Interest Netting Post-Merger: The “Same Taxpayer” Requirement

The United States Court of Appeals for the Fourth Circuit recently addressed a critical issue for corporate tax professionals regarding the application of the interest netting provision under 26 U.S.C. § 6621(d) following a corporate merger. This case, Bank of America Corporation v. United States (CA4, Case No. 23-2319) provides essential clarity on the interpretation of the “same taxpayer” requirement for pre-merger underpayments and overpayments.

Background of the Case

Bank of America Corporation, which merged with Merrill Lynch in 2013, brought a lawsuit seeking to recover interest on its pre-merger tax underpayments by netting them against pre-merger overpayments made by Merrill Lynch. The core of the dispute revolved around whether the post-merger integration rendered Bank of America the “same taxpayer” as Merrill Lynch for the purposes of Internal Revenue Code § 6621(d). The case was heard on appeal from the United States District Court for the Western District of North Carolina, which had granted partial summary judgment in favor of the government. The Fourth Circuit affirmed the district court’s decision.

Two test cases formed the basis of the parties’ cross-motions for partial summary judgment. In the first scenario, Bank of America had an underpayment for the 2005 tax year, while Merrill Lynch had an overpayment for the same year. Interest on these amounts accrued during an overlapping period from March 15, 2010, through June 30, 2014. In the second test case, Bank of America’s 2005 underpayment was at issue against Merrill Lynch’s overpayment for the 1999 tax year, with overlapping interest accrual periods from March 15, 2006, through March 15, 2007, and April 15, 2009, through August 26, 2009. It’s crucial to note that the merger of Bank of America and Merrill Lynch, with Bank of America as the surviving corporation, occurred on October 1, 2013.

Taxpayer’s Assertion for Relief

Bank of America sought to recover a substantial amount, totaling $163,469,627, in underpayment interest it had already paid to the government and overpayment interest it contended the government owed. The Bank’s position was that, following the merger, it became the “same taxpayer” as Merrill Lynch, and therefore, the interest netting provision of § 6621(d) should apply to the pre-merger payments of both entities. The Bank contended that “by the same taxpayer” in the statute should be interpreted to mean “with respect to” or “concerning,” arguing that because the overpayments and underpayments were now the responsibility of Bank of America, they were effectively “by the same taxpayer”. It also asserted that § 6621(d) should be interpreted consistently with § 6402(a), the balance-netting provision, which it believed would permit netting in this scenario. Furthermore, the Bank argued that Delaware merger law retrospectively treats the surviving company and the merged companies as the same for federal tax purposes.

The Court’s Legal Analysis and Application

The Fourth Circuit’s analysis meticulously examined the statutory text, relevant precedents, legislative history, and policy considerations, ultimately affirming the district court’s decision.

  • Interpretation of Statutory Text: “By the Same Taxpayer” The court began its analysis with the text of 26 U.S.C. § 6621(d), which states that interest netting applies when “interest is payable . . . on equivalent underpayments and overpayments by the same taxpayer”. The court agreed that “by the same taxpayer” modifies “equivalent underpayments and overpayments,” not the “interest [that] is payable”. Applying the last-antecedent rule of construction, the court found that the phrase limits the immediately preceding noun or phrase, indicating that the underpayments and overpayments themselves must be made by the same taxpayer. The most natural interpretation of “by” in this context, according to the court, is “through the means or instrumentality of”. This implies that the same taxpayer must have made the underpayments and overpayments. The court rejected the Bank’s broader interpretation of “by” meaning “with respect to” or “concerning,” noting that such definitions are less natural in the context of tax payments and would effectively rewrite the statute to focus on current liability rather than the original payment maker.

  • Reliance on Precedent: Energy East and Wells Fargo The court heavily relied on Federal Circuit precedents, particularly Energy East Corp. v. United States, which 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”. This principle was further reinforced by Wells Fargo & Co. v. United States, a case deemed “materially identical” to the one at hand. Wells Fargo explicitly stated that a merged corporation could not net pre-merger interest for payments made by different corporations because “it is the identity of the corporation at the time of the payments that matters”. The Fourth Circuit distinguished this from a scenario Wells Fargo did permit: netting interest from a post-merger payment by the surviving entity against a pre-merger payment by one of the merged entities. The key distinction is that the former involves two distinct entities making payments pre-merger, while the latter involves the surviving entity (a composite of both) making a post-merger payment.

  • Distinction from Balance-Netting (§ 6402(a)) Bank of America argued for consistency with the balance-netting provision under 26 U.S.C. § 6402(a), which allows the Secretary to credit an overpayment against “any liability in respect of an internal revenue tax on the part of the person who made the overpayment”. The court acknowledged the intuitive appeal of this argument but found that the two provisions have materially different language and purposes. Section 6402(a) has a broader scope, allowing netting when the “person who made the overpayment” has “any liability,” including liability originally incurred by another corporation that merged. In contrast, § 6621(d) is narrower, specifically requiring “under- and overpayments by the same taxpayer” during an overlapping interest accrual period. The court clarified that while a merger might make the surviving entity a “composite” of the merged entities for balance-netting purposes (as held in Wells Fargo for § 6402(a)), this does not retroactively make the distinct pre-merger entities the “same” for § 6621(d).

  • Legislative History and Policy Considerations Although the court found the statutory text clear, it also reviewed the legislative history of § 6621(d). This history indicates that Congress added the provision in 1998 to allow interest netting even when underpayments were no longer “outstanding” or “satisfied,” addressing a perverse incentive for taxpayers to delay payments. However, the court found no indication in the legislative history that Congress intended to treat companies that later merge as the “same taxpayer” for pre-merger payments. The court also considered the government’s policy argument that allowing the Bank’s position could “lead to abusive mergers that have no purpose other than to retroactively create a ‘same taxpayer’ to make interest-netting claims”. Despite the Bank’s contention that a merger for tax benefits defies belief, the court found it plausible, especially given the significant sums at stake (over $160 million in this case).

  • Rejection of State Merger Law Argument Finally, Bank of America argued that Delaware merger law should apply, which it claimed retrospectively treats the surviving company and the merged companies as the same for federal tax purposes. The court firmly rejected this argument for two reasons. First, federal taxing power is not subject to state control unless explicitly made dependent on state law, and there was no “hole in the analysis that state law must fill” regarding the clear federal requirement for the “same taxpayer” at the time payments were made. Second, even if state law were relevant, Delaware merger law does not retroactively make distinct corporations the “same” at the time of payment. It merely means that the surviving corporation absorbs the identities and liabilities of the merged entities after the merger. It does not retroactively unify the identities of the original, distinct entities prior to the merger.

Conclusion

The Fourth Circuit affirmed the district court’s grant of partial summary judgment in favor of the government. The court concluded that Bank of America and Merrill Lynch were not the “same taxpayer” when they made the underpayments and overpayments at issue because they were distinct corporate entities at those times, which occurred years before their 2013 merger. Therefore, Bank of America was ineligible for interest netting under the plain text of 26 U.S.C. § 6621(d) for these pre-merger payments. This decision reinforces the principle that for interest netting purposes under § 6621(d), the identity of the taxpayer at the time the payments were made is paramount, not their post-merger status or the absorption of liabilities. Tax professionals should carefully consider the timing of underpayments and overpayments relative to corporate restructuring when assessing interest netting opportunities.

Prepared with assistance from NotebookLM.