The Court of Federal Claims ruled that a member of a consolidated group is “the same taxpayer” for purposes of interest-netting relief both before and after becoming a member of the consolidated group.
The IRS assessed a tax deficiency of $9,953,525 against Magma Power Co. with respect to its tax return for the year ending Dec. 31, 1993. On Feb. 24, 1995, Magma Power was acquired by CalEnergy Co. Inc. (succeeded by MidAmerican Energy Holdings Co., which was the agent for the consolidated group). During 2000 and 2002, Magma satisfied the deficiency and paid an additional $9,235,206 in interest. In the interim, the consolidated group had a series of tax overpayments for the tax years 1995–1998, which were refunded during 2004 and 2005. Interest totaling $5,872,354 was paid to the group on those overpayments.
Under Sec. 6621, to the extent interest is payable on underpayments and allowable on overpayments for an overlapping period by “the same taxpayer,” the net rate of interest on the underpayment and overpayment amounts is zero for that overlapping period. In 2007, MidAmerican filed a $2,190,234 claim for refund and request for abatement on behalf of Magma. MidAmerican claimed that a substantial portion of the consolidated overpayments were directly attributable to Magma and that overlapping periods of interest extended from the due date of the consolidated returns, which had resulted in overpayments through the date Magma satisfied its 1993 underpayment liability.
The IRS disallowed the claim, contending that a consolidated group and one of its members are not “the same taxpayer” for purposes of the interest-netting provisions. The underpayment resulted from Magma’s separate tax return, while the overpayments resulted from a consolidated group’s tax return, the IRS said. MidAmerican subsequently filed a refund suit in the Court of Federal Claims.
In a case of first impression, the court sided with MidAmerican and Magma and agreed that Magma should be considered “the same taxpayer” in relation to the 1993 underpayment and the consolidated group’s overpayments and therefore should qualify for the interest-netting provisions. In making this determination, the court considered both the fact that Magma had kept its employer identification number, which is how the IRS identifies a taxpayer when collecting revenue, and that it was possible to trace the consolidated overpayments directly to Magma. According to the court, when filing a consolidated return, an affiliated group is the tax-computing unit, but the separate corporations are the actual taxpayers. Thus the interest-netting relief should be afforded Magma to the extent the consolidated group’s overpayment can be traced to the company, the court held.
By Karen M. Cooley, CPA, MBA, instructor of accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Business, both of the College of Business, West Texas A&M University, Canyon, Texas.
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