Supreme Court Update: PPL Corp. v. Commissioner (12-43), Sebelius v. Cloer (12-236) and Metrish v. Lancaster (12-547)
Greetings, Court fans!
The Court released four decisions this week. To break things up, this Update will tackle three, addressing topics ranging from credit for the payment of foreign taxes in PPL Corp. v. Commissioner (12-43), to attorneys' fees for late-filed cases under the National Childhood Vaccine Injury Act in Sebelius v. Cloer (12-236), to habeas challenges under AEDPA (yes, every Update has to have at least one) in Metrish v. Lancaster (12-547). Our next Update will cover the fourth decision as well this week's Orders.
Who says lawyers are bad at math? (Lawyers do, all the time.) In PPL Corp. v. Commissioner (12–43), the Court employed a nifty "algebraic reformulation" of a British tax formula to conclude that the British tax was in fact a tax on net income and therefore creditable toward U.S. taxes under 26 U.S.C. § 901(b)(1). Justice Thomas wielded the pen (and calculator) for a unanimous Court, with Justice Sotomayor filing a separate concurrence.
At issue was a one-time "windfall tax" imposed by the U.K.'s Labour government in 1997 on 32 British energy companies that had been privatized during the reign of the Conservative Party in the ‘80s and early ‘90s. Though these companies were required to provide services at the same rates they'd offered under government control for an "initial period" of time (which, for most of them, was 4 years), they were nevertheless able to turn handsome profits by increasing efficiency. When the Labour Party took control in 1997, it sought to impose a one-time tax on those profits. However, it characterized the windfall tax not as a tax on profits, but rather a tax on the difference between two values: the "flotation" value that the private investors paid for the companies and the value that the companies in fact had, based in retrospect on the unexpected profits they were able to reap. This distinction made a big difference for U.S. tax purposes. Section 901(b)(1) of the Internal Revenue Code provides that any "income, war profits, and excess profits taxes" paid overseas are creditable against U.S. income taxes. PPL Corp., a U.S. corporation that owned 25% of one of the privatized British companies, claimed a credit for its share of the company's windfall tax in its 1997 federal income tax return. The Commissioner rejected the claim, but the Tax Court concluded that the windfall tax was creditable. The Third Circuit reversed, creating a circuit split with the Fifth Circuit, which had earlier held that the windfall tax was creditable.
The Supreme Court resolved the split in the taxpayers' favor. The ultimate question was whether the windfall tax qualified as an "income, war profits, [or] excess profits" tax. Quoting relevant Treasury Regulations, Justice Thomas noted that "a foreign levy is an income tax if and only if . . . the predominant character of that tax is that of an income tax in the U.S. sense." In making this determination, it is the "predominant character" of the tax that controls; it doesn't matter if the tax affects a few taxpayers differently than the others. It also doesn't matter how the foreign government characterizes its tax. Instead, "the crucial inquiry is the tax's economic effect." In other words, Justice Thomas wrote, "foreign tax creditability depends on whether the tax, if enacted in the U.S., would be an income, war profits, or excess profits tax." If the foreign tax reaches net income, or profits, it operates as an income tax in the U.S. sense, and is creditable.
The Commissioner, channeling the former Labour government, characterized the windfall tax as a tax on the difference between the amount that private investors paid for the company when it was privatized and the company's imputed "profit-making value," which was essentially the value the company had in hindsight, based on its ability to earn profits during the "initial period" when it was required to keep rates the same. The Court wasn't sold. Justice Thomas employed an algebraic reformulation demonstrate "that the windfall tax is economically equivalent to the difference between the profits each company actually earned and the amount the Labour government believed it should have earned given" the value it was assessed at when privatized. It was, in short "a classic excess profits tax."
Justice Sotomayor wrote separately to observe that the Court's math was a bit fuzzy. The reformulation depended on restricting the analysis to the companies that shared an "initial period" of 1,461 days during which they could not raise rates, and treating that initial-period variable as fixed in the formula. In fact, if the inquiry were expanded to include the five companies with shorter initial periods, "it becomes impossible to rewrite the windfall tax as an excess profits tax." This was the position taken by a cadre of Tax Law professors, in an amicus brief. They found a sympathetic ear with Justice Sotomayor, but because the Commissioner had agreed at oral argument that the five "outlier" companies should be disregarded in the predominant-character analysis, she concurred in the judgment of the Court.
Next up, in Sebelius v. Cloer (12-236), the Court held that attorneys' fees may be awarded under the National Childhood Vaccine Injury Act ("NCVIA" or the "Act"), even if the NCVIA petition was untimely. The NCVIA created an alternative court procedure to deal with injuries arising from vaccines. Within 36 months of the first signs of a vaccine-related injury, the injured party must file a NCVIA petition with the Court of Federal Claims. Attorneys cannot charge fees for filing a NCVIA petition, but the court may award attorneys' fees under certain circumstances. If the petition is successful, fees are automatic. If unsuccessful, fees may be awarded if the petition was "filed" in good faith and with a reasonable basis.
Shortly after the respondent Dr. Cloer received Hepatitis-B vaccinations, she experienced numbness in her left forearm and hand. She sought treatment, but was not diagnosed with multiple sclerosis (MS) until five years later. A year after her diagnosis, she learned of a link between MS and the Hepatitis-B vaccine and filed a NCVIA petition. A special master denied the petition as untimely, a decision that was ultimately affirmed by an en banc panel of the Federal Circuit. Dr. Cloer then moved for attorneys' fees, which were granted. The government appealed, arguing that attorneys' fees should not be awarded for untimely petitions.
Justice Sotomayor led the unanimous Court in affirming the fee award. The plain language of the NCVIA's fees provision, the Court noted, tied attorneys' fees to the act of "filing" a petition under the Act. In a different provision, the NCVIA explained that actions are initiated by "filing a petition" with the clerk of the Court of Federal claims. Ordinarily, the Court noted, an application is "filed" when delivered to and accepted by the appropriate court officer. The NCVIA provided no reason to stray from this ordinary meaning.
The Government argued that timeliness was a prerequisite to filing. The Court found no textual support for this position because, unlike other provisions of the NCVIA, the fees provision did not cross-reference to the timeliness rule. Moreover, the Government's interpretation would mean that untimely petitions were never filed at all. This would wreak havoc with other provisions of the NCVIA because "filing" triggered certain obligations for the Secretary of Health and Human Services. Under the Government's interpretation, the Secretary would either have to make an immediate decision regarding timeliness or undo her actions after a petition was deemed untimely. The Court also found no support for ascribing a different meaning to the word "filing" in the fees provision than the word had in the rest of the statute. The Court also noted that the Government's position was inconsistent with the goal of the fees provision. The Court declined to entertain arguments regarding canons of construction and policy arguments because such arguments are irrelevant where the statutory language is unambiguous. The Court found the Government's fears of "shadow trials" and a flood of untimely petitions to be exaggerated or without evidentiary support.
True to form, Justices Scalia and Thomas joined the opinion, except for the section discussing the purpose of the statute, which relied in part on an analysis of legislative history.
Finally, in Metrish v. Lancaster (12-547), the Court considered whether Burt Lancaster was entitled to habeas relief under the "demanding standard" of the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA), which requires a petitioner to establish that the state court's decision "was contrary to, or involved an unreasonable application of, clearly established Federal law, as determined by [the Supreme] Court." Lancaster, who had a long history of mental-health problems, murdered his girlfriend in 1993. At that time, Michigan's intermediate appellate court had clearly recognized "diminished capacity" as a defense negating the mens rea element of first-degree murder; the Michigan Supreme Court never explicitly addressed the viability of the defense, but had made reference to it on various occasions. Lancaster was tried in 1994, asserted the diminished capacity defense, but was nevertheless convicted of first degree murder. His conviction was overturned on other grounds and he was retried in 2005. Unfortunately for Lancaster, between his first and second trials, the Michigan Supreme Court had weighed in – rejecting the diminished capacity defense. The Michigan legislature had enacted a comprehensive statute in 1975 concerning defenses based on mental illness or retardation and the Court found that this statute precluded the use of evidence of a defendant's lack of mental capacity that fell short of insanity to avoid or reduce criminal responsibility. As a result, the trial court precluded Lancaster from raising his diminished capacity defense in his second trial. Lancaster was again convicted.
On appeal, Lancaster argued that the retroactive application of the Michigan Supreme Court's decision rejecting the diminished capacity defense violated his due process rights. The Michigan Court of Appeals affirmed the conviction, finding that while due process prevents retroactive application of judicial decisions in some cases, where the change in the law is unforeseeable, that was not the case here because there was an unambiguous statute on point and because this was the first time the Michigan Supreme Court (as opposed to the Court of Appeals) had explicitly addressed the viability of the defense. After the Michigan Supreme Court declined review, Lancaster filed a federal habeas petition. The district court denied the petition, but a divided panel of the Sixth Circuit reversed, finding that the change in the law was unforeseeable given that the Michigan Court of Appeals had consistently recognized the defense, the Michigan Supreme Court had repeatedly referenced the defense without casting doubt on its validity, and the defense was included in the State Bar's pattern jury instructions.
The Court unanimously reversed, in an opinion by Justice Ginsburg, that relied heavily on the deferential AEDPA standard. Under that standard, the starting point is to look at Court decisions existing at the time of the state court ruling to determine the "clearly established" federal law. Here, the Court turned to two prior decisions that set the guide posts for analyzing due process challenges based on retroactive application of a judicial decision that arguably changed the law. In Bouie v. City of Columbia (1964), the Court had found a due process violation where a state court decision applied retroactively and was inconsistent with the most natural meaning of a criminal statute. By contrast, in Rogers v. Tennessee (2001), the Court found no due process violation where a judicial decision departed from prior decisions as to a common law rule where the rule was deemed "outdated" and had been rejected by most jurisdictions and had only been mentioned in prior decisions in that state only a few times in dicta. According to Ginsburg, this case fell somewhere in between Bouie and Rogers. The Michigan Court of Appeals' repeated acceptance of the diminished capacity defense made this case significantly different from Rogers, where the caselaw was sparse and arguably dicta. But it was also significantly different from Bouie because the Michigan Supreme Court's decision was consistent with a clear statute and this was the first time the Michigan Supreme Court had the addressed the issue. Since reasonable jurists could differ as to whether a due process violation existed in light of the Court's prior precedent, Lancaster could not establish that the Michigan Court of Appeals had unreasonably applied clearly established federal law.
That's it for now, but we're approaching the end of the Term, with dozens of cases not yet decided. So, look for us to appear in your inboxes early and often!
Kim, Jenny & Julie