IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 98-20810
SCHLUMBERGER TECHNOLOGY CORPORATION,
also known as Sedco, Inc.
Plaintiff-Appellee,
versus
UNITED STATES OF AMERICA,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Texas
November 5, 1999
Before REAVLEY, HIGGINBOTHAM, and DENNIS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This case concerns the time at which a taxpayer must accrue a
foreign arbitral award as income. The district court held that an
arbitral award need not be accrued until the time to appeal
judicial confirmation of the award expires in the jurisdiction in
which enforcement is sought. We AFFIRM.
I.
Sedco, Inc., now part of Schlumberger Technology Corp. (STC),
entered a joint venture in 1966 with a company owned by the
Algerian government, known as Sonatrach. Sedco and Sonatrach owned
49% and 51%, respectively, of the joint venture, which engaged in
oil and gas exploration. An agreement required binding arbitration
before a Swiss tribunal for any dispute between the parties. In
February of 1981, Sedco claimed Sonatrach was using its majority
interest in the venture to deprive Sedco of its stock value. By
1983, Sonatrach had liquidated the venture and informed Sedco that
Sedco’s portion of the proceeds was $2.6 million. Sedco disputed
this, claiming Sonatrach sold assets below market value to entities
Sonatrach owned or controlled.
Based on this dispute, a Swiss arbitration tribunal awarded
Sedco nearly $26 million in February of 1984. In April of 1984 a
Swiss appeals court temporarily stayed the arbitral award. In May,
the Swiss court revoked the stay, and in July of 1984 the Swiss
court rejected Sonatrach’s application for nullification of the
award.
Sedco then began enforcement proceedings. The recognition and
enforcement of foreign arbitral awards is governed by the
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, June 10, 1958 (New York Convention). See 9 U.S.C. § 201.
In 1984, every major Western European Country except Portugal was
party to the New York Convention.
Article III of the New York Convention requires signatories to
recognize arbitral awards as binding and enforce them just as
easily as domestic arbitral awards, subject only to a few defenses:
incapacity of a party, illegality of agreement, lack of due process
in arbitration, award outside scope of arbitration, improper
2
arbitration panel, and vacated or not-yet-binding award. See New
York Convention, Arts. III, V.
Furthermore, if the subject matter of the dispute is not
capable of settlement by arbitration under the law of the enforcing
state or if enforcement of the award by the enforcing state would
be contrary to the public policy of the enforcing state, then the
enforcing state can also refuse to enforce the award. See id.
Thus, recognition of an arbitral award is not automatic and can be
refused by the enforcing state if the losing party proves one of
these defenses.
On September 7, 1984, Sedco demanded payment from Sonatrach
because the time for appealing the award in Switzerland had
expired. No response came. On September 17, 1984, Sedco filed in
France for enforcement because Sonatrach had no assets in
Switzerland that could be attached.
In the French court, Sedco obtained an “exequatur” or
enforcement order that issued on September 19, 1984. This order
granted provisional recognition of the award in France subject only
to appeal on grounds similar to the New York Convention defenses
above. The time for appeal by non-residents such as Sonatrach was
three months from the date of official notification of the order.
Because Sedco received notification of the order on September
26, 1984, the time for Sonatrach’s appeal would not have expired
3
until at least sometime after December 24, 1984, even if Sedco had
notified Sonatrach immediately.
In October of 1984, Sedco got permission from the French court
to begin attachment proceedings on Sonatrach’s French assets. The
French court issued an order allowing attachment by means of
“saisie-arret,” comprising two phases. In phase one, Sedco
attached assets belonging to Sonatrach which resided in the hands
of a garnishee such as a bank. In phase two, Sedco applied for a
validation order from the appropriate French court directing the
garnishee to pay the attached assets directly to Sedco. Gaz de
France (GDF), a French-owned gas company, eventually notified Sedco
that GDF possessed funds of Sonatrach sufficient to pay the award.
Actual execution on the assets held by GDF, however, was contingent
on the expiration of the time for appeal (or an explicit denial of
the appeal) coupled with an affirmation of the exequatur order.
On October 9, 1984, documents were filed with the French court
requesting a hearing on the validity of the attachment served on
GDF. On December 11, 1984, Sedco and Sonatrach reached a tentative
settlement agreement, subject to approval by the Algerian
government and Sedco’s board of directors.
The current case arises because Sedco merged into STC on
December 24, 1984, making Sedco’s final taxable year end on
December 24, 1984. Its tax return for that year did not include
the arbitral award as income. The IRS audited and assessed amounts
4
due and penalties for this omission. Sedco paid them and filed
this suit for refund.
Both parties sought summary judgment using affidavits from
French experts. Sedco’s expert agreed that the arbitral award
from Switzerland had res judicata effect and Sonatrach could not
attack the merits of the award in a French court; consequently,
there was nothing a French court could do to alter the award.
Sedco’s expert also admitted that under French law, the grounds for
challenging the implementation of the award were somewhat more
limited than those allowed by the New York Convention. The expert
made no estimate of whether there was any chance for Sonatrach to
prevail on such an appeal, and even if Sonatrach prevailed on one
of the New York Convention defenses, it would not annul the award
or change the amount of damages determined in Sedco’s favor. It
would simply mean the award could not be enforced in France.
The expert for the United States said there did not appear to
be any possible legal or factual basis to prevent Sedco from
obtaining a final decision from the French courts ordering GDF to
hand over the attached funds to Sedco, up to the amount of the
award. The United States argued that “all events” necessary to
establish Sedco’s right to the arbitral award had occurred prior to
the close of Sedco’s taxable year in 1984 and that the award had
become final no later than September 1984.
According to the United States, it was irrelevant whether
enforcement had been completed in France by the end of 1984,
5
because Sedco could not show a sufficient doubt as to the ultimate
enforceability of the award under French law to allow Sedco to
defer the accrual of the award until 1985 when the parties executed
the final agreement.
Sedco maintained that the accrual of the award in 1984 was
improper because enforcement of the award was not a foregone
conclusion: it could be defeated by a defense to the New York
Convention. Thus, accrual was not appropriate until 1985 when
Sonatrach actually agreed to pay the award.
The district court granted summary judgment to Sedco, noting
that the “the overarching fact [was] that until France judicially
recognized the Arbitral Award, the right to income it represented
was contingent.” Finality did not occur until Sonatrach’s time to
appeal the exequatur order expired. The United States appeals the
grant of summary judgment.
II.
We examine the grant of summary judgment de novo and view
factual inferences in the light most favorable to the United
States. See Ellisen v. Connor, 153 F.3d 247, 251 (5th Cir. 1998).
The law in this case is easy to state. An accrual basis
taxpayer such as Sedco must report income in the taxable year in
which the last event occurs which unconditionally fixes the right
to receive the income and there is a reasonable expectancy that the
right will be converted to money. See H. Liebes & Co. v.
6
Commissioner, 90 F.2d 932, 937-38 (9th Cir. 1937). The difficulty
lies in defining an unconditional, fixed right to receive.1 T h e
United States argues that once Sedco received a final, unappealable
arbitral award in Switzerland, Sedco had an unconditional, fixed
right to receive. Sedco argues that the arbitral award only gave
Sedco the right to seek enforcement but not the right to enforce or
receive payment. Until Sedco had a right to enforce – namely, when
the time to appeal the exequatur order expired – Sedco did not have
a right to receive anything.
Both the taxpayer and the government accept the proposition
that a domestic judgment constitutes an unconditional, fixed right
to receive–assuming the defendant has U.S. assets–despite the
potential for collateral attack when enforcing the judgment in
another state. Assuming but not deciding that this is so, we must
decide whether an arbitral award is sufficiently like a domestic
judgment so as to constitute an unconditional, fixed right to
receive. If it is, then enforcement proceedings in another country
such as France are akin to enforcement proceedings in another state
when attempting to collect a domestic judgment.
1
The United States argues that the district court confused accrual and
cash accounting when applying the standard. While we agree that the
district court used language applicable to cash accounting when
explaining accrual accounting, we do not find that the district court
applied the wrong standard. Regardless, on appeal our review of a grant
of summary judgment is de novo and the judgment will be affirmed if the
record indicates "that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law.”
FED. R. CIV. P. 56(c); Ellisen, 153 F.3d at 251.
7
Some courts in fact have stated that “a confirmation
proceeding [with respect to a foreign arbitral award subject to the
New York Convention] is not an original action; it is, rather, in
the nature of a post-judgment enforcement proceeding.” Fertilizer
Corp. of India, 517 F.Supp. 948, 963 (S.D. Ohio 1981);
International Standard Elec. v. Bridas Sociedad Anonima, 745 F.
Supp. 172, 182 (S.D.N.Y 1990). In neither case, however, was the
comparison made in order to determine whether the award should be
seen as a “right to receive” before confirmation. See Fertilizer,
517 F.Supp at 963; International Standard, 745 F. Supp at 182.
Instead, there are compelling reasons to say that a final, binding
arbitral award differs sufficiently from a domestic judgment that
it does not constitute a fixed right to receive.
First, an arbitral award must be confirmed, and the
confirmation process allows for appeal and potential denial of
enforcement based on the defenses of the New York Convention.
Although Sonatrach did not appeal the exequatur order in France,
Sonatrach had the right to appeal until some time after December
24, 1984. Had Sonatrach appealed successfully, Sedco would not
have had an enforceable judgment in France, but only an arbitral
award which Sedco would have been forced to confirm and enforce
elsewhere.
Domestic judgments are also capable of being attacked on
certain grounds when taken to another state. However, under full
8
faith and credit, such judgments must be given the same effect the
judgment would have in its rendering state. See Fehlhaber v.
Fehlhaber, 681 F.2d 1015, 1021 n.6 (5th Cir. 1982) (noting that
full faith and credit analysis reduces “to only an inquiry into
what effect a judgment has in its rendering state, for a state is
not allowed to give effect to a judgment rendered in violation of
due process”). Unlike the New York Convention, there is “no roving
‘public policy exception’ to the full faith and credit due
judgments.” See Baker by Thomas v. General Motors Corp., 118 S.
Ct. 657, 664 (1998).
As such, even though a foreign arbitral award is res judicata
between the parties as to the merits (and a foreign court cannot
alter the award), that court can refuse to enforce the award under
a public policy exception. Thus, defenses to confirming a foreign
arbitral award are broader than those available when enforcing
domestic judgments under full faith and credit.
Second, once Sedco received the final award from Swiss
arbitration, the award was not self-executing. See Fotochrome,
Inc. v. Copal Co., 517 F.2d 512, 518 (2d Cir. 1975). In other
words, before an order of execution could issue which would allow
the award to be enforced, the award first had to be converted by
confirmation into a judicial judgment. The expert for the United
States agreed that Sedco’s award could not be executed until the
9
exequatur order became final through the expiration of the time for
appeal.
While no order is self-executing – even a Texas judgment will
not “get up and execute itself” in Texas – an arbitral award
requires an extra step that a Texas judgment does not. An arbitral
award must first be judicially confirmed, and it is not confirmed
until the time for appeal expires. Given this additional step in
the enforcement process, it makes little sense to say a right to
receive exists before the ability to execute on a judgment is
granted.2 Finally, and most importantly, an arbitral award has no
legal effect without the stamp of judicial approval. “Absent
voluntary compliance, the authority of the arbitrator does not
include the coercive power to enforce the award, and thus the award
must be transformed into a judgment, which can be executed with the
enforcement mechanism of the state.” Michael H. Strub, Jr., Note,
Resisting Enforcement of Foreign Arbitral Awards under Article
V(1)(E) and Article VI of the New York Convention: A Proposal for
Effective Guidelines, 68 TEX. L. REV. 1031, 1044 (1990).
Some cases hold that an expectation of payment need not be legally
enforceable to be accruable. See Flamingo Resort, Inc. v. United
States, 664 F.2d 1387 (9th Cir. 1981); Eastman Kodak Co. v. United
2
Even if Sonatrach owned Swiss assets, Sedco could not have executed on
the arbitral award in Switzerland. Instead, Sedco would have been
forced to institute a separate proceeding in Switzerland to judicially
confirm the award.
10
States, 534 F.2d 252 (Ct. Cl. 1976); Travis v. Commissioner, 406
F.2d 987 (6th Cir. 1969); Barker v. Magruder, 95 F.2d 122 (D.C.
Cir. 1938). These cases, however, involve undisputed debts and
debts such as gambling markers which are routinely paid in the
normal course of business although technically unenforceable. See,
e.g., Flamingo Resort, 664 F.2d at 1390-91.
The United States asks that the reasoning of these cases not be so
limited, but to read them more expansively ignores the critical
difference between disputed and undisputed debts. The general rule
is that taxpayers do not have to accrue disputed debts until the
dispute is resolved. See Thompson v. Commissioner, 761 F.2d 259,
265 (6th Cir. 1985) (holding that liability is not fixed until “the
last bell [is] rung in the last court”); Maryland Shipbuilding and
Drydock Co. v. United States, 409 F.2d 1363, 1367 (Cl. Ct. 1969)
(requiring a judgment to be “enforceable with no strings
attached”); H. Liebes & Co. v. Commissioner, 90 F.2d 932, 938 (9th
Cir. 1937) (holding that a disputed payment need not be accrued
until the time for appeal has expired); Beauty Acquisition Corp. v.
Commissioner, 69 T.C.M. 1971, 1977 (1995) (“The all-events test is
based on the existence or nonexistence of legal rights or
obligations at the close of a particular accounting period, not on
the probability – or even absolute certainty that such right or
obligation will arise at some point in the future.”).
As such, a foreign arbitral award need not be accrued until
judicially confirmed in a jurisdiction in which enforcement is
11
sought. Given that some line must be drawn, it makes sense to draw
the line between a private arbitration award and a judicially
enforceable order, even if the former flows almost always into the
latter. The existence of state enforcement mechanisms is one
reason we give great respect to judicial orders. The lack of such
enforcement for a bare arbitral award is thus a decisive
distinction. Drawing the line at the existence of an unappealable
judicial confirmation is also a rule that is easy to follow and
apply. Furthermore, in the context of international arbitration,
it makes sense to give the taxpayer the benefit of the doubt given
the inherent difficulties associated with collecting foreign awards
in foreign countries.
For these reasons, we hold that a fixed right to receive does not
exist with respect to a foreign arbitral award until the award is
judicially confirmed and no longer subject to appeal in the
jurisdiction in which enforcement is sought. Because we hold that
Sedco did not have to accrue their arbitral award in 1984, we do
not reach their alternative argument that the award could be
treated as an installment sale under 26 U.S.C. § 453(c).
AFFIRMED.
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