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December 13, 1989


Marvin E. Aspen, United States District Judge.

The opinion of the court was delivered by: ASPEN


 Plaintiff Continental Illinois Corporation ("Continental") has filed this action against the United States of America. Continental seeks the recovery of overpayment of federal income tax for the years 1969 to 1973. Currently before the Court is the United States' motion for partial summary judgment or a partial dismissal with respect to refunds claimed for the years 1969 and 1971. For the reasons given below, we grant partial summary judgment in favor of the United States.


 For the most part, the facts relevant to this motion are undisputed. Continental is a large bank holding company that conducts a significant amount of international business. During the 1960's and 1970's, Continental made loans to various entities in foreign countries. Many of these loans were structured as "net loans" or "net quoted loans." The tax consequences of these loans are at the root of the dispute between the parties.

 A "net loan" or "net quoted loan" describes a particular type of transaction in which Continental loaned funds "net" of foreign taxes. In other words, Continental did not pay any taxes directly to a foreign government. Instead, the foreign borrower would assume the responsibility for paying these taxes. In this manner, Continental would be assured of receiving a specified net interest amount, regardless of foreign taxes or changes in foreign tax law. *fn1"

 For many years, a lender which had made net loans to foreign borrowers included in income only the amount of net interest received from the borrower. The payment of taxes by the foreign borrower on behalf of the lender did not have any tax consequences. However, in 1976, Continental determined that revisions of IRS policy regarding net loans had altered the tax consequences of these transactions. *fn2" Instead of including only the amount of net interest received from the borrower, the revision in policy required the lender to include in income the amount of foreign withholding tax which the borrower promised to pay on behalf of the lender. However, the revision in policy also entitled the lender to foreign tax credits for foreign taxes paid on its behalf by the borrower.

 After Continental became apprised of the new IRS policy, it began an exhaustive analysis of the amount of foreign withholding taxes paid on its behalf by foreign borrowers pursuant to the terms of the net quoted loans. For present purposes, a detailed description of this study is unnecessary. It is sufficient to note that Continental concluded that, for the years 1969 to 1973, it was entitled to substantial refunds due to its ability to claim the tax payments made on its behalf as foreign tax credits.

 Continental submitted the study to the IRS, and it was reviewed by an International Tax Examiner ("Examiner"). Upon review of the study, various revisions were made to Continental's claims for refunds for the years 1969 to 1973. Two of these revisions are relevant to the current motion.

 First, substantial revisions were made to Continental's claim for a refund for 1969. Continental originally had claimed $ 2,415,094 in foreign tax credits for 1969, which was the basis for a claimed tax refund of $ 1,139,925. However, Continental and the Examiner later determined that this amount should be adjusted. First, the figure mistakenly included foreign withholding taxes for foreign loans that were exempt from these taxes. Second, an adjustment was required to reflect a partial refund of income tax that Continental had received from the United Kingdom. These adjustments reduced the $ 2,415,094 tax credit total by $ 557,196. This adjustment to the tax credit total required a $ 290,838 reduction in Continental's claimed tax refund for 1969.

 Revisions were also made to Continental's 1971 foreign tax credit claims. In its 1971 refund claim, Continental declared foreign tax credits of $ 1,673,908 and a corresponding tax refund of $ 870,432. The Examiner recognized the requested foreign tax credit of $ 1,673,908. However, the Examiner subsequently determined that Continental had failed to consider the maximum limitation on foreign tax credits, as established in 26 U.S.C. § 904(a). Because of foreign tax credits that had previously been allowed *fn3" as "carry backs" from 1973, the refund of $ 867,356 *fn4" was disallowed. Continental agreed with this adjustment.

 During this first audit of Continental's Net Loan Study, the IRS and Continental executed certain documents. Their dispute over the effect of these documents is the catalyst of this motion. First, Continental executed a Form 870, or Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. In essence, this form listed the proposed tax refunds that had resulted from the first audit of the Net Loan Study.

 Continental also signed a Form 2297, or Waiver of Statutory Notification of Claim Disallowance. Form 2297 is most easily understood in the context of the normal procedure for refund suits under the Internal Revenue Service Code. 26 U.S.C. § 6532. IRS Code § 6532 sets forth the period of limitations for refunds suits. After the receipt of a formal IRS notice of disallowance of a claim for refund, a taxpayer is given two years in which he is allowed to institute a suit or proceeding challenging the disallowance. However, rather than waiting for the IRS to send formal notice of disallowance, the taxpayer is entitled to sign a Form 2297. By executing this form, the taxpayer waives his right to formal notice of the disallowance. The taxpayer is able to challenge the disallowance without receiving formal notice from the IRS. However, the two year period of limitation begins on the date the waiver is filed. 26 U.S.C. § 6532(a)(3).

 On June 3, 1981, Continental executed a Form 2297 waiver. This form reflected the disallowance of a $ 290,838 claim for 1969 and a $ 867,356 claim for 1971. These disallowances represent the adjustments to the Net Loan Study which are described above; the 1969 adjustment reflecting tax exempt foreign loans and a refund received from the United ...

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