Exxon Seeks Additional Overpayment Interest From IRS

Affiliates of Exxon Mobil Corporation, which number more than 1500, are interested parties. Most of these affiliates are not publicly traded. The following affiliates have publicly traded equity and/or debt:

Castle Peak Power Company Limited

Esso Malaysia Berhad

Esso Societe Anonyme Francaise

Exxon Asset Funding Company

Exxon Capital Corporation

Exxon Capital Ventures Inc.

Exxon Mobil Corporation

ExxonMobil Oil Corporation

ExxonMobil Pipeline Company

Imperial Oil Limited

Mobil Chemical Finance (Texas) Inc.

Mobil Corporation

Mobil Equipment Finance Company Inc.

Mobil G.B. 388 Finance Inc.

Mobil Marine Finance Company I Inc.

Mobil Marine Finance Company II Inc.

Mobil Marine Finance Company III Inc.

Mobil Oil Ghana Limited

Mobil Oil Nigeria Public Limited Company

Mobil Oil Refining Corporation

Mobil Producing Nigeria Ltd.

SeaRiver Maritime Financial Holdings, Inc.

Societe Francaise ExxonMobil Chemical SCA

Tonen General Sekiyu K.K.

The jurisdiction of the Tax Court was originally based on 26 U.S.C. § 6213(a) and 26 U.S.C. § 6512(b)(1) following Appellant's filing of a timely petition for redetermination of a deficiency. The Tax Court's jurisdiction over the issue presented on appeal rested on 26 U.S.C. § 7481(c), following Appellant's timely filing of a post-judgment motion for redetermination of interest.

This Court's jurisdiction rests on 26 U.S.C. § 7482(a)(1). Venue in this Court rests on 26 U.S.C. § 7482(b)(1)(B), because Appellant's principal place of business at the time Appellant filed its Tax Court petition was in Texas. Appellant timely filed its notice of appeal on February 17, 2006.

After resolution of the substantive issues raised in the petition, the parties stipulated to the amount of Appellant's resulting tax liability for the years at issue. On April 12, 2005, the Tax Court entered a decision stating the amount of tax overpaid by Appellant for those years. The IRS subsequently refunded those amounts with interest.

On July 22, 2005, Appellant timely filed a motion to redetermine interest pursuant to 26 U.S.C. § 7481(c), arguing that the IRS had not correctly calculated the amount of overpayment interest (also called "statutory interest") owed on the refund. The principal issue in dispute was the correct interest rate to be used for computing additional overpayment interest for the period beginning January 1, 1995, on interest that had already accrued before that date. Following briefing and oral argument, the Tax Court issued an opinion rejecting Appellant's contentions. Exxon Mobil Corp. and Affiliated Cos. v. Comm'r, 126 T.C. No. 3 (Jan. 17, 2006) (hereafter "Op.") (included in Record Excerpts (R.E.) at Tab 4). The court also entered a final order denying the motion, from which Appellant now appeals.¹

Prior to the amendment at issue here, Code section 6621 (a) provided that the interest rate on all overpayments of tax would be two points higher than the federal short-term interest rate, which is a reference rate of interest announced each quarter by the Secretary of the Treasury. See I.R.C. § 6621(a), (b). In 1994, Congress passed legislation to implement the Uruguay Round trade agreements concerning the GATT tariff regime. To help offset the anticipated revenue loss from the new tariff regime, Congress prospectively reduced the interest rate that the government should use in calculating interest owed to corporate taxpayers on certain tax overpayments. To accomplish this result, Congress added a new sentence at the end of section 6621(a) that reduces the interest rate for certain specified overpayments of tax, and it provided that the amendment applies "for purposes of determining interest for periods after December 31, 1994." Uruguay Round Agreements Act, Pub. L. No. 103-465, § 713(b), 108 Stat. 4809, 5002 (1994).

As amended, section 6621 (a) provides in pertinent part as follows (with the GATT amendment in italics):

The parties agree that the GATT amendment applies two different interest rates to those amounts for periods beginning January 1, 1995. To the extent the overpayment of tax exceeds $10,000, the statute requires that the interest rate be reduced prospectively to the "GATT rate," that is, 1.5 percentage points less than the "regular rate" described in section 6621(a)(1)(B), at which interest had been accruing prior to January 1, 1995. To the extent the overpayment of tax does not exceed $10,000, the statute does not call for any change in the interest rate, and therefore interest would continue to accrue on those amounts at the regular rate. The parties disagree, however, on the effect of the GATT amendment on amounts of accrued overpayment interest outstanding on December 31, 1994. Appellant maintains that interest on this amount should continue to accrue at the regular rate. The government maintains that the interest rate on this amount should switch to the GATT rate, to the extent the interest had accrued on an overpayment of tax exceeding $10,000.

The refund paid to Appellant by the IRS for the 1983-85 taxable years reflected principal and interest on overpayments that arose prior to December 31, 1994. As of that date, the amounts of accrued overpayment interest owed to Appellant were as follows: (1) $78,631,554 for the 1983 taxable year; (2) $44,633,756 for the 1984 taxable year; and (3) $16,497,946 for the 1985 taxable year, all of which accrued at the regular rate.

The government's subsequent payment to Appellant for these years reflected additional compound interest on the above amounts of outstanding accrued overpayment interest that was calculated at the GATT rate for the period beginning January 1, 1995. Appellant filed a motion for redetermination of interest with the Tax Court, pursuant to I.R.C. § 7481(c), seeking additional interest that would reflect overpayment interest calculated at the regular rate for the entire period.

3. The Tax Court's Decision. The Tax Court denied the motion, holding that overpayment interest previously accrued at the regular rate prior to January 1, 1995, earns interest after that date at the GATT rate just like overpayments of tax that exceed $10,000. The court did not dispute Appellant's contention that the term "overpayment of tax" in the Code generally does not include accrued overpayment interest, thus yielding different treatment for such interest. See Op. 13-15. Apart from observing that "the language of section 6621(a)(1) could be clearer" (Op. 15), however, the court attached no significance to the use of the term "overpayment of tax."

Instead, the court stated that the GATT amendment language "does not provide its own, stand-alone, reduced interest rate that becomes applicable only to overpayments of tax" because the "language explicitly bumps the corporation back up into" the pre-existing subsection, while substituting a different interest rate. Op. 10. Therefore, the court reasoned, "with respect to that corporation (and with respect to all overpayment interest accrual except that relating to the corporation's tax overpayment up to $10,000), section 6621(a)(1) effectively provides only one interest rate -- the reduced GATT rate. . . . [T]he regular interest rate, for practical purposes, is eliminated from the statutory language of section 6221." Op. 11. The court accordingly concluded that, "[o]nce the GATT trigger occurs, then any and all further interest after December 31,1994, relating to or associated with that excess corporate overpayment, is to accrue only at the reduced GATT rate."Id.³

The GATT amendment directs a change in the overpayment rate only for one specified quantity, an "overpayment of tax" to the extent it exceeds $10,000. The statute does not direct a change in any other quantity. Hence, unless accrued overpayment interest is encompassed within the term "overpayment of tax," the GATT amendment does not direct any change in the rate at which interest that had already accrued as of December 31, 1994, should continue to accrue interest after that date.

It is well settled, however, that the term "overpayment of tax" in the Code does not ordinarily include an amount of previously accrued overpayment interest, and the Code frequently accords such interest different treatment from the underlying tax overpayment. See Alexander Proudfoot Co. v. United States, 454 F.2d 1379, 1384 (Ct. CI. 1972). When Congress wants the same statutory rule to govern both overpayments of tax and overpayment interest, it generally makes an explicit reference to interest. See, e.g., I.R.C. §§ 6402(a), 7481(c). Accordingly, the plain language of the GATT amendment does not direct any change in the interest rate applicable to Appellant's previously accrued interest, and the amount of that accrued interest in existence on January 1, 1995, should continue to earn interest after that date at the regular rate. This interpretation of the statute is buttressed by the fact that it accords with the contemporaneous interpretation applied by the IRS and Justice Department officials charged with its administration.

The Tax Court suggested that it believed Congress did not intend for previously accrued interest to continue to accrue at the regular rate after December 31, 1994. There is no support for that suggestion, and, indeed, whatever evidence can be gleaned from the legislative history is to the contrary. In any event, the court was bound to follow the dictates of the statutory language, even if it believed that the text was inartfully drafted and failed to achieve Congress's intent "to effect a purpose which does not appear on the face of the statute." Hanover Bank v. Comm'r, 369 U.S. 672, 687 (1962); Transco Exploration Co. v. Comm'r, 949 F.2d 837, 841 (5th Cir. 1992).

B. The rationale of other cases that have considered the same issue do not support the Tax Court's decision. The Federal Circuit in General Electric Co. v. United States, 384 F.3d 1307 (Fed. Cir. 2004), used a retrospective application of the GATT amendment to try to avoid the consequences of the basic principle that the term "overpayment of tax" does not encompass accrued overpayment interest. The court held that the GATT amendment transition should be accomplished by tracing amounts owed by the IRS to taxpayers on January 1, 1995, back to the date on which interest first began to accrue. That "original overpayment" amount would then be divided into two portions for interest accrual purposes (with both portions accruing interest at the regular rate until January 1, 1995, and the portion exceeding $10,000 then switching to the GATT rate on January 1, 1995), thereby preventing the formation of a distinct pool of previously accrued interest.

The GATT amendment was intended to operate prospectively, however, and the court's approach departs from the ordinary and logical application of the statute's effective date provision. It pointlessly creates a "GATT basket" of tax overpayment at a time long before the GATT interest rate goes into effect. Moreover, the court's approach rests on the fallacy that there exists a "single," original tax overpayment amount to which the GATT amendment must be referring. In fact, the amount of overpayment on which interest is computed is constantly changing because of refunds, payments, credits, and other events. Therefore, interest computations are based on multiple dates of overpayments, with each computation turning on the outstanding balance at the time, not on the amount of the original overpayment. That original amount becomes irrelevant to the computation once the outstanding balance is changed by a refund or payment.

The decision in State Farm Mutual Automobile Insurance Co. v. Comm'r, 126 T.C. No. 2 (Jan. 17, 2006), also provides no justification for the court's decision. There is no support whatsoever for the court's suggestion that the use of the phrase "to the extent" in the GATT amendment means that an overpayment exceeding $10,000 triggers application of the GATT rate to all outstanding amounts. That unique interpretation leads to absurd results and is at odds with the legislative history and the government's own interpretation. Nor is there anything inherently suspect about applying different interest rates to accrued interest and principal, an approach that is not unusual in commercial dual-interest arrangements.

This case presents a relatively narrow issue of statutory construction. Congress provided for a change in the interest rate the government pays on a specifically identified class of obligations owed by the government to taxpayers -- namely, overpayments of tax in excess of $10,000. Congress acted prospectively, with the interest rate change commencing on a specified effective date. The only question here is how that statutory language applies to a particular pot of money -- interest that had already accrued as of the December 31, 1994 effective date on Appellant's tax overpayments for the 1983-85 taxable years (sometimes referred to in this brief as "pre-1995 accrued overpayment interest"). The text of the statute definitively answers that question because it does not direct any change in the interest rate for overpayment interest that accrued prior to the effective date.

The focus of the GATT amendment was prospective. Congress made the amendment effective only for periods beginning after December 31, 1994. For those periods, however, Congress created a regime under which the government is to divide monies owed to the taxpayer into two different "baskets" and apply different interest rates going forward to the two amounts. Thus, when an overpayment of tax arises after December 31, 1994, the amended section 6621(a) provides that the portion of the tax overpayment exceeding $10,000 will accrue interest at the new GATT rate. The GATT amendment, however, changes the interest rate only "to the extent that an overpayment of tax . . . exceeds $10,000," and therefore interest will accrue at the old "regular" rate on $10,000 of the tax overpayment. Compounding of interest under section 6622 proceeds along the same lines: Interest on the "excess over $10,000" portion of the tax overpayment compounds at the GATT rate, and interest on the other portion compounds at the regular rate.

Thus, the Tax Court has it completely backwards in stating that, after the GATT amendment, "section 6621(a)(1) effectively provides only one interest rate." Op. 11. Prior to the GATT amendment, that section provided only one interest rate for corporate overpayments. Once the GATT amendment became effective for periods after December 31, 1994, the section provides two interest rates for amounts derived from corporate overpayments of tax.

The question presented here relates to the transition from the single interest rate regime to the dual interest rate regime that Congress provided would occur on January 1, 1995. There existed outstanding amounts owed to taxpayers on that date, and those amounts consisted of both principal overpayments of tax and amounts of accrued interest that had accumulated from the time the overpayment originally arose. Beginning with the effective date of January 1, 1995, the GATT amendment calls for the commencement of a dual interest rate regime, with some portion of those amounts beginning to accrue interest at the GATT rate instead of the regular rate as before. There is no indication in the legislative history of the GATT amendment that Congress gave any specific consideration to this transitional issue, nor is there any general Congressional policy embodied in the statute that points to any particular resolution. Rather, the answer to the question must be found within the four corners of the statutory text.

For the outstanding amounts of principal, the parties agree that the statutory text clearly answers the question. Just like overpayments of tax that first arise after the effective date, the principal will begin on the effective date to accrue interest at the GATT rate to the extent it exceeds $10,000, and the portion that does not exceed $10,000 will continue to accrue interest at the regular rate.

We submit that the statutory text also definitively resolves the issue presented in this case concerning the interest rate applicable to accrued overpayment interest. The GATT amendment was not drafted in a way that specifies a new interest rate for every kind of amount owed to the taxpayer. Rather, it specifies a new interest rate only for one such amount, an "overpayment of tax" in excess of $10,000. Everything else is left unaffected by the new flush language of the GATT amendment and therefore continues to be governed by the regular rate set forth in the unamended section 6621(a)(1)(B). Because accrued overpayment interest is not encompassed within the phrase "overpayment of tax," the interest rate on outstanding amounts of pre-1995 accrued overpayment interest are not affected by the GATT amendment and should continue to accrue at the regular rate. The Tax Court's contrary decision is flawed because it fails to pay heed to the key elements of the statutory text -- both that the GATT rate applies only to those amounts specifically identified in the amendment and that those amounts are limited to a portion of the "overpayment of tax."

The Tax Court did not properly analyze the question in this fashion because it treated the GATT amendment as saying something different. The court stated that "the language of section 6621(a)(1) establishes a specific and definite overpayment interest rate where a corporation has made a tax overpayment for a year of $10,000 or less and another specific and definite overpayment interest rate where a corporation has made a tax overpayment in excess of $10,000." Op. 10. Only the latter part of that statement is correct. The flush language of section 6621(a)(1) does establish a specific overpayment interest rate (the GATT rate) for overpayments of tax in excess of $10,000. But the statute does not establish a specific rate for tax overpayments of $10,000 or less. Rather, such tax overpayments, like everything else that does not fall within the specific language of the GATT amendment, remain covered by the pre-existing general language of section 6621(a)(1)(B) establishing the "regular" overpayment interest rate.

If the statute had specified that the regular rate applied only to overpayments of tax of $10,000 or less, as the Tax Court suggested, this would be a different case because that would be a different statute. Significantly, an early draft of the GATT amendment fit the Tax Court's description much more closely.

The language originally recommended by the Senate Finance Committee on July 29, 1994, would have made the new GATT rate the generally applicable rate by changing the basic rate stated in section 6621(a)(1)(B) (from 2 percentage points over the short- term rate to 0.5 percentage points over that rate), while creating exceptions to that change in new flush language to be added. See 94 Tax Notes Today 167-4 (Aug. 24, 1994). That flush language would have provided:

The House of Representatives, however, proposed different language on this point. The House and the Senate then engaged in a "mock conference" process to resolve differences in their two versions of the legislation.⁴ In that process, the House "offer" was that the Senate should adopt the "House position applying the lower interest rate only to corporate income tax overpayments in excess of $10,000." See 94 Tax Notes Today 165-22 (Aug. 22, 1994). The Senate "counteroffer" agreed to "[a]dopt [the] House position." See 94 Tax Notes Today 181-30 (Sept. 13, 1994); 94 Tax Notes Today 168-21 (Aug. 25, 1994). As a result, the legislation submitted by the President and enacted by Congress did not contain the Senate's draft language. Instead, it implemented the House position by generally leaving undisturbed the "regular" rate (2 points over the federal short-term rate) described in section 6621(a)(1)(B), and providing for a change in that rate only for the corporate tax overpayments in excess of $10,000 specifically identified in the GATT amendment.

The issue presented here must be resolved on the basis of the statute actually enacted by Congress, not the statute that it might have enacted. The Tax Court incorrectly characterizes the actual statute in stating that "the flush language of section 6621(a)(1) does not provide its own, stand-alone, reduced interest rate that becomes applicable only to overpayments of tax." Op. 10. That is precisely what the flush language does -- changing the interest rate for certain overpayments of tax, but leaving intact the previous interest rate for other amounts. If Appellant's pre-1995 accrued overpayment interest is not covered by the term "overpayment of tax," as we maintain, it necessarily follows that the statute did not make the GATT interest rate applicable to that accrued interest.

For example, Code section 6511 (a) establishes a three-year limitations period for seeking a refund of "an overpayment of any tax." The courts and the IRS have recognized that this statutory language does not encompass overpayment interest, however, and therefore a suit for overpayment interest is governed not by section 6511(a) but instead by the general six-year statute of limitations for claims against the government (28 U.S.C. §§ 2401, 2501). See, e.g., General Instrument Corp. v. United States, 33 Fed. Cl. 4, 6 (1995); Lyons v. United States, 93-1 U.S. Tax Cas. (CCH) ¶ 50,026 (S.D. Iowa 1992); Rev. Rul. 57-242, 1957-1 C.B. 452 (noting that "a statutory period of limitations for the allowance and payment of interest on an overpayment of tax is not provided for in the Internal Revenue Code"); Rev. Rul. 56-506, 1956-2 C.B. 959.

Other statutes confirm the conclusion that Congress does not intend to include overpayment interest when it uses the term "overpayment of tax" alone. Code section 6402(a) currently permits the IRS to credit an "overpayment, including any interest allowed thereon," against the taxpayer's other tax liabilities. The latter phrase was added in 1954 for the specific purpose of allowing the IRS to credit accrued overpayment interest; prior to that time, when the statute referred only to an "overpayment," the statute was understood not to allow the crediting of overpayment interest. See S. Rep. No. 83-1622, at 581 (1954) ("This section . . . changes existing law so as to permit expressly the crediting of interest on an overpayment against any outstanding liability for any tax.").

Similarly, when the Tax Court prior to 1997 was given refund jurisdiction under section 6512(b)(1) only with respect to an "overpayment," that court recognized that it was powerless to enter a decision for overpayment interest. See, e.g., Harrison v. Comm'r, 68 T.C.M. (CCH) 1438, 1441 (1994). Congress relaxed this limitation in 1997 by adding the section on which the motion for redetermination of interest in this case was based, I.R.C. § 7481(c)(3), which provides that a determination by the Tax Court that the government owes additional interest "shall be treated under section 6512(b)(1) as a determination of an overpayment of tax."

All of these examples point to the same interpretive rule. Congress uses specific language when it wants overpayment interest to be treated like an overpayment of tax; the statutory term "overpayment of tax" is not construed to encompass overpayment interest unless Congress explicitly so provides. Indeed, the Tax Court did not appear to dispute the correctness of this interpretive rule, reciting several examples "in which overpayment interest is or has been treated differently from overpayments of tax" under the Code. Op. 13-15. The Tax Court, however, erroneously failed to follow this interpretive rule to its logical conclusion -- namely, that the interest rate on Appellant's accrued overpayment interest was unaffected by the GATT amendment's change of the interest rate on "overpayment[s] of tax." The court's only explanation was that "the language of section 6621(a)(1) could be clearer." Op. 15. But even if that is true, it did not excuse the court from construing the statutory language that was enacted in conformity with the way the Code consistently uses the term "overpayment of tax," which would exclude accrued overpayment interest. By attaching no significance to Congress's use of the term "overpayment of tax," the Tax Court essentially ignored an important limitation that Congress expressly placed upon the operation of the new GATT interest rate.

Shortly after the effective date of the GATT amendment, IRS senior officials issued guidance to the employees tasked with calculating interest for post-1994 periods. A February 27, 1995, memorandum from John Monaco (Assistant Commissioner, Examination) instructed IRS Field Agents to separate for interest calculation purposes the quantities that made up the taxpayer's outstanding account on December 31, 1994, with additional interest on "all interest accrued to this date" to "be calculated . . . at the normal rate," along with $10,000 of the tax overpayment. Monaco Memorandum, at 1 (included in R.E. at Tab 7). The memorandum explicitly confined the applicability of the GATT rate to the quantity described in the GATT amendment -- "the principal amount that exceeds the $10,000 threshold." Id. These instructions were then included in the Internal Revenue Manual, which is the IRS's official compilation of administrative instructions and guidelines. See I.R.M. § 31(59)(32) (1996) (included in R.E. at Tab 8) (stating that "[c]redit interest accrued through December 31, 1994: (a) is NOT subject to the GATT rate, (b) is calculated at the normal interest rate . . . .").⁵

The interest specialists at the Department of Justice's Tax Division reached the same conclusion a few months later. See Mildred L. Seidman and Micheline M. Maritz, A Bird's Eye View of Some General Principles Re Interest (July 7, 1995) (included in R.E. at Tab 9). The Seidman/Maritz memorandum illustrates the computation of interest after the effective date of the GATT amendment on a tax overpayment that arose prior to the effective date -- the precise question at issue here. Id. at Q-3 to Q-4, Q-11 to Q-14. The illustration divides the balance outstanding on January 1, 1995, into three distinct quantities, and directs that the previously accrued overpayment interest, like $10,000 of the overpayment, should continue to earn interest at the higher regular rate even after the effective date of the GATT amendment. Id. at Q-l2, Q-l3 ($4,467.30 in accrued interest earns interest at the regular rates of 8 and 9 percent). This memorandum was appended as Exhibit Q to the Justice Department's Settlement Reference Manual (and remains publicly available at http://www.usdoj.gov/tax/readingroom/foia/tax.htm).

This approach accords completely with Appellant's position and is directly contrary to the trial court's opinion. See Op. 9 (disputing the proposition that the balance outstanding on January 1, 1995, consists of three distinct quantities). These contemporaneous statutory interpretations by government officials with considerable experience and expertise in interest calculations under the Code are powerful evidence that Appellant's position reflects the ordinary and logical reading of the statutory text.

Neither court provided any support for its supposition concerning Congress's intent, and in fact there is no reason to assume that Congress intended to have the GATT rate apply to pre-1995 accrued overpayment interest. Indeed, as noted above (supra pp. 18-20), to the extent the legislative history bears on the question, it indicates that Congress was careful to avoid having the new GATT rate apply to amounts that were not specifically identified. Instead, it deliberately chose statutory language that confined operation of that rate only to overpayments of tax in excess of $10,000 -- leaving all other quantities to be governed by the regular rate.

In any event, even if the Tax Court were correct in surmising Congress's unexpressed intent, that would provide no justification for departing from the result demanded by the statutory language. This Court has repeatedly emphasized that the role of the judiciary is to apply the statutory text as enacted, even if the court believes that the statutory draftsmen may have failed to implement Congress's intent accurately. Thus, for example, in Grider v. Cavazos, 911 F.2d 1158, 1162 (5th Cir. 1990), this Court described as a basic rule of statutory construction the principle that "courts may not re-write inartfully but unambiguously drafted legislation in order to accomplish results perceived by the court to be the goals of such flawed legislation."

This principle of adhering to the statutory language is fully applicable to the Internal Revenue Code. See, e.g., Gitlitz v. Comm'r, 531 U.S. 206, 219-20 (2001); Transco Exploration Co. v. Comm'r, 949 F.2d 837, 841 (5th Cir. 1992); King Ranch, Inc. v. United States, 946 F.2d 35, 37 (5th Cir. 1991). As the Supreme Court stated in Hanover Bank v. Comm'r, 369 U.S. 672, 687 (1962), the courts "are not at liberty . . . to add to or alter the words employed to effect a purpose which does not appear on the face of the statute." Here, the statutory text does not direct any change in the interest rate applicable to pre-1995 accrued overpayment interest nor does the statute evidence any purpose that would necessitate such a change. In these circumstances, the Tax Court's decision cannot be sustained.

The court reasoned that "the 'overpayment' in section 6621 refers to GE's original overpayment of taxes for taxable year 1978, not the amount still owing to GE in 1995" on the effective date of the GATT amendment. Id. at 1313. By defining the "overpayment of tax" in this fashion, the court ruled that the GATT amendment's division of the overpayment into two interest rate "baskets" occurred at the instant the overpayment first arose -- long before 1995 and before any pool of accrued interest yet existed. "Those two sums," the amount over $10,000 and the remaining $10,000, could then "be envisioned as generating separate interest streams to which different interest rates are assigned" tracing from the "original . . . overpayment," and there would be no unassigned pool of accrued overpayment interest in existence on January 1, 1995. Id. at 1312. (Presumably, both "streams" would accrue interest at the regular rate until January. 1, 1995, when one would abruptly change to the GATT rate.) The Federal Circuit's reasoning is untenable, however, because it conflicts with the effective date provision of the GATT amendment and with the basic concept of an "overpayment."

This common sense reading of the statute conforms to how the courts have consistently construed similar effective date provisions. For example, in Union Pacific Railroad Co. v. United States, 11 Cl. Ct. 177 (1986), the court considered a series of interest rate increases enacted by Congress over a period of years. The court noted that, in each case, "increased interest rates were meant to apply to all taxes outstanding on the effective dates of the legislation." Id. at 179.

The Tax Court has elaborated on the reason why effective date provisions operate in this fashion for interest rate changes. Former Code section 6621(d) (26 U.S.C. § 6621(d) (1986)) was enacted in 1984 to increase the interest rate on certain underpayments, including those attributable to a "valuation overstatement" on the return. The new rule was made effective as to interest accruing after December 31, 1984. In discussing whether the statute was impermissibly retroactive when applied to a pre-1984 tax return, the Tax Court explained that "[t]he event which subjects petitioners to the imposition of section 6621(d) is not the filing of their 1978 tax return, but the existence, beyond the effective date of section 6621(d), of an underpayment attributable to a valuation overstatement." Solowiejczyk v. Comm'r, 85 T.C. 552, 555 (1985), aff'd mem., 795 F.2d 1005 (2d Cir. 1986) (emphasis added). Thus, one implements a transition to a different interest rate by identifying the balance in existence on the effective date and then applying the new interest rules to that outstanding balance.

This approach also harmonizes with the way that interest calculations are actually performed. Once an interest methodology is selected (simple or compound), an interest calculation for a particular period is based on three variables: the outstanding balance, the interest rate, and the length of the time period. The amounts contained in interest-bearing accounts tend to fluctuate -- either because of deposits or withdrawals in the case of a bank account, or payments or refunds or credits in the case of a tax account. But such events that occurred prior to the beginning of the time period for which interest is being calculated have no bearing on the calculation. When an event occurs that changes one of the variables, that terminates one calculation period, and a new calculation with different numbers is triggered for a second period.

The GATT amendment directs a change in the interest rate on January 1, 1995, so a new interest calculation begins on that date, applying the new GATT regime to the amounts outstanding on January 1, 1995. The dual interest rate component necessitates a separation of the existing amounts into two baskets, only one of which is subject to the interest rate reduction, and that separation logically should occur when the interest rate changes. The alternative is pointless -- taking steps to create a "GATT basket" that will earn a separate "stream" of interest, even though a single interest rate regime remains in effect. Rather, when Congress directs a change in the interest rate on tax overpayments and makes it effective on January 1, 1995, the only logical way to implement that directive is by looking at the outstanding account balance on that date and adjusting the interest rate on that balance in accordance with the statutory directive.

The General Electric court's approach is not only illogical, it also creates practical difficulties. Even the trial court in General Electric acknowledged that creating two baskets and streams of interest during the pre-1995 single rate regime introduces additional complexities into the interest calculations. See 56 Fed. Cl. at 493-94. Moreover, the Tax Court's ruling on the second issue presented below (see supra n.3) demonstrates that this premature division of the amounts owed to the taxpayer can lead to problematic results. The statute unquestionably was designed to give taxpayers some relief from the new GATT regime, at least to the extent that $10,000 of the overpayment amount would be permitted to earn overpayment interest at the regular rate. But the Tax Court denied even this relief to Appellant, on the theory that $10,000 of the overpayment had already been paid to Appellant prior to 1995. Op. 17-19. In other words, the Tax Court held that Appellant used up its benefit of partial relief from the GATT rate during a period when there was no GATT rate in effect! This peculiar ruling further confirms that the General Electric court erred in holding that the GATT amendment contemplated the creation of a "GATT stream" of interest years before the effective date of the statute.

This line of reasoning does not support the Tax Court's holding in this case. Appellant's position here does not rest on the assertion ascribed to the taxpayer by the General Electric court -- namely, that the amount of accrued interest as of January 1, 1995, "was not interest on any amount of 'overpayment.'" Id. While that amount is more precisely described as compound "interest on interest," which is payable only under the authority of section 6622, Appellant does not dispute that it is traceable in some sense to an overpayment of tax, as that term is used in section 6621. But that is equally true of every pool of accrued overpayment interest, yet the Code consistently treats such quantities differently from overpayments of tax. See supra pp. 21-23. The GATT amendment calls for the same approach here. By its terms, it establishes a rule for the principal overpayments of tax (in excess of $10,000) that does not apply to previously accrued interest on overpayments of tax. Nothing in section 6611 suggests a different interpretation.

Following its mistaken analysis of section 6611, the court expressly adopted "[t]he trial court's construction of the term 'overpayment' as being a fixed amount that is not reduced as the overpayment is retired . . . ." 384 F.3d at 1313; see also 56 Fed. Cl. at 493, 492 ("there is only one [overpayment] for any given taxable period," which is unaffected by "when and to what extent the IRS refunds (or credits to another taxable year) that overpayment"). If that "single overpayment" assertion were correct, then one can perhaps understand why the court applied the GATT amendment retrospectively to the original overpayment of tax, rather than to the amount outstanding on January 1, 1995. In fact, however, this assertion is untenable. It is plainly impossible for the term "overpayment" in sections 6611 and 6621 to refer to the original overpayment without reduction for refunds or credits.

Section 6611 directs the IRS to pay interest on an "overpayment" at the rate specified in section 6621 "from the date of the overpayment." If the term "overpayment" in these sections refers to the "original" overpayment, unreduced by previous credits or refunds, that would mean that the IRS in General Electric was required to continue paying interest on "the amount of the original overpayment for 1978, i.e., $15,497,938" (384 F.3d at 1311) -- even after that amount had been substantially reduced by payment of a refund. That would be absurd and is plainly not the law.

The regulations under section 6611 instead make clear that interest is paid on the outstanding overpayment balance, not on the amount of the "original" overpayment. The regulations must account for the fact that all kinds of events can affect the amount of the outstanding overpayment, such as refunds, credits, additional payments, and carryback or carryforward adjustments from other years. Accordingly, the regulations implement the reference in section 6611 to interest running from the "date of overpayment" by recognizing that there can be multiple dates of overpayment. See Treas. Reg. § 301.6611-1(b). The regulatory examples illustrate how a series of taxpayer payments yield different overpayment amounts on different dates. A separate interest computation is made beginning with each of these dates with the interest rate being applied to a different amount of overpayment each time -- the outstanding balance at the beginning of the period. Treas. Reg. § 301.6611-1(c), Ex. 2. The amount of the "original" overpayment is no longer relevant to the calculation once that amount has been reduced by a refund or credit.

The courts similarly have recognized that the statutory term "overpayment" refers to an amount that varies over time if interim payments are made by either the IRS or the taxpayer. See generally Jones v. Liberty Glass Co., 332 U.S. 524, 531 (1947) (an overpayment is "any payment in excess of that which is properly due"); Bachner v. Comm'r, 109 T.C. 125, 128-29 (1997), aff'd mem., 172F.3d 859 (3d Cir. 1998). In Soo Line Railroad Co. v. United States, 44 Fed. Cl. 760 (1999), for example, the Court of Federal Claims directly confronted the question of the effect of a refund on an overpayment. The taxpayer had argued that it was entitled to interest on a 1980 overpayment notwithstanding that the IRS had credited against the 1980 tax liability an amount greater than the overpayment to reflect a net operating loss carryback. The court rejected that argument, explaining as follows:

In sum, refunds and credits are relevant to the amount of an overpayment, and the starting point for an interest calculation for a given time period must be the overpayment balance outstanding at the beginning of that period, taking into account all prior payments and refunds. For the transition triggered by the GATT amendment, the relevant interest calculation period is the one commencing on January 1, 1995. The GATT amendment thus directs the IRS to look at the tax overpayment amount outstanding on that date to determine how to effectuate the transition. By the terms of the GATT amendment, the interest rate on that amount (less $10,000) should have switched to the lower GATT rate on January 1, 1995. But the terms of that statute do not call for a change in the interest rate payable on the remaining amounts owed to Appellant on that date -- that is, the other $10,000 of tax overpayment and the previously accrued overpayment interest.

First, the court invoked the following statement by the State Farm court: "the phrase in question is a device to describe the occasion when the GATT rate is triggered for all interest computational purposes including compounding under section 6622. We do not read the phrase 'overpayment of tax' as a limitation on the scope of the applicability of the changed rate once triggered." Op. 12 (quoting State Farm, slip op. at 9). By describing the statute in terms of a "trigger," rather than a "limitation," the court appears to be suggesting that the phrase "to the extent" should be construed to mean "if -- that is, that all outstanding amounts (including the first $10,000 of principal) are subject to the GATT rate if an overpayment of tax exceeds the $10,000 threshold. That novel construction of the statute cannot be sustained.

The State Farm court's suggestion is unique; the government has never construed the statute this way nor has any other court. Indeed, the suggestion is inconsistent with other aspects of the Tax Court's opinion in this case, since the court's analysis of how to administer "the $10,000 exemption" (Op. 17-19) would be pointless if the $10,000 acts as a trigger, rather than a limitation. Moreover, the court's suggestion leads to absurd results. A taxpayer would receive less overpayment interest on a tax overpayment of $10,001 (all at the GATT rate) than it would receive on an overpayment of $9,999 (all at the regular rate). Finally, the court's suggestion is directly contradicted by the legislative history, which states unequivocally that the GATT rate is to apply to the "portion of an overpayment" that exceeds $10,000. H.R. Rep. No. 103-826, pt. 1, at 178; S. Rep. No. 103-412, at 144 (1994).

Second, the Tax Court cited approvingly to the State Farm court's observation that the legislative history does not specifically state that different interest rates should apply to the overpayment itself and to the accrued interest. Op. 12 (quoting State Farm, slip op. at 10). That observation is misguided, since there is ordinarily no justification for drawing a negative inference from the absence of a specific statement in the legislative history. See, e.g., Community for Creative Non-Violence v. Reid, 490 U.S. 730, 748-49 (1989); VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1581 (Fed. Cir. 1990); Linquist v. Bowen, 813 F.2d 884, 889-90 (8th Cir. 1987). Congress's stated purposes for enacting the GATT amendment were both forward-looking -- namely, partially offsetting the cost of the prospective change in the GATT tariff regime and avoiding "distortions" that could result "if the rates of interest in the Code differ appreciably from market rates," which could encourage corporations to overpay their taxes initially. H.R. Rep. No. 103-826, pt. 1, at 178; S. Rep. No. 103-412, at 144. Thus, it is hardly surprising, and surely insignificant, that the legislative history contains no specific statement addressing the transition issue presented here.

To the extent the court is suggesting that there is something inherently suspect about applying different interest rates to accrued interest and principal, the court is mistaken. It is atypical, of course, to have a bifurcation in interest rates between the principal and the accrued interest, but that is only because it is customary for a single recipient to receive a single interest rate for a particular period. When commercial arrangements provide for dual interest rates, however, it is not uncommon for accrued interest to compound at a different rate from the principal, and there is accordingly no reason to question that outcome here. See, e.g., Burns Mortgage Co. v. Fried, 292 U.S. 487, 492 (1934) (loan agreement paying 10% interest on interest and 7% interest on underlying principal); In re Canal Place Ltd. Partnership, 921 F.2d 569, 575 (5th Cir. 1991) (loan agreement setting interest on accrued interest at 8.75% while interest on principal varies from 13.16% to 13.86%); Treas. Reg. § 1.1001-3(d), Ex. 11 (describing situation where interest on deferred interest on a corporate note compounds at a higher rate than the rate applicable to the principal).

Moreover, the bifurcation identified by the court is no more unusual or inherently questionable than the bifurcation in interest rates here between two portions of the principal. The court, however, did not question that differential treatment (of $10,000 of overpayment and the excess over $10,000) because it agreed that the difference in interest rates is compelled by the statute. But, as explained above, the statutory language also compels the bifurcation identified by the court -- accrued interest continues to compound at the regular rate while the overpayment principal in excess of $10,000 switches on January 1, 1995 to earn interest at the GATT rate. That statutory language is controlling here and requires reversal of the Tax Court.

OF COUNSEL:

² The language increasing the overpayment rate for noncorporate taxpayers to 3 points above the Federal short-term rate was added in 1998. That change has no bearing on this case.

³ The court also addressed a second issue concerning the application of the $10,000 limitation to calculation of interest on the principal owed to Appellant. Op. 17-19. Although Appellant disagrees with the court's opinion on that issue (see, e.g., infra p. 34), it does not raise that issue on appeal because its effect on the interest calculation is relatively small.

⁴ This informal "mock conference" procedure was used because the legislation implementing the Uruguay Round trade agreements proceeded under "fast track rules" that did not permit any amendments to the legislation after it was formally introduced. Hence, the two houses of Congress would consult and seek to resolve differences in advance "in order to develop a draft implementing bill together with the Administration . . . before it introduced the legislation formally." See generally H.R. Rep. No. 104-285, pt. 1, at 17-18 (1994). The President submitted the Uruguay Round trade agreement and implementing legislation on September 27, 1994. See H.R. Doc. No. 103-316 (1994).

⁵ The IRS reversed its position and adopted its current interpretation of the GATT amendment more than two years later. See Significant Service Center Advice (SCA) 1998-014 (Apr. 24, 1997) (included in R.E. at Tab 5); SCA 1998-015 (Dec. 24, 1997) (included in R.E. at Tab 6). The stated rationale was that "tax and the interest thereon are generally treated as one," citing Alexander Proudfoot Co. v. United States, 454 F.2d 1379 (Ct.Cl. 1972). SCA 1998-014 at 2; SCA 1998-015 at 3. As noted above (supra p. 21), the cited language in Proudfoot refers only to underpayment interest, which is explicitly made part of the tax by statute. The case actually stands for the opposite proposition with respect to overpayment interest. The Internal Revenue Manual was then amended to conform to this change of position.