Federal Circuit Outlines When Merged Corporations May Utilize Interest Netting

The Federal Circuit wasn’t willing to go quite as far as the Court of Federal Claims in the case of Wells Fargo & Co. vs. United States, CA FC, No. 2015-5059, 2016 TNT 126-15 in allowing a corporation to allowing interest netting for overpayments and underpayments arising from prior years involving entities that later were acquired and merged into the entity.

In the original case (Wells Fargo & Company v. United States, Court of Federal Claims, No. 11-808T, 2014 TNT 125-13, 6/27/14) the Court of Federal Claims had adopted Wells Fargo’s position allowing that following mergers the corporation was in all cases the “same” corporation as any of the pre-merger predecessors.

Under IRC §6621(d) interest on overpayments and underpayments of a corporation can be netted for computing interest:

To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.

The Federal Circuit opinion explains the reason for this provision, noting:

Absent an interest-netting provision like § 6621(d), a taxpayer might make equivalent underpayments and overpayments yet owe the IRS interest. This is because corporate taxpayers pay underpayment interest to the IRS at a higher rate than the IRS pays overpayment interest to corporations. See Tax Reform Act of 1986, Pub. L. No. 99-514, § 1511(a), 100 Stat. 2085, 2744. Section 6621(d) corrects this inequity by permitting taxpayers to net interest on “equivalent underpayments and overpayments by the same taxpayer.”

For large corporations (such as Wells Fargo) the question of what is the “same corporation” isn’t obvious, especially following the acquisitions and consolidations in the banking sector in recent history.

Situation 1

The first case to be considered goes as follows. In Year 1, Acquired Corporation has an overpayment of taxes. In Year 2, Survivor Corporation has an underpayment of taxes. In Year 3 the two corporations merge, with Survivor being the single existing entity.

The Court of Federal Claims had ruled that since Survivor was the legal successor to both corporations, the “same corporation” rule would apply to this pair of overpayments and underpayments, allowing Survivor to net the payments. Note that this meant that one of the side effects for Survivor of the acquisition of Acquired was to reduce the interest it would otherwise have owed the IRS, assuming this view holds.

For the Federal Circuit panel that didn’t seem to be the correct result. The panel notes that the Federal Circuit had previously ruled against such netting in the case of Energy East Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011) (though the Court of Federal Claims had found the fact that it did not involve a merger made the case different).

The panel noted:

...[W]e agree with the government that Energy East applies to this case. The Court of Federal Claims erred in holding otherwise. This court decided Energy East as a matter of statutory interpretation. We explained that in § 6621(d), the term “by the same taxpayer" immediately follows and therefore refers to "equivalent underpayments and overpayments.” Energy E., 645 F.3d at 1361. We applied the last antecedent rule, which requires that “a limiting clause or phrase ‘should ordinarily be read as modifying only the noun or phrase that it immediately follows.’” Id. (quoting Barnhart v. Thomas, 540 U.S. 20, 26 (2003)). We thus held that “the statute provides an identified point in time at which the taxpayer must be the same, i.e., when the overpayments and underpayments are made.” Id. (emphasis omitted).

Energy East did not rely on the nature of the corporations at issue. Indeed, the parties did not dispute the meaning of “same taxpayer” in that case because they disagreed only on “the point in time at which the party requesting the refund must be the ‘same taxpayer’ to avail itself of interest netting under § 6621(d).” Id. As such, we conclude that the statutory framework announced in Energy East applies regardless of the corporate structures at issue.

Situation 2

In the second case, the Survivor had an overpayment in Year 1 and an underpayment in Year 2. In Year 3 Survivor merges with Acquired. Now the question becomes whether the addition of “Acquired” makes Survivor a different corporation than the one that had previously incurred an underpayment and an overpayment.

The government conceded that, in this case, the mere addition of “Acquired” to the situation did not mean that Survivor was not the “same corporation” for interest netting purposes. Thus the overpayment in Year 1 is eligible for netting with the underpayment in Year 2.

Situation 3

In Situation 3 Acquired has an overpayment in Year 1. In Year 2 Acquired and Survivor merged. In Year 3 Survivor has an underpayment. The IRS position is that in order to have interest netting the corporations must meet the “same TIN test.” Since Acquired’s TIN was eliminated by the merger and the tax return in year 3 is filed under Survivor’s TIN, there can be no netting.

The panel find that the more appropriate test is not the “same TIN” but rather took a detailed look at what Congress meant by the “same taxpayer,” finding that in this case that despite the fact that Acquired’s EIN may have been retired, it still continued on as a taxpayer following the statutory merger—so the later underpayment is one of the “same taxpayer” that had the earlier overpayment.

As the Court explains:

...[W]e find that Wells Fargo may net interest in Situation Three. As noted above, § 6621(d) is a remedial statute, which we read broadly. Moreover, Congress promulgated § 6621 against the legal background detailed above, including principles of merger law and the IRS's treatment of mergers in the statutory precursor to § 6621(d). Also, general IRS treatment of mergers suggests that § 6621(d)’s “same taxpayer” requirement, read broadly, permits netting in Situation Three. Thus we hold that an acquired corporation that makes an overpayment before a merger is the “same taxpayer” for the purposes of § 6621(d) as the post-merger surviving entity that has absorbed the acquired corporation.