Merged corporations can offset tax interest

By Charles J. Reichert, CPA

The surviving corporation and acquired corporations in a merger are considered the same taxpayer for purposes of interest offsetting.

The U.S. Court of Federal Claims held that a corporate taxpayer that had merged with other corporations in a series of mergers could offset the interest receivable from tax overpayments of the acquired companies against the interest owed to the IRS from tax underpayments of the acquired companies. The taxpayer, as the surviving corporation, and the acquired corporations were considered the same taxpayer for purposes of interest offsetting because legally, after the merger, the acquired companies were treated as if they had always been part of the surviving company, according to the court.

Facts: The current Wells Fargo & Co. (formerly Norwest Corp.) was created by seven mergers that occurred from 1996 to 2008. In 2010 and 2011, Wells Fargo filed three refund claims based on interest netting related to tax overpayments and underpayments of companies acquired in the mergers; however, the IRS rejected all three claims. In October 2012, the taxpayer filed a complaint with the Court of Federal Claims that included 64 refund claims based on the netting of interest on underpayments and overpayments of some of the merged corporations.

Issues: The interest rate charged by the IRS on taxpayers’ underpayments is higher than the interest rate received from the IRS on overpayments. When the same taxpayer makes equivalent underpayments and overpayments of tax, Sec. 6621(d) mitigates the interest rate disparity by setting a zero interest rate on those payments. In Magma Power Co., 101 Fed. Cl. 562 (2011), the Court of Federal Claims held that a parent company and its subsidiary that filed consolidated tax returns would be the same taxpayer only if the payments were made by a taxpayer with the same taxpayer identification number (TIN) at the time of the payments. The IRS argued that Magma Power established a strict rule that interest netting is not allowed whenever the surviving/acquiring corporation and the acquired corporation have different TINs at the time of the overpayments and underpayments; therefore, no offsetting should be permitted for Wells Fargo.

Holding: The court rejected the IRS’s argument and instead held that the Magma Power decision did not apply in this case because the legal status of a surviving corporation in a merger is different from that of affiliated corporations that are part of a consolidated group. In a merger, the surviving company is liable for any taxes owed by the acquired company and is entitled to any refunds due to the acquired company, while the acquired company ceases to exist, loses its TIN, and is treated as though it had always been part of the surviving company. Therefore, in a merger, the acquiring company and the acquired company are the same taxpayer for purposes of Sec. 6621(d), according to the court. Furthermore, the court held that prior revenue rulings of the IRS related to a surviving corporation’s obligation for tax liabilities of an acquired corporation had treated the surviving corporation and the acquired corporation in a merger as the same taxpayer.

The IRS also argued that despite the surviving company’s liability for the acquired company’s tax obligations, interest netting is a tax attribute, not a tax. The Service contended the interest netting would not transfer in a merger because it is not included in the Sec. 381(a) list of tax attributes that transfer to the acquiring company in a merger. The court disagreed, stating that interest is not a tax attribute because interest is part of the tax; therefore, interest netting is an element of the tax itself.

After concluding that merged corporations were the same taxpayer, the court found that interest netting should be allowed between (1) a premerger acquiring corporation and the premerger acquired corporation, (2) a premerger acquiring corporation and a post-merger surviving corporation, and (3) a premerger acquired corporation and a post-merger surviving corporation.

By Charles J. Reichert, CPA , instructor of accounting, University of Minnesota–Duluth.

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