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United States v. National Steel Corporation

February 1, 1996






Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division.

No. 94 C 1007--Larry J. McKinney, Judge.

Before POSNER, Chief Judge, and CUMMINGS and EASTERBROOK, Circuit Judges.

POSNER, Chief Judge.



The United States sued National Steel Corporation for the return of a portion of an incometax refund--the portion that, according to the United States, exceeded National Steel's actual entitlement. The district court granted summary judgment for the United States and ordered National Steel to pay back the excess portion of the refund, some $2.5 million, plus interest.

Section 212(a) of the Tax Reform Act of 1986, 100 Stat. 2170, entitled qualified steel manufacturers, of which National Steel was one, to apply certain unused tax credits against income tax due in the manufacturer's first taxable year after December 31, 1986, which for National Steel was calendar 1987. By the end of 1987 it was clear to National Steel that, as a result of these credits, it had overpaid its 1987 income tax by a considerable margin and would be entitled to a large refund. But it had not yet filed its tax return for 1987; in fact, it was not to do so until September or December of 1988. (Oddly, the record does not reveal which is the correct month; but it doesn't matter.) In March 1988, National Steel went to the Internal Revenue Service and asked for an anticipatory refund. The Service agreed and on March 11 the parties executed a Form 906 "Closing Agreement on Final Determination Covering Specific Matters," which we print as an appendix to this opinion. The agreement recites that the taxpayer anticipates an overpayment of its federal income taxes for 1987 and desires "a quick release" of the overpayment, that the Service agrees to the quick release upon the filing by the taxpayer of a claim for it, and that the taxpayer agrees both that the statute of limitations for recovering any overpayment shall not start to run until the taxpayer files its tax return for 1987 (the limitations period was later extended to June 30, 1994) and that the taxpayer shall, within three years of the signing of the agreement, reinvest "the amount determined under section 212 of the Act" in its steel operations, such reinvestment being the quid for the 1986 Act's quo of tax relief for steel producers. See section 212(f) of the Act. The agreement also recites that "no change or modification of applicable statutes will render this agreement ineffective with respect to the terms agreed to herein."

A few days after the agreement was executed, National Steel submitted a claim for a $19.2 million refund and the Service issued the refund on March 25. Later that year, however, Congress passed the Technical and Miscellaneous Revenue Act of 1988, 102 Stat. 3342, which amended section 212 of the Tax Reform Act of 1986 to provide that investment tax credits that had accrued in 1986 could not be used to generate section 212 credits. Section 1019 of the 1988 statute applied the statute retroactively to the effective date of section 212. On the strength of this retroactive amendment, the Internal Revenue Service decided that National Steel was not entitled to $2.5 million of the refund it had received, and it brought this suit for the return of that amount. National Steel argues that the Internal Revenue Service's claim is precluded by the provision of the closing agreement forbidding the use of a statute enacted after the agreement to modify the terms of the agreement.

Whether this argument is sound is the only substantial issue in the case, but the parties have each injected an insubstantial issue. The taxpayer argues that the suit is barred by the two-year statute of limitations for the bringing of suits to recover refunds. 26 U.S.C. sec. 6532(b). It would be if the taxpayer had not agreed to extend the statute of limitations. The taxpayer argues that its agreement is ineffective because no statute authorizes the government to extend the statute of limitations for its refund suits, whereas--showing the omission was not inadvertent, or without significance--there is statutory authorization for the government to do so for refund suits brought against it. 26 U.S.C. sec. 6532(a)(2). The reason for the asymmetry is obvious, and is of no help to National Steel. A statute of limitations is a defense, and, unless jurisdictional, can be waived by the defendant. Section 6532(a)(2), the provision allowing waiver by the United States of the statute of limitations in refund suits brought by taxpayers, makes clear that the United States has this normal right of defendants, the right to waive the statute of limitations. When the United States is the plaintiff, as in this case, it has no occasion to waive the statute of limitations, because the statute of limitations confers no right on it, so there is nothing for it to waive. Only the defendant (here the prospective defendant in a suit for the recovery of an erroneous refund) can waive the statute of limitations, and did so. No statute precludes such a waiver.

The government's insubstantial argument is that the taxpayer never was entitled to use its 1986 tax credits to obtain benefits under section 212 of the Tax Reform Act of 1986. National Steel concedes that the issue was not one withdrawn from future contention by the closing agreement. But it points out that the Act, while generally denying credits for investments made after December 31, 1985, contained an exception for "transition property," defined as property placed in service after December 31, 1985, pursuant to a written contract that took effect before then. Tax Reform Act of 1986, secs. 203(b)(1)(A), 211(e)(1), 212(g)(2)(B), 100 Stat. 2143-44, 2167, 2171. The property on which National Steel claimed 1986 tax credits for use with section 212 was transition property. Against this conclusion the government cites legislative history which it claims shows that Congress did not mean what it clearly said. Of the four items of legislative history that the government cites, one is not cited fully enough to be locatable; one supports the taxpayer's interpretation, S. Rep. No. 313, 99th Cong., 2d Sess. 115 (1986); one is neutral, H.R. Rep. No. 426, 99th Cong., 1st Sess. 146 (1985); and the last, while it does say that the Tax Reform Act repealed the investment tax credit, obviously was making a general observation rather than attempting to deny the existence of the extensive, explicit statutory provisions that retained the investment tax credit for some taxpayers during a transition period. H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., vol. 2, p. 51.

The government has not made a responsible use of legislative history, and in any event there no basis in any responsible theory of statutory interpretation for using legislative history to change the meaning of a statute that is clear on its face and does not, if read literally, produce an absurd or unsound result. Central States, Southeast & Southwest Areas Health & Welfare Funds v. Cullum Cos., 973 F.2d 1333, 1339 (7th Cir. 1992); In re Sinclair, 870 F.2d 1340, 1341 (7th Cir. 1989). There is a helpful analogy to the distinction in contract law between "intrinsic" and "extrinsic" ambiguity. The first is present when from just reading the contract it is apparent that the contract is unclear. The second is present when although the contract is clear at the semantic or literal level, anyone who knew something about the subject matter would realize that the contract probably did not mean what it said. AM International, Inc. v. Graphic Management Associates, Inc., 44 F.3d 572, 574-76 (7th Cir. 1995). If neither type of ambiguity is present, the court does not take evidence beyond the contract itself.

Here there is neither intrinsic nor extrinsic ambiguity. No one reading the statute would think there was any doubt about the meaning of "transition property" or the application of the term to the investments made by National Steel in 1986, and the parties have given us no reason to suppose that anyone knowledgeable in the intricacies of tax law, or investment tax credits, or the steel industry would know that the statute cannot sensibly be understood to mean what it seems to mean.

Let us turn, at last, to the closing agreement. The government points out, unhelpfully, that closing agreements are not contracts. What it means is that they are not governed by state contract law, but rather by federal common law contract principles. They certainly are contracts in the ordinary legal sense of the term, because they contain binding promises. The government does not claim to be free to walk away from a closing agreement, and it certainly does not acknowledge the right of a taxpayer to do so. Indeed, the finality of the closing agreement is said to be a reason that the Internal Revenue Service discourages their use, even though they are expressly authorized by statute. 26 U.S.C. sec. 7121; Michael I. Saltzman, IRS Practice and Procedure para. 9.09 (2d ed. 1991). The question is whether the closing agreement contains a promise not to apply a new statute to the determination of the taxpayer's section 212 entitlements, and it is a question of contractual interpretation and thus of contract law, albeit of federal rather than of state contract law. The government argues that the ordinary rules of contract law do not apply to closing agreements, but the only cases it cites for this proposition are lower-court decisions no more recent than 1935. Recent cases affirm that for most purposes closing agreements are just like other contracts. Rink v. Commissioner, 47 F.3d 168, 171 (6th Cir. 1995); Alexander v. United States, 44 F.3d 328, 332 (5th Cir. 1995).

For the sake of simplicity, the starting point in the formulation of a federal common law of contracts should normally be the standard principles of contract law--more precisely, the core principles of the common law of contract that are in force in most states. Fleming ...

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