Eaton Corp. Seeks Interlocutory Appeal of Tax Court Decision

 

EATON CORPORATION AND SUBSIDIARIES,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

PETITIONER'S MOTION TO CERTIFY FOR INTERLOCUTORY APPEAL

UNITED STATES TAX COURT

Judge Kerrigan

PETITIONER'S MOTION TO CERTIFY ORDER DENYING PETITIONER'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

Petitioner Eaton Corporation & Subsidiaries (hereinafter “Eaton”), hereby moves the Court, pursuant to section 7482(a)(2)(A) of the Internal Revenue Code (the “Code”) and Rule 193 of the United States Tax Court Rules of Practice and Procedure (“Tax Court Rules”), to certify for interlocutory appeal its Order dated March 12, 2019, granting Respondent's motion for partial summary judgment and denying Eaton's motion for partial summary judgment (the “Section 956 Order”).

In support of this motion, Eaton states as follows:

Due to the significance of the issues raised in this Motion, Eaton requests oral argument.

WHEREFORE, Eaton respectfully requests that the Court grant this motion.

Dated: June 6, 2019

Respectfully Submitted,

Raj Madan
T.C. Bar No. MR1190
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel for Petitioner
1440 New York Avenue, N.W.
Washington, DC 20005
(202) 371-7020
raj.madan@skadden.com

Kevin R. Stults
T.C. Bar No. SK0309
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel for Petitioner
1440 New York Avenue, N.W.
Washington, DC 20005
(202) 371-7095
kevin.stults@skadden.com

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PETITIONER'S BRIEF IN SUPPORT OF MOTION TO CERTIFY FOR INTERLOCUTORY APPEAL

PETITIONER'S BRIEF IN SUPPORT OF ITS MOTION TO CERTIFY ORDER DENYING PETITIONER'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

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TABLE OF CONTENTS

INTRODUCTION

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Cases

Ahrenholz v. Board of Trustees of University of Illinois, 219 F.3d 674 (7th Cir. 2000)

In re Baker & Getty Financial Services, Inc., 954 F.2d 1169 (6th Cir. 1992)

Canaveral Int I Corp. v. Comm'r, 61T.C. 520 (1974)

Cardwell v. Chesapeake & Ohio Railway Co., 504 F.2d 444 (6th Cir. 1974)

In re City of Memphis, 293 F.3d 345 (6th Cir. 2002)

Eastern States Casualty Agency, Inc. v. Commissioner, 62 T.C.M. (CCH) 1213 (1991)

Eaton Corp. v. Commissioner, T.C. Memo. 2017-147

Kovens v. Commissioner, 91 T.C. 74 (1988)

In re Miedzianowski, 735 F.3d 383 (6th Cir. 2013)

In re Trump, 874 F.3d 948 (6th Cir. 2017)

Statutes & Regulations

I. R.C. § 312

I.R.C. § 951

I.R.C. § 951(a)

I.R.C. § 956

I.R.C. § 956(c)(1)(C)

I.R.C. § 964(a)

I.R.C. § 7482(a)(2)

I.R.C. § 7482(a)(2)(A)

Temp. Treas. Reg. § 1.956-1T(b)(4)

Treas. Reg. § 1.312-6(b)

Treas. Reg. § 1.964-1

Treas. Reg. § 1.964-1(a)

Other Authorities

Rule 155

Rule 193

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INTRODUCTION

Eaton respectfully requests the Court certify its Order dated March 12, 2019, for interlocutory appeal pursuant to section 7482(a)(2)(A)¹ and Rule 193 of the Tax Court Rules of Practice and Procedure. The Court's Order effectuated the Court's Opinion dated February 25, 2019 (“Opinion”), denying Eaton's Motion for Partial Summary Judgment and granting Respondent's Motion for Partial Summary Judgment. The Opinion addressed a controlling and novel issue of law regarding whether section 964(a) and Treasury Regulation section 1.964-1 incorporate the section 312 regulations (the “Section 956 Issue”).

Interlocutory appeal would allow the Sixth Circuit to review the Court's decision on the Section 956 Issue immediately, rather than hearing the appeal after the completion of all proceedings related to the 2007-10 tax years. Deferring the appeal until after the completion of all proceedings related to the 2007-10 tax years would create the potential for a significant waste of this Court's and the parties' time and resources, which can be avoided by granting interlocutory appeal.

For the Sixth Circuit to review the Section 956 Issue on an interlocutory basis, both this Court and the Sixth Circuit must determine that such an appeal is appropriate under a four-factor test set forth in section 7482(a)(2)(A).² The four factors are: (1) the issue subject to the appeal must be a question of law; (2) the issue must be “controlling” in the litigation; (3) there must be a substantial ground for difference of opinion on the issue; and (4) an immediate appeal may materially advance the ultimate termination of the litigation. See Cardwell v. Chesapeake & Ohio Ry. Co., 504 F.2d 444, 446 (6th Cir. 1974). The Section 956 Issue satisfies each of the four factors. Thus, while interlocutory appeal is only granted in exceptional circumstances, those exceptional circumstances exist here:

Admittedly, interlocutory appeal is granted only in exceptional circumstances because it is rare for all four of these conditions to be present in a single case. The Section 956 Issue is the rare case involving a pure, unsettled legal issue where the decision on the issue of law is determinative of whether the parties must engage in significant, fact-intensive litigation on a separate issue. Moreover, the need for the Sixth Circuit to resolve a novel Section 956 Issue, over which there are differences of opinion, is objectively established by the concurrence and the dissenting opinion.

Accordingly, Eaton respectfully requests the Court to certify the Order on the Section 956 Issue for interlocutory appeal under section 7482(a)(2)(A) and Tax Court Rule 193.

FACTUAL BACKGROUND

On February 25, 2019, the Court issued its Opinion denying Eaton's Motion for Partial Summary Judgment and granting Respondent's Motion for Partial Summary Judgment. The core legal issue split the Court, resulting in three different statutory interpretations as reflected in a majority opinion, a concurring opinion, and a dissenting opinion authored by the Chief Judge.

The majority opinion held that “the reference to 'regulations' in section 964(a) is reasonably read to include regulations promulgated under section 312,” and thus “the rules set forth in section 312 and its regulations must be applied in determining the E&P of the upper tier CFC partners of EW LLC.” Opinion at 12, 18. Based on this statutory interpretation, the majority held that the calculation of the E&P of Eaton's upper tier CFC partners must include their distributive shares of EW LLC's section 951(a) income inclusions.

The concurring opinion found the statutory analysis conducted by the majority “unsatisfactory” to the extent the majority concluded that section 964(a) incorporated Treasury Regulation section 1.312-6(b) directly. Opinion at 27. It reached a different analytical conclusion — that Treasury Regulation section 1.312-6(b) was incorporated through the regulations issued under section 964(a).

Chief Judge Foley dissented from the majority opinion and performed an entirely different statutory analysis. The Chief Judge's dissent concluded that section 964(a) does not incorporate the section 312 regulations and that the majority “imprudently stretches the explicit terms of section 964(a) and its accompanying regulation.” Opinion at 28. The dissent characterized the majority opinion as “a rickety analytical construct” that “sets bad precedent.” Opinion at 29. The Chief Judge concluded that the E&P calculation process in Treasury Regulation section 1.964-1(a) “is self-contained and complete,” and that the Commissioner “is bound by the terms of the rules he created.” Opinion at 30-31. Finally, the Chief Judge noted that the role of the Court is “to review and construe, not adjust and reconstruct, the statute and the regulations,” and that “we must interpret, not make, the law.” Opinion at 31.

On April 10, 2019, Respondent filed a motion to amend its answer to add a new issue (the “Loan Issue”). On May 10, 2019, the Court granted Respondent's motion. Development of the Loan Issue is expected to require extensive discovery and a potentially lengthy trial.

ARGUMENT

Under section 7482(a)(2)(A) and Tax Court Rule 193, the Tax Court may certify an order for immediate interlocutory appeal if:

• The order addresses a “question of law”;

• The question of law is “controlling”;

• There is “a substantial ground for difference of opinion” on the legal issue; and

• An immediate appeal “may materially advance the ultimate termination of the litigation.”

Here, because all four of these conditions are met, Eaton's motion to certify the Order should be granted.

1. The Opinion Addresses a Pure Issue of Law

The first condition for certification is that the order must address an issue of law. A question of law that is ripe for interlocutory appeal must be a “pure question of law, something the court of appeals [can] decide quickly and cleanly without having to study the record.” Ahrenholz v. Bd. of Trs. of Univ, of Ill., 219 F.3d 674, 677 (7th Cir. 2000).

The Opinion is based on just such a “pure question of law.” Id. The Section 956 Issue requires a court to determine whether section 964(a) and Treasury Regulation section 1.964-1 incorporate the section 312 regulations. There are no issues of fact that must be decided to resolve this question. Indeed, this Court concluded that the Section 956 Issue was a pure question of law when it granted Respondent's motion for summary judgment, and it was not necessary for this Court to consider any disputed facts in its Opinion. The Section 956 Issue thus involves an interpretation of the relevant statutes and regulations, which the Sixth Circuit regularly reviews de novo. Consequently, this factor is satisfied.

2. The Opinion Addresses a Controlling Issue

The second condition requires that the issue on appeal be controlling. Section 7482(a)(2)(A). The Sixth Circuit has held that an issue is controlling if it could “materially affect the outcome of the case.” In re City of Memphis, 293 F.3d 345, 351 (6th Cir. 2002). Further, this Court has held that a question of statutory interpretation is controlling. E. States Cas. Agency, Inc. v. Comm'r, 62 T.C.M. (CCH) 1213 (1991). This Court has also held that an issue is controlling if it concerns “a question of law which is serious to the conduct of the litigation.” Kovens v. Comm'r, 91 T.C. 74, 79 (1988). The Court requires that an issue be controlling in order to ensure that interlocutory appeal is limited to issues where appeal could have a significant and meaningful impact on the outcome of the case, and that ancillary issues of little importance do not hold up court proceedings.

The parties agree that the final resolution of the Section 956 Issue controls the outcome of Respondent's adjustments under sections 951 and 956. These adjustments would not be sustained if the Sixth Circuit were to reverse the Court on the Section 956 Issue. Perhaps more importantly, for purposes of resolving this motion, the resolution of the Section 956 Issue is controlling and determinative of whether Respondent can pursue its new claim, the Loan Issue. Respondent amended his answer to raise the Loan Issue because the Court ruled for Respondent on the Section 956 Issue. But if the Sixth Circuit were to reverse, Respondent could no longer pursue the Loan Issue.³

Thus, the Section 956 Issue is a controlling issue of law.

3. There Is Substantial Ground for Difference of Opinion on the Section 956 Issue

The third condition is that a “substantial ground for difference of opinion” exists for the controlling question of law. This Court has found substantial grounds for difference of opinion where the issue on appeal “involve[s] questions that present serious and unsettled legal issues.” Kovens, 91 T.C. at 80. Similarly, the Sixth Circuit evaluates whether “the question is difficult, novel and either a question on which there is little precedent or one whose correct resolution is not substantially guided by previous decisions.” In re Miedzianawski, 735 F.3d 383, 384 (6th Cir. 2013) (citation omitted); see In re Trump, 874 F.3d 948, 952 (6th Cir. 2017).

Unquestionably, the Section 956 Issue satisfies this third condition, as articulated both by this Court and the Sixth Circuit. The legal question of whether section 964(a) and/or Treasury Regulation section 1.964-1 incorporate the section 312 regulations is an issue of first impression for both this Court and the Sixth Circuit. Indeed, no other trial or appellate court has decided this legal issue. The importance of this legal question is reflected in the Court's decision to issue a decision reviewed by the full Tax Court. The Section 956 Issue thus presents a “serious and unsettled” novel legal issue that is ripe for immediate consideration by the Sixth Circuit.

Further, the Opinion itself demonstrates the substantial grounds for differences of opinion. The Opinion includes three different analyses — a majority opinion, a concurrence, and a dissent. The Chief Judge's dissenting opinion was joined by another judge. The fact that the thirteen Tax Court judges that reviewed the Section 956 Issue came to three different conclusions on the issue establishes that there is substantial ground for difference of opinion.

In sum, it is clear even from just a review of the Opinion that the Section 956 Issue is novel and that there exists substantial disagreement over how the issue should be decided.

4. Interlocutory Appeal May Materially Advance the Ultimate Termination of This Litigation

Finally, the fourth condition is that interlocutory appeal “may materially advance the ultimate termination of the litigation.” Section 7482(a)(2)(A). The Sixth Circuit has held that interlocutory appeal is warranted in cases where immediate appeal could help “avoid protracted and expensive litigation.” In re Baker & Getty Fin. Servs., Inc., 954 F.2d 1169, 1172 (6th Cir. 1992) (quoting Cardwell v. Chesapeake & Ohio Ry., 504 F.2d 444, 446 (6th Cir. 1974)).

In this case, the Court's certification of the Section 956 Issue for interlocutory appeal will cut-off protracted and expensive litigation in two separate areas: the Loan Issue and the Rule 155 Computations for the 2005-06 years.

First, the Loan Issue recently raised by the Respondent is the type of issue that will involve protracted and expensive litigation, as contemplated by this fourth condition. The Loan Issue involves an upward adjustment to Eaton's taxable income based on Temporary Treasury Regulation section 1.956-1T(b)(4). In order for Respondent to sustain his adjustment based on Temporary Treasury Regulation section 1.956-1T(b)(4), he bears the burden of proving that one of Eaton's principal purposes for establishing a particular aspect of the EW LLC structure was to avoid section 956. Cases involving questions of a taxpayer's business motives routinely involve significant discovery and lengthy trials. See, e.g., Canaveral Int'l Corp, v. Comm'r, 61 T.C. 520, 536 (1974) (“The determination of the purpose of an acquisition requires a scrutiny of the entire circumstances in which the transaction or course of conduct occurred, including the relationship of the transaction to the claimed consequent tax result.”). Indeed, the Loan Issue will require the parties to engage in: (i) significant discovery; (ii) development of legal arguments; (iii) an extensive stipulation process; (iv) development of potential expert testimony; and ultimately, (v) a lengthy trial.

Those facts alone satisfy this fourth condition, but there is an additional procedural fact that makes the Section 956 Issue even more compelling. The Loan Issue was not raised during the administrative process; instead, Respondent amended his Answer to add the Loan Issue adjustment only a few weeks ago. Therefore, the issue was not developed factually or legally by either party during the administrative process, which necessitates substantially more factual and legal development in litigation than the typical “business purpose” case.

Importantly, however, if the Sixth Circuit reversed the Court's ruling on the Section 956 Issue, the parties agree that none of those proceedings would be required. Respondent himself recognized the inefficiency of pursuing the Loan Issue prior to the resolution of the Section 956 Issue when he decided to hold the Loan Issue in abeyance until after a decision on the parties' cross motions for summary judgment. It did not make sense for Respondent to pursue the Loan Issue because that issue would have been moot if Eaton prevailed on its motion for partial summary judgment. That same justification for deferring consideration of the Loan Issue until after resolution of the motion for summary judgment continues to apply. While this Court has rendered its decision on the motions for summary judgment, the Sixth Circuit still has not spoken on this issue of first impression. Thus, the unique procedural circumstances presented in this case justify interlocutory appeal of the Section 956 Issue. If the Court were to certify the issue for interlocutory appeal, the parties and the Court may be able to avoid protracted and expensive litigation over the Loan Issue.

In sum, it is beyond dispute that litigation in this case will not “be conducted in substantially the same manner regardless” of the Sixth Circuit's decision. See City of Memphis, 293 F.3d at 351. Allowing interlocutory appeal would “avoid protracted and expensive litigation” and most efficiently utilize the resources of this Court and the parties. See In re Baker & Getty Fin. Servs. Inc., 954 F.2d at 1172 (citation omitted).

There is a second area in which resources would potentially be saved by granting interlocutory appeal. Specifically, Eaton would also potentially save resources and avoid a potential delay in resolving Eaton Corp. v. Commissioner, T.C. Memo. 2017-147 (f Eaton F). As has been previously reported to the Court, Eaton's tax returns from the 2007-10 tax years have tax attributes (i.e., foreign tax credits and net operating losses) that Eaton carried back into the 2005-06 tax years. The Rule 155 Computations for the 2005-06 years cannot be completed without a determination of the correct carryback amounts from the 2007-10 tax years. The outcome of the Section 956 Issue thus directly affects the tax attributes Eaton has available to carryback to the 2005-06 tax years.

In the scenario in which interlocutory appeal is denied, Rule 155 Computations would be determined for both tax periods — 2005-06 and 2007-10 — on the basis that the IRS prevails on the Section 956 Issue. If the Sixth Circuit later reversed, that would affect not only the computations for the 2007-10 tax period but also the computations for the 2005-06 tax years because of the carrybacks from 2007-10.

Given that the tax attributes available to carry back to the 2005-06 tax years cannot be conclusively determined until the Sixth Circuit rules on the Section 956 Issue, denying interlocutory appeal here may require indefinitely postponing the closure of the 2005-06 tax years in Eaton I. Alternatively, even if the Rule 155 computations for the 2005-06 tax years could be completed prior to a conclusive determination of the 2007-10 tax attributes, deferring appeal of the Section 956 Issue would create the potential for an unnecessary waste of resources if the Sixth Circuit ultimately reversed.

As the parties and this Court have experienced in Eaton I, performing the complex calculations required to determine the proper tax liability in these cases is a time-consuming and resource-intensive process. An immediate appeal in this case would provide certainty on the Section 956 Issue and thus prevent the unnecessary expenditure of time and resources to perform Rule 155 calculations in Eaton / that would need to be recalculated if the Court's ruling on the Section 956 Issue is reversed. Thus, this Court's certification for interlocutory appeal of the Section 956 Issue would avoid unnecessary allocation of this Court's and the parties' time and resources to address Rule 155 Computations that would have to be substantially modified, were the Sixth Circuit to reverse.

Accordingly, for the reasons stated above, interlocutory appeal of the Section 956 Issue “may materially advance the ultimate termination of the litigation.” Section 7482(a)(2)(A).

CONCLUSION

For the foregoing reasons, and in light of the satisfaction of the applicable four-factor analysis, Eaton respectfully requests that the Court certify the March 12, 2019 Order for immediate review by the U.S. Court of Appeals for the Sixth Circuit pursuant to section 7482(a)(2) and Rule 193 of the Tax Court Rules of Practice and Procedure.

Dated: June 6, 2019

Respectfully Submitted,

Raj Madan
T.C. Bar No. MR1190
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel for Petitioner
1440 New York Avenue, N.W.
Washington, DC 20005
(202) 371-7020
raj.madan@skadden.com

Kevin R. Stults
T.C. Bar No. SK0309
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel for Petitioner
1440 New York Avenue, N.W.
Washington, DC 20005
(202)371-7095
kevin.stults@skadden.com