In a case of first impression, the Court of Federal Claims held in Wells Fargo v. United States [(No. 11-808T) (United States Court of Federal Claims) release date June 27, 2014 (Doc 2014-16178)] that interest netting under section 6621(d) of the Internal Revenue Code is allowed among corporations that have acquired other corporations in statutory mergers. The case turned on the definition of the “same taxpayer” requirement in the statute and in examining three test case scenarios. The court held that in all of the scenarios, interest netting was allowed between the acquired corporations and the surviving entities. Specifically, the court sanctioned interest netting in the following merger scenarios:
- Underpayments and overpayments between a pre-merger acquiring corporation and the pre-merger acquired corporation;
- Underpayments and overpayments between a pre-merger acquiring corporation and the post-merger surviving corporation; and
- Underpayments and overpayments between a pre-merger acquired corporation and the post-merger surviving corporation.
In all three scenarios, the mergers satisfied section 368(a)(1)(A) of the Code, and the corporation surviving the merger acquired the assets and liabilities of the acquired corporation.
Under section 6621(d), if interest is payable on an underpayment and allowable on an overpayment by the same taxpayer, the net rate of interest on such amounts is zero for the period that the underpayment and overpayment overlap. Wells Fargo argued that the term “same taxpayer” includes the predecessors of a surviving corporation in a statutory merger, regardless of whether the overlapping underpayments and overpayments involve corporations that were separate before the merger took place. Wells Fargo argued that section 6621(d) permits interest netting after a merger because the acquiring corporation becomes the same entity as the acquired corporation as a matter of law and assumes the liabilities of the acquired corporation.
In Wells Fargo, the government took the narrow position that corporations can only be considered the “same taxpayer” within the meaning of section 6621(d) if the corporations had the same Taxpayer Identification Number (TIN) at the time the underpayments and overpayments occurred. The government cited Energy East Corp. v. United States, 645 F 3d. 1358 (Fed. Cir. 2011) and Magma Power Co. v. United States, 101 Fed. Cl. 562 (2011) in support of its position.
The Court of Federal Claims rejected the application of Energy East Corp. and Magma Power Co. because those cases were factually distinguishable from Wells Fargo’s case and did not involve statutory mergers. The “same TIN” approach to determining whether the same taxpayer test is met was rejected by the court, holding that “…where a statutory merger has occurred, the surviving corporation is the ‘same taxpayer’ as the acquired corporation for purposes of § 6621(d).”
The court also noted that the Internal Revenue Service (IRS) had previously sanctioned interest netting in merger situations. For example, in FSA 200212028; 2002 FSA LEXIS 45, the IRS concluded that interest netting is permitted where an acquiring corporation assumes the acquired corporation’s liabilities, and the acquired corporation ceases to exist. The court concluded that the IRS originally got it right and rejected its new restrictive position. The issue of “same taxpayer” in the interest netting context involves hundreds of millions of dollars, if not billions of dollars. The government, even prior to the decision, had vowed to appeal the case to the Court of Appeals for the Federal Circuit, if it lost.
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