Before Clevenger, Circuit Judge, Archer, Senior Circuit Judge, and
Gajarsa, Circuit Judge.
The opinion of the court was delivered by: Archer, Senior Circuit Judge.
Appealed from: United States Court of Federal Claims Judge Diane G. Weinstein
AMP Incorporated and Consolidated Subsidiaries (AMP) appeals the summary judgment of the Court of Federal Claims in favor of the United States (the government). See AMP, Inc. and Consol. Subsidiaries v. United States, 40 Fed. Cl. 172 (1998) (AMP I). *fn1 The court held that AMP is not entitled to a redetermination of the foreign tax credit claimed in its 1981 and 1982 tax returns for additional foreign taxes paid by its wholly-owned Brazilian subsidiary. Because AMP is entitled to a foreign tax credit redetermination for such additional payments, we reverse.
AMP is a United States corporation which owned 100% of the stock of AMP do Brasil Conectores Eletricos E Eletronicos Limitada (AMP Brasil), a Brazilian subsidiary. AMP Brasil manufactured and sold electrical connecting devices in Brazil. AMP Brasil's taxable years at issue here are the twelve-month periods ending January 2, 1982 (TYE 1982) and January 2, 1983 (TYE 1983). AMP was required to file Brazilian tax returns for these years in February 1983 and February 1984, respectively.
Under the Brazilian tax system, the Brazilian tax liability was payable in twelve monthly installments. Eleven of these installments were advance payments which commenced in March following the end of the tax year and which were equal to one-twelfth of the company's prior year tax liability. The final installment was paid with the return and reflected the balance of the tax liability shown on the return.
During the years at issue in this case, the Brazilian economy was operating under hyperinflationary conditions which decreased the purchasing power of the Brazilian cruzeiro. In November 1982, Brazil adopted Decree Law No. 1967, which established an indexing system for the payment of Brazilian income taxes. The index was based on the value of the Brazilian Readjustable National Treasury Bond (Obrigacoes Reajustaveis do Tesouro Nacional) (ORTN). The ORTN's nominal cruzeiro value was adjusted monthly as a function of the fluctuation in the purchasing power of the cruzeiro, in effect reflecting a devaluation of the cruzeiro resulting from inflation. Under Decree Law No. 1967, the ORTN index was used to calculate how many cruzeiros had to be paid to satisfy the Brazilian tax liability. AMP's tax payments were required to be paid in cruzeiros; tax payments were not made in ORTNs.
Decree Law No. 1967 was effective for AMP Brasil's tax years ending in January 1982 and January 1983. Under this law, AMP Brasil was required to state its tax liability on its returns in units of ORTNs. In order to determine its tax liability in ORTNs, AMP Brasil converted its taxable income for each year from cruzeiros to units of ORTNs based on the cruzeiro-to-ORTN index for the month following the end of the taxable year, i.e., February 1982 for TYE 1982, and February 1983 for TYE 1983. The ORTN value of the Brazilian taxes due was calculated by multiplying this figure by the Brazilian corporate tax rate.
Advance tax payments were paid in cruzeiros based on the ORTN-to-cruzeiro index prevailing in the month of actual payment. To determine the final payment due with its return, AMP Brasil subtracted the advance payments, expressed in ORTNs, from the total ORTN tax liability. The ORTN value of the Brazilian tax amount remaining due was then converted to cruzeiros based on the ORTN-to-cruzeiro index for the month of payment.
By the time Decree Law No. 1967 was enacted in November 1982, AMP Brasil had already made nine advance payments for TYE 1982 in cruzeiros, as the ORTN index was not yet applicable. Due to the application of the ORTN index to these advance payments, AMP Brasil needed a significantly larger than anticipated amount of cruzeiros to satisfy its tax liability. In recognition of this type of burden, Brazil provided a transition rule. Under that rule, AMP Brasil was permitted to pay the remaining TYE 1982 tax liability in eleven installments from February 1983 to December 1983. Although AMP Brasil was allowed eleven additional months to pay its TYE 1982 tax liability, AMP Brasil paid its outstanding tax liability in three months - February, March, and April of 1983. For TYE 1983, AMP Brasil made three payments: two advance payments in March and April of 1983 and one final payment in February 1984 when its tax return was due.
During AMP's 1981 and 1982 taxable years, it received dividends from AMP Brasil and reported the dividends on its 1981 and 1982 United States income tax returns. AMP claimed a foreign tax credit under Internal Revenue Code (I.R.C.) ¶¶ 901 and 902 *fn2 for the deemed paid Brazilian taxes attributable to the 1981 and 1982 dividends received from AMP Brasil. The deemed paid credits were calculated using AMP Brasil's accrued cruzeiro tax liabilities for TYE 1982 and TYE 1983. Deemed paid foreign taxes were calculated, pursuant to I.R.C. ¶ 902, in cruzeiros and translated into United States dollars using the spot exchange rates on the dates of the dividend payments.
In 1986, AMP filed amended 1981 and 1982 United States income tax returns to claim refunds for 1981 and 1982. On these amended returns, AMP recalculated the Brazilian deemed paid tax credits using the actual amount of cruzeiros that AMP Brasil had to pay to satisfy its Brazilian income tax liability under the ORTN indexing system. The amended returns reflected the increased foreign income taxes paid by AMP Brasil and a decrease in AMP Brasil's earning and profits for purposes of the I.R.C. ¶ 902 formula. As in the original returns, the deemed paid taxes were calculated in cruzeiros and translated to U.S. dollars using the dividend payment date exchange rates. When the refund claims were rejected by the IRS, AMP filed a refund suit in the Court of Federal Claims.
In the Court of Federal Claims, AMP and the government filed cross-motions for summary judgment. The court granted the government's motion and entered judgment for the government. ...