Dresser Industries, Inc. v. United States

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_________________

No. 99-11231
_________________

DRESSER INDUSTRIES, INCORPORATED,

Plaintiff-Appellant,

VERSUS

UNITED STATES OF AMERICA,

Defendant-Appellee.

________________________________

Appeal from the United States District Court
for the Northern District of Texas
________________________________
January 10, 2001

Before SMITH and DENNIS, Circuit Judges, and HARMON, District
Judge.1

MELINDA HARMON, District Judge:

This is an appeal from a suit for tax refund in which the

district court ruled against the taxpayer. Plaintiff-Appellant

Dresser Industries, Inc. argues that the district court erred when

it held on summary judgment that: (a) Treasury Regulation 1.861-

8(e) disallows “interest netting”; (b) interest liability exists on

deficiencies later eliminated or reduced by foreign tax credit

carrybacks; and (c) such interest accrues until the filing date of

1
District Judge of the Southern District of Texas, sitting by designation.
the return of the tax year in which the foreign tax credit arises.

Finding that the district court correctly ruled in favor of the

United States in light of express statute and applicable case law,

we affirm.

I.

Dresser Industries, Inc. (“Dresser”) is a worldwide supplier

of technology, products, and services to industries involved in the

development of energy and natural resources. Dresser is subject to

the Coordinated Examination Program, and, as a result, is under

continuous audit by the Internal Revenue Service.

In 1972, Dresser established Dresser International Sales

Corporation (“Dresser International”) as a wholly owned subsidiary.

Dresser International qualified as a Domestic International Sales

Corporation (“DISC”) to take advantage of Congress’s overall

strategy to increase domestic exports by providing tax incentives

to companies involved in export trade.2 A qualified DISC

subsidiary is not taxed on income derived from the sale of exports;

rather, its shareholders are taxed on a specified percentage of

DISC taxable income as if a dividend distribution had been made at

the end of the tax year. DISC taxable income, from which this

constructive dividend distribution is calculated, is based on a

complex statutory framework that establishes a “deemed” transfer

2
See Revenue Act of 1971, Pub.L. No. 92-178, 85 Stat. 535 (1971), codified as
amended at 26 U.S.C. §§ 991-997. For a more complete discussion on the structure of
DISCs, see Dresser Indus., Inc. v. United States, 73 F. Supp.2d 682, 684-85 (N.D.
Tex. 1999).

2
price for export goods provided to the DISC by the parent supplier.

The taxpayer calculates the deemed transfer price as 50% of the

“combined taxable income” of the DISC and its parent.

In 1984, when Congress replaced the DISC provisions of the tax

code with the Foreign Sales Corporation (“FSC”), Dresser responded

by incorporating Dresser Foreign Sales Corporation. The FSC serves

essentially the same purpose as the DISC, except a taxpayer

calculates combined taxable income using a 23% standard instead of

a 50% one.3

While the Internal Revenue Code governs transfer prices

applicable to DISCs and FSCs, the Treasury Regulations provide

rules governing the allocation of expenses, losses, or deductions

in computing the combined taxable income from those sources.

Allocation of interest expenses in the instant case is governed by

the 1977 version Treasury Regulation § 1.861-8(e). That Regulation

provides that “the aggregate of deductions for interest shall be

considered related to all income producing activities and

properties of the taxpayer and, thus, allocable to all the gross

income which the income producing activities and properties of the

taxpayer generate, have generated, or could reasonably have been

expected to generate.” Treas.Reg. 1.861-8(e)(2)(ii) (as amended in

1977).

3
For a thorough treatment of the FSC, see generally Note, The Making of a Subsidy,
1984: The Tax and International Trade Implication of the Foreign Sales Corporation
Legislation, 38 STAN. L. REV. 1327, 1334-55 (1986).

3
 The issues in this case arise from an audit of Dresser that

ended in September 1993. At the conclusion of the audit, Dresser

paid additional taxes and interest for taxable years 1980, 1981,

1982, 1984, 1986, and 1987, but subsequently filed formal claims

for refund. In these claims, Dresser asserted that, in

apportioning interest expenses between its DISC and FSC activities

and its non-DISC and non-FSC activities, it had erroneously

allocated gross income expense, and that it should have first

offset interest expense against interest income, and then allocated

only the net interest expense. The purpose of this practice,

called “interest netting,” would be to maximize the income treated

as included in the combined taxable income of Dresser and its DISC

and FSC from exports and foreign trade; the advantage would thus be

to increase the amount of income eligible for the favorable tax

benefits conferred by Congress on the DISC and FSC.

Dresser also asserted that use of interest netting in its 1983

taxable year gave rise to an additional foreign tax credit

carryback to its 1981 taxable year in the amount of $257,236; that

use of interest netting in 1985 resulted in an additional net

operating loss carryback to its 1982 taxable year; and that use of

interest netting in its 1984 taxable year resulted in an

overpayment of its tax liability for that year. Accordingly, based

on the technique of interest netting, Dresser sought tax refunds

for its 1981, 1982, and 1984 taxable years.

4
 In addition to its claims for refunds based on interest

netting, Dresser sought refunds of interest it previously had paid

on deficiencies in its 1981 and 1984 tax liabilities. Dresser had

previously filed a petition in the Tax Court contesting a

deficiency in its 1981 tax liability; as a result of Dresser’s

execution of a Waiver of Restrictions on Assessment and Collection

of Deficiency in Tax and Acceptance of Overassessment, and in light

of the Tax Court’s determination of tax deficiencies for those

years, Dresser was allowed to carry back excess foreign taxes from

its 1983 taxable year to its 1981 taxable year. Dresser was also

allowed to carry back excess foreign taxes from its 1986 taxable

year to its 1984 taxable year. These carrybacks effectively

reduced or eliminated Dresser’s tax deficiencies for 1981 and 1984.

Dresser sought refunds of the interest that it had paid on the

deficiencies that existed for those years because the foreign tax

carrybacks reduced or eliminated the initial deficiencies.

The Internal Revenue Service (“IRS”), in response, not only

rejected Dresser’s argument of using foreign tax credit carrybacks

to eliminate deficiency interest owed, but it also rejected

Dresser’s claim of interest netting and the subsequent refunds

arising from interest netting. Instead, the IRS maintained that

only a ratable share of “gross interest” could be apportioned to

the DISC and FSC.

5
 Dresser eventually sued the United States (“Government”) for

tax refund in the United States District Court for the Northern

District of Texas, seeking, inter alia, refunds of the federal

income taxes and interests that would arise from interest netting

and elimination of Dresser's deficiency interest. Dresser's

desired refunds totaled $2,585,776. On cross motions for partial

summary judgment, the district court held in favor of the

Government.4 While the court observed that an earlier version of

Treas.Reg. § 1.861-8 allowed for interest netting, the court held

that the version of the Regulation applicable to Dresser's case

specifically forbade interest netting. The district court also

held that Dresser was not entitled to a refund of the interest it

had paid with respect to deficiencies in its 1981 and 1984 tax

liabilities that were later reduced or eliminated as a result of

the carryback to those years of excess foreign tax credits from

Dresser’s 1983 and 1986 taxable years. The district court further

held that Dresser’s liability for interest continued to accrue

4 The court first considered the Government’s procedural argument that Dresser’s claim
for refund for its 1981 taxable year, based on a carryback of a foreign tax credit, was
both untimely and barred by § 6512(a) of the Internal Revenue Code. Section 6512(a)
prohibits obtaining tax refunds for taxable years previously before the Tax Court. The
district court concluded that, although Dresser’s claim for refund was timely filed
pursuant to § 6511(a) (which allows filing of a claim within two years from the date
a tax was paid), Dresser’s claim was nonetheless barred by § 6512(a)’s prohibition.
The district court also concluded that Dresser’s claim for refund for its 1982
taxable year was untimely, but that there was a genuine issue of material fact as to
whether Dresser had made a timely “informal” claim for refund for that year. Because
the court subsequently held that interest netting was not permissible, the court did
not resolve the issue of “informal” claim. Dresser and the Government, in their briefs,
both recognize that if this Court were to hold that the Treasury Regulations allow for
interest netting, a remand would be required to permit the District Court to resolve
the issue of whether Dresser made a timely informal claim for its 1982 taxable year.

6
until the due date for filing tax returns for the years in which

the excess foreign tax credits arose.

Dresser now appeals the district court's holding on these

three substantive issues.

II.

This Court reviews the district court's granting of summary

judgment for the Government de novo, applying the same standards as

those applied by the district court in making its determination.

Neff v. American Dairy Queen Corp., 58 F.3d 1063, 1065 (5th Cir.

1995) (citing McDaniel v. Anheuser-Busch, Inc., 987 F.2d 298, 301

(5th Cir. 1993)); Cavallini v. State Farm Mut. Auto Ins. Co., 44

F.3d 256, 266 (5th Cir. 1995) (citing LeJeune v. Shell Oil Co., 950

F.2d 267, 268 (5th Cir. 1992)).

The first issue presented on appeal is whether Treasury

Regulation § 1.861-8(e)(2) permits Dresser first to offset interest

income against interest expense and then apportion only the “net”

interest expense between its DISC/FSC activities and its non-

DISC/FSC activities in computing combined taxable income

attributable to qualified export receipts or foreign trading gross

receipts. Dresser argues that § 1.861-8(e)(2) allows for interest

netting, and, as a result, Dresser calculates that it is entitled

to refunds for its 1981, 1982, and 1984 taxable years.

In support of its position, Dresser invokes this Court's

decision in Dresser Indus., Inc. v. Commissioner, 911 F.2d 1128

7
(5th Cir. 1990), which explicitly ruled in favor of interest

netting. Specifically, we held in that case that “Dresser may

offset its interest income against its interest expense and

allocate the net interest expense to its DISC for purposes of

calculating [combined taxable income].” Id. at 1136.

Our 1990 Dresser opinion, however, analyzed the 1975 version

of Treas.Reg. 1.861-8(a), which provided in pertinent part:

From the items of gross income specified in §§ 1.861-2 to
1.861-7, inclusive, as being income from sources within
the United States there shall be deducted the expenses,
losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other
expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of
any other expenses, losses, or deductions which cannot
definitely be allocated to some item or class of gross
income.

Treas.Reg. § 1.861-8(a) (as amended in 1975). While this

regulation set out the method of allocating “expenses, losses, and

other deductions,” it did not define the amount of deductions to be

allocated. Id. Additionally, “the specific code sections

pertaining to DISCs, the legislative history, and the applicable

Treasury Regulations [were] silent with regard to the amount of

interest expense to be allocated in calculating” combined taxable

income. Dresser, 911 F.2d at 1135.

Such ambiguity gave rise to our consideration of competing

interpretations of the 1975 Regulation. On the one hand, the

Commissioner in Dresser urged that “expenses” under the Regulation

meant “specific itemized deductions set out” in the Tax Code, an

8
interpretation that would dictate that gross interest expense would

be apportioned. Id. On the other hand, Dresser argued the

“equally acceptable interpretation” that interest expense among

related business operations was “the actual cost of financing those

operations.” Id.

We found the latter reading more consistent with the

legislative intent of the DISC and more agreeable to “the realities

of business of finance.” Id. The Treasury Regulations take the

view that money is fungible. Id. (citing Treas.Reg. 1.861-

8(e)(2)(I) (as amended in 1988)). Given such fungibility, we

appreciated that, in the normal business context, the amount and

timing of business borrowing rarely, if ever, correlate to specific

investments. Id. For example, a business may incur a debt in a

single transaction, even though its cash requirements are spread

out over the ensuing quarter. The business may then choose to

reduce the cost of holding these as-yet unneeded funds by investing

in short-term, interest-bearing instruments. Id. (citing Ideal

Basic Indus. v. Commissioner, 82 T.C. 352, 400 (1984)); see also

Portland General Cement Co. v. United States, 628 F.2d 321, 342-43

(5th Cir. 1980) (holding that the actual cost of borrowing was the

amount properly allocable to mining operations so as not to

allocate a disproportionate share of the business's financing costs

to a specific phase of its operations). In such a case, “the total

cost of the borrowing is the interest expense on the debt incurred,

9
reduced by the interest earned on the investment of any temporary

cash surplus.” Dresser, 911 F.2d at 1135.

We concluded in the 1990 Dresser case that requiring the

allocation of gross interest expenses in this kind of business

context “would burden the DISC with a disproportionate share of the

actual borrowing costs attributable to all operations, not merely

to export operations.” Id. at 1136. Therefore, with respect to

the 1975 version of Treas.Reg. 1.861-8(e), we did “not believe that

Congress contemplated or intended this result when it enacted the

DISC legislation, and we [found] nothing in the statute, the

legislative history, or the applicable Treasury Regulations that

contradict[ed] our belief.” Id. Rather, under the 1975 version of

the Regulation, “interest expense to be apportioned among related

business operations [was] the actual cost of financing those

operations.” Id.

This Court recognized in Dresser, however, that Congress

substantially revised the 1975 version of Treas.Reg. 1.861-8 in

1977. Id. at 1134, n.11. Moreover, we acknowledged that our

reasoning in that case did “not address whether interest netting is

consistent with the [1977] version of the Treasury Regulations, or

whether the [1977] Regulations are consistent with Congressional

intent underlying the original DISC legislation.” Id.

Although it is the 1977 version of the Treas.Reg. 1.861-8(e)

that is at issue in the instant case, Dresser presently argues that

10
the 1977 version does not call for any different result with regard

to interest netting. Indeed, Dresser insists that the only

difference between the 1975 and 1977 versions of Treas.Reg. §

1.861-8(e) merely involves the method of allocating and

apportioning expense items, not the amount of an expense item.

Dresser thus claims that the district court committed error when it

failed to follow the 1990 Dresser opinion and instead held that the

plain language of the revised Regulation disallows interest

netting. In contrast, the Government argues that the 1977 version

of Treas.Reg. § 1.861-8, by its explicit terms, does not permit

interest netting, and instead requires allocation of gross interest

expenses between the DISC/FSC and non-DISC/FSC activities.

We agree with the Government. The plain language of the 1977

version, as noted above, specifically states that “the aggregate of

deductions for interest shall be considered related to all income

producing activities and properties of the taxpayer and, thus,

allocable to all the gross income which the income producing

activities and properties of the taxpayer generate, have generated,

or could reasonably have been expected to generate.” Treas.Reg. §

1.861-8(e)(2)(ii) (emphasis added). The 1977 revision moreover

provides that

[t]he method of allocation and apportionment for
interest set forth in this paragraph is based on
the approach that money is fungible and that
interest expense is attributable to all activities
and property regardless of any specific purpose for
incurring an obligation on which interest is paid.

11
 This approach recognizes that all activities and
property require funds and that management has a
great deal of flexibility as to the source and use
of funds.

Treas.Reg. 1.861-8(e)(2)(I) (emphasis added). Thus, while the

Regulation's adherence to the principle of money fungibility

remains intact in the newer version of Treas.Reg. 1.861-8(e), the

new Regulation nonetheless explicitly mandates that interest be

calculated by “all income producing activities” and “all the gross

income.” Treas.Reg. 1.861-8(e)(2). Cf. Bowater, Inc. and

Subsidiaries v. C.I.R., 108 F.3d 12, 14 (2nd Cir. 1997) (finding it

ironic that the Regulation, in mandating that interest expense be

allocated to all income producing activities, and the taxpayer, in

arguing for interest netting, both cited the principle of

fungibility of money); Dresser Indus., Inc. v. United States, 73 F.

Supp.2d 682, 693 (N.D. Tex. 1999) (“Indeed, the revised regulations

use the concept of fungibility to reach the exact opposite

conclusion as the [1990] Dresser court.”)

We therefore hold that the plain language of the 1977 version

of Treas.Reg. 1.861-8(e)(2) disallows interest netting and

precludes taxpayers from offsetting interest expense against

interest income with only the balance being attributable to other

income producing activities. The two-tiered allocation mechanism

urged by Dresser, where interest income and expense are netted and

then allocated only for any remaining interest expense, finds no

place in the revised language of the Regulation. Instead, the

12
unambiguous language of Treas.Reg. 1.861-8(e)(2) orders that gross

interest expenses be ratably allocated to “all income producing

activities.” Treas.Reg. 1.861-8(e)(2) (emphasis added). Although

“the realities of business finance,” Dresser, 911 F.2d at 1135, may

not have changed since our 1990 Dresser decision, the plain

language of the applicable Regulation clearly has.

Our interpretation of the 1977 language of Treas.Reg. 1.861-

8(e) parallels the Second Circuit's in Bowater, Inc. v.

Commissioner, 108 F.3d 12 (2nd Cir. 1997).5 As in this case, the

taxpayer in Bowater insisted that Treas.Reg. § 1.861-8(e) permitted

the netting of interest income and expense, and apportionment of

only net interest expense among the taxpayer’s other income

producing activities. Id. at 14. The taxpayer, in essence, argued

that the Regulation's “all income producing activities language”

should be read as “all income producing activities except those

that produce income in the form of interest.” Id.

In rejecting the taxpayer's argument, the Bowater court found

that there is no relevant difference between debt and equity

investments under Treas.Reg. 1.861-8(e)(2) because “both involve

5
In Bowater, the Second Circuit considered the 1978 version of Treas.Reg. 1.861-
8(e)(2), which provides that “the aggregate of deductions for interest shall be
considered related to all income producing activities and properties of the taxpayer
and, thus, allocable to all the gross income which the income producing activities
and properties of the taxpayer generate, have generated, or could reasonably have
been expected to generate.” Bowater, Inc. v. Commissioner, 108 F.3d 12, 13 (2nd
Cir. 1997) (quoting Treas.Reg. 1.861-8(e)(2) (as amended in 1978)) (emphasis added).
Notably, the language of the 1978 version echoes exactly the language of the 1977
version relevant to this case. Because the language is the same, we find the Second
Circuit’s analysis in Bowater illuminating to the case at bar.

13
the use of money to produce income.” Id. Because the revised

Regulation provides that “deductions for interest expense be

allocated to all income producing activities, with no distinction

based on whether the income produced bears the label 'interest' or

dividend' or any other appellation,” the Second Circuit reasoned

that the newer language of the Regulation, by its explicit terms,

disallowed interest netting. Id.

Like the taxpayer in the instant case, the taxpayer in Bowater

cited this Court's 1990 Dresser decision to argue in favor of

interest netting. Id. at 15. The Second Circuit, however,

correctly recognized that Dresser “arose under an earlier version

of the regulations that was much less clear than the Regulation at

issue” in Bowater. Id. at 15 n.6. Because the revision of

Treas.Reg. 1.861-8(e) explicitly spoke in terms of “all income

producing activities” and “items of gross income,” the Bowater

court ultimately concluded that “the plain language of the

Regulation [did] not give [the court] the latitude to interpret”

the Regulation in light of business models or economic theories.

Id. at 16 (questioning this Court's economic premises in Dresser,

but holding that the plain language of the revised Regulation

nevertheless rendered any disagreement moot). In the instant case,

we agree that the unambiguous language of the Regulation provides

for gross interest expenses to be ratably allocated to all income

producing activities.

14
 As a final argument in favor of interest netting, Dresser

contends that the IRS took a contrary position and allowed interest

netting in two prior Tax Court cases involving Dresser’s 1978 to

1982 taxable years. In both cases, the 1977 version of Treas.Reg.

§ 1.861-8(e)(2) was in effect; nevertheless, the IRS allowed

interest netting. Dresser, in essence, argues that the IRS has

waived any position against interest netting.

We disagree. First, Dresser fails to demonstrate how the

IRS's past allowance of interest netting constitutes a waiver on

the part of the Government. Second, and more important, it is well

established that the Commissioner may change an earlier

interpretation of the law, even if such a change is made

retroactive in effect. Dickman v. Commissioner, 465 U.S. 330, 343

(1984) (citing Dixon v. United States, 381 U.S. 68, 72-75 (1965);

Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183-184

(1957)). This rule applies even though a taxpayer may have relied

to his detriment upon the Commissioner's prior position. Id.

(citing Dixon, 381 U.S. at 73). Additionally, the Commissioner is

under no duty to assert a particular position as soon as a relevant

statute authorizes such an interpretation. Id. (citing Bob Jones

Univ. v. United States, 461 U.S. 574 (1983)). Therefore, the IRS's

past allowance of Dresser's interest netting does not compromise

the IRS's current position against interest netting, nor does it

15
preclude this Court from reading the plain language of Treas.Reg.

1.861-8(e)(2).6

III.

The second issue raised on appeal is whether Dresser's

deficiency interest was eliminated when foreign tax credit

carrybacks extinguished the deficiencies in the years to which the

foreign tax credits were carried.

As discussed supra, Dresser was allowed to compute foreign tax

credits for taxable years 1981 and 1984 which resulted in an

elimination of tax owed for those tax years. Specifically, Dresser

was allowed to carry back excess foreign taxes in the amount of

$265,109 from its 1983 taxable year to its 1981 taxable year.

Dresser was similarly allowed to carry back excess foreign taxes in

the amount of $6,261,397 from its 1986 taxable year to its 1984

taxable year. The result of these foreign tax credit carrybacks

was the reduction or elimination of deficiencies in Dresser's 1981

and 1984 income tax liabilities. Dresser subsequently sought

refunds of the interest it had paid for the 1981 and 1984

deficiencies, insisting that the carrybacks eliminated not only the

deficiency, but also the deficiency interest.

6
In light of our holding against interest netting under the 1977 version of
Treas.Reg. 1.861-8(e)(2), we find some of Dresser's refund claim for taxable year
1981 moot. Dresser contends that its use of interest netting in 1983 resulted in
the availability of excess foreign taxes that it was entitled to carry back to 1981
in the amount of $257,236. Both parties acknowledge in their briefs that this
particular claim would be rendered moot if the Court were to hold against interest
netting. Because we find that the 1977 language of Treas.Reg. 1.861-8(e)(2) plainly
disallows interest netting, we further find Dresser's refund claim based on such a
practice without merit.

16
 Arguing this position on appeal, Dresser first contends the

plain language of Internal Revenue Code § 904(c) clearly and

conclusively provides that a foreign tax credit carryback

eliminates both the deficiency and the interest on the deficiency.

Section 904(c) states that excess foreign taxes

shall be deemed taxes paid or accrued to foreign
countries in or possessions of the United States in the
second preceding taxable year . . . . Such amount deemed
paid or accrued in any year may be availed of only as a
tax credit and not as a deduction and only if the
taxpayer for such year chooses to have the benefits of
this subpart . . . .

26 U.S.C. § 904(c) (emphasis added). From this language, Dresser

asserts that because its foreign taxes were “deemed paid or

accrued” in 1981 and 1984, the result is as if the excess foreign

taxes at issue had initially accrued in 1981 and 1984. Dresser

contends that the IRS should essentially operate under the fiction

that the taxes were indeed actually paid in 1981 and 1984. The

result of this counterfactual construction would then be that no

interest would exist because no predicate deficiency would have

existed.

We reject the fiction. Inherent in Dresser's argument is the

notion that the “deemed paid” language of § 904(c) speaks not only

to what year the credit will be applied, but also to when the

reallocation of the tax credit will be deemed to occur. Finding no

case law or legislative history to support such a proposition, we

17
hold that Dresser remained liable for interest on deficiencies that

were later reduced or eliminated by foreign tax credit carrybacks.

The Federal Circuit carefully addressed this precise issue in

Fluor Corp. and Affiliates v. United States, 126 F.3d 1397 (Fed.

Cir. 1997), reh’g granted, 132 F.3d 700 (Fed. Cir. 1997), cert.

denied, 522 U.S. 1118 (1998). As that court explained,

The word “deemed” is used interchangeably with the words
“treated as” in a closely associated provision of the
Code, 26 U.S.C. § 902(a), and the legislative history of
section 904(c) confirms that the statute uses the word
“deemed' in that sense.
. . . .
We thus can be confident that when Congress used the word
“deemed,” it meant “treated as if,” and that a foreign
tax paid in a particular year would be treated as if it
were paid in another year. Indeed, that interpretation
is necessary to effect the reduction of a deficiency in
a carryback year.

Id. at 1401. However, the Fluor court noted that “while

interpreting the word 'deemed' to mean 'treated as if' answers the

question of what year the credit will be applied to, it does not

answer the question of when the reallocation of the foreign tax

credit will be deemed to occur-–whether in the carryback year or at

the time the carryback was generated, one or two years later.” Id.

We recognize that if the reduction or elimination of the

deficiency is treated as having occurred in the carryback year, “it

does not make sense to assess interest on the deficiency.” Id.

Conversely, if the reduction or elimination of the deficiency is

considered to have occurred at the time the carryback was

generated, “it makes sense that interest should be assessed on the

18
deficiency during the time it was outstanding.” Id. The language

of § 904(c), however, is unclear as to whether the “deemed paid”

language relates to the carryback year or the year in which the

carryback arises.

The district court therefore correctly appreciated that the

text of § 904(c) does not provide “clear legislative expression”

regarding whether Congress intended to eliminate deficiency

interest on a tax deficiency that is subsequently extinguished by

a foreign tax credit carryback. See Dresser, 73 F. Supp.2d at 695-

96. The Federal Circuit in Fluor and the Tax Court in Intel Corp.

and Consol. Subsidiaries v. Commissioner, 111 T.C. 90 (1998), have

also perceived as much. See Fluor, 126 F.3d at 1401-02 (“We are

thus confronted with an ambiguity as to whether Congress meant the

language of section 904(c) to forbid the assessment of interest on

a previous tax deficiency that is erased as a result of the foreign

tax carryback.”); Intel, 111 T.C. at 98 (describing § 904(c) as

“ambiguous” and interpreting it “without the benefit of any

legislative history directed to this ambiguity”).7 Moreover,

7
But see Fluor Corp. v. United States, 35 Fed. Cl. 520, 526 (1996), rev'd, 126 F.3d
1397 (Fed. Cir. 1997), cert. denied, 522 U.S. 1118 (1998). In Fluor, the Federal
Circuit reversed the Court of Federal Claims, which had held that no ambiguity in §
904(c) exists. Rather, the Court of Federal Claims found that
[t]he intent of Congress can be discerned from the plain language of
the statute. Congress provided in § 904(c) that they carryback of the
credit for excess foreign tax paid “shall be deemed taxes paid or
accrued” in the earlier year. Under § 904(c), therefore, Fluor's tax
obligation for 1982 was changed; it was reduced by the foreign tax
carried back which was “deemed” paid in 1982.
Fluor Corp. v. United States, 35 Fed. Cl. at 526 (1996).

19
nothing in the language of § 904(c) or its legislative history

addresses this ambiguity. See Fluor, 126 F.3d at 1402; Intel, 111

T.C. at 98. Rather, § 904(c) conclusively answers only the

question of to what year will the tax credit be applied. Fluor,

126 F.3d at 1401.

Because § 904(c) does not answer the issue posed in this

appeal, we look to 26 U.S.C. § 6601(a), the general provision for

deficiency interest in the Tax Code. Section 6601(a) provides that

when an underpayment in tax for a particular year is reduced or

eliminated as a result of a carryback from a later year, the

taxpayer remains liable for interest on its underpayment from the

time the tax in question was due until the date the tax was

satisfied by application of the carryback. 26 U.S.C. § 6601(a);

see Fluor, 126 F.3d at 1402. The principle undergirding this rule

is that the government is deprived of the money for the period

between the original time the tax deficiency should have been paid

and the time the deficiency was abated by the foreign tax credit.

Manning v. Seeley Tube & Box Co., 338 U.S. 561, 566 (1950); Fluor,

126 F.3d at 1402; see also In re Rush-Hampton Indus., Inc., 98 F.3d

614, 616 (11th Cir. 1996). In the absence of an explicit

countermand to § 6601(a)'s general rule, the statute “compels the

conclusion that the government is entitled to interest for that

interim period.” Fluor, 126 F.3d at 1402. Without clear language

in § 904(c) to provide an exception to the § 6601(a) standard, we

20
find that § 6601(a) operates in the instant case to impose interest

liability on Dresser's 1981 and 1984 deficiencies, even though the

deficiencies were later reduced or eliminated by foreign tax credit

carrybacks.

Two closely analogous Supreme Court decisions, cited by the

Government, support this conclusion. In the first, Manning v.

Seeley Tube & Box Co., 338 U.S. 561 (1950), the government assessed

a deficiency in the taxpayer's 1941 taxes, with interest from the

date the taxes were due. The taxpayer subsequently filed a return

in 1943, showing a net operating loss for that year. The net

operating loss carryback, when applied to the taxpayer's 1941

taxes, was sufficient to eliminate its tax liability for that year.

The Commissioner abated the deficiency, but the question then arose

as to whether the taxpayer was entitled to refund of the interest

that it had paid on the deficiency. Id. at 563-65.

The Supreme Court held that the taxpayer was not relieved of

its liability to pay interest on the 1941 deficiency despite the

net operating loss carryback because “subsequent cancellation of

the duty to pay [the] assessed deficiency does not cancel in like

manner the duty to pay the interest on that deficiency.” Id. at

565. In coming to its conclusion, the Court reasoned that

the taxpayer, by its failure to pay the taxes owed, had
the use of funds which rightfully should have been in the
possession of the United States. The fact that the
statute permits the taxpayer subsequently to avoid the
payment of that debt in no way indicates that the

21
 taxpayer is to derive the benefits of the funds for the
intervening period.

Id. at 566. Rather, as the Court explained, the general

proposition is that “Congress intended the United Stats to have the

use of money due when it became due.” Id.

Accordingly, when the Commissioner assesses a deficiency, “he

also may assess interest on that deficiency from the date the tax

was due to the assessment date.” Id. The Supreme Court in Seeley

Tube saw nothing in the net operating loss carryback statute that

altered this fundamental principle. Id. Moreover, because the Tax

Code prohibits a taxpayer who pays a tax that is later abated by a

carryback from claiming interest from the government in the

intervening period, the Supreme Court inferred that Congress “did

not intend to change the basic statutory policy: the United States

is to have the possession and use of the lawful tax at the date it

is properly due.” Id. at 568. The Court thus concluded that,

“[i]n the absence of a clear legislative expression to the

contrary, the question of who properly should possess the right of

use of the money owed to the Government for the period it is owed

must be answered in favor of the Government.” Id. at 566.

In holding against the taxpayer's claim for interest, the

Supreme Court also identified a policy justification against

cancellation of interest on a deficiency subsequently abated. To

allow a taxpayer to recoup interest paid on a later-extinguished

deficiency, the Court reasoned, “would be to place a premium on

22
failure to conform diligently with the law.” Id. The undesirable

result would thus be a delinquent taxpayer's receiving “ the full

use of the tax funds for the intervening period,” id., while a

diligent taxpayer's being “statutorily prohibited from having the

use of the money for that period,” Fluor, 126 F.3d at 1400. As the

Court concluded, “We cannot approve such a result.” Seeley Tube,

338 U.S. at 568.

The Supreme Court issued a similar decision in the case of

United States v. Koppers, Inc., 348 U.S. 254 (1955), which involved

interest on a deficiency with respect to excess profits taxes. The

Koppers Court held that an abatement of federal excess profits

taxes that eliminated a taxpayer’s deficiency in that tax did not

relieve the taxpayer from having to pay interest on the deficiency

for the period between the tax's being due and the tax's being

abated. Koppers, 348 U.S. at 269. In concluding that the

taxpayers still had duties to pay interest on tax obligations

subsequently abated, the Court held that to extinguish the interest

obligation would be to “sustain the proposition that the tax relief

granted under [the adjustment provision] is necessarily

retroactive, extinguishing the deficiency as of the original due

date of the tax and thus eliminating the interest charges for the

corresponding period.” Id. at 263. Because no explicit provision

evinced any intent by Congress to eliminate the interest charges on

the former deficiency, the Court held that the taxpayer was liable

23
for the interest. Id. at 269. Finally, as in Seeley Tube, the

Supreme Court in Koppers observed that there was “nothing to

justify a greater tax advantage to any taxpayer that underpays its

correct tax, over one that pays such tax in full when due.”

Koppers, 348 U.S. at 262.

In the instant case, the Government argues that the reasoning

underlying Seeley Tube and Koppers bars Dresser from obtaining a

refund of interest on its deficiencies that were later reduced or

eliminated by the carryback of excess foreign taxes. Likewise, the

Federal Circuit in Fluor found “powerful support” in Seeley Tube

and Koppers when it held that a taxpayer remained liable for

interest on a deficiency that was later eliminated by the carryback

of excess foreign taxes. Fluor, 126 F.3d at 1400.

We agree that Seeley Tube and Koppers inform our examination

of interest liability in the context of foreign tax credit

carrybacks. As the Fluor court recognized, foreign tax carrybacks

operate in essentially the same manner as the net operating loss

carrybacks of Seeley Tube or the adjustments to excess profits

taxes of Koppers, because all three reduce or eliminate a tax

deficiency in a previous year. See id. at 1399-1400. Moreover, as

with the taxpayers in Seeley Tube, Koppers, and Fluor, there is no

dispute that Dresser in the instant case is subject to the general

provisions of § 6601(d). While no statute, including § 904(c),

specifically addresses the issue of interest liability with respect

24
to a foreign tax credit carryback, § 6601(d) mandates that a

taxpayer must pay interest on any deficiency from the time the

deficiency arises until it is paid or otherwise abated. See id. at

1400 (referring to 26 U.S.C. § 6601(a), discussed supra). Thus,

following the Supreme Court in Seeley Tube and the Federal Circuit

in Fluor, we hold that any departure from that general rule “would

require 'a clear legislative expression to the contrary.'” Id.

(quoting Seeley Tube, 338 U.S. at 566); see Intel, 111 T.C. at 98-

100 (providing similar reasoning in holding that foreign tax credit

carrybacks do not eliminate a taxpayer's interest liability).

Because, as discussed above, such clear legislative expression is

absent in this case, we agree with the Fluor court that the

“question of who should possess the right of use of the money owed

the Government for the period it is owed must be answered in favor

of the Government.” Fluor, 126 F.3d at 1401 (quoting Seeley Tube,

338 U.S. at 566).

Dresser nevertheless argues that the general rule of § 6601(d)

is inapplicable to foreign tax credit carrybacks because the 1939

version of § 6601(d), under which the Supreme Court decided Seeley

Tube and Koppers, included net operating loss carrybacks, but not

foreign tax credit carrybacks. To Dresser, that difference defines

the instant case.

We disagree. The version of § 6601(d) relevant to this case

authorizes the government to collect deficiency interest from

25
taxpayers whose deficiencies are eliminated by net operating loss

carrybacks, capital loss carrybacks, and credit carrybacks. 26

U.S.C. § 6601(d)(1)-(2). While the statute does not mention

foreign tax credit carrybacks, we disagree with Dresser's

conclusion that such absence constitutes a “clear legislative

expression” by Congress to carve out foreign tax credit carrybacks

as an exception to the general rule of § 6601(d). Cf. Seeley Tube,

338 U.S. at 566 (requiring a “clear legislative expression” before

finding that a taxpayer is entitled to money owed to the government

for the period it is owed); Fluor, 126 F.3d at 1400 (citing Seeley

Tube and holding same).8

Moreover, the legislative history of § 6601(d) indicates that

Congress did not intend to prohibit the assessment of interest on

deficiencies later eliminated by foreign tax credit carrybacks. As

the Fluor court explained:

When the foreign tax carryover was enacted in 1958,
section 6601(d) (which was then section 6601(e))
addressed only one form of carryback--the net operating
loss carryback. It was not until later that Congress
converted section 6601(d) into a catchall provision
imposing deficiency interest in the case of all
subsequently enacted carryback statutes. Because no such

8
Subsequent to the tax years at issue, Congress, in the Taxpayer Relief Act of
1997, modified § 6601(d) to provide explicitly that interest must be paid even if
the deficiency is eliminated by a foreign tax credit carryback. According to the
Intel case, the legislative history behind the change in the statute makes it clear
it was intended to overrule the decision of the Court of Federal Claims in Fluor
Corp. & Affiliates v. United States, 35 Fed. Cl. 520 (1996), which allowed the
foreign tax carryback to reduce an underpayment for purposes of computing interest,
and that Congress believed that the rule should be the same for both underpayments
and overpayments. Intel Corp. and Consol. Subsidiaries v. Commissioner, 111 T.C.
90, 101-04 (1998) (citing H. Conf. Rept. 105-220, 575-576 (1997); S. Rept. 105-33;
178-179 (1997); H. Rept. 105-148, 551-552 (1997)).

26
 catchall provision existed in 1958, Congress's failure to
alter the single-purpose section 6601(e) at that time to
include a reference to foreign tax carrybacks does not
compel the conclusion that Congress intended to prohibit
the collection of deficiency interest in the case of
foreign tax carrybacks.

Fluor, 126 F.3d at 1404. We also appreciate, as did the district

court, that Seeley Tube and Koppers had recently been decided when

the foreign tax credit was created. Dresser, 73 F. Supp.2d at 696

(citing Fluor, 126 F.3d at 1404). It was thus “reasonable for

Congress to assume that those cases would apply to analogous

carryback provisions,” id., especially because the rule of Seeley

Tube and Koppers “did not depend on specific legislation imposing

deficiency interest,” Fluor, 126 F.3d at 1404. Because it was

reasonable for Congress to make that assumption, no special

legislation was needed to ensure that the principles of Seeley Tube

and Koppers regarding net operating loss carrybacks (or adjustments

due to excess profits taxes) would apply similarly to foreign tax

credit carrybacks.9 Id.

As a final argument on this issue, Dresser contends that the

IRS took the position for approximately thirty-five years that

deficiency interest under Internal Revenue Code § 6601(a) was not

payable to the extent that income tax was eliminated by foreign

9
Like the Fluor court, we recognize a fundamental principle of statutory
construction is “that Congress is presumed to be aware of judicial interpretations
of the law, and that when Congress enacts a new statute incorporating provisions
similar to those in prior law, it is assumed to have acted with awareness of
judicial interpretations of prior law.” Fluor, 126 F.3d at 1404; see Merrill,
Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 382 n.66 (1982).

27
taxes which were deemed paid or accrued by the taxpayer pursuant to

§ 904(c). This stance, according to Dresser, is reflected by the

fact that Treas.Reg. 301.6601-1 fails to provide for such

interest.10 Dresser moreover notes that the Internal Revenue Manual

was not amended to conform to the current IRS position with respect

to deficiency interests vis-à-vis foreign tax credit carrybacks

until December 1992. See I.R.M. § 8712.3. Dresser therefore

concludes that “[t]he fact that IRS agents have consistently failed

to collect deficiency interest [related to foreign tax credit

carrybacks] for over 35 years supports [the] position that the law

did not require that deficiency interest be charged . . . .” To

Dresser, thirty-five years of “silence” by the IRS on this issue

is, “in effect, a tacit agreement with [Dresser's] particular

position.”

We disagree with Dresser's inference and refuse to hold that

the IRS's previous failure to impose interest on deficiencies

eliminated by foreign tax credit carrybacks necessarily precludes

it from imposing such interest now. “This is not a case . . . in

which the Service is attempting to reverse a position it has long

taken in construing a statute.” Fluor, 126 F.3d at 1405. Rather,

10
Treas.Reg. 301.6601-1 provides:
The carryback of a net operating loss, net capital loss, investment
credit, or work incentive program (WIN) credit shall not affect the
computation of interest on any income tax for the period commencing
with the last day prescribed for the payment of such tax and ending
with the last day of the taxable year in which the loss or credit
arises.
Treas.Reg. 301.6601-1 (as amended in 1983).

28
the district court in this case observed that no practice regarding

deficiency interest related to foreign tax credits was followed

uniformly, and Dresser has presented no evidence showing how

interest was imputed in other cases. See Dresser, 73 F. Supp.2d at

696. Similar to the Fluor court, we “are unwilling to treat as

established administrative practice what amounts to no more than a

failure to advert to the issue at a policymaking level.” Fluor,

126 F.3d at 1405.11

In sum, we find that the inconclusive language of § 904(c)

fails to establish an exception to the mandate of § 6601(d) in the

clear terms that the Supreme Court contemplated when it stated its

rule in Seeley Tube and Koppers. We agree with the district court

that the “deemed paid” language of § 904(c) can only be inferred to

“relate[] . . . to the year in which the foreign tax credit will be

applied.” Dresser, 73 F. Supp.2d at 695; see Fluor Corp., 126 F.3d

at 1401. Accordingly, elimination or reduction of Dresser's

deficiencies for 1981 and 1984 taxable years does not eliminate

Dresser's interest on those deficiencies.

IV.

11
Even assuming arguendo that the IRS's failure to impose deficiency interest
related to foreign tax credit carrybacks constituted an administrative practice, the
IRS is not precluded from departing from a prior administrative practice. See
Dickman v. Commissioner, 465 U.S. 330, 343 (1984) (stating that the IRS Commissioner
was “under no duty to assert a particular position as soon as the statute authorizes
such interpretation” even though “a taxpayer may have relied to his detriment upon
the Commissioner's prior position”).

29
 Having decided that Dresser is liable for interest on

deficiencies later eliminated by the carryback of excess foreign

taxes from its 1983 and 1986 taxable years, we now address the

issue of when the interest on those deficiencies ceases to accrue.

The district court, following the rule enunciated by the Tax Court

in Intel, held that “deficiency interest accrues until the filing

date of the return for the tax year in which the foreign tax credit

arises.” Dresser, 73 F. Supp.2d at 697; see Intel, 111 T.C. at

101-04; Hallmark Cards, Inc. v. Commissioner, 111 T.C. 266, 272

(1998). Dresser, however, appeals the district court's holding and

instead argues that deficiency interest accrues only until the end

of the taxable year in which the carryback was generated.

Dresser's position is consistent with the Federal Circuit's

decision in Fluor. See Fluor, 126 F.3d at 1406. In Fluor, the

Federal Circuit held that deficiency interest should be calculated

only through the end of the taxable year when the carryback arises

because such was the language of § 6601(e) (as it related to net

operating loss carrybacks) when the foreign tax credit was enacted

in 1958. Id. (citing 26 U.S.C. § 6601(e) (1958)). The Fluor court

presumed that “Congress . . . would have selected the same date for

ending the accrual of deficiency interest with respect to foreign

tax carrybacks if it had expressly addressed that subject in the

1958 legislation.” Id. Although the court in Fluor acknowledged

that Congress amended the timing rules in 1982 (changing the

30
accrual date for carrybacks covered by § 6601(d) to the filing date

for the taxable year in which the credit arises), the court

nonetheless declined to treat the legislative change as affecting

foreign tax credit carrybacks as well. Id. (“[W]e cannot attribute

to Congress the intention to have the foreign tax carryover timing

rules follow the 1982 legislative change in the rules applicable to

other carryovers.”).12

We agree with the district court that the Fluor court's

reasoning on the matter is “perplexing,” Dresser, 73 F. Supp.2d at

697, and we note that such reasoning has been criticized by the Tax

Court in recent decisions. See Intel, 111 T.C. at 102-04; Hallmark

Cards, 111 T.C. at 272 (1998).

In 1982, when Congress changed the accrual period for

underpayments with respect to tax credits specifically covered

under § 6601(d), it also made similar changes to the accrual period

for interest on overpayments, including overpayments generated by

the allowance of foreign tax credits. See 26 U.S.C. § 6611(f)(1)

& (2). In the Tax Equity and Fiscal Responsibility Act of 1982,

Pub.L. 97-248, § 346(c), 96 Stat. 637, Congress changed the

effective dates of carryback credits in all of the carryback

interest provisions for both overpayments and deficiencies from the

last day of the taxable year in which the credit arose to the due

12
The amendments promulgated by Congress were part of the Tax Equity and Fiscal
Responsibility Act of 1982, Pub.L. No. 97-248, § 346(c), 96 Stat. 324 (1982). This
change was effective for interest accruing after October 3, 1982.

31
date for filing the return for that year. The rule that the Fluor

court effectively pronounced, and the argument that Dresser now

advances, is that “Congress intended for the interest accrual rules

to be the same with respect to overpayments and underpayments for

every type of credit except foreign tax credits.” Dresser, 73 F.

Supp.2d at 697.

Such a proposition is illogical and inconsistent with the

Internal Revenue Code's consistent policy of symmetrical treatment

with respect to the period during which interest accrues on both

underpayments of tax that are eliminated by carrybacks and

overpayments of tax resulting from carrybacks. See Intel, 111 T.C.

at 103. Thus, as the Tax Court opined in Intel, it would be

contrary to well-ingrained tax policy, and indeed an “eccentric

action by Congress,” for interest attributable to a deficiency that

is reduced or eliminated by the carryback of a foreign tax credit

to accrue for a different period than interest on an overpayment

resulting from the same foreign tax carryback. Id. at 104.

Indeed, Congress's amendments to § 6601(d) in 1997 indicate the

intent to maintain symmetry between the interest accrual rules.

See § 6601(d)(2) (specifying that interest related to carryback of

a foreign tax credit continues to accrue until the filing date of

the year in which the credit arises). Consequently, we hold that

Dresser's deficiency interest accrued until the filing date of the

returns for the tax years in which the foreign tax credits arose.

32
 V.

For the reasons assigned, the district court's judgment for

the Government is AFFIRMED.

33