Second Circuit's Statutory Interpretation for Taxpayer Victory on Retrospective Interest Netting (8/9/12)

In  Exxon Mobil Corp. v. Commissioner, 689 F.3d 191 (2d Cir. 2012), here, the Second Circuit held that Exxon Mobil is entitled to retrospective interest netting which is now required under Section 6621(d) prospectively since the enactment of global interest netting in 1998.  The opinion was written by Judge Jose A. Cabranes.  His Wikipedia entry is here.

The Court introduced the concept as follows (footnotes omitted):

Under section 6621 of the Internal Revenue Code ("I.R.C."), interest is calculated at a higher rate for corporate tax underpayments than it is for corporate tax overpayments. In principle, therefore, a corporate taxpayer could owe the Treasury underpayment interest even if the amount by which the taxpayer had underpaid its taxes in one tax year (or set of tax years) was entirely offset by the amount by which it had overpaid in another tax year (or set of tax years). To remedy this apparent inequity, Congress amended section 6621 in 1998 to include a provision for "global interest netting," by which the interest rate differential is adjusted to yield a net interest rate of zero for periods of reciprocal indebtedness — that is, periods during which the taxpayer's overpayments in one set of tax years overlap and offset its equivalent underpayments in another set. See I.R.C. § 6621(d), 26 U.S.C. § 6621(d).

By noncodified contemporaneous legislation (called the "special rule"), Congress allowed the retrospective application of global interest netting.  The issue in Exxon Mobil was whether the taxpayer qualified for the special retrospective relief provision.

The narrow question the Court resolved was "whether retrospective global interest netting is permitted when the limitations period for either of the 'legs' of the period of overlapping indebtedness has not expired, or only when the period of limitations for both legs is open."  Since this is an issue that arises only under the retrospective relief provision that has no continuing significance, I will not get into the substantive issues.

I will develop in this blog entry the Court's process of statutory interpretation because the Court made some interesting analyses.  Here are the points I think worthy of development in this blog:

1.  The first step in the analysis is that the Second Circuit found, as had other courts, that the language of the "special rule" is ambiguous.  The Court said:

We agree that the provision is susceptible to both proffered interpretations and that the intended meaning of the special rule cannot be derived from the text alone. It is necessary, therefore, to consult the provision's structure, historical context, and purpose—as well as applicable canons of statutory construction—in order to determine its meaning. 

In so doing, we are particularly mindful of the longstanding canon of construction that where "the words [of a tax statute] are doubtful, the doubt must be resolved against the government and in favor of the taxpayer," United States v. Merriam, 263 U.S. 179, 188 (1923).

[JAT Note:  The last quoted paragraph just seems to hang there, like it was stuck in at the last minute.  It is unclear what role that "canon" of construction actually played (I don't think it played any role), but the Second Circuit does offer it as an opening guide to its analysis once it found the statute to be ambiguous.  I note in this regard that the "canon" has overtones of the rule of lenity applicable in criminal cases.  The rule of lenity, also a canon of construction, requires courts to construe ambiguous criminal statutes in the defendant's favor.  If one can view taxes as penalties, then the "canon" of construction cited by the Second Circuit perhaps makes sense as a rule of lenity variant.  I won't chase this down right now, but leave it for possible future development; but it does strike me as odd.]

2.  The Second Circuit noted two arguments that the IRS had unsuccessfully made in earlier cases and, while stating that the IRS had abandoned them in this case, the Second Circuit stated its "agreement with the rejection of these arguments."  Those arguments were:

a. IRS Interpretation is entitled to deference.  The IRS interpretation contained in a Revenue Procedure adopted to implement the "special rule" is not entitled either Chevron or Skidmore deference.  (I discuss deference concepts for statutory interpretation in the text (footnoted version pp. 61-75; nonfootnoted version, pp. 42-51.)  This Revenue Procedure interpretation was not entitled to the stronger Chevron deference because it was not in a format in which the IRS exercised the authority delegated to interpret the statute.  (That authority is usually excercised in the format of regulations.)  Further, the Revenue Procedure was not entitled to the lesser Skidmore deference because the Revenue Procedure did not state a reasoned basis for the rule it sought to impose. 

b.  Blue Book is not entitled to weight.  The Blue Book which had adopted the IRS's interpretation of the special rule was not entitled to any weight in the interpretive process.  The Blue Book is the Joint Committee Staff analysis of recently enacted legislation.  I discuss the Blue Book and its interpretive role in the Federal Tax Procedure Book (footnoted version pp. 16 & 17; nonfootnoted version pp. 9 & 10.  [JAT Note:  I think the Second Circuit and the Federal Circuit give too short a shrift to the Blue Book.  It is of course not legislative history.  But, as the Court of Federal Claims noted in a tax case,  "The Supreme Court has made use of Blue Books in interpreting statutory provisions. See Fed. Power Comm'n v. Memphis Light, Gas & Water Div., 411 U.S. 458, 472, 93 S. Ct. 1723, 36 L. Ed. 2d 426 (1973) (describing Blue Book under consideration in that case as "compelling contemporary indication" of congressional intent)."  AD Global Fund LLC v. United States, 67 Fed. Cl. 657, 677- 678  (2005), aff’d 481 F.3d 1351 (Fed. Cir. 2007).  The precise role of the Blue Book in tax statute interpretation thus remains ambiguous.

3.  The Second Circuit held that the special rule was not a waiver of sovereign immunity.  If it were a waiver of sovereign immunity, another canon of construction would apply to hold that the statute be strictly construed in the IRS's favor.  In so holding, the Second Circuit disagreed with the Federal Circuit.

4.  The Second Circuit then, still needing a rationale for decision, for the rationale in the "structure, historical context and purpose of Section 6621(d).

As stated above, the language of the special rule is ambiguous. But, as with any provision, the meaning of the special rule is informed by its context. See Brown v. Gardner, 513 U.S. 115, 118 (1994) ("[T]he meaning of statutory language, plain or not, depends on context[.]" (internal quotation marks omitted)). "Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis." Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006). In interpreting the special rule, therefore, we "consider not only the bare meaning of the critical word or phrase but also its placement and purpose in the statutory scheme," Holloway v. United States, 526 U.S. 1, 6 (1999) (internal quotation marks omitted)—namely, the interest-netting scheme created by Congress in § 6621(d) to erase the inequitable effects of the interest rate differential.

5.  Decision for Exxon Mobil.

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1. Because the holding as to retrospective application of interest netting is of no continuing importance, I make no change to the text other than to cite the case in a footnote.  I have, however, added the case to footnote 44 of the text as additional support for a holding that the Blue Book has no weight.