Appealed from United States Claims Court; Chief Judge Smith.
Mayer, Michel, and Lourie, Circuit Judges.
The United States appeals the July 13, 1990 judgment of the United States Claims Court awarding to Exxon Corporation (Exxon) a refund of income tax and interest it had paid for tax year 1960. See Exxon Corp. v. United States, 19 Cl. Ct. 755 (1990) (opinion prior to entry of final judgment). Because Chief Judge Smith was permitted, on remand, to revisit and revise the finding of ultimate fact made by the predecessor trial judge, former Chief Judge Kozinski, and because the government has not shown any subsidiary finding on which the new judgment is based to be clearly erroneous, we affirm.
The factual background of this lengthy and complex litigation has already been set out in some detail in two Federal Circuit and three Claims Court opinions,*fn1 and we will therefore confine ourselves to a summary of only the facts most pertinent to our disposition of this appeal.
The litigation concerns the income tax consequences to Exxon of Fidel Castro's takeover of Cuba in 1959 and the Cuban government's seizure in 1960 of Exxon's Cuban-based subsidiary, Esso Standard Oil S.A. (known as "Essosa").*fn2 Specifically, two deductions on Exxon's 1960 tax return are at stake in this appeal: (1) a $9 million bad debt deduction for a loan Exxon had made to Essosa, and (2) a worthless securities deduction of $2.13 million representing Exxon's basis in Essosa's stock. Both parties agree that the allowability of these deductions depends upon the date on which Essosa became insolvent. If, as the government maintains, Essosa became insolvent as a result of a corporate reorganization on June 30, 1960, in which Essosa's non-Cuban assets were transferred to a newly formed Exxon subsidiary, then both deductions must be disallowed. On the other hand, if, as Exxon contends, the insolvency did not occur until Castro's government actually seized Essosa's Cuban assets on the next day, July 1, 1960, then both deductions must be allowed.
This litigation began after the Internal Revenue Service, on audit, disallowed a bad debt deduction on Exxon's 1960 return for $27.4 million Essosa owed to Esso Export, another Exxon subsidiary, at the time of the Cuban government's expropriation of Essosa. Exxon paid the tax on this sum under protest, and in 1979 brought suit for a refund. The government then alleged that its earlier allowance of the $9 million and $2.13 million deductions had been erroneous, and argued that they should be offset against any amount Exxon might be awarded.
The case was tried before Judge Alex Kozinski, then Chief Judge of the United States Claims Court,*fn3 who held that the $27.4 million debt was not worthless because Esso Export had a reasonable chance of recovering it in an action against Exxon, in which it could argue that the June 30 corporate reorganization was a fraudulent conveyance because it left Essosa insolvent. The court therefore rendered a partial judgment dismissing Exxon's $27.4 million claim. Exxon Corp. v. United States, 7 Cl. Ct. 347, 357 (1985). In his opinion, Chief Judge Kozinski found that Essosa did in fact become insolvent immediately after the June 30 corporate reorganization, id. at 354, though he noted that this finding was in no way necessary to his decision, the dispositive issue being only whether "the question of solvency was sufficiently in doubt so that a fraudulent conveyance action . . . would have had a reasonable probability of success." Id. at 354 n.8.
Exxon appealed, and we reversed, holding that Exxon was entitled to the $27.4 million bad debt deduction because Esso Export and Exxon were a single entity for tax purposes, and thus Esso Export could have no fraudulent conveyance claim against its parent, Exxon. Exxon Corp. v. United States, 785 F.2d 277, 281 (Fed. Cir. 1986) (" Exxon I "). Judge Kozinski's findings of fact as to the date of insolvency of Essosa were not addressed in, or in any way material to, our decision in Exxon I.
On remand to the Claims Court, the case was assigned to Chief Judge Kozinski's successor, Chief Judge Smith. Stating that our opinion in Exxon I had implicitly determined that Essosa's insolvency was caused by the seizure on July 1 and not the reorganization on June 30, the court ruled that the law of the case doctrine required it to deny the government's request for offset of the $9 million bad debt and $2.13 million worthless stock deductions. Exxon Corp. v. United States, 12 Cl. Ct. 434, 439-40 (1987). The court accordingly awarded Exxon the tax and interest it had paid on the entire $27.4 million as to which it was entitled to a bad debt deduction, with no offset. Id. at 440.
Upon the government's appeal, we noted that our earlier decision in Exxon I had not addressed, explicitly or implicitly, the question of when Essosa had became insolvent, and held that the Claims Court had erred in ruling that the law of the case required it to allow the $9 million bad debt and $2.13 million worthless stock deductions. Accordingly, we vacated the court's judgment and remanded for further proceedings on the offset issues. Exxon Corp. v. United States, 840 F.2d 916, 917 (Fed. Cir. 1988) (" Exxon II ").
On this second remand, the parties stipulated to having the offset issues decided on the record as it had been developed before Chief Judge Kozinski. Chief Judge Smith concluded that the court's original finding that Essosa became insolvent on June 30 was based on erroneous assumptions and faulty analysis of the evidence in the record, and found instead that Essosa did not become insolvent until July 1. Exxon Corp. v. United States, 19 Cl. Ct. 755, 764 (1990). The court therefore ruled in favor of Exxon as to both the $9 million bad debt deduction and the $2.13 million worthless stock deduction (though in light of Exxon's admission that ...