Opinion
12466-16
08-11-2023
THE CANNON CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Mark V. Holmes, Judge
In November 2020 we granted Cannon Corporation's motion to amend its petition to assert equitable claims against the Commissioner. See Order dated November 19, 2020. That led to a renewed bombardment of motions. Cannon moves to compel production of certain documents, a request that we previously denied because we "[couldn't] imagine how discovery of these documents would be reasonably calculated to lead to the discovery of admissible evidence." See Order Denying Petitioner's 4-6-18 Motion to Compel Production of Documents dated June 4, 2018. The Commissioner moves for summary judgment against Cannon on the equitable claims, and Cannon returns fire with a summary-judgment motion of its own.
Background
We've thoroughly discussed the background of this case in our previous summary-judgment order, see Order Granting Respondent's Amended Motion for Partial Summary Judgment dated June 4, 2018, but we'll provide a refresher course.
IRC section 179D gives building owners an incentive to make their buildings more ecofriendly. Taxpayers can take "as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year." See § 179D. But when a building's owner does not pay taxes, such as the government, it can allocate the deduction to the "designer" of the building. See § 179D(d)(4); Notice 2008-40, 2008-1 C.B. 725; Notice 2006-52. Cannon is one of these designers: it designs energy-efficient buildings around the world for a variety of clients, including governments.
Even though Congress enacted § 179D in 2005, Cannon did not take the § 179D deduction on its tax returns because the Commissioner had not yet released Notice 2008-40, which explained how to allocate the deduction between owners and designers. Cannon later properly and timely filed an 1120X-an amended corporate income-tax return- and claimed the deduction for its 2006 tax year. But then it misfired. Instead of also filing amended returns for 2007-2010, Cannon accumulated the 179D deductions from 2007-2010 and reported them all on its 2011 tax return as § 481(a) adjustments on a Form 3115, Application for Change in Accounting Method. This had the effect of using them all in 2011.
Cannon did this because shortly after filing its 1120X for year 2006, the IRS released Revenue Procedure 2011-14, 2011-4 I.R.B. 330. Cannon claimed that this revenue procedure forced taxpayers to use the Form 3115 to take the § 179D deduction. This was previously the predominant issue in this case, and we disposed of it with an order granting summary judgment to the Commissioner. See Order dated June 4, 2018. We held that both § 179 and the Revenue Procedure stated plainly that a taxpayer had to take a §179 deduction for the year the more energy-efficient property was put into service. We also held that the plain language of Revenue Procedure 2011-14 did not apply to Cannon because it was not changing its accounting method. We concluded that Cannon should have filed Forms 1120X for the later years, just as it did for 2006.
Cannon was not out of ammunition in defense of its case. It now seeks equitable relief, arguing again that Rev. Proc. 2011-14 forced it to use Form 3115. And "mere days before" Cannon was going to file its 2011 tax returns along with the Form 3115, the IRS published Revenue Procedure 2012-39, which expressly stated that taxpayers taking a § 179D deduction must file an amended tax return and not a Form 3115. Cannon found itself in a precarious situation: it was too late to file an amended return for 2007, and the deadline to file an amended return for 2008 was expiring in "mere days."
Cannon argues that it was these confusing directives that forced it to take protective measures. So it filed the Form 3115 with its 2011 tax returns, along with the "Andreozzi Letter" explaining its situation (as we've just described above) and requesting a change in its accounting method. Afterwards, it timely filed protective amended returns for years 2008-2010.
That means that the controversy here is really only about tax year 2007 as Cannon's timely filed amended returns for 2008-2010. We do note, however, that Cannon's deduction for 2007 was considerably larger than for the other years.
This time around, Cannon argues that three different equitable doctrines - equitable estoppel, equitable recoupment, and the duty of consistency -- allow it to claim the deductions despite our ruling that Revenue Procedure 2011-14 did not require taxpayers to use a Form 3115.
In March 2023, we invited the parties to file memoranda of law to address the question of whether any § 179D deduction was available in the absence of a regulation. Neither party wanted to confront that language in the section.
Analysis
We may grant summary judgment when there is no genuine dispute of any material fact and a party is entitled to judgment as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). The party opposing the motion cannot rest upon the allegations or denials in his pleadings, but must instead produce specific facts that shows there is a genuine issue. Rule 121(d); Dahlstrom v. Commissioner, 85 T.C. 812, 820-21 (1985). The moving party bears the burden of proving there is no genuine dispute of material fact and we read factual inferences in a manner most favorable to the nonmoving party. Dahlstrom, 85 T.C. at 821.
Cannon argues that there are still material factual disputes remaining, so summary judgment is improper. This is where the motion to compel comes into play. Cannon wants access to materials related to the "drafting, meaning, purpose, and implementation" of Rev. Proc. 2011-14 and Rev. Proc. 2012-39. The Commissioner has produced around 22,000 pages in response, but has also withheld and redacted portions of the pages produced claiming privilege.
Cannon also seeks to compel documents related to communications between Jennifer Bernardini of the IRS Chief Counsel office and two private accounting firms. The Commissioner says that it has already produced all documents related to those communications through informal discovery. As we concluded in our earlier order, we find this sufficient.
We've already rejected Cannon's previous attempt to compel production of these documents. Is the situation any different now? Cannon raises several different arguments this time around. The first argument is that the Commissioner created disputes of material facts in his answer to the amended petition because he denied some of Cannon's claims as false -- specifically, Cannon's claim that Revenue Procedure 2011-14 directed designers claiming a § 179D deduction to use a Form 3115, and that an email from the IRS National Office describing the revenue procedure's implementation was false. This argument loses because the Commissioner is simply restating our determination in a previous order and so this is not a genuine dispute about a material fact.
Cannon's second argument is that the Commissioner waived his privilege on these materials because he provided 22,000 pages of documents only to redact "reams of relevant materials[.]" But the Commissioner is allowed to withhold internal deliberations over policy from discovery, so this argument also loses. See, e.g., United States Fish & Wildlife Serv. V. Sierra Club, Inc., 141 S.Ct. 777, 783 (2021)("[D]eliberative process privilege . . . protects from disclosure documents generated during an agency's deliberations about a policy....").
Lastly, Cannon argues that our decision on its last motion to compel production of documents was based on our findings that Rev. Proc. 2011-14 only applied to taxpayers changing their accounting method and not to Cannon. Cannon is correct that we did not consider any of its equitable claims in our previous order. But this argument still fails to overcome the Commissioner's claims of privilege.
More importantly, however, is that these documents aren't relevant to this case and won't lead to any evidence that is. It doesn't matter what the Commissioner was saying "behind the curtain," as we already found that the plain language of Rev. Proc. 2011-14 tells us that Cannon can't use the Form 3115 to claim § 179D deductions. The Commissioner's intent doesn't matter in the face of the revenue procedure's plain language. Cannon also did not have access to these documents when it incorrectly chose to use the Form 3115, so it could not possibly have relied on them.
Cannon's motion to compel documents fails for a second time, and so this case can be decided on summary judgment.
Equitable Estoppel
We now have to address the equitable claims themselves. The first is equitable estoppel. Equitable estoppel "precludes a party from denying his own acts or representations which induced another to act to his detriment." Hofstetter v. Commissioner, 98 T.C. 695, 700 (1992) (quoting Graff v. Commissioner, 74 T.C. 743, 761 (1980)). We use the utmost caution and restraint when applying equitable estoppel against the Commissioner. Estate of Emerson v. Commissioner, 67 T.C. 612, 617 (1977). Equitable estoppel is a question of law when there are no disputes as to any relevant facts. McCorkle v. Commissioner, 124 T.C. 56, 68 (2005). The taxpayer has the burden of proving all 5 elements of equitable estoppel: (1) false representation or wrongful, misleading silence; (2) an error in a statement of fact and not in an opinion or statement of law; (3) taxpayer's ignorance of the truth; (4) reasonable reliance on the representation; and (5) the taxpayer suffered adverse effects. Wilkins v. Commissioner, 120 T.C. 109, 112 (2003).
We can shoot down Cannon's argument on the first element. The Commissioner did not make any false representations nor did he respond with any wrongful or misleading silence. Cannon argues that the Commissioner made false claims on Rev. Proc. 2011-14 which Cannon alleges told designers to take the § 179D deduction through Form 3115. But we already decided in our previous order that Rev. Proc. 2011-14's plain language - "the deduction will be allowed to the designer for the taxable year that includes the date on which the property is placed in service" - means what it says. A designer can't accumulate many years' worth of deductions and take them when it wants.
So the Commissioner did not make a false representation.
Equitable Recoupment
Cannon's second equitable claim is for equitable recoupment. Equitable recoupment prevents an inequitable windfall to either the taxpayer or government as a result of inconsistent treatment of a single transaction. See Menard, Inc. v. Commissioner, 130 T.C. 54, 62 (2008). Section 6214(b) permits the Tax Court to provide for equitable recoupment to the same extent as other federal courts. The party seeking equitable recoupment must show that (1) the deficiency for which recoupment is sought is barred by an expired period of limitations; (2) the time-barred deficiency arose out of the same transaction, item, or taxable events before the court; (3) the transaction has been inconsistently subject to two taxes; and (4) if the transaction involves two or more taxpayers, there is sufficient identity of interest between the taxpayers. See Menard, Inc., 130 T.C. at 62-63.
The Commissioner concedes the first and second elements, but he contests the third. Cannon argues that the Commissioner inconsistently taxed its 2007 returns by requiring that it to use the Form 3115 as directed in Revenue Procedure 2011-14, only to change that revenue procedure with Revenue Procedure 2012-39 that directed Cannon to use Form 1120X. The problem for Cannon here is that Revenue Procedure 2011-14 didn't tell Cannon to use Form 3115-it was Cannon's own misinterpretation of Rev. Proc. 2011-14 that led it to this point. And it certainly didn't tell Cannon to accumulate the deductions from year to year.
Thus, there was no inconsistent tax treatment here.
Duty of Consistency
Last is the duty of consistency. Both the taxpayer and the Commissioner have a duty of consistency with their tax treatment of items. LeFever v. Commissioner, 103 T.C. 525, 541 (1994). The duty of consistency is an affirmative defense that requires that (1) the Commissioner made a representation for tax purposes; (2) the taxpayer acquired or relied on that representation; and (3) the Commissioner changes that representation after a statute of limitations bars an adjustment. Id. at 543.
Cannon makes the same argument again -- that the Commissioner represented in Revenue Procedure 2011-14 that taxpayers had to use the Form 3115 to claim a § 179D deduction, and then the Commissioner changed that representation with Revenue Procedure 2012-39. Cannon loses with this argument because the plain language of Revenue Procedure 2011-14 doesn't say anything about using the Form 3115 to claim the § 179D deduction.
That means the Commissioner never changed any representation for tax purposes.
The Commissioner wins on all issues still in play. It is therefore
ORDERED that Cannon's March 5, 2021, motion to compel production of documents is denied. It is also
ORDERED that the Commissioner's motion for partial summary judgment is granted. It is also
ORDERED that Cannon's motion for partial summary judgment is denied. It is also
ORDERED that on or before September 8, 2023 the parties shall submit stipulated decision documens.