Company Argues Claims Court Properly Granted Voluntary Dismissal of Refund Suit

(1) The full name of every party or amicus represented by Appellee's counsel is Browning-Ferris Industries, Inc. & Subsidiaries. However Browning-Ferris Industries, Inc. has terminated as an entity for federal income tax purposes and is therefore merely the nominal Appellee in this proceeding. The very issue on appeal concerns whether the trial court had jurisdiction to preside over a suit in which the nominal plaintiff, the nominal Appellee herein, has terminated as an entity for federal income tax purposes.

(2) The name of the real party in interest represented by Appellee's counsel is BFI Waste Systems of North America, Inc. BFI Waste Systems of North America, Inc. is the designated agent for the consolidated group formerly known as "Browning-Ferris Industries, Inc. & Subsidiaries."

(3) BFI Waste Systems of North America, Inc. is a wholly owned subsidiary of Allied Waste Industries, Inc., a publicly traded corporation.

(4) The names of all law firms and the partners or associates that have appeared for the party in the lower tribunal or are expected to appear for the party in this court are as follows:

• Winston & Strawn, LLP; Robert F. Denvir (Attorney of Record), James M. Lunch and Peter W. Poulos (Of Counsel);

• Miller & Chevalier Chartered; Philip Karter (Attorney of Record) and Herbert Odell (Of Counsel); and

• Chamberlain, Hrdlicka, White, Williams & Martin; Philip Karter (Attorney of Record), Herbert Odell and Jonathan M. Prokup (Of Counsel).

The jurisdiction vested in this Court is solely to determine the jurisdiction of its subordinate tribunal as well as its own. In re Alappat, 33 F.3d 1526. 1576 (Fed. Cir. 1994) (citing Bender v. Williamsport Area School District, 475 U.S. 534, 541 (1986) ("Every federal appellate court has a special obligation to 'satisfy itself not only of its own jurisdiction, but also that of the lower courts in a cause under review' . . . '[When the lower federal court] lack[s] jurisdiction, we have jurisdiction on appeal, not of the merits but merely for the purpose of correcting the error of the lower court in entertaining the suit.'")).

In framing the issues on appeal, the Government makes several statements that are unsupported by either the appellate record or the law applicable to this case. For example, the Government's first enumerated issue on appeal challenges the actions of the lower court based on the presumption that "the relevant consolidated return regulation," i.e., Treas. Reg. § 1.1502-77A, "looks to state law concepts of termination and dissolution" to determine when agency rights granted under the federal tax law actually cease to exist where the corporate parent converted to a limited liability company under state law." Br. at 3.

Here, the Government seeks to argue that the continued existence of the former corporate parent under state law, albeit in another legal form, means that the same entity filed the May 5, 2005 refund claims after the termination of Browning-Ferris Industries, Inc. ("BFI, Inc.") and continued to be authorized to act as the agent for the consolidated group when it did so. The applicable regulation, however, says nothing about looking to state law concepts of when termination occurs for purposes of limiting the scope of agency for the consolidated group. Consequently, the Government's statement of the issue presumes the very conclusion it is trying to reach, i.e., that Treas. Reg. § 1.1502-77A looks only to state law concepts of termination and dissolution.

The Government's framing of its second issue is equally flawed. Its claim of error in the lower court's application of the entity classification regulations is predicated on the statement that such regulations "provide that an election to be disregarded does not terminate an entity's ability to file refund claims [on behalf of the consolidated group]." Id. Here, as in the case of its first issue statement, the Government attempts to extend the scope of a regulation beyond its terms. In this instance, the Government assumes the conclusions that it is attempting to prove: (1) that an entity's election to be disregarded does not terminate its ability to file refund claims, and (2) that it may do so as the agent for the consolidated group, notwithstanding that the entity no longer exists for federal tax purposes.

The Government's third and final issue statement does not correspond to its subsequent argument. In the issue statement, the Government argues that the defective claims filed by BFI, Inc. should be treated as claims filed on behalf of each of the group's subsidiaries. The subsequent argument, contained in Section D of the Government's brief, clarifies that, despite the phraseology in the Government's issue statement, it is the same argument first raised in its motion for reconsideration in the court below that the claims should be treated as claims by the group's subsidiaries.

In an effort to clarify the issues presented in this appeal, we set forth our own statement of the following five issues:

1. Did the Court of Federal Claims correctly conclude that the liquidation of BFI, Inc. constituted a termination of its existence as the common parent of the BFI Group for federal tax purposes, without regard to state law?

2. Even assuming that the liquidation of BFI, Inc. did not terminate its existence within the meaning of Treas. Reg. § 1.1502-77A, did it nonetheless lose its authority to act as the agent for the consolidated group upon its conversion from a corporation to a disregarded entity?

3. Does Treas. Reg. § 301.7701-2(c)(2) authorize a disregarded entity to file refund claims as agent for a consolidated group, notwithstanding the requirements of Treas. Reg. § 1.1502-77A that only the common parent corporation or, in certain circumstances, another designated member corporation of the group, are authorized to act as an agent for the group?

4. Assuming a disregarded entity cannot act as agent for a consolidated group, does Treas. Reg. § 301.7701-2(c)(2) nonetheless authorize the entity to file refund claims on its own behalf (and not on behalf of the consolidated group)?

5. Can a claim for refund filed on behalf of a former corporate parent of a consolidated group be treated instead as a claim by each member of the group on its own behalf?

Each of the foregoing issue statements, although expressed differently than the Government's issue statements, correspond to arguments in its brief.² The Government includes one additional argument in Section E of its appellate brief that does not correspond to any issue raised on appeal. Nonetheless, we briefly respond to the Government's argument in Section VI of this brief.

Federal courts' subject matter jurisdiction over federal tax refund actions is predicated on the filing of valid claims for refund. § 7422(a). The putative claims at issue in this appeal were filed in the name of "Browning-Ferris Industries, Inc. & Subsidiaries," on behalf of the affiliated group of corporations (the "BFI Group") of which BFI, Inc. had previously been the common parent corporation. At the time such claims were filed, Appellee erroneously believed that the jurisdictional prerequisite to commence a refund suit in the Court of Federal Claims had been satisfied. Appellee subsequently discovered that the refund claims were defective because BFI, Inc. was no longer an existing corporation at the time the claims were filed.

Approximately five months before the claims for refund were filed, BFI, Inc. had been converted to a limited liability company under state law, which, for Federal tax purposes, was treated as a liquidation of the corporation. BFI, Inc.'s liquidation constituted a termination of its existence as the common parent of the BFI Group for purposes of the federal tax law, as the Court of Federal Claims so held. (A10.) As a result of the liquidation, BFI, Inc. also ceased to be a member of the consolidated group. (Id.)

Under applicable Treasury regulations, a claim for refund may be filed on behalf of a consolidated group of corporations by one of two entities, either (i) the common parent corporation or (ii) another member corporation that is designated as the group's substitute agent. The operative requirement in either instance is that the entity must be a corporation for federal tax purposes. Following the liquidation of BFI, Inc., that entity ceased to exist as a corporation, both for federal tax purposes and under state law. It therefore could be neither the common parent corporation of the BFI Group nor a member corporation that had been designated as the group's substitute agent. Consequently, the putative refund claims were not filed "according to the provisions of law in that regard," as required by § 7422.

A taxpayer's failure to file a valid refund claim constitutes a jurisdictional defect that may not be forfeited or waived. § 7422; Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006). Because the claims for refund filed on behalf of Appellee were not valid claims, the Court of Federal Claims had no subject matter jurisdiction to hear the case and dismissed it on that basis.

On December 31, 2004, BFI, Inc. converted from a Delaware corporation to a Delaware limited liability company, known as Browning-Ferris Industries, LLC ("BFI, LLC") pursuant to § 266 of the Delaware General Corporation Law. Del. Code Ann. tit. 8 § 266. (A280, 359.) Allied Waste Industries, Inc. disclosed its treatment of BFI, Inc.'s conversion to a limited liability company as a liquidation of BFI, Inc. for tax purposes. (A280-81.)

In July 1999, BFI, Inc. entered into a transaction designed to restructure the management of certain contingent environmental liabilities. (A26-27.) The Government has described the transaction as a "contingent liability tax shelter" Br. At 6, (emphasis added) and drawn comparisons between the instant case and Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 1261 (2007), a case decided by this Court in favor of the Government. Br. at vii, 6, 9 and 21. As the merits of the transaction itself are not at issue in this appeal, the "tax shelter" appellation and the Coltec comparison are irrelevant and premature, inasmuch as both presume certain conclusions to legal and factual questions that have not been presented to any court.⁴

On or about May 5, 2005, on the advice of then-counsel, refund claims were filed for the BFI Group's consolidated return years 1997 and 1998 in the name of "Browning-Ferris, Inc. and Subsidiaries." (A4, 281, 357.) On May 10, 2005, the IRS sent a notice of claim disallowance with respect to these claims. (A4, 281, 357.)

On July 8, 2005, a complaint for the refund of taxes for the BFI Group's consolidated tax years 1997 and 1998 was filed in the Court of Federal Claims, ostensibly by "Browning-Ferris, Inc. and Subsidiaries." (A4, 281, 357.) Both the refund claims and the corresponding refund litigation were improperly filed in the name of BFI, Inc. because that entity had ceased to exist as a corporation under Delaware law, and had ceased to exist altogether for federal tax purposes, as of December 31, 2004, the date that BFI, Inc. converted to a limited liability company. (A3, 280, 371.)

In August 2006, shortly after Allied retained new counsel to represent the company in this litigation, counsel discovered, in the course of its own due diligence, that the refund claims had been filed ostensibly by an entity that no longer existed for federal tax purposes (A5, 281) and existed only in a noncorporate form for state law purposes. (A578); Br. at 5. Upon discovery of this error, new counsel advised Allied to file corrected refund claims in the name of the proper designee of the BFI Group pursuant to applicable Treasury regulations and IRS administrative procedures. (A5, A281-82.) On or about August 26, 2006, members of the BFI Group designated BFI Waste Systems of North America, Inc. (BFI Waste Systems) as substitute agent for the BFI Group pursuant to Treas. Reg. § 1.1502-77A(d) and the procedures contained in Rev. Proc. 2002-43, 2002-2 C.B. 99, § 8.

On August 31, 2006, the IRS approved the designation. (A5, 282.)⁵ As the authorized agent for the BFI Group, BFI Waste Systems filed claims for refund on or about August 24, 2006 for the BFI Group's consolidated tax years 1997 and 1998. (A5, 282, 550, 555.) The refund claims bore the employer identification number (EIN) for BFI Waste Systems, 41-1696636. (A550, 555.)⁶ The explanation of changes in the refund claims filed by BFI Waste Systems referenced that BFI Waste Systems is the duly authorized agent of the BFI Group pursuant to Treas. Reg. § 1.1502-77A(d) and the Designation filed with the IRS on or about August 24, 2006, pursuant to Rev. Proc. 2002-43. (A552-53, 557-58.)

On September 12, 2006, Appellee filed a motion with the Court of Federal Claims seeking to dismiss the instant suit, along with the Government's counterclaim. (A268-70.) In both the court below and this appeal, the Government has endeavored to portray Appellee's actions as opportunistic forum shopping designed to avoid the possible application of this Court's decision in Coltec. See, e.g., Br. at 2, 10, 13, 21. The court below concluded that such an argument cannot be used to overcome a jurisdictional defect, both in its initial decision (A6, 11) and in its order denying the Government's motion for reconsideration. (A15.)

Though couched as "facts," the Government's arguments in this regard are disingenuous because Appellee's actions to cure a jurisdictional defect, once identified, were not dependent on the outcome of Coltec. As pointed out in oral argument before the trial judge, once the defect in the original refund claims was discovered by new counsel, it would have been improvident for Appellee not to file corrected refund claims to cure the jurisdictional defect even if this Court had affirmed the lower court's decision in Coltec. (A784-795) Because jurisdictional defects are never waivable and can be raised not only by the opposing party, but also sua sponte by the court, even for the first time on appeal, Arbaugh, 546 U.S. at 501 (citing Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583 (1999)), Appellee's failure to cure the jurisdictional defect would have potentially exposed it to dismissal of the case on jurisdictional grounds after the statute of limitations had expired, leaving it no opportunity to cure the defect and refile its refund action.

Concluding that the motives of the Appellee for filing its motion were, in any case, irrelevant to the jurisdictional question (A3, 11), the Court of Federal Claims granted Appellee's motion to dismiss on the grounds that the "filing of a refund claim in the name of a corporation that no longer exists does not comply with Treas. Reg. § 1.1502-77A, and deprives the Court of jurisdiction." (A3.)

Recognizing that the common parent corporation of a consolidated group of corporations is "the sole agent for each subsidiary in the group" that "file[s] claims for refund or credit," the Court of Federal Claims concluded that if the existence of the common parent corporation is terminated, that former corporation is no longer authorized to act on behalf of the consolidated group." (A7.) Apropos to this case, finding that BFI, Inc. had terminated for federal tax purposes prior to the date on which the refund claims were filed (A10), the court concluded that BFI, Inc.'s authority to file the claims had been relinquished before such claims were filed. The court reasoned that the preamble to the new Treasury regulation that replaced the regulation at issue in this case confirmed the conclusion that a liquidation of a common parent constituted a cessation of the corporation's existence for purposes of the applicable regulation. (A8-9.)

The court further rejected the Government's reliance on Delaware law for the proposition that BFI, Inc. continued to exist for federal tax purposes. (A11.) According to the Court, "state law is irrelevant to the question of whether an entity had authority to file a claim for refund under 26 U.S.C. § 7422." (Id.)

Having determined that each party's arguments led to the conclusion that the putative refund claims filed in the name of BFI, Inc. were invalid, the court, citing Stelco Holding Co. v. United States, 42 Fed. Cl. 101, 104 (1998), concluded that, absent a properly filed administrative claim, which is an "indispensable prerequisite" to the court's exercise of jurisdiction, jurisdiction over the suit could not be sustained. (A11.)

The authority vested in the common parent includes the authority to file claims for refund for the consolidated group. Id. In the event that a common parent dissolves or terminates, its authority to act as agent for the group, including the authority to file claims for refund, is revoked. Absent a designation of a substitute agent for the group pursuant to Treas. Reg. § 1.1502-77A(d), no other entity has the authority to file claims for refund on the group's behalf.

Appellee's arguments that the decision of the Court of Federal Claims to dismiss the case for lack of subject matter jurisdiction should be affirmed are as follows, and correspond to the arguments in Sections II through VI below.

1. The conversion of BFI, Inc. to a limited liability company terminated its existence for federal tax purposes. Such termination was determined without regard to the continuation of the entity in another form under state law but was rather based on it becoming a disregarded entity under applicable federal law. Once BFI, Inc. became a disregarded entity, it was deemed for federal tax purposes to distribute all of its assets and liabilities to its single owner in "liquidation." The liquidation constituted a termination of the entity within in the meaning of Treas. Reg. § 1.1502-77A. The Commissioner of the Internal Revenue concluded as much in an internal memorandum analyzing an analogous fact pattern.

2. Even if BFI, Inc. did not terminate as a result of becoming a disregarded entity, it could nonetheless no longer act as agent for the BFI consolidated group and file refund claims on behalf of the group once it converted to a limited liability company because such authority is vested only in corporations.

3. Nothing in Treas. Reg. § 301.7701-2(c)(2) authorizes a disregarded entity to file claims for refund on behalf of a consolidated group. The application of the regulation is limited to a disregarded entity receiving refunds to which it is already entitled, which assumes a valid refund claim has already been filed. Moreover, even assuming the disregarded entity was capable of filing refund claims, it could still not do so as an agent for the consolidated group. That authority is contained within the consolidated return regulations, which preempt all other provisions of the Code to the extent they conflict.

4. For the same reason that a disregarded entity is not permitted to file claims for refund as an agent for the consolidated group, nothing in Treas. Reg. § 301.7701-2(c)(2) authorizes a disregarded entity to file claims for refund on its own behalf. Moreover, the individual members of the consolidated group are not authorized to file claims for refund on their own behalf merely because the Commissioner is authorized to deal with individual members directly in the event there is no designated agent for the group. Additionally, the record contains no evidence that the Commissioner dealt with individual members of the BFI Group anyway.

5. The Government's speculation as to the possible effects of the lower court's decision on other taxpayers, or the Appellee's motivation, are irrelevant to whether, as a matter of law, the jurisdictional prerequisites to filing the instant action were satisfied. None of the authorities cited by the Government to demonstrate the prejudice to other taxpayers involves the filing of refund claims pursuant to agency authority granted by a specific legislative regulation such as Treas. Reg. § 1.1502-77A.

Federal tax law grants to affiliated groups of corporations the privilege of filing a consolidated corporate income tax return, rather than separate returns by each corporation. § 1501. The Code directs the Secretary of the Treasury to issue regulations that provide rules for calculating, assessing, and collecting a consolidated group's tax liability. § 1502. Consequently, the consolidated return regulations are legislative in character and have the force and effect of law. See Southern Pacific Co. v. Comm'r, supra; Union Oil Co. of Calif. v. Comm'r, supra.

An important aspect of the consolidated return regulations are the procedural rules that determine who may act on behalf of the group. Courts have observed that "[a] central feature of the consolidated return regulations is the role of the common parent as the exclusive agent for the consolidated group with respect to all procedural matters." Interlake Corp. v. Comm'r, 112 T.C. 103, 113 (1999); see also Southern Pacific Co., 84 T.C. at 401. Treas. Reg. § 1.1502-77A sets forth the scope of agency of the common parent of a consolidated group for consolidated tax years beginning before June 28, 2002.

The common parent of a consolidated group is "the sole agent for each subsidiary in the group, duly authorized to act in its own name in all matters relating to the tax liability for the consolidated return year." Treas. Reg. § 1.1502-77A(a). In particular, the regulation provides that the "common parent will file claims for refund or credit, and any refund will be made directly to and in the name of the common parent." Id. Therefore, corporations that are members of a consolidated group have no authority to act on their own behalf regarding the group's tax liability.

B. Under The Controlling Consolidated Return Regulations, A Common Parent That Terminates Cannot Act On Behalf Of A Consolidated Group.

If the existence of the common parent terminates, it is no longer authorized to act on behalf of the consolidated group. See Southern Pacific Co., 84 T.C. at 401 ("Obviously, if the existence of the common parent were to terminate . . ., the agency relationship would terminate, and the group would . . . be left without an agent to act on its behalf in any subsequent dispute over its liability for that year."); see also Interlake, 112 T.C. at 114 ("Of course, if the common parent ceases to exist, its authority to act for the group terminates."). Anticipating the problems that could arise in the absence of an agent to act on behalf of a consolidated group, the consolidated return regulations provide procedures for authorizing a new agent to act for the group in the event of a termination of the common parent.

If the common parent is about to be dissolved, "or if for any other reason its existence is about to terminate," the common parent can designate another member to act as agent for the consolidated group. Treas. Reg. § 1.1502-77A(d). Such a designation by the common parent is supposed to be made before its existence terminates. Id. However, if the common parent does not designate a new agent for the consolidated group before its existence terminates, the regulation provides that "the remaining members may, subject to the approval of the Commissioner, designate another member to act as such agent, and notice of such designation shall be given to the Commissioner." Id.

Apart from this designation procedure, Treas. Reg. § 1.1502-77A does not authorize any corporation to act as agent for a consolidated group whose common parent's existence has terminated.⁸ Consequently, if the common parent of a consolidated group terminates without designating another corporation to act as agent for the group, and if the remaining members do not so designate another agent, the group would be left without an agent that had the authority to undertake most of the actions that are reserved to the common parent, including filing a claim for refund on behalf of the group.

In 2000, the Treasury Department proposed new regulations intended to provide a more comprehensive regime to address the scope of common parent agency. These new regulations, which were finalized in 2002, apply prospectively to consolidated tax years beginning on or after June 28, 2002. See Treas. Reg. § 1.1502-77(h). The agent for the BFI Group's 1997 and 1998 tax years, which are at issue here, is therefore determined according to the prior regulations. See Treas. Reg. § 1.1502-77A(g).

The preamble to the new regulations confirms that, with respect to tax years before June 28, 2002, when the common parent of a consolidated group terminates without designating an agent for the group, the only alternatives are for the remaining members to designate one such remaining member agent under Treas. Reg. § 1.1502-77A(d) or for the IRS "to deal separately with each remaining member for any purpose not covered by § 1.1502-77T." 65 Fed. Reg. 57755, 57756.

As discussed in our motion to dismiss filed in the case below, the IRS has concluded in written determinations, including Field Service Advices ("FSAs") and Non Docketed Service Advice Reviews ("NSARs") that the designation procedure contained in Treas. Reg. § 1.1502-77A is the exclusive procedure for determining what entity is authorized to act on behalf of a consolidated group whose parent has terminated, and that absent such designation, the IRS is left with no choice but to deal with each group member individually. (A286-287.)⁹ Importantly, and as the Court held below (A14), this right does not translate into a right of each group member to unilaterally engage in activities expressly reserved by Treas. Reg. § 1.1502-77A for the designated agent of the consolidated group.

Thus, the parties' dispute is centered on the implication of the conversion for federal tax purposes, and whether an entity's ability to file refund claims on behalf of a consolidated group of corporations is determined by federal tax law or by Delaware corporate law.

A. State Law Is Irrelevant To BFI, Inc.'s Status As A Common Parent Corporation Because A Termination Of A Corporation For Federal Tax Purposes Can Occur Irrespective Of Its Status Under State Law.

A common parent corporation of a consolidated group can no longer act as the agent for the group under Treas. Reg. § 1.1502-77A once the common parent corporation "dissolves" or "terminates." Southern Pacific, 84 T.C. at 401. Whereas the concept of corporate dissolution clearly implicates state law considerations of when a business continues in existence, the concept of termination, as the term is utilized in Treas. Reg. § 1.1502-77A, does not require the discontinuation of the business as determined under state law. Subsection (d) of the regulation makes clear that an entity can terminate for federal tax purposes without necessarily having to dissolve (i.e., discontinue its existence) for state law purposes. It states, in pertinent part:

The Court of Federal Claims concluded as much when it held the liquidation of BFI, Inc. for federal tax purposes constituted a termination of its existence as the common parent of the BFI Group. (A10.) On this basis, the court correctly held that Delaware law is irrelevant to the question of whether an entity has the authority to file claims for refund on behalf of a consolidated group.

The Government has argued to both this Court and the court below that BFI, Inc.'s existence had not terminated under Delaware law as of the date that the refund claims were filed in May 2005, and that consequently, the filed claims were valid claims on behalf of the BFI Group. In support of this proposition, the Government suggests in this appeal that the lower court erred by not recognizing that the consolidated return regulations "look to state law to determine whether a common parent that was created under state law has dissolved or terminated." Br. at 32-33.

However, the Government's argument that such regulations (actually Treas. Reg. § 1.1502-77A) look to state law, is really an argument by negative implication. More specifically, the Government is arguing that the Court should look to state law because the regulation in question does not specifically prohibit the Court from doing so. Such logic is contrary to long-established Supreme Court authority.

State law may control the operation of federal tax law "only when the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law." Burnet v. Harmel, 287 U.S. 103, 110 (1932) (concluding that the relevant Code section neither said nor implied that Texas law would control the characterization of oil and gas interests as capital assets) (citations omitted); see also IRS CCA 200245050, 2002 WL 31492512 (Nov. 8, 2002) ("[T]he core test of corporate existence for purposes of federal income taxation is always a matter of federal law."); cf. Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 114 (1925) ("Neither the conception of unincorporated associations prevailing under local law, nor the relation under law of the association to its shareholders . . . is of legal significance as bearing upon the power of Congress to determine how . . . the income of the joint enterprise shall be taxed."). Neither of those conditions -- "express permission" or "necessary implication" -- is satisfied here.

With regard to the first condition set forth in Burnet, nothing in the language of Treas. Reg. § 1.1502-77A expressly permits state law to determine whether a common parent corporation exists or terminates for federal tax purposes. Not surprisingly, the Government's brief cites not a single authority in support of its blanket assertion otherwise. Br. at 32-33.

With regard to the second condition set forth in Burnet, i.e., that state law may affect conclusions of federal tax law by "necessary implication," the Government's argument also fails because a corporation can be terminated for federal tax purposes by simple operation of the entity classification regulations, commonly known as the "check the box rules," embodied in Treas. Reg. § 301.7701-1 et. seq. The essence of these rules is to permit certain entities other than corporations to elect their tax classification generally without regard to their particular legal classification under state law.

At the time Treas. Reg. § 1.1502-77A came into effect, the entity classification rules did not exist.¹¹ These rules, which were issued on December 17, 1996, T.D. 8697, 1997-1 C.B. 215, became effective January 1, 1997, id., and were in effect during the timeframe relevant to this appeal, clarify that a corporation can both come into existence and terminate for federal tax purposes without any corresponding change in the entity's legal status under state law. The following example illustrates this point.

A single-member Delaware limited liability company that is, by default, disregarded as an entity separate from its owner under the entity classification regulations can elect to be treated as a corporation for federal tax purposes. Treas. Reg. § 301.7701-3(a). If such an election is made, the entity is treated as a corporation "[f]or federal tax purposes," Treas. Reg. § 301.7701-2(b), and, if positioned as the common parent of a consolidated group, accedes to the same powers available to a common parent that is a corporation for all purposes, including under state law. Cf. KEVIN M. HENNESSEY ET AL., THE CONSOLIDATED TAX RETURN ¶ 2.03[2] [i] (2003) (". . . LLCs . . . that are treated for tax purposes as corporations under Regulation § 301.7701-2 or Regulation § 301.7701-3 also may be includable corporations.").¹²

In turn, the limited liability company could subsequently elect to be treated as a disregarded entity, pursuant to Treas. Reg. § 301.7701-3(a), which would return it to the same tax status it held before its prior election. Thus, because the status of a limited liability company as a corporation for federal tax purposes can commence and terminate without any reference to, or corresponding change in, its status under state law, Treas. Reg. § 1.1502-77A is not, by "necessary implication," dependent on state law.

To support its argument that the lower court should have looked to state law to interpret Treas. Reg. § 1.1502-77A, the Government cites to two Tax Court decisions, Union Oil Co. of California v. Commissioner, 101 T.C. 130 (1993), and INI, Inc. v. Commissioner, T.C. Memo 1995-112 (1995), aff'd without op., 107 F.3d 27 (11th Cir. 1997), as authority that the Tax Court has looked to state law to determine when a common parent corporation ceases to exist. Br. at 35. However, as the Government is undoubtedly aware, both of these decisions relate to tax years that predate the Treasury Department's issuance of the elective entity classification regulations. Consequently, the cases cited in the Government's brief are inapposite because they do not account for subsequent changes in federal tax law -- which went into effect before the period relevant to this appeal -- that obviated the need to refer to state law in this circumstance.

B. The Liquidation Of BFI, Inc. For Federal Tax Purposes Revoked Its Authority To Act As The Common Parent Under Treas. Reg. § 1.1502-77A, Rendering BFI, Inc. Unable to File Valid Refund Claims on Behalf of the BFI Group.

The Government has contended that the conversion of BFI, Inc. to a limited liability company was "a mere change in form" that had no effect on the status of that entity for purposes of the consolidated return regulations. Br. at 14. At the same time, the Government has conceded that BFI, Inc. became a disregarded entity under the entity classification rules in Treas. Reg. § 301.7701-3(b)(ii). Br. at 40. When a corporation becomes a disregarded entity, it is deemed for federal tax purposes to distribute all of its assets and liabilities to its single owner in "liquidation." Treas. Reg. § 301.7701-3(g)(1)(iii); see also Rev. Rul. 2004-59, 2004-1 C.B. 1050 (effect of conversion of a partnership into a corporation pursuant to state conversion statute is determined by Treas. Reg. § 301.7701-3(g)(1)).

The Government agrees that the conversion of BFI, Inc. to a limited liability company constituted a liquidation of the entity for federal tax purposes. (A371.) Therefore, the Government's argument that BFI, Inc. did not terminate upon becoming a disregarded entity rests on the proposition that the "liquidation" of a corporation for federal tax purposes by reason of it becoming a "disregarded entity" is somehow not a "termination" for purposes of the consolidated return regulations.

The Government's claim that the liquidation of BFI, Inc. is not a termination is contradicted by its own interpretation of then-existing law in the preamble to new consolidated return regulations proposed in 2000. As we noted in the court below, in 2000, the Treasury Department proposed new regulations under § 1502 in order to provide for a more comprehensive regime to address the scope of common parent agency.

Although the new regulations do not apply in this instance, the preamble to these regulations when they were proposed in 2000 confirms Treasury's own acknowledgement under then-existing law of the loss of agency authority by the former common parent of a consolidated group, to wit:

The key phraseology of the preamble quoted above is that that a common parent "has ceased to exist" due to a merger or liquidation. The preamble later explains that a corporation's existence is deemed to cease if the corporation becomes a disregarded entity for federal tax purposes:

Although the preamble contemplates that the common parent can cease to exist under state law (i.e., "applicable law"), as in the case of an actual dissolution of the entity, it independently contemplates that the common parent can cease to exist by operation of federal law by reason of becoming a disregarded entity. That becoming a disregarded entity constitutes a termination is made clear by the new regulation, Treas. Reg. § 1.1502.-77(e)(1)(ii)(A), which states:

Where the new regulation diverges from its predecessor is in crafting a solution to the extraordinary circumstance where no corporation exists that is capable of serving as the group's agent. See Treas. Reg. § 1.1502-77(e)(3)(i). In that one limited circumstance, becoming a disregarded entity is not treated as a termination. In this particular case, the limited exception in Treas. Reg. § 1.1502-77(e)(3)(i) does not apply because (1) it was not in effect for the relevant time period (and the old regulation had no comparable provision), and (2) in any event, there continued to be an eligible corporation that was capable of serving as the substitute agent for the group upon the termination of BFI, Inc. under the designation provision of Treas. Reg. § 1.1502-77A(d). Through those provisions, the BFI Group was able to designate BFI Waste Systems as the substitute agent thereafter authorized to file valid refund claims for the group. (A510.)

Finally, the IRS itself confirmed that "Browning-Ferris Industries, Inc. has terminated," in its August 31, 2006 approval of the BFI Group's designation of BFI Waste Systems of North America, Inc. (A324.) This confirmation of BFI, Inc.'s termination outside the context of litigation demonstrates that the IRS's and Appellee's definition of a "termination" are consistent,

As a result of its liquidation for Federal tax purposes, BFI, Inc. terminated within the meaning of Treas. Reg. § 1.1502-77A(d) and therefore no longer possessed the authority to file refund claims on behalf of the BFI Group.

C. The Government's Argument That Treas. Reg. § 1.1502-77A Looks To State Law To Determine Whether A Common Parent Has Dissolved Or Terminated Ignores The Federal Regulation That Determines The Effect Of Becoming A Disregarded Entity.

On page 36 of its appellate brief, the Government argues that "a deemed liquidation of BFI, Inc. under Treas. Reg. § 301.7701-3(g)(1) . . . is irrelevant to BFI, Inc.'s continued existence as the common parent of the consolidated group." Br. at 36. To support this proposition, the Government notes that "Treas. Reg. § 1.1502-77A is devoid of any reference to the entity classification regulations or to a deemed liquidation." Id. As already noted above, it should come as no surprise that Treas. Reg. § 1.1502-77A is devoid of any reference to the entity classification regulations because the latter did not come into effect until after the former was already in effect. The mere fact that Treas. Reg. § 1.1502-77A does not directly refer to the entity classification regulations does not mean that it is not affected by them. See Treas. Reg. § 1.1502-80(a) ("The Internal Revenue Code, or other law, shall be applicable to the group to the extent the regulations do not exclude its application.").

The Government's argument that state law controls the application of Treas. Reg. § 1.1502-77A, which ignores that a subsequently added provision of federal tax law (i.e., the entity classification regulations) affects the operation of Treas. Reg. § 1.1502-77A, is very similar to the argument it made in another case involving the interplay between a consolidated return regulation and another subsequently enacted provision of federal tax law.

In Woods Investment Co. v. Comm'r, 85 T.C. 274, 281-82 (1985), the Government tried to argue against its own regulation that permitted a taxpayer to receive a double deduction, once through a depreciation deduction by a subsidiary, and then again in calculating the basis of its stock in the subsidiary, which was not fully reduced by the amount of the depreciation deduction pursuant to another Code provision that was added after the regulation.

The Tax Court rejected the government's argument, which would have required a de facto amendment of the regulation by judicial fiat, holding instead that "respondent should use his broad power to amend his regulation." Id. at 282. The Tax Court pointed out that the government was aware of the interplay between the regulation and the Code provision that produced the double deduction and could have fixed the problem itself by amending the regulation. Id. at 281.¹⁴

The Tax Court's rationale is equally applicable in this case. If the Government did not intend for Treas. Reg. § 1.1502-77A to be affected by the subsequently enacted entity classification regulations, it could have amended the regulation to specifically preclude their application. Instead, the eventual amendment to Treas. Reg. § 1.1502-77A, which became Treas. Reg. § 1.1502-77, does the opposite, confirming that a deemed liquidation under Treas. Reg. § 301.7701-3(g)(1)(iii) constitutes a "termination," the same term used in the predecessor regulation. This makes clear that a termination can occur without regard to state law.

D. The Government's Interpretation Of The Consolidated Return Regulations Is Contrary To Its Own Prior Interpretation Of These Regulations.

An additional argument offered by the Government is that the Commissioner's interpretation of the consolidated return regulations is "controlling" or is at least "entitled to 'substantial deference' by the courts." Br. at 37-38 (citations omitted). There are two problems with this argument. First, the argument is predicated on the notion that there is "doubt about how the consolidated return regulations should be construed." Br. at 37. The confusion, however, is unilateral as Treas. Reg. § 1.1502-77A is quite explicit in what it permits and what it does not.

Second, the argument presumes that the position for which the Government seeks deference is consistent with the position it now takes in this appeal. Here again, the Government's argument must fail because the Commissioner's only written analysis of a factually analogous situation contradicts the Government's current position. See 2001 NSAR 10183, 2001 WL 34145296 (Nov. 19, 2001), discussed in Section II.D, below. Therefore, the Government's argument on appeal is, according to the very authority it cites, Bowen v. Georgetown University Hosp., 488 U.S. 204, 473-74 (1988), the sort of "post hoc rationalization" that is unworthy of deference. Cf. Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962) ("The courts may not accept appellate counsel's post hoc rationalization for agency [decisions].").

Indeed, the case for rejecting the Government's claim to deference is even stronger here than in Bowen. In that case, the Court refused to give deference to the litigating position of the Secretary of Health and Human Services where the "agency itself ha[d] articulated no position on the question. . . ." Bowen, 488 U.S. at 212. In contrast, the Commissioner has not only articulated a position on the question before this Court, he has taken a position that contradicts the position proffered by the Government's in its appellate brief.¹⁵

E. The Government's Internal Analysis Of The Issue Concludes That BFI, Inc.'s Conversion To A Limited Liability Company Terminated Its Authority To Act On Behalf Of The BFI Group.

The Government's argument that a common parent's purported continuation under state law controls this case is belied by the Commissioner's own analysis of a scenario that was very similar to the present case and which reached the opposite conclusion. In 2001, the IRS's Office of Chief Counsel issued a Non-Docketed Service Advice Review ("NSAR"), consisting of two memoranda that support Appellee's conclusion and illustrate how the Government's present argument misunderstands the intersection of the consolidated return regulations with state law.¹⁶See 2001 NSAR 10183, 2001 WL 34145296 (Nov. 19, 2001). Although this document has been redacted to protect the identity of the taxpayer, it reaches unambiguous conclusions that the prior views of the Commissioner on the same issue is incompatible with the "post hoc rationalization" of the Government in this appeal that state law, not federal law, determines whether BFI, Inc. terminated.

The first memorandum, issued in August 2001, provides advice as to the proper entity to execute a Form 872, Consent to Extend the Time to Assess Tax, on behalf of a consolidated group of corporations. The relevant facts are as follows:

• A Delaware corporation ("DC") was the common parent of a consolidated group.

• DC was wholly owned by a Delaware partnership ("DP") that had elected to be treated as a corporation for federal tax purposes.

• DC converted from a Delaware corporation into a limited liability company (ostensibly under the same authority that BFI, Inc. converted, 8 Del. C. § 266).

• DC made no election to be treated as a corporation for federal tax purposes.

In addition, the memorandum drew a sharp distinction between the actions that an entity is permitted to take on its own behalf by operation of state law, and the actions that an entity is permitted to take on behalf of a consolidated group. Like the Government's brief, the memorandum recognized that, under Delaware law, a corporation that converts to an LLC is effectively the same entity that existed before the conversion. But as the memorandum also stressed, the LLC "has no authority to act on behalf of the Consolidated Group." Id. Thus, the IRS' Office of Chief Counsel addressed the Government's precise argument (i.e., that an entity's continued existence under state law continues its authority to act on behalf of a consolidated group) and rejected it without qualification.

Since the relevant NSAR was issued in 2001, neither the applicable consolidated return regulations nor the applicable state law have been materially amended. Consequently, the Government is confronted with a Hobson's choice. Either it is engaging in the type of post hoc rationalization that courts have been ordered to reject, or it must reconcile its current position against the Commissioner's only written analysis of this issue, which contradicts that position.

The Government does not dispute that BFI, Inc. converted under Delaware law from a corporation to a limited liability company. Br. at 5. Rather, the Government contends only that BFI, Inc.'s conversion did not terminate BFI, LLC's authority to act as agent on behalf of the BFI Group. Br. at 33-37. In making this argument, the Government overlooks a necessary step in its reasoning-the authority granted by Treas. Reg. § 1.1502-77A is conferred only upon corporations.¹⁷

A business entity can be treated as a "corporation" for federal tax purposes in one of two ways, either (i) be treated as a corporation per se, based on the entity's form of organization under state law, or (ii) elect to be treated as a corporation under federal tax regulations. A business entity that is organized under a state statute that refers to the entity as incorporated or as a corporation is considered to be a corporation per se for federal tax purposes. Treas. Reg. § 301.7701-2(b)(1).¹⁸ On the other hand, an unincorporated business entity (e.g., a limited liability company) is, by default, either considered to be a partnership if the entity has two or more owners, or is disregarded as a separate entity altogether if the entity has only a single owner. Treas. Reg. § 301.7701-3(a). Nevertheless, such an entity may elect to be treated as a corporation for federal tax purposes, in which case it is subject to the same federal tax rules as a per se corporation. Treas. Reg. § 301.7701-2(b).

Following its conversion to a limited liability company, BFI, LLC was, by default, disregarded as an entity separate from its single owner. It did not elect to be treated as a corporation for federal tax purposes. Consequently, following the conversion, BFI, LLC was not treated as a corporation, irrespective of whether it was considered to have "terminated." There is no dispute in this appeal that, upon its conversion to a limited liability company, the former BFI, Inc., was no longer a corporation for either federal tax purposes or state law purposes. Br. at 5 (citing A578).

Under the applicable consolidated return regulations, an entity may be the agent of a consolidated group only if it either (i) is the common parent corporation of the group or (ii) is a member corporation that is designated to act as the group's agent upon the termination of the common parent. See Treas. Reg. § 1.1502-77A(a) and (d). Because BFI, LLC is not treated as a corporation for federal tax purposes, it could not be a member, let alone the common parent, of the BFI Group following its conversion to LLC status. See TAM 200123002, 2001 WL 634439 (June 11, 2001) (entity classified as a partnership could not be a member of an affiliated group).

In sum, following its conversion to a limited liability company, BFI, Inc. both ceased to be the common parent of the BFI Group and ceased to be affiliated with the BFI Group. Accordingly, by application of § 1504 and Treas. Reg. § 1.1502-77A, BFI, Inc. lost its authority to act as agent for the BFI Group when it converted to a limited liability company and lost the authority to file refund claims on behalf of itself or the consolidated group.

A. Treas. Reg. § 301.7701-2(c)(2)(iii) Does Not Confer Upon A Disregarded Entity The Authority To File Refund Claims.

Treas. Reg. § 301.7701-2(c)(2)(iii) provides, in pertinent part, that "an entity that is otherwise disregarded as separate from its owner is treated as an entity separate from its owner for purposes of . . . refunds or credits of tax." The Government construes this to mean that a disregarded entity such as BFI, LLC is also a separate entity "for purposes of filing a claim for refund" and that "BFI, Inc. retained the authority, after its conversion to a limited liability company, to file refund claims related to its prior status. . . ." See Br. at 41-42 (emphasis added).

In fact, the regulation cited by the Government does not authorize a disregarded entity to file a refund claim or, for that matter, address whether such a claim would be valid. Rather, the regulation merely sanctions the payment of otherwise authorized refunds to a disregarded entity, which necessarily presumes the proper filing of a valid refund claim by an entity that is authorized to file such a claim. The preamble to this regulation makes this logic clear, providing:

B. Treas. Reg. § 301.7701-2(c)(2)(iii) Does Not Confer Upon A Disregarded Entity The Authority To File Refund Claims On Behalf Of A Consolidated Group.

Even assuming that the Government were correct that Treas. Reg. § 301.7701-2(c)(2)(iii) treats a disregarded entity as separate from its owner for purposes of filing refund claims, the regulation does not confer upon a disregarded entity that authority to file claims on behalf of a consolidated group of corporations. That authority is contained in Treas. Reg. § 1.1502-77A and the interpretation suggested by the Government, which goes well beyond a plain reading of Treas. Reg. § 301.7701-2(c)(2)(iii) anyway, would plainly contradict the limits of agency authority imposed by Treas. Reg. § 1.1502-77A.

According to the Government, Treas. Reg. § 301.7701-2(c)(2)(iii) implies that BFI, Inc. continued to have authority to act as agent for the BFI Group for purposes of filing the refund claims at issue in this appeal because BFI, Inc. was not considered to have "terminated" for purposes of the consolidated return regulations. Br. at 40-41. But the Government's fails to take into account that, even if BFI, LLC were not treated as a disregarded entity under the entity classification rules, it still would have no authority to act as agent for the BFI Group pursuant to the proper application of the consolidated return regulations, which the Government concedes "preempt other provisions of the Internal Revenue Code." Br. at 28 (citing Grove Equity, Inc. v. Commissioner, T.C. Memo 1994-102 (1994); Sooner Federal Savings & Loan Ass'n v. United States, 4 Cl. Ct. 746, 751 (1984)).²⁰ For the reasons explained in Sections II and III, above, following its conversion to a limited liability company, BFI, Inc. had no authority to file refund claims on behalf of the BFI Group under Treas. Reg. § 1.1502-77A, the regulation that controls this case. This conclusion does not change by treating BFI, LLC as a separate entity because it still would not be a corporation, which is a prerequisite to filing a claim for the BFI Group.

The Government further contends that Treas. Reg. § 301.7701-2(c)(2)(iii) "trumps" the Tax Court's Interlake decision because Interlake (1) was decided before the cited regulation was issued and (2) did not base its decision "on unambiguous statutory terms that left no room for agency discretion." Br. at 44-45. In support of this argument, the Government relies upon cases which hold that an agency's interpretation of a statute overrides prior judicial interpretations of the same statute unless the relevant court decisions hold that their "construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion." Id. at 44 (quoting Nat'l Cable & Telecommunications Ass'n v. Brand X Internet Services, 545 U.S. 967, 982 (2005)).

Here, the Government's attempted comparison between prior consolidated return case law and the Treasury Department's interpretation of § 7701, arguing the latter is entitled to deference over the former, is unsustainable because Treas. Reg. § 301.7701-2(c)(2)(iii) does not interpret the same statute (§ 1502) that was addressed in Interlake. Interlake says that a former common parent of an affiliated group loses its authority to act on behalf of the group once the former parent ceases to be affiliated with the group. 112 T.C. at 114-15. Treas. Reg. § 301.7701-2(c)(2)(iii), on the other hand, deals with a different issue, stating only that a disregarded entity is treated as a separate entity for purposes of refunds of tax. The regulation has nothing to do with the rules applicable to consolidated groups.

In sum, the Government's argument misapplies the rule of National Cable in contending that its reading of Treas. Reg. § 301.7701-2(c)(2)(iii) "trumps the earlier Interlake decision," Br. at 44, because the regulation does not interpret the same statute as Interlake and therefore does not trump the Tax Court's interpretation of Treas. Reg. § 1.1502-77A. The same logic holds true in defeating the Government's attempted use of this argument to nullify the lower court's interpretation of, and reliance on, the preamble issued in 2000 to proposed regulations that eventually replaced Treas. Reg. § 1.1502-77A and the IRS's interpretive Field Service Advisories. Br. at 46-47. All relate to the interpretation of an entirely different statute.

In Section D of its brief, the Government argues once again that Treas. Reg. § 301.7701-2(c)(2)(iii) provides authority for BFI, Inc. to file refund claims, if not as agent for the consolidated group, then on its own behalf. Br. at 50. The only authority offered in support of this argument is a reference to Treas. Reg. § 1.1502-6(a) that a member of a consolidated group is severally liable for the income tax liability of the group.

The argument that BFI, Inc. is entitled to file refund claims on its own behalf cannot be sustained because it presumes that Treas. Reg. § 301.7701-2(c)(2)(iii) authorizes a disregarded entity to file refund claims when, in fact, all it does is authorize the disregarded entity to receive refunds, assuming valid refund claims were filed. As noted in Section IV above, such an expansive reading of the scope of the regulation is flatly inconsistent with the explanatory preamble, which makes clear that the regulation does not address whether the disregarded entity is entitled to a refund.

B. The Authority Granted To The Commissioner To Deal With Each Member Individually Does Not Grant Each Such Member The Authority To File Refund Claims On Its Own Behalf.

Besides arguing that Treas. Reg. § 301.7701-2(c)(2)(iii) provides BFI, Inc. the continued right to file claims for refund, Section D of the Government's brief also argues that the claims were valid claims filed by the remaining members of the former BFI Group. Because the Government first raised this argument in its motion for reconsideration in the court below, (A843), this argument is subject to an "abuse of discretion" standard rather than a de novo standard of review.

The essence of the Government's Section D argument is best examined by breaking it down into component parts. First, the Government correctly notes that Treas. Reg. § 1.1502-77A(d) provides the Commissioner with authority to deal directly with members of the consolidated group if the common parent has terminated. Second, it challenges the lower court's finding that "[t]here is nothing in the record to indicate that the Commissioner exercised his authority under Treas. Reg. § 1.1502-77A(d)." Br. at 48-49 (citing A14).

One would reasonably expect that the Government would then point to the actual authority allegedly exercised by the Commissioner to support the Government's claim of error. Instead, the Government points only to the fact that "[t]he May 2005 refund claims were filed in the name of 'Browning-Ferris Industries, Inc. & Subsidiaries,'" and that the explanation of changes in the claims referred to "the members of [the] consolidated group as appropriate." Br. at 49 (citing A514, 517). The Government then follows with the perplexing statement, "[t]hat description of the claimant is sufficiently broad to encompass all of the individual members of the group, including BFI, Inc." Id. Nowhere does the Government ever actually mention what authority was exercised by the Commissioner in allegedly dealing with the group's members directly.

The implication of this omission is that one never even reaches the question of whether the Commissioner's actions in dealing directly with individual members of the group somehow imbues the individual members themselves with the authority to take such actions as filing refund claims, because the record is devoid of any action being taken by the Commissioner.

Even assuming the record demonstrated that the Commissioner had dealt with the individual members of the group directly, the court below correctly concluded that the Government was confusing "what the IRS is permitted to do with what taxpayers may do." (A14.) The Government's only challenge to the court's ruling, which it describes as "fundamentally misconceived," is that Treas. Reg. § 1.1502-77A(d) "expressly permits the Commissioner to deal with any member directly." Br. at 50, n. 14. Such circular reasoning takes the Government right back to where it starts, with (1) a record that is devoid of any evidence that the Commissioner dealt with the individual members of the group and (2) an argument that never explains how, even if the Commissioner had done so, this would entitle the individual group member to perform activities expressly and exclusively reserved under Treas. Reg. § 1.1502-77A to the common parent corporation of the group or, in the event the common parent has terminated, to the designated agent of the group.

As this Court has previously held, "An abuse of discretion occurs when a court misunderstands or misapplies the relevant law or makes clearly erroneous findings of fact." Renda Marine, 2007 WL 4302725, at *5 (citing PPG Indus., Inc. v. Celanese Polymer Specialties Co., 840 F.2d 1565, 1572 (Fed.Cir.1988).) The Government cites not a single legal authority to demonstrate that the lower court misunderstood or misapplied the law. Instead, the Government claims only that (1) its argument is "eminently reasonable when juxtaposed against taxpayer's position, which is that no one was capable of making refund claims at the times that the claims were filed," and (2) that "nothing in Treas. Reg. § 1.1502-77A(d) imposes any obligation on the Commissioner to provide notice that he is dealing with a member directly." Id. at 49-50. Both statements are devoid of substance, both factually and legally, and would fail even a de novo standard of review. Therefore, the Government cannot possibly claim to have satisfied its burden of proving that the lower court abused its discretion.

The Court of Federal Claims rejected the Government's attempt to overcome the jurisdictional defect in this litigation, noting, "Rule 12(b)(1) is by design a strict legal standard, and leaves the Court no discretion to invent subject matter jurisdiction where it does not exist." (A15.) The Government's assertions on appeal that an affirmance would "constitute an endorsement of taxpayer's forumshopping strategy" and "prejudice taxpayers," Br. at 56, are also unavailing because such issues are of no relevance to the question of whether, as a matter of law, the jurisdictional prerequisites for the instant action have been satisfied. See Giannakos v. M/V Bravo Trader, 762 F.2d 1295, 1297 (5th Cir. 1985) (rejecting the argument that "equities" should be considered in evaluating subject matter jurisdiction because the "question of subject matter jurisdiction must be resolved by the application of proper legal principles to the facts").

The Government's other assertion, that jurisdiction exists because the filing of the defective refund claims was ratified by "subsequent conduct,"²² Br. at 53, likewise does not resolve the jurisdictional deficiency that required dismissal of the underlying action. None of the cases cited by the Government are relevant to the jurisdictional question at issue in this appeal because none of them involve the ratification of a refund claim that was not filed "in accordance with the provisions of law in that regard" as required by § 7422.

The only case cited by the Government that even addresses the filing of a refund claim, Oldham's Estate v. Campbell, 217 F.Supp. 819 (N.D. Tex. 1963), is also distinguishable. The jurisdictional defect at issue in that case was whether the attorney who filed the claims had the ministerial authority to actually file the claims as a representative of the estate's trustees, not whether the claims themselves were valid (i.e., were filed in the name of and on behalf of the correct entity, the decedent's estate). See id. at 825 (". . . the real question for decision is whether the Director had the authority to accept and file the powers of attorney when they did not accompany the claim itself."). Thus, the trustees' ratification in that case did not validate the claims themselves; rather, the ratification validated only the attorney's actions in filing the claims.

Finally, the authorities cited by the Government to demonstrate that the defect in this case does not rise to "jurisdictional proportions" are also inapposite. None of those authorities involve the filing of refund claims pursuant to agency authority granted by a specific legislative regulation, such as Treas. Reg. § 1.1502-77A.

As noted above, an abuse of discretion requires a misunderstanding or misapplication of relevant law or a clearly erroneous finding of fact. Renda Marine, supra. The Government has not asserted that the Court of Federal Claims misunderstood or misapplied the relevant law. Instead, the Government relies upon distinguishable case law and speculative claims about the implications of the lower court's decision on general tax policy. Therefore, the Government has not demonstrated that the lower court abused its discretion in denying the Government's motion for reconsideration on the basis, in part, of the purported impact of its decision.

The Internal Revenue laws are replete with examples of rules that may, at times, seem technically harsh but are nonetheless rigorously applied. In most instances, the perceived harshness of such rules redounds to taxpayers' detriment, just as could have occurred here if, after the relevant statute of limitations expired, the Government itself sought to dismiss the case on the same jurisdictional grounds, i.e., invalidity of the May 2005 refund claims. In this instance, however, the Government takes the position that "rules are made to be broken" where it perceives its own strategic interests to be at stake.

At the core of the technical application of these rules are those that define who the taxpayer is and, under what circumstances, the taxpayer may act in an agency capacity for another. The consolidated return rule set forth in Treas. Reg. § 1.1402-77A provides a clear answer that the common parent corporation of a consolidated group must remain a corporation and must not terminate under federal law in order to maintain its authority to act as agent for the consolidated group.

In this case, a confluence of unique facts gave rise to the filing of defective refund claims. The simple solution was to correct the defect by ensuring that new refund claims were filed by a duly authorized agent of the consolidated group. In fact, that is precisely what was done with the filing of corrected refund claims by the properly designated agent for the BFI consolidated group, BFI Waste Systems, after BFI, Inc. ceased to exist. That would be the end of the issue, but for the fact that a refund suit was filed with an incurable jurisdictional defect.

Had the Government not perceived a tactical disadvantage here, it undoubtedly would have raised no objection to the consolidated group's refiling of valid refund claims. However, such notions of disadvantage or prejudice, whether real or perceived, have no bearing, on a question involving subject matter jurisdiction. In its application of the legal rules in effect at the time to such facts, the Court of Federal Claims correctly concluded that the prerequisites in 26 U.S.C. § 7422 for maintaining a tax refund suit were not satisfied and that the court therefore lacked jurisdiction over the case. Accordingly, the judgment of the Court of Federal Claims should be affirmed.

² For the Court's ease of reference, our Statement of the Issues correlates to the arguments contained in the parties' briefs as follows:

• Issues 1 and 2 correspond to the arguments set forth in Section B of the Government's brief (regarding the question of whether federal or state law determines if BFI, Inc's ability to act as agent for the consolidated group terminated). These issues are addressed in Sections II and III, respectively of this brief.

• Issue 3 corresponds to the arguments set forth in Section C of the Government's brief (regarding the application of Treas. Reg. § 301.7701-2(c)(2) to authorize a disregarded entity to file refund claims for a consolidated group). This issue is addressed in Section IV of this brief.

• Issues 4 and 5 correspond to the arguments set forth in Section D of the Government's brief (regarding the ability of individual members of the BFI Group to file refund claims). These issues are addressed in Section V of this brief.

⁴ Moreover, to the extent that Appellee's restructuring is "similar to" the Coltec transaction, Appellee notes that both this Court and the Court of Appeals for the Fourth Circuit have affirmed the statutory validity of the transaction. See Coltec Industries, 454 F.3d at 1347-51; The Black & Decker Corporation v. United States, 436 F.3d 431, 438-40 (4th Cir. 2006). This Court's opinion in Coltec held only that the transaction at issue in that litigation lacked economic substance, see Coltec Industries, 454 F.3d at 1343, not that all transactions based upon the same statutory scheme per se lack economic substance. In fact, such a conclusion would be plainly contradictory to this Court's other conclusion that the transaction was within the scope of the applicable statutory provisions of the Internal Revenue Code and would render such provisions superfluous.

⁵ In its brief, the Government claims that "the members of the BFI consolidated group, on August 24, 2006, purportedly designated BFI Waste Systems of North America, Inc. as the substitute agent for the members of the consolidated group under Treas. Reg. § 1.1502-77A(d)." Br. at 10 (emphasis added). The characterization is inaccurate as established by the fact that the IRS itself approved the designation. (A5, 324.)

⁶ The Government's statement that BFI, LLC continued to use the EIN of the former BFI, Inc., after its conversion "for refund purposes," (Br. at 8), is a red herring. The actual corrected refund claims were, as noted above, filed by the duly authorized agent, BFI Waste Systems, which bore a different EIN, and not BFI, LLC. Although refund claims were also filed in the name of BFI, LLC around the same date as the refund claims filed by BFI Waste Systems, such claims were only designated as "PROTECTIVE REFUND CLAIMS." (A533, 538, 745 at n. 6.) In any case, the validity of the corrected refund claims filed by BFI Waste Systems and the protective refund claims filed by BFI, LLC in August 2006, is not at issue in this appeal nor was it at issue in the case below.

⁷ There is no dispute on this appeal that Treas. Reg. § 1.1502-77A applies to the consolidated group for the tax years in question in this case.

⁸ The regulations provide that certain specified entities may serve as alternative agents, but only for the limited purposes of receiving notices of deficiencies and waiving the statute of limitations. See Treas. Reg. § 1.1502-77A(e)(2) and (e)(3).

⁹ As noted in that brief (A287, n.5) and subsequently by the Court of Federal Claims (A9-10), although IRS administrative pronouncements such as FSAs and NSARs are not binding precedent, they can be taken into account as persuasive authority. See, e.g., Buckeye Power, Inc. v. United States, 38 Fed. Cl. 154 (Ct. Cl. 1997) (finding that a technical advice memorandum demonstrates "the strength of [the taxpayer's] evidentiary position"); McKnight v. Comm'r, T.C. Memo 1990-69 (1990) (in following the reason of a technical advice memorandum, the court noted that it "may. . ., in the absence of authority to the contrary, accept the reasoning of a technical advice memorandum as persuasive").

¹⁰ The latter of these two arguments is discussed in Section III, below.

¹¹ We assume this is not a point lost on the Government, notwithstanding its statement that Treas. Reg. § 1.1502-77A is "devoid of any reference to the entity classification regulations, or to a deemed liquidation." Br. at 36.

¹² The term "includible corporation," as defined by § 1504(b), requires that an entity be, in fact, treated as a corporation. Section 1504(b) excludes certain types of corporations from the definition of "includible corporation" however none of such exceptions are pertinent to this appeal.

¹³ The only exception to the deemed termination under the new regulation is in the extraordinary circumstance in which there is no other corporation that is capable of acting for the group. See Treas. Reg. § 1.1502-77(e)(3)(i).

¹⁴ In a subsequent Action on Decision ("AOD") on Woods Investment, AOD-1986-39, 1986 WL 376306, though disagreeing with the result of the case because it allowed the taxpayer a double deduction, the government accepted the holding and agreed not to relitigate the issue in other cases "pending revision of the regulations."

¹⁵ Finally, we note that a case cited by the Government, Long Island Care at Home, Ltd. v. Coke, 127 S. Ct. 2339, 2349 (2007), Br. at 37 and 43, supports the position that even an internal memorandum (such as NSAR 10183) can be given the type of deference suggested by the Government. In Long Island Care, the Department of Labor prepared an internal analysis of its own regulations, reflecting its "considered view." On that basis, the court held that analysis was "controlling."

¹⁶ The later memorandum, issued in November 2001, addresses only the ability of a state law corporate successor to file certain consents on its own behalf. It was issued due to the discovery of additional facts that were not available at the time the earlier memorandum was issued; however, those additional facts did not change the relevant analysis. Consequently, Appellee does not discuss the second memorandum in this brief.

¹⁷ Appellee notes that the authority granted by Treas. Reg. § 1.1502-77A(a) can be exercised by an agent that is designated to replace a terminating common parent pursuant to the procedures contained in Treas. Reg. § 1.1502-77A(d). The Government, however, has not contended that BFI, LLC was designated as an agent according to these procedures, and Appellee therefore does not address that argument. Nevertheless, were the Government to make this argument, it would fail for similar reasons, because a designated agent must be a "member" of the group, Treas. Reg. § 1.1502-77A(d), and only an entity that is considered to be a "corporation" for federal tax purposes may be such a "member". § 1504(a)(1), (b); Treas. Reg. § 1.1502-1(b).

¹⁸ Other forms of legal organization (e.g., a business entity wholly owned by a state) are also considered per se to be corporations for federal tax purposes; however, those other forms are not relevant to this appeal and, therefore, are not discussed in this brief.

¹⁹ Throughout its appellate brief, the Government has referenced the entities "BFI, Inc." and 'BFI, LLC" interchangeably even though, by its own acknowledgement, BFI, Inc. converted from a corporation to a limited liability company before the refund claims were filed. (A5.) It is therefore impossible for BFI, Inc. to have filed such claims, notwithstanding the Government's blurring of the distinction between the pre-conversion BFI, Inc. and the post-conversion BFI, LLC. References in Section C of the Government's brief to BFI, Inc. filing valid claims are inconsistent with its admission that BFI, Inc. had previously converted into BFI, LLC.

²⁰ There is no basis to conclude that an interpretive regulation, such as Treas. Reg. § 301.7701-2(c)(2)(iii), can preempt a legislative regulation having the force of law. See, e.g., O'Neill v. United States, 281 F. Supp. 359, 363 (D. Ohio 1968), aff'd, 410 F.2d 888 (6th Cir. 1969) ("Regulations are not entitled to equal weight before the courts. A court has greater freedom when passing on an interpretative rule than a legislative one").

²¹ We also noted in our Statement of the Issues that the Government's argument in Section E of its appellate brief also does not correspond to any of the issues it has raised in this appeal. Had this been a bona fide issue for this Court to consider, the Government should have included it in its issue statement.

²² The Government's brief does not make clear whose subsequent conduct purportedly ratified the defective refund claims, and the Government has pointed to no evidence of such conduct in the record on appeal.