In Wells Fargo & Co. v. US, the US Court of Appeals for the Federal Circuit, reversing in part and affirming in part a decision by the Court of Federal Claims, has held that, following a merger, merged companies are treated as the "same taxpayer" as their predecessor entities in certain but not all situations for purposes of allowing interest netting under Section 6621.

Background

The Wells Fargo consolidated group, as comprised during the years at issue, was created through a series of bank mergers over a period of years. In 2011, Wells Fargo sought "interest netting" refunds under Section 6621(d) based on reducing to zero for overlapping periods the differential on the higher rate of interest it paid on tax underpayments and the lower rate of interest received on tax overpayments involving Wells Fargo and various predecessor entities that were absorbed into Wells Fargo via mergers.

Section 6621 prescribes the rules for the rates to be used in calculating interest for both underpayments and overpayments. For corporations, the interest rate on overpayments is lower than that applied to underpayments. Section 6621(d) equalizes the rate (i.e., eliminates the rate differential) when the periods of underpayments and overpayments overlap in time for "the same taxpayer."

Following Wells Fargo's filing of its refund suit in the Court of Federal Claims to recover its "interest netting" refund, Wells Fargo and the US filed cross motions for summary judgment on the issue of whether Wells Fargo and its predecessor entities were the "same taxpayer."

The Court of Federal Claims held that Wells Fargo is the "same taxpayer" as companies that it had acquired through mergers. In so deciding, the Court of Federal Claims distinguished prior case law and found the legislative history inconclusive. Accordingly, in a case of first impression, it held that the merged companies and Wells Fargo were "the same taxpayer" for purposes of Section 6621(d), based on the "established principle" that statutory mergers result in a complete merging of identities of the merged corporations, as well as on examples of similar but non-precedential treatment by the IRS.

Federal Circuit decision

The three judge panel of the Federal Circuit reviewed three different "situations" described by Wells Fargo and the government for purposes of simplifying the discussion of Wells Fargo's history of mergers.

— In Situation 1, both the underpayment year and the overpayment year occur before the relevant merger, with one company having an underpayment and another having the overpayment, and the company with the overpayment subsequently merging into the company with the underpayment.

— In Situation 2, an acquiring company had an overpayment before a merger, and subsequently, post-merger, the surviving company had an underpayment.

— In Situation 3, an acquired company had an overpayment before the merger, and subsequently, post-merger, the surviving company had an underpayment.

The government generally argued that the determination of whether two entities are the "same taxpayer" for purposes of Section 6621(d) should be based on whether the companies share the same Taxpayer Identification Number (TIN). Under this test, interest netting would be permitted in Situation 2, where the corporation having the overpayment and the corporation having the underpayment had the same TIN. The same would not be true, however, of Situations 1 and 3.

While the government's argument would allow interest netting only in Situation 2, and the Court of Federal Claims' decision would allow it in all three situations, the Federal Circuit distinguished between Situations 1 and 3.

The Federal Circuit held that Wells Fargo may not net interest in Situation 1. In so holding, the

Federal Circuit determined that the Federal Claims Court erred in distinguishing Energy East Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011), in which the Federal Circuit held that a parent corporation and its subsidiary that were not affiliated at the time of tax overpayments and underpayments could not net interest on their consolidated return. The Federal Circuit concluded that Energy East established that the Section 6621(d) statutory language "underpayments and overpayments by the same taxpayer" means "same taxpayer" at the time of such payments. In Situation 1, in which both payments were pre-merger, the entities were not the same taxpayer at the time of the payments, and thus interest netting is not permitted.

The Federal Circuit concluded that answering whether interest netting should be permitted in Situation 3 requires a further clarification of the term "same taxpayer." While not defined in the statute, the Federal Circuit, unlike the Court of Federal Claims, found that the legislative history did shed some light on the meaning of "same taxpayer." The legislative history made clear that Congress intended Section 6621(d) to be remedial and that case law favors broad — rather than narrow - interpretation of remedial provisions. The Federal Circuit concluded that such a broad reading would support treating an acquired corporation in a merger as the same taxpayer as the surviving corporation.

Accordingly, the Federal Circuit held that Wells Fargo may net interest under Section 6621(d) in Situation 3, as well as Situation 2, but not in Situation 1, where the underpayments and overpayments were by two unrelated companies prior to their merger.

Implications

The Wells Fargo decision reaffirms the lower court's opinion on Situation 3 and presents potential significant interest netting refund opportunities arising from some merger transactions. Corporate taxpayers that have both overpayments and underpayments with respect to acquired entities that are now merged into one corporation should consider whether they are entitled to interest netting under Section 6621(d) as the "same taxpayer" based on the Federal Circuit's opinion.

While it is unknown at this time how the government will respond to the Federal Circuit's opinion, including changes to its administrative review process and/or whether the government will seek en banc or Supreme Court review, corporate taxpayers should consider taking appropriate action, such as filing timely protective claims for refund and/or suit, to protect the ability to obtain interest netting in appropriate circumstances based on the ruling in Wells Fargo. Moreover, even if not covered by the Wells Fargo decision, interest netting could be available in various situations in which corporate taxpayers have overlapping overpayments and underpayments. Corporate taxpayers should regularly conduct an IRS transcript analysis, at least every two or three years, to determine potential opportunities to seek interest netting relief, especially considering that there are complexities in determining whether the statute of limitations is still open for claims for a refund of either overpayment interest (six years after the overpayment is allowed) or underpayment interest (generally three years from filing, or two years from payment, whichever is later).

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