Amp Incorporated and Consolidated Subsidiaries v. United States
Docket: 98-5083
Court: Court of Appeals for the Federal Circuit; August 2, 1999; Federal Appellate Court
AMP Incorporated and its subsidiaries appealed a summary judgment from the Court of Federal Claims, which ruled against AMP regarding a foreign tax credit for additional taxes paid by its Brazilian subsidiary, AMP do Brasil. The Federal Circuit reversed this decision, confirming that AMP is entitled to a redetermination of the foreign tax credit for its 1981 and 1982 tax returns.
AMP is a U.S. corporation that owned 100% of AMP Brasil, which operated in Brazil during a period of hyperinflation. Brazilian tax liabilities were paid in monthly installments, with the final payment reflecting the total tax due as reported on the tax return. In November 1982, Brazil implemented Decree Law No. 1967, introducing an indexing system based on the value of the Brazilian Readjustable National Treasury Bond (ORTN) to calculate tax liabilities amidst inflation.
For its tax filings in 1982 and 1983, AMP Brasil had to express tax liabilities in ORTNs and convert its taxable income from cruzeiros to ORTNs based on the relevant index. Advance tax payments were made in cruzeiros using the ORTN-to-cruzeiro index, with the final payment calculated by subtracting advance payments from the total ORTN tax liability, and subsequently converting the remaining balance back to cruzeiros for payment.
Decree Law No. 1967, enacted in November 1982, affected AMP Brasil's tax obligations for TYE 1982, as it had already made nine advance payments in cruzeiros before the ORTN index was applicable. This led to AMP Brasil requiring more cruzeiros than expected to meet its tax liabilities, prompting Brazil to allow a transitional payment rule. AMP Brasil was permitted to pay the remaining TYE 1982 tax in eleven installments between February and December 1983 but settled the liability within three months. For TYE 1983, AMP Brasil made three payments, including two advances and a final payment in February 1984.
During the taxable years of 1981 and 1982, AMP received dividends from AMP Brasil and reported them on its U.S. tax returns, claiming foreign tax credits based on Brazilian taxes deemed paid. These credits were calculated using AMP Brasil's accrued cruzeiro tax liabilities for TYE 1982 and 1983, converted to U.S. dollars based on the exchange rates at the time of dividend payment. In 1986, AMP filed amended returns for 1981 and 1982 to claim refunds, recalculating the foreign tax credits based on the actual cruzeiros paid by AMP Brasil under the ORTN index system.
When the IRS rejected these refund claims, AMP initiated a lawsuit in the Court of Federal Claims. The court ultimately sided with the government, ruling on the method of calculating foreign tax liability. It considered whether to assess the tax based on the original cruzeiro liability or the inflation-adjusted ORTN amount. The court concluded that, given the stability of the ORTN-to-dollar rate, the tax should be calculated in ORTN, aligning with the IRS Revenue Ruling 91-21, which indicated that ORTN represented the functional currency for Brazilian tax law.
The court determined that AMP Brasil's functional currency was the ORTN, based on I.R.S. Ann. 81-4, which defines functional currency as the primary currency of the economic environment in which an entity operates. While it is typically the currency of the country where the entity is located, exceptions exist. The Brazilian economy's reliance on the ORTN for various financial transactions, including taxes and labor costs, supported this conclusion. Consequently, all earnings, dividends, and taxes of AMP Brasil were to be converted to U.S. dollars using the ORTN value.
The Court of Federal Claims rejected AMP's argument for a redetermination of foreign taxes under I.R.C. 905(c), clarifying that such a redetermination is warranted only when there is a discrepancy between foreign taxes 'accrued' and 'paid.' Since both were measured in ORTN and no differences existed, AMP was not entitled to recalculation of its foreign tax credits. AMP appealed, claiming it deserved a recalculation of deemed paid taxes in cruzeiros, the currency used in its records. They contended that the court erred by identifying the ORTN as Brazil's functional currency and argued that their earnings should reflect the additional cruzeiros paid.
Conversely, the government maintained that AMP's foreign tax credit should be based solely on the income tax accrued and paid by AMP Brasil in ORTN. They contended that no redetermination was necessary, as the ORTN tax liability accrued equaled the tax paid, and argued that additional cruzeiro payments should reduce AMP's earnings and profits in the respective years.
AMP seeks additional foreign tax credits for 1981 and 1982 under I.R.C. 901, 902, and 905 related to extra cruzeiros paid by its subsidiary, AMP Brasil, to meet its foreign tax liability under Brazil’s ORTN indexing system. Under I.R.C. 901, U.S. taxpayers can claim credits for foreign taxes deemed paid through subsidiaries, as AMP did not directly pay Brazilian taxes but received dividends from AMP Brasil, which did. AMP argues that the additional cruzeiros paid warrant a recalculation of its deemed paid taxes, thus entitling it to refunds based on I.R.C. 905.
The court correctly applied Temporary Treasury Regulation 1.905-3T(c)(2), which allows adjustments for redetermination of accrued or paid foreign taxes. However, it mistakenly concluded that the regulation was irrelevant because there was no discrepancy between taxes accrued and paid, misinterpreting the ORTN as Brazil's functional currency. The cruzeiro is defined as the medium of exchange in Brazil, and evidence shows it was used by AMP Brasil for all transactions, including tax payments. The Brazilian Supreme Court confirmed that the cruzeiro remained the national currency during the relevant period, despite inflationary indexing with the ORTN.
The court’s reliance on Revenue Ruling 91-21 is deemed unpersuasive, as it was issued while AMP's claims were pending before the IRS and lacked authoritative support, making it potentially self-serving.
Revenue Ruling 91-21 indicates that when a subsidiary distributes all accumulated profits, the taxes paid by the subsidiary are considered as paid by the parent company. This ruling asserts that, for section 902 of the Internal Revenue Code (IRC), the ORTN tax liability equates to the foreign income tax, a statement deemed self-serving and lacking authoritative support, particularly in light of ongoing litigation. Furthermore, it conflicts with the definition of foreign tax redetermination, which is quantified in the foreign currency—cruzeiros, in this case—as established by relevant Treasury regulations. The Court of Federal Claims acknowledged that despite recognizing the ORTN as Brazil's 'functional currency,' AMP's tax payments were made in cruzeiros.
Brazil’s tax system sought protection from hyperinflation effects, yet taxpayers were not insulated from these impacts. The IRC, prior to the Tax Reform Act of 1986 (TRA 1986), allowed for unusual foreign tax credits that could result in significant discrepancies due to currency fluctuations. The Court recognized that the application of IRC sections 902 and 905 could yield differing results based on a foreign economy's inflation or deflation status.
When Congress amended tax laws in 1986, it aimed to address anomalies caused by inflation, mandating that subsidiaries in hyperinflationary economies use the U.S. dollar as their functional currency. However, these amendments were prospective and did not apply to tax years prior to 1987. Consequently, the Court of Federal Claims erred in determining the ORTN as Brazil's functional currency for the applicable years, leading to a reversal of its decision.
Additionally, there is a dispute regarding whether the additional cruzeiro tax payments by AMP Brasil should reduce its earnings and profits for the year to which they pertain or the year they were made. AMP contends for reductions in earnings for TYE 1981 and TYE 1982, while the government argues these payments, classified as 'monetary correction payments,' should only affect earnings in the years they were made, asserting they did not constitute taxes but rather diminished AMP Brasil's dividend-paying capacity.
The Court of Federal Claims rejected the government's interpretation of I.R.C. 902(a), which relates to the calculation of foreign tax credits based on taxes paid by foreign subsidiaries. The court emphasized that the foreign taxes should reduce earnings and profits for the year they pertain to, regardless of when they are paid. The government’s method, which involved calculating income tax liabilities using different indexes for the months of dividend distribution and the year-end, was deemed inconsistent with the statute's plain language. In contrast, the court found that AMP Brasil's additional payments were indeed tax payments, not merely monetary corrections as the government initially argued. As a result, the court determined that AMP Brasil’s earnings and profits for the relevant years must be adjusted downward to reflect these additional tax payments. Consequently, AMP is entitled to additional foreign tax credits for 1981 and 1982, and the prior judgment favoring the government was reversed. The court also noted procedural details regarding the summary judgment order and clarified that references to the I.R.C. and Treasury Regulations pertain to the provisions applicable during the years in question.
