Appeal from the United States Court of Federal Claims in case no. 07-CV-812, Judge Mary Ellen Coster Williams.
The opinion of the court was delivered by: Gajarsa, Circuit Judge.
Before LOURIE, GAJARSA, and O'MALLEY, Circuit Judges.
The issue before the court is whether a parent and its subsidiaries, who incurred overpayments and underpayments prior to consolidation, qualify as the "same taxpayer" under Internal Revenue Code ("I.R.C.") § 6621(d). Energy East Corporation ("Energy East") filed a refund claim, seeking to offset the amount it underpaid in 1999 with amounts two of its subsidiaries overpaid from 1995-97, even though consolidation did not occur until 2000 and 2002. The Court of Federal Claims determined that Energy East was not the "same taxpayer" as its subsidiaries under § 6621(d) and denied its claim for a refund. Upon review of the statute and attendant case law, this court affirms the trial court's decision.
On September 20, 2000, Energy East acquired CMP Group, Inc., and its subsidiary Central Main Power Company ("CMP"). Energy East Corp. v. United States, 92 Fed. Cl. 29, 30, 31 (2010) ("CFC Op."). Energy East then acquired RGS Energy Group, Inc., including its subsidiary Rochester Gas & Electric Company ("RG & E"), on July 1, 2002. Id. After the acquisition, Energy East became the parent of CMP and RG & E, who in turn became brother and sister subsidiaries of the parent. Energy East assumed all of CMP's and RG & E's liabilities. Id. Subsequent to their respective acquisitions, CMP and RG & E became part of Energy East's affiliated group of corporations for filing consolidated income tax returns pursuant to I.R.C. § 1501. Id. Although CMP and RG & E are members of an affiliated group for income tax purposes, they maintain their own employer identification numbers and file other taxes individually. Id.
Prior to their acquisition, both CMP and RG & E overpaid their federal income taxes. CMP overpaid its income tax in the tax years 1995-97 in the amount of $6,827,882. Id. at 30 n.1, 32-33. RG & E did the same in the tax years 1996 and 1997 in the amount of $2,272,792. Id. If a taxpayer overpays its taxes, the IRS owes the taxpayer interest on that amount, which begins accruing on the day the overpayment was made. I.R.C. § 6611(a). Post-acquisition, CMP and RG & E received refunds of their overpayments and the accrued interest. CFC Op. at 31-32. CMP received refunds for all three tax years on November 20 and 21, 2001; RG & E received refunds for both tax years on July 22, 2002. Id.
Also prior to the acquisition, Energy East underpaid its taxes in the 1999 tax year in the amount of $2,079,827. Id. at 33. Like the subsidiaries' overpayments, interest began accruing on Energy East's underpayment on the day the taxes were due. I.R.C. § 6601(a). Energy East paid the amount it underpaid and its first assessment of deficiency interest on September 23, 2002. CFC Op. at 32. It satisfied a second assessment of deficiency interest with applied credit that posted in the 36th week of 2005. Id.
In July 2006, Energy East filed a claim with the IRS, requesting a refund of the interest it paid on its 1999 underpayment. Id. at 32. The IRS took no action on this claim, and therefore Energy East filed suit in the Court of Federal Claims on November 20, 2007. Id. at 32-33. Energy East argued that it is entitled to a net interest rate of zero on its 1999 deficiency because § 6621(d) allows it to offset its underpayment with CMP's and RG & E's overpayments. Id. at 31.
Section 6621(d) was added to the Internal Revenue Code in 1998 and allowed a taxpayer to zero out the interest rate on equivalent overpayments and underpayments. Prior to 1998, if a corporate taxpayer had over-payments and underpayments outstanding at the same time, the IRS would offset those amounts and apply the appropriate interest rate to the remaining amount, depending on whether it was an overpayment or an under-payment. H.R. Rep. 105-599, 218 (1998) (Conf. Rep.). The IRS could not, however, offset an underpayment with an overpayment that had been refunded, or conversely, offset an overpayment with an underpayment that had been satisfied. Id. Thus, taxpayers having equivalent overpayments and underpayments would still be assessed interest because the overpayment interest rate is less than the underpayment interest rate for corporate taxpayers. See id.; compare I.R.C. § 6621(a)(1) ("The over-payment rate . . . shall be the sum of (A) the Federal short-term rate [and] 3 percentage points (2 percentage points in the case of a corporation)." (emphasis added)) with id. § 6621(a)(2) ("The underpayment rate . . . shall be the sum of (A) the Federal short-term rate [and] 3 percentage points.")). The difference in interest rates for overpayments and underpayments increases with the size of overpayment or underpayment. Compare id. § 6621(a)(1) (stating that the interest rate for corporate overpayments exceeding $10,000 decreases from 2 percentage points to 0.5 percentage points) with id. § 6621(c) (stating that the underpayment rate increases from 3 percentage points to 5 percentage points for large corporate underpayments).
To eliminate this discrepancy for corporate taxpayers, Congress amended § 6621, which provides the rate of interest for overpayments and underpayments, by adding subsection (d), which states:
To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.
Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3302, 112 Stat. 685, 741 (codified at I.R.C. § 6621(d)) (emphasis added). In other words, when a corporate taxpayer makes equivalent underpayments and overpayments for any period, the interest rate is zero on those overpayments and under-payments. The "for any period" language allows taxpayers to use interest netting under this section for overpayments that have been refunded and underpayments that have been paid.
In the Court of Federal Claims, Energy East and the Government cross-moved for summary judgment. The sole issue was whether Energy East and its subsidiaries are the same taxpayer under I.R.C. § 6621(d), and would therefore be entitled to net the interest on their respective underpayments and overpayments. CFC Op. at 33. The trial court granted the Government's motion, deciding that Energy East was not the "same taxpayer" as its subsidiaries under § 6621(d). Id. at 36. Because the Internal Revenue Code does not define "same taxpayer," the trial court relied on a dictionary to determine that "same" meant "identical" or "without addition, change, or discontinuance." Id. at 34 (quoting Webster's Ninth New Collegiate Dictionary 1040 (1985)). Using this definition, the trial court found that "the Energy East corporation that underpaid its taxes in 1999 is not the 'same' taxpayer as either the CMP corporation that overpaid its taxes in 1995, 1996, and 1997, or as the RG & E corporation that overpaid its taxes in ...