transac-
tion out itself and only handed over $5 in the first place—PNC
would have us take legal account of the $10 and ignore the $5
given back.
“Inconsistency is the antithesis of the rule of law.”
LaShawn A. v. Barry, 87 F.3d 1389, 1393 (D.C. Cir. 1996) (en
banc). Of the various doctrines, principles, and practices we use
to police inconsistency, some of which go to the root of what
law is, law-of-the-case doctrine is most applicable here: “[T]he
same issue presented a second time in the same case in the same
court should lead to the same result.” Id. (emphasis in original);
see also Arizona v. California, 460 U.S. 605, 618 (1983) (“As
most commonly defined, the doctrine posits that when a court
decides upon a rule of law, that decision should continue to
govern the same issues in subsequent stages in the same case.”);
Crocker v. Piedmont Aviation, Inc., 49 F.3d 735, 739 (D.C. Cir.
1995) (“When there are multiple appeals taken in the course of
a single piece of litigation, law-of-the-case doctrine holds that
decisions rendered on the first appeal should not be revisited on
later trips to the appellate court.”). Law-of-the-case doctrine
encompasses issues decided both explicitly and “‘by necessary
implication.’” LaShawn A., 87 F.3d at 1394 (quoting Crocker,
49 F.3d at 739). The identity or non-identity of the Central
Bank and the Brazilian government for purposes of the tax
arrangement in this case was decided by necessary implication
in Riggs II.
Riggs II was a subtle case. The issue was whether the
Central Bank’s payments to the Brazilian government on PNC’s
behalf should be regarded as voluntary or compulsory in light of
14
the Foreign Minister’s private letter ruling stating that the
payments were compulsory. The court applied the act of state
doctrine, which in its classic formulation holds that “the courts
of one country will not sit in judgment on the acts of the
government of another done within its own territory,” Underhill
v. Hernandez, 168 U.S. 250, 252 (1897), and in its modern
formulation “precludes the courts of this country from inquiring
into the validity of the public acts a recognized foreign sover-
eign power committed within its own territory,” Banco Nacional
de Cuba v. Sabbatino, 376 U.S. 398, 401 (1964). Since Banco
Nacional, the doctrine has been understood to arise from the
separation of powers, reflecting “the strong sense of the Judicial
Branch that its engagement in the task of passing on the validity
of foreign acts of state may hinder the conduct of foreign
affairs.” W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int’l,
493 U.S. 400, 404 (1990) (internal quotation marks omitted).
Applying this doctrine to the Minister of Finance’s private
letter ruling was not straightforward. For one thing, the doctrine
is typically applied to tangible acts, like the expropriation of
property, rather than the ruling of a government official. See
Riggs II, 163 F.3d at 1368. For another, applying the doctrine
to a foreign official’s ruling might run contrary to Federal Rule
of Civil Procedure 44.1, directing courts to independently
determine issues of foreign law, and its tax law equivalent, U.S.
Tax Court Rule 146. In a crucial passage threading these
obstacles, the Riggs II court reasoned that
whether or not it can be said that the Brazilian Minister
of Finance’s interpretation of Brazilian law qualifies as
an act of state, the Minister’s order to the Central Bank
to withhold and pay the income tax on the interest paid
to the Bank goes beyond a mere interpretation of law.
The Minister, after all, ordered that the Central Bank
“must, in substitution of the future not yet identified
15
debtors of the tax [i.e., the borrowers-to-be], pay the
income tax . . . .” Such an order has been treated as an
act of state. The Tax Court’s conclusion on Brazilian
law—that no tax is imposed on a net loan transaction
involving a governmental entity as borrower—implicitly
declared “non-compulsory,” i.e., invalid, the Minister’s
order to the Central Bank to pay the taxes. The act of
state doctrine requires courts to abstain from even
engaging in such an inquiry.
Id. (bracketed text in original) (internal citations omitted). Put
in the affirmative, the holding here is that American courts must
accept as given that the Brazilian government levied a compul-
sory tax payment on the Central Bank, where the Central Bank
stood in for borrowers-to-be. Thus what Riggs II resolved by
necessary implication was the status of or role played by the
Central Bank with respect to the PNC transaction. That resolves
the present appeal, for if the Central Bank stood in for
borrowers-to-be when it paid PNC’s taxes, it also stood in for
them when it received 40% of those tax payments back in
subsidies.
PNC tries to avoid this conclusion by arguing that the Riggs
II court disavowed the borrowers-to-be rationale when it refused
to hold that the “Minister of Finance’s interpretation of Brazilian
law qualifies as an act of state.” The act of state at issue in
Riggs II, as PNC interprets the case, was solely the Minister’s
order, the bare imperative to the Central Bank to pay taxes.
Indeed, as PNC sees it, the act of state doctrine cannot encom-
pass the rationale behind a foreign government’s acts. The
holding of Riggs II, on this argument, would be that American
courts must accept as given that the Brazilian government levied
a compulsory payment on the Central Bank—period.
16
But the borrowers-to-be rationale and the Minister’s
interpretation of Brazilian law are not one and the same, and the
court’s refusal to call one an act of state in no way implies
rejection of the other. The Minister’s private letter ruling has
three parts: the bare imperative, the borrowers-to-be rationale,
and a broader discussion of the Central Bank’s legal situation in
various types of financial transactions. The last of these is the
likely antecedent for Riggs II’s reference to an interpretation of
Brazilian law—which makes good sense when one notices that
the borrowers-to-be rationale is not an interpretation of law at
all. Far from rejecting the borrowers-to-be logic, Riggs II in fact
repeated that rationale—indeed, restated the Minister’s order in
such a way as to incorporate it—immediately after disclaiming
the Minister’s interpretation of Brazilian law as an act of state:
“[W]hether or not it can be said that the Brazilian Minister of
Finance’s interpretation of Brazilian law qualifies as an act of
state . . . [t]he Minister . . . ordered that the Central Bank must,
in substitution of the . . . [borrowers-to-be], pay the income tax
. . . .” Id. (internal quotation marks omitted).
In concluding that the Central Bank is “another person” in
the sense of the treasury regulation, we need not apply the act of
state doctrine. Rather, in the interest of consistency, we need
only adhere, as a law-of-the-case matter, to the necessary
implications of Riggs II. There, the court held that, based on the
act of state doctrine, American courts had to accept the Minis-
ter’s determination that the Brazilian government had compelled
the Central Bank to remit tax payments on PNC’s behalf,
standing in for the borrowers-to-be. In that role, the Central
Bank was distinct from the Brazilian government. Thus, as the
payment and the subsidy are both part of the same indivisible
transaction, Riggs II necessarily implies the Central Bank is
likewise distinct for purposes of the subsidy.
17
Two last points round out this argument. First, law-of-the-
case doctrine is prudential; the Supreme Court has instructed
that courts may “reopen what has been decided,” though they
should “as a rule . . . be loath[] to do so in the absence of
extraordinary circumstances such as where the initial decision
was clearly erroneous and would work a manifest injustice.”
Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817
(1988) (quoting Messinger v. Anderson, 225 U.S. 436, 444
(1912))(internal quotation marks omitted), and Arizona, 460
U.S. at 618 n.8); see also LaShawn A., 87 F.3d at 1393. PNC
has failed to persuade us that there is error or injustice, particu-
larly when every previous court to address the issue has re-
garded PNC’s tax arrangement in Brazil as a stratagem for
avoiding U.S. taxes. See Riggs I, 1996 U.S. Tax Ct. LEXIS 49,
at *41; Riggs II, 163 F.3d at 1369; Riggs III, 2001 Tax Ct.
Memo LEXIS 20, at *64–66.
Second, the root principles at work here—the principle that
courts must be consistent with one another and the principle that
governmental entities may in some circumstances be treated as
private when taking on a private role or function—have a
venerable lineage. See Republic of Argentina v. Weltover, Inc.,
504 U.S. 607, 611, 614 (1992) (putting a distinction between a
government’s exercises of uniquely sovereign power and
ordinary private power at the heart of foreign sovereign immu-
nity); Alfred Dunhill of London, Inc. v. Republic of Cuba, 425
U.S. 682, 695 (1976) (plurality opinion) (recognizing a tradi-
tional distinction “between the public and governmental acts of
sovereign states on the one hand and their private and commer-
cial acts on the other”); Bank of the U.S. v. Planters’ Bank of
Ga., 22 U.S. (9 Wheat) 904, 907 (1824) (Marshall, C.J.)
(“[W]hen a government becomes a partner in any trading
company, it devests itself, so far as concerns the transactions of
that company, of its sovereign character, and takes that of a
private citizen.”); Henry J. Friendly, Indiscretion About Discre-
18
tion, 31 EMORY L.J. 747, 758 (1982) (“[T]he most basic
principle of jurisprudence [is] that we must act alike in all cases
of like nature.” (internal quotation marks omitted)).
III
In place of the analysis above, PNC asks us to follow the
Seventh Circuit’s approach from Amoco Corp. v. Commissioner,
138 F.3d 1139 (7th Cir. 1998). But as described below, Amoco
shares none of the factual circumstances we find dispositive
here, for which reason we decline to follow it in the instant case.
Virtually every page of PNC’s briefs is studded with
references to Amoco, which involved the tax consequences of a
complicated oil exploration arrangement between Amoco, a U.S.
oil company operating in Egypt, and the Egyptian General
Petroleum Corporation, an entity owned and controlled by the
Egyptian government for the purpose of managing Egypt’s oil
wealth. EGPC contracted to pay Amoco’s Egyptian income tax
on Amoco’s behalf—as in a net loan arrangement—and then
took a credit on its own Egyptian taxes exactly equal to what it
paid for Amoco. (EGPC had no tax immunity and ordinarily
paid income taxes as if a commercial entity.) The question for
the Seventh Circuit was whether Amoco should be permitted a
foreign tax credit on its U.S. taxes under § 901, or whether the
credit EGPC took in Egypt should, under the same subsidy
regulation at issue in our case, count as an indirect subsidy,
reducing Amoco’s U.S. credit to zero. The Tax Court had found
no indirect subsidy because “EGPC was part of the Egyptian
government, and thus by definition it was incapable of receiving
a subsidy from itself.” Id. at 1146. The Seventh Circuit
affirmed, but on somewhat more modest reasoning. Finding
“[t]he question of how to treat state-owned enterprises . . .
exceedingly complicated,” the court favored a “functional
approach” over “bright-line rules” and refused to decide
19
“whether it is impossible in all circumstances for a government
to grant a subsidy to one of its wholly or majority owned
enterprises.” Id. at 1146–47. In Amoco’s case, the court found
no indirect subsidy for two reasons: first was EGPC’s economic
identity with the Egyptian government (“EGPC’s profits go
straight to the treasury, and it would never feel any losses,
because the treasury would absorb them.”), and second was the
fact that, as an economic matter, EGPC alone received the
benefit of the credit while “Amoco unquestionably bore the
economic burden of the taxes imposed on its operations by
Egypt.” Id. at 1148–49.
PNC argues that its situation is identical to the one in
Amoco: It too contracted with a foreign governmental entity that
agreed to pay its American partner’s local taxes, received some
of the tax money back, and shares an economic identity with the
foreign government. Thus it too should benefit from the idea
that, as PNC characterizes Amoco’s holding, “when the benefit
of the subsidy is provided to the foreign government, there is no
subsidy within the meaning of the regulations since it is impossi-
ble for the foreign government to subsidize itself.” Appellant’s
Br. 21.
But to start with, that isn’t Amoco’s holding—or rather, it
is only half of Amoco’s holding. The other half is the economic
analysis concluding that the U.S. taxpayer bore all the burden of
the foreign tax and received no benefit from the foreign
credit—whereas in our case, the tax Brazil formally levied on its
Central Bank represented only a benefit to PNC. Even more
importantly, Amoco lacked every factual feature we have found
decisive in this appeal: no tax immunity, no private letter ruling
or equivalent, no borrowers-to-be or analogue for them, and no
controlling precedent. Unless we ignore the facts and the
history of this case, we are bound to regard the Central Bank as
standing in for private parties. Indeed, PNC’s comparisons
20
between the Central Bank in this case and EGPC in Amoco are
premature: Logically prior to any such comparison—indeed the
first analytic step in many cases that turn on someone’s or
something’s governmental status—is fixing on the role that
person or entity played in the particular circumstances of the
case. The Seventh Circuit itself said as much (“[T]he kind of
legal issue presented and the context of the suit has been more
important than the label ‘governmental’ or ‘non-governmental,’”
Amoco Corp., 138 F.3d at 1147) and was careful to cabin its
conclusions accordingly.
IV
Both PNC and the dissent would have us answer the
question of the Central Bank’s status as if indifferent to all
context and background. This we cannot do. As we agree with
the Tax Court that, under the facts of this case, it is “proper to
treat the Central Bank as separate from the Brazilian govern-
ment” and deem the bank “another person” within the meaning
of the subsidy regulation, the judgment of the Tax Court is
Affirmed.
1
GRIFFITH, Circuit Judge, dissenting:
I share the majority’s frustration with this, the latest of
what seems to have become a judicial mini-series, “Riggs VI:
Return of the Subsidy.” We are unanimous in the hope that it is
the last of the sequels. We disagree, however, about what our
role in this case should be, and I think it a disagreement worthy
of some discussion. While I share my colleagues’ unease over
PNC’s “stratagem for avoiding U.S. taxes,” Op. at 17, such
discomfort alone cannot determine the outcome of a case. Both
facts and law are fundamental to our conclusions, and although
the facts of this case are complicated, the law is simple. This
case turns entirely on the plain language of controlling U.S. tax
regulations. That language is clear, unambiguous, and
dispositive. Its effects—whatever they may be—are not within
our power to forestall, and its neutral application does not, as the
majority suggests, create any inconsistency. On the contrary, our
abandonment of a textual approach creates inconsistencies
galore, putting us conspicuously at odds with the text of both
U.S. and relevant Brazilian law, our own precedent, and the
reasoned decision of a sister circuit. The court’s analysis also
obscures two important principles it seeks to clarify: the act of
state doctrine and the law-of-the-case doctrine. Accordingly, I
dissent.
I.
The text of controlling law requires our disposition in
favor of PNC. We are reluctant to disregard an agency’s
interpretation of its own regulation “unless an alternative
reading is compelled by the regulation’s plain language . . . .”
Air Transp. Ass’n of Am., Inc. v. F.A.A., 291 F.3d 49, 53 (D.C.
Cir. 2002) (quoting Thomas Jefferson Univ. v. Shalala, 512 U.S.
504, 512 (1994)) (internal quotation marks omitted). In this case,
the plain language of the relevant Treasury regulation is
2
sufficient to compel an alternative reading. The question for the
court is whether foreign tax credits properly claimed by PNC
should be reduced by the amount of subsidy payments made by
the Brazilian government to the Central Bank of Brazil. See
Riggs Nat’l Corp. & Subsidiaries v. Comm’r, 295 F.3d 16, 22-23
(D.C. Cir. 2002) (Riggs IV) (remanding this issue to the Tax
Court). The controlling provision of law is Treas. Reg. § 1.901-
2(e)(3)(ii) (1984),1 which provides in relevant part that a
payment constitutes a “subsidy” only if it is paid by a “foreign
country” to “another person.” The resolution of this appeal thus
depends on whether the Brazilian government (a “foreign
country”) has made payments to “another person” within the
meaning of Treas. Reg. § 1.901-2(e)(3)(ii). Our sole task is to
determine whether the Central Bank is “another person” for the
purpose of the relevant regulation. See Op. at 11.
Given the ample amount of judicial ink put to paper
concerning the relationship between and among Riggs Bank, the
Central Bank of Brazil, and the government of Brazil, our
analysis need not be labored. It is uncontested, as the court
observes, that the Central Bank is “100% a part of Brazil’s
federal government,” id. at 5, “government-controlled,” id. at 3,
and “required [by Brazilian law] to act on behalf of Brazil’s
government and prohibited from acting on behalf of anyone
else,” id. at 5. And yet the court simultaneously contends that
the Brazilian government and the Central Bank of Brazil are
“distinct,” see id. at 16, and concludes that the Central Bank
“stood in for [borrowers-to-be] when it received . . . tax
payments back in subsidies,” id. at 14. I disagree. The answer to
the question before us is apparent: The Central Bank is
unquestionably part of a “foreign country” and therefore not
1
“A foreign country is considered to provide a subsidy to a
taxpayer if the country provides a subsidy to another person that . . .
[e]ngages in a transaction with the taxpayer.” Treas. Reg. § 1.901-
2(e)(3)(ii).
3
“another person.” No one disputes that Riggs’s taxes have been
retained by the Brazilian government. The functional transfer of
funds within a government is not a transfer to “another person.”
The regulations confirm this conclusion by clarifying that when
a subsidy is paid to a “political subdivision” of a foreign state
issuing the subsidy, the subsidy is paid to the “foreign country”
itself. Treas. Reg. § 1.901-2(g)(2). I fail to see ambiguity in this
text that would permit any alternative conclusion.
Even my colleagues agree that, “in a vacuum,” our
disposition ought to be self-evident. See Op. at 12 (“[W]e might
well answer [the question] as PNC proposes. There is, after all,
no denying the Central Bank’s part-to-whole relationship to the
Brazilian government.”). But the court, perhaps frustrated by
the outcome that this straightforward analysis of the text and
neutral application of law requires,2 struggles to justify the
opposite result. Observing that “we do not operate in a vacuum,”
id. at 12, the court concludes that a decision in favor of PNC
would ratify an intolerable inconsistency, see id. at 13. Again,
I disagree. On the contrary, the court, in trying to restore clarity
to the confusing legal interpretation of a foreign minister (and,
perhaps, in its attempt to reach what it deems a just end to a
troubling case), has contorted what precious little logic remains
available to us and, in so doing, has overstepped the limits of its
authority.
2
“[E]very previous court to address [this] issue has regarded
PNC’s tax arrangement in Brazil as a stratagem for avoiding U.S.
taxes.” Op. at 17. Although I am sympathetic to the court’s reluctance
to tolerate what it senses to be unfair play, we do not referee fairness.
We construe law. As Thomas More observed in A Man for All
Seasons, “I know what’s legal not what’s right. And I’ll stick to
what’s legal.” ROBERT BOLT, A MAN FOR ALL SEASONS 65 (Vintage
International Ed. 1990).
4
II.
The majority’s error flows from its mistaken effort to
impose consistency on the reasoning of a foreign
state—specifically, the dubious conclusion that the Central Bank
stood in for borrowers-to-be when it paid PNC’s taxes, see id. at
15. From my colleagues’ perspective, it is not possible to
conclude that the Central Bank was compelled to pay taxes to
the government of Brazil without also concluding that the
Central Bank acted in the place of borrowers-to-be and is,
therefore, “another person” for the purpose of our tax law. The
majority observes that “[when it was compelled to] remit tax
payments on PNC’s behalf, standing in for the borrowers-to-be
. . . the Central Bank was distinct from the Brazilian
government. Thus, as the payment and the subsidy are both part
of the same indivisible transaction, Riggs II necessarily implies
the Central Bank is likewise distinct for purposes of the
subsidy.” Id. at 16 (emphasis in original). But in fact we
specifically held otherwise in Riggs National Corp. &
Subsidiaries v. Commissioner, 163 F.3d 1363 (D.C. Cir. 1999)
(Riggs II), declining to conclude that the Central Bank of Brazil
was distinct from the government of Brazil, much less that it
acted in the place of borrowers-to-be. Such a conclusion would
not have been supported by law, nor by logic. As the court itself
notes, the Central Bank is “required to act on behalf of Brazil’s
government and prohibited from acting on behalf of anyone
else.” Op. at 5.
Ironically, my colleagues’ disregard for the logical flaws
in the Minister’s reasoning is animated by their desire to
circumvent what they misconceive to be another logical
problem: how this court, in Riggs II, could have deferred to a
conclusion if that conclusion were based on a false premise. In
other words, how could we have deferred to an act of state (i.e.,
the order that the Central Bank pay taxes on PNC’s income)
5
without having accepted, “by necessary implication,” see Op. at
13, 15-16, the reasoning offered to justify the state act (i.e., that
the Central Bank stood in for borrowers-to-be)? But this is no
logical problem at all. We deferred to the act because the act of
state doctrine compelled us, regardless of the underlying
premise. That is the purpose of the doctrine, which precludes us
from “inquiring into the validity of the public acts a recognized
foreign sovereign power committed within its own territory,”
Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 401
(1964), and the nature of deference, which precludes us from
“sit[ting] in judgment on the acts of the government of another
done within its own territory,” Underhill v. Hernandez, 168 U.S.
250, 252 (1897). The fact that the Minister of Finance “looked
through” the Central Bank for the purposes of deciding the
proper tax treatment of loans, see Riggs II, 163 F.3d at 1366,
does not require that we base our own conclusions on the result
of that awkward analysis. Had the Minister of Finance based an
order on his observation that the sky is orange, we would still
defer to the order, regardless of the reasoning. No implications,
therefore, “necessary” or otherwise, fell out of our decision that
the Central Bank paid taxes on behalf of PNC other than the fact
that PNC could claim foreign tax credits in the amount of those
taxes.
I agree that “in the interest of consistency, we need [to]
adhere . . . to the necessary implications of Riggs II.” Op. at 16.
But that is not what the court has done. Instead—and contrary
to its own representation (“We cannot ignore the holding in [a
previous case] and consider the facts de novo.” Op. at 12)—the
court has adopted, de novo, the interpretation of a foreign
official that contravenes the text of foreign law (an observation
that both the Commissioner and the tax court have shared).
(“[T]he Central Bank, under Brazilian law, was constitutionally
immune from having to pay withholding tax with respect to its
net loan interest remittances abroad.” Riggs Nat’l Corp. v.
6
Comm’r, 107 T.C. 301, 355 (1996) (Riggs I), rev’d on other
grounds, Riggs II, 163 F.3d 1363.) This is precisely the error we
avoided in our previous holding. (“We are . . . hesitant to treat
an interpretation of law as an act of state, for such a view might
be in tension with rules of procedure directing U.S. courts to
conduct a de novo review of foreign law when an issue of
foreign law is raised. See FED. R. CIV. P. 44.1; TAX COURT R.
146.” Riggs II, 163 F.3d at 1368.) The act of state doctrine did
not compel our deference to the legal interpretation of a foreign
state and therefore offers no support for the majority’s
conclusion. Nor does our holding in Riggs II bolster the court’s
conclusion that we are bound by the law of this case to abandon
our unanimous plain language interpretation of controlling law.
Nor has the court offered any analysis to support its novel
conclusion that the Central Bank should be considered to have
acted on behalf of borrowers-to-be despite the explicit
prohibition against acting on behalf of anyone but the
government of Brazil. See Op. at 5. In fact, the majority admits
to being puzzled (as am I) by how, even “if it were legally
possible for the Brazilian government to impose a tax on its
Central Bank . . . it would be economically possible for the
Central Bank to pay it: At most, the money would go from the
Brazilian government’s right pocket to its left.” Id. Precisely. It
is similarly puzzling to suppose that when the Brazilian
government pays subsidies to the Central Bank, it is doing
anything more than the same motion in reverse. Why then are
these two halves of the same transaction, occurring
simultaneously, treated differently? Because an act of state
compelled us to recognize the first half (i.e., mandatory payment
of tax) while no such act compels our recognition of the second
half (i.e., payment of subsidy). Whereas we were obliged in
Riggs II to accept the fact that the Central Bank had been
compelled to pay taxes (despite all evidence to the contrary), we
were not (nor are we now) obliged to accept the argument that
the Central Bank stood in the place of borrowers-to-be and is
7
therefore “another person” for the purpose of our tax law. It was
our required deference in one case, not required in another, that
accounts for our “disparate treatment to two legs of a
simultaneous transaction,” see id. at 13, which, frustrating
though it may be to those who dislike the outcome, is not at all
inconsistent.
III.
Far from being “indifferent to all context and
background” in this case, Op. at 20, I am mindful of our duty to
respect the effect of our previous holdings and the bounds of our
role in this case. I also share my colleagues’ interest in policing
inconsistency in our jurisprudence, see id. at 13, and therefore
find myself motivated by the same concerns expressed by the
court, but reach the opposite conclusion. I believe that the
court’s analysis has ignored conclusive authority, created
inconsistencies where none need exist, and ultimately put us at
odds with (1) the plain language of U.S. law, (2) our own
precedent in this case, and (3) the reasoned analysis of a sister
circuit.
First, the court’s decision ignores the language of the
controlling U.S. tax regulation. The plain meaning of “another
person” is clear, despite the majority’s initial interpretation of
that dispositive phrase. See id. at 11 (“Read in isolation,
§ 1.901-2(e)(3) . . . appears to ask whether the recipient is the
taxpayer.” (emphasis in original)). The words “another person”
are most naturally read—both in isolation and in the relevant
context—to mean a third party that is neither the foreign
government nor the U.S. taxpayer. Thankfully, this is not a
source of disagreement, as the majority ultimately concludes that
“for purposes of this appeal . . . [another person] is a person
other than the Brazilian government,” and “[t]here is, after all,
8
no denying the Central Bank’s part-to-whole relationship to the
Brazilian government.” Op. at 12.
A textual approach to the case would therefore seem
appealing, not only because of the clarity it offers, but also
because the relevant regulations did not, at the time of their
effect in this case, permit a functional analysis of whether the
“subdivision” of a “foreign country” was in fact part of the
foreign country. Instead, the Internal Revenue Service created
a bright-line rule to govern the categorization of indirect
subsidies. That rule, as our sister circuit has noted, was intended
to save the Service from the “interminable investigation of the
mysteries of public finance.” See Cont’l Ill. Corp. v. Comm’r,
998 F.2d 513, 520 (7th Cir. 1993) (Posner, J.). If an alternative
mechanism were preferable, it was for the Service to create, not
for us to impose. There is nothing in the regulations to support
the view that a “subdivision” of a “foreign state” can be part of
the “foreign country” in some cases but not others. Indeed, the
regulations state the contrary, defining “foreign country” as “any
foreign state . . . and any political subdivision of any foreign
state . . . .” Treas. Reg. § 1.901-2(g)(2); see also Amoco Corp.
v. Comm’r, 138 F.3d 1139, 1147 (7th Cir. 1998).
The decision of this court is therefore at odds with the
plain language of relevant law, creating a troubling
inconsistency between our jurisprudence and the controlling text
of a regulation. If the Commissioner is frustrated by a loophole
that exists in the agency’s regulations, he need only correct it or
request that Congress amend the statute.3 We may not enforce
3
Indeed, it would appear that the loophole that gave rise to
Riggs’s petition in this case has been appropriately remedied by
Congress. The current regulations, revised in 1991, eliminate the
phrase “another person” and provide that an amount is a subsidy if it
is provided “to any person (governmental or not).” Treasury Decision
8372, 1991-2 C.B. 338 (emphasis added); see also Op. at 12 n.5.
9
such corrections retroactively. See Bowen v. Georgetown Univ.
Hosp., 488 U.S. 204, 208 (1988) (“Retroactivity is not favored
in the law. Thus . . . a statutory grant of legislative rulemaking
authority will not, as a general matter, be understood to
encompass the power to promulgate retroactive rules unless that
power is conveyed by Congress in express terms.”).
Second, the court’s analysis is inconsistent with our own
precedent in this case. The majority asserts that we are bound by
the law-of-the-case doctrine (“[T]he same issue presented a
second time in the same case in the same court should lead to
the same result.” Op. at 13 (quoting LaShawn A. v. Barry, 87
F.3d 1389, 1393 (D.C. Cir. 1996) (en banc) (emphasis in
original))) and that “[t]he identity or non-identity of the Central
Bank and the Brazilian government for purposes of the tax
arrangement in this case was decided by necessary implication
in Riggs II.” Op. at 13. I disagree and believe that the majority
has misinterpreted our decision in Riggs II, which was
specifically and explicitly limited to address whether or not the
Central Bank had been compelled to pay taxes on Riggs’s
income. The issue in that case was whether Riggs was “legally
liable for the tax under Brazilian law.” Riggs II, 163 F.3d at
1363 (internal quotation marks omitted). The result in that case
was that the Minister’s order to the Central Bank to make tax
payments on behalf of Riggs was presumptively valid, see id. at
1368; Riggs IV, 295 F.3d at 18, or as the majority puts it,
“American courts must accept as given that the Brazilian
government levied a compulsory payment on the Central
Bank—period.” Op. at 15. That is the extent of the result in that
case. The law-of-the-case doctrine compels our deference only
to that previous judicial conclusion, and not to the incongruous
legal interpretations of a foreign state that we have previously
disavowed. See Riggs II, 163 F.3d at 1368 (declining to apply
the act of state doctrine to a foreign state’s interpretation of law
in light of our obligation to interpret law de novo).
10
In support of its law-of-the-case argument, the court
suggests that Riggs II can be read to include the Minister’s
“borrowers-to-be” rationale as part of its holding because it
“restated the Minister’s order in such a way as to incorporate [its
rationale . . . .” Op at 16. It then quotes Riggs II as evidence of
its theory: “[T]he Minister . . . ordered that the Central Bank
must, in substitution of the . . . [borrowers-to-be], pay the
income tax . . . .” Id. (internal quotation marks omitted) (citing
Riggs II, 167 F.3d at 1368). But the original language of Riggs
II is as follows:
[W]hether or not it can be said that the Brazilian
Minister of Finance’s interpretation of Brazilian law
qualifies as an act of state, the Minister’s order to the
Central Bank to withhold and pay the income tax on the
interest paid to the Bank goes beyond a mere
interpretation of law. The Minister, after all, ordered
that the Central Bank “must, in substitution of the future
not yet identified debtors of the tax . . . pay the income
tax on the interest paid during the period in which the
funds remained available for relending.” Riggs, 107
T.C. at 331. Such an order has been treated as an act of
state.
Riggs II, 163 F.3d at 1368 (emphasis added). The language we
quoted in Riggs II was not even the Minister’s language. It was
excerpted from the Opinion of the Acting Secretary of the
Brazilian tax authority, upon which the Minister based his order.
In fact, the actual language of the Minister’s order was much
more concise:
I agree fully with the conclusions of the attached
opinion of the . . . [Brazilian IRS]. In view of item 13 of
said opinion, I direct the Central Bank of Brazil to
11
implement the payment of income tax on or before the
last business day of the month following the month in
which the withholding is made.
Riggs I, 107 T.C. at 329. Our decision in Riggs II to quote
language from the opinion upon which the Minister’s order was
based does not imply, much less demonstrate, that our deference
in that case extended to the reasoning behind the act of state. The
court errs when it fixes its attention on the contents of a state
authority’s legal opinion, see Op. at 16 (“[The foreign ruling] has
three parts: the bare imperative, the borrowers-to-be-rationale,
and a broader discussion of the Central Bank’s legal situation in
various types of financial transactions.”), rather than the state’s
act (“I direct the Central Bank of Brazil to implement . . .
payment . . . .” Riggs I, 107 T.C. at 330 (internal quotation marks
omitted)). The act of state has only one part: the official demand
of payment. Particularly in light of our own language in Riggs II
describing the Minister’s order “to withhold and pay the income
tax on the interest paid,” id. at 1368, as well as the surrounding
discussion, which I read to be contemplative of the very scenario
now before us, I cannot agree with the majority that we ever
intended to include the borrowers-to-be reasoning in our
understanding of what the act of state included. Our language in
Riggs IV further confirms my view when it describes our holding
in Riggs II, in which “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
inquiring into its validity.” Riggs IV, 295 F.3d at 18 (emphasis
added).
The court’s conclusion that the Central Bank’s role (i.e.,
“standing in for the borrowers-to-be,” Op. at 16) is defined by
the “necessary implication” of our previous limited holding is
therefore unsupported and the majority now rests its entire
decision on the faulty reasoning we have hitherto disclaimed. In
12
so doing, the court turns the Tax Court’s error in Riggs I on its
head. In Riggs I, the Tax Court ignored the Minister’s ruling and
instead conducted its own investigation of Brazilian tax law. We
corrected the error by clarifying that a U.S. court may not
invalidate a foreign sovereign’s official act within its own
territory. The tax court had not been appropriately deferential.
The approach advocated today by the majority goes too far in the
opposite direction by requiring our deference not only to a
sovereign’s official act, but also to the underlying reasoning.
This is a misapplication of the act of state doctrine, which is
meant to prevent the courts of one sovereign from examining the
validity of the acts of another because doing so “would very
certainly imperil the amicable relations between governments
and vex the peace of nations.” Oetjen v. Cent. Leather Co., 246
U.S. 297, 304 (1918) (internal quotation marks omitted). As the
Court made clear in Underhill v. Hernandez, “[r]edress of
grievances by reason of [acts of state] must be obtained through
the means open to be availed of by sovereign powers as between
themselves.” 168 U.S. at 252. Just as the appropriate audience
for frustration at the controlling language of the Treasury
regulations is Congress and the Internal Revenue Service, the
appropriate audience for frustration at Brazil’s order is the
Executive.
Third, and finally, the majority’s analysis is inconsistent
with the decision of our sister circuit, and therefore creates a split
from the Seventh Circuit’s determination in Amoco. In that case,
both the Tax Court and the Seventh Circuit held that a
government entity could not receive a subsidy from that same
government. See Amoco, 138 F.3d at 1146 (citing Tax Court’s
interpretation of Treas. Reg. § 1.901-2(e)(3)(ii), “which indicates
that indirect subsidies to the U.S. taxpayer occur when a foreign
nation provides a subsidy to another person” (emphasis in
original)). The Amoco court based its conclusion on the
seemingly uncontroversial observation that it is impossible for a
13
foreign government to subsidize itself. See id. at 1148-49.
Although we are not bound by the Seventh Circuit’s holding,
“we avoid creating circuit splits when possible.” United States v.
Philip Morris USA Inc., 396 F.3d 1190, 1201 (D.C. Cir. 2005).
This may be particularly true in a case involving federal tax law,
where “uniformity among the circuits is particularly
desirable . . . to ensure equal application of the tax system,”
Wash. Energy Co. v. United States, 94 F.3d 1557, 1561 (Fed. Cir.
1996) (internal quotation marks omitted), and to further maintain
consistency.
Of greater concern than our departure from the views of
a sister circuit in a similar case, however, is our departure from
the logic that undergirds both Amoco and the case before us.
Key to the Amoco court’s analysis of whether a subsidy was paid
to “another person” was whether the “benefit” of the subsidy was
retained by the foreign government that had paid it. See Amoco,
138 F.3d at 1148-49; see also Riggs Nat’l Corp. & Subsidiaries
v. Comm’r, No. 24368-89, slip op. at 38 n.12 (T.C. May 3, 2004)
(recognizing the necessity of a benefit analysis in determining
whether a subsidy is an “indirect subsidy” for the purposes of the
Treasury regulations).4 If the benefit of the subsidy is retained by
the foreign government, then it should not be treated as a subsidy
for the purpose of the Treasury regulations.
My colleagues acknowledge that the purpose of the
subsidy provision in U.S. tax law is to avoid double taxation. See
Op. at 2. They fail to demonstrate, however, how a decision in
favor of PNC would offend this purpose. They claim that “[t]he
IRS ends up on the wrong end of the see-saw.” Id. at 6. But
whether or not the IRS ends up on the wrong end of the see-saw
4
Although I have noted that a functional approach to the
relevant regulatory language is disfavored in this case, the fact that the
court’s analysis contravenes both textual and functional approaches
bears notice.
14
is not our concern. We have no authority over that playground.
It is undisputed that the Central Bank received and retained the
benefit of the subsidy. The majority has failed to cite any record
evidence to the contrary. If the benefit of the subsidy paid by
Brazil is retained by Brazil, then it should not be treated as a
subsidy for the purposes of the Treasury regulations. See, e.g.,
Amoco, 138 F.3d at 1148.
The court distinguishes Amoco by listing factual
differences between the cases. See Op. at 19 (“Amoco lacked
every factual feature we have found decisive in this appeal: no
tax immunity, no private letter ruling or equivalent, no
borrowers-to-be or analogue for them, and no controlling
precedent.”). None of these features compels a different decision.
If anything, they strengthen the case for PNC. The Central
Bank’s tax immunity demonstrates its economic identity with the
government of Brazil—a characteristic that weighs strongly in
favor of PNC. The private letter ruling explains why in Riggs II
we allowed PNC to claim foreign tax credits—a determination
that would otherwise seem surprising at best. The borrowers-to-
be are irrelevant to the analysis favored by the Amoco court, as
no borrowers-to-be retained the benefit of subsidies. And, as I
have discussed, our precedent in this case does not compel our
endorsement of the suspicious rationale put forth by the Minister
of Finance—indeed, it counsels our reluctance to adopt that
reasoning.
IV.
Our previous holdings in this line of cases allowed Brazil
to place an artificial tax liability on its own Central Bank and
thus exploit a domestic tax loophole for the benefit of Riggs
Bank. Regretful about the consequences of our holding, we
nonetheless recognized that the remedy sought by the
Commissioner was not ours to provide: “Of course, the
15
opportunistic nature of the Brazilian government’s action is
particularly vexing. . . . But although we can visualize
prophylactic regulatory measures . . . the Commissioner has not
yet fashioned a legitimate legal challenge to Riggs’s use of the
foreign tax credit in this case.” Riggs II, 163 F.3d at 1369. PNC’s
attempt to take advantage of the Treasury regulations by virtue
of our previous decision is similarly vexing. And similarly,
although we can easily visualize prophylactic regulatory
measures (which have in fact since been implemented), the
Commissioner has again failed to request relief that a court can
provide. If an act of state is objectionable, it is for the Executive
to contest. If laws are flawed, they are for Congress to improve.
I respectfully dissent.