The opinion of the court was delivered by: PAUL L. FRIEDMAN
American Deposit Corporation ("ADC") developed an innovative financial instrument, which it named the Retirement CD, to exploit a tax code provision permitting companies other than insurance companies to issue tax-deferred annuities. See 26 U.S.C. § 1275(a)(1)(B). The Retirement CD has many of the characteristics of an ordinary certificate of deposit. By combining the CD with a deferred refund annuity, however, ADC attempted to shelter interest income from taxation until that income is withdrawn.
By contrast, interest earned on a regular CD is taxable each year as it accrues, even if payment of the interest is postponed. The Retirement CD was designed specifically to compete with insurance company issued tax deferred annuities. Such annuities postpone inclusion in gross income of accumulated interest until the interest is withdrawn, usually at or after the purchaser's retirement when the individual's tax rate would be lower than at the time the interest accumulated.
ADC obtained approval from the Comptroller of the Currency to permit banks to offer the Retirement CD on certain conditions designed to assure the safe and sound operation of the program. It also obtained approval from the FDIC to treat the pre-maturity portion of a Retirement CD as an FDIC insured bank deposit, a feature that does not apply to insurance company offered annuities. Affidavit of James F. Malloy ("Malloy Aff."), Ex. F Attachs. B, C. Both the Comptroller of the Currency and the FDIC made clear that they could express no opinion on the tax treatment to be accorded the Retirement CD under the Internal Revenue Code. Affidavit of Richard E. Fasold, Ex. 1 (page 1) and Ex. 2 (page 9). At no time has ADC sought a ruling or other assurance from the Internal Revenue Service that tax on interest earned on funds deposited in a Retirement CD may be deferred.
ADC proceeded to license the Retirement CD to 11 banks, including plaintiffs Blackfeet National Bank, a small bank on the Blackfeet Indian Reservation in Montana, and First National Bank of Santa Fe ("FNB Santa Fe"). Both banks began to market the Retirement CD to depositors.
The IRS caught wind of the Retirement CD when a New York Times article reported that ADC claimed to have "discussed the product with the Internal Revenue Service and received a private letter confirming that interest on the account would receive the tax deferred treatment of an annuity." Malloy Aff. P 5, Ex. A.
After confirming that no "private letter ruling" had been issued by the IRS and that no member of the Financial Institutions and Products Section of the IRS remembered speaking with the developers of the Retirement CD, the staff of the IRS Assistant Chief Counsel, James F. Malloy, met with representatives of the Tax Legislative Counsel's office of the Treasury Department and resolved to initiate a regulations project to address the tax treatment of a product such as the Retirement CD. Malloy Aff. PP 7, 9.
Regulations Project FI-33-94 was opened on May 17, 1994. The project was announced on November 14, 1994 in the first Semiannual Agenda of Regulations published after the regulations project was opened. 59 Fed. Reg. 58031, 58047 (1994). Over the course of the regulations project the IRS developed two concerns: (1) whether the Retirement CD's early withdrawal feature excluded it from the definition of a "debt instrument," and (2) whether the flexible maturity date could result in a substantial tax deferral. Malloy Aff. P 11, 12. As a result of its study of this product, the Treasury Department published a notice of proposed rulemaking and proposed regulations, announcing a public comment period and public hearing, in the Federal Register on April 7, 1995. If promulgated in final form, these regulations would require that in order for tax on interest income from an annuity issued by other than an insurance company to be deferred, all payments under the contract "must be part of a series of payment that begins within one year of the date of the initial investment in the contract." 60 Fed. Reg. 17731, 17733 (1995). This regulation would limit the accumulation period for the Retirement CD to one year.
ADC and the banks which market the Retirement CD maintain that they were unaware of the regulations project until shortly before the Treasury Department published its proposed regulations. During the second half of March, 1995, Donald E. Rocap of the law firm of Kirkland & Ellis contacted the Insurance Branch of the Treasury Department on behalf of the plaintiffs. He was told that his inquiry related to the interpretation of the Original Issue Discount ("OID") rules and that such issues would be overseen by the OID Branch. He was given the names of individuals in that Branch, some of whom were working on the regulations project. Malloy Aff. P 18. Those individuals do not recall ever having been contacted by Mr. Rocap. Id. A letter dated March 31, 1995 (six days before the April 6, 1995 Federal Register notice of the proposed regulations), was addressed to and received by the Insurance Branch from Mr. Rocap on behalf of ADC. Attached to the letter was a memorandum of law concerning the tax treatment of accumulated interest on Retirement CD deposits. Id.
As evidenced by the documents attached to the Affidavit of James F. Malloy, the insurance industry was well aware of the regulations project and submitted several legal memoranda addressing the proper tax treatment of the Retirement CD. See Malloy Aff., Ex. F, G. Mr. Malloy acknowledges that the regulations project staff met on at least two occasions with representatives of insurance industry groups to discuss the OID tax treatment of products such as the Retirement CD and that they never held similar meetings with plaintiffs. He contends, however, that plaintiffs never requested any meeting and that, if they had, such a meeting would have been arranged. Malloy Aff. PP 4, 17, 18.
After being unable to secure an agreement from Mr. Malloy that the proposed regulations would be withdrawn, plaintiffs filed this lawsuit challenging the publication of the proposed regulations in the Federal Register. They allege that the proposed regulations are contrary to the language of the Internal Revenue Code and that the proposed retroactive application of the regulations would be unwarranted, arbitrary and capricious and a discriminatory exercise of the Secretary's power. Plaintiffs moved for preliminary injunctive relief and seek a declaratory judgment and a permanent injunction setting aside the proposed regulations, as well as an order enjoining this rulemaking proceeding and requiring the process to begin de novo with an opportunity for them to participate fully.
The Court heard argument on plaintiff's motion for preliminary injunction on June 7, 1995. Because the Court concludes that the case is not ripe for review, plaintiffs' motion for a preliminary injunction is denied and the case is dismissed.
According to the traditional formulation for a preliminary injunction in this jurisdiction, a movant is entitled to injunctive relief upon a showing (1) that it has a likelihood of success on the merits; (2) that movant will suffer irreparable harm if the relief is denied; (3) that other interested parties will not suffer substantial harm if injunctive relief is granted; and (4) that the public interest favors the granting of relief or, at least, that the granting of relief is not adverse to the public interest. National Wildlife Federation v. Burford, 266 U.S. App. D.C. 241, 835 F.2d 305, 318-19 (D.C. Cir. 1987); Washington Metropolitan Area Transit Comm'n. v. Holiday ...