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Merged Corporations Are the "Same Taxpayer" for Interest Netting Purposes.
(Parker Tax Publishing July 17, 2014)

In a case of first impression, the Court of Federal Claims concluded that, following a merger, the entities that merged become one and the same as a matter of law and thus become the "same taxpayer" for purposes of interest netting. Wells Fargo & Company v. U.S., 2014 PTC 317 (Fed. Cl. 6/27/14).

In 1998, Norwest Corporation acquired Wells Fargo & Company (Old Wells Fargo) through a forward triangular merger under Code Sec. 368(a)(1)(A) and Code Sec. 368(a)(2)(D). Old Wells Fargo merged into WFC Holdings, Corp. (WFC), and Old Wells Fargo's separate existence was terminated. Norwest changed its name to Wells Fargo & Company, acquired the assets and assumed the liabilities of Old Wells Fargo, and became the common parent of the affiliated corporations that were previously members of Old Wells Fargo's consolidated group.

In 1997 and 1998, First Union merged with Signet Banking Corporation and CoreStates Financial Corporation, respectively. In 2001, First Union merged with Wachovia Corporation in a Code Sec. 368(a)(1)(A) transaction. First Union survived the merger, while Wachovia's separate existence was terminated. First Union acquired the assets and assumed the liabilities of Old Wachovia, and became the common parent of the affiliated corporations that were previously members of Wachovia's consolidated group. First Union changed its name to Wachovia Corporation (New Wachovia). In 2008, New Wachovia and Wells Fargo merged in a Code Sec. 368(a)(1)(A) merger. Wells Fargo survived the merger, and New Wachovia's separate existence was terminated. Wells Fargo acquired the assets and assumed the liabilities of New Wachovia, and became the common parent of the affiliated corporations that were previously members of New Wachovia's consolidated group.

In 2012, Wells Fargo filed 64 separate claims for a refund for interest overpayments based on the application of the interest netting authorized under Code Sec. 6621(d). Code Sec. 6621(d) was enacted in 1998 to allow for "global netting" on interest rates for tax overpayments and tax underpayments by the "same taxpayer" in order to address the disparity between the higher interest rate imposed on tax underpayments and the lower interest rate applied when the IRS pays a refund on tax overpayments. After the IRS disallowed the refund claims, the case ended up before the Court of Federal Claims. The issue presented was one of first impression regarding the application of Code Sec. 6621(d) to corporations that have acquired other corporations or been acquired through a statutory merger. Under Code Sec. 6621(d), interest rates may be netted to zero when there are overlapping overpayments and underpayments by the "same taxpayer" during the same period. Specifically, the issue before the court was whether Wells Fargo was entitled to net the interest paid on certain tax underpayments owed by Wells Fargo or its predecessor, First Union, with the interest owed by the IRS to Wells Fargo on overpayments made by First Union or other companies acquired by Wells Fargo through the various corporate mergers.

Wells Fargo argued that the term "same taxpayer" includes both predecessors of the surviving corporation in a statutory merger and that, as a result, the statute allows for interest netting regardless of whether the overlapping overpayments and underpayments involve corporations that were separate until the merger is carried out. According to Wells Fargo, following a merger, the entities become one and the same as a matter of law and thus become the "same taxpayer" for purposes of interest netting.

The IRS argued that the phrase "same taxpayer" is narrower and that taxpayers should only be considered the "same" for purposes Code Sec. 6621(d) if they had the same taxpayer identification number at the time of the initial tax overpayment or underpayment, regardless of whether the entities later merged and the surviving entity became a single entity for tax purposes.

Wells Fargo and the IRS identified three test claims, based on scenarios representing three different merger transactions, to test the application of Code Sec. 6621(d). The first scenario addressed whether interest netting is allowed in connection with underpayments and overpayments between a pre-merger acquiring corporation and a pre-merger acquired corporation. The second scenario addressed whether interest netting was allowed in connection with underpayments and overpayments between a pre-merger acquiring corporation and the post-merger surviving corporation. The third scenario addressed whether interest netting is allowed between the pre-merger acquired corporation and the post-merger surviving corporation.

The Court of Federal Claims held that the merged corporations are the "same taxpayer" for purposes of Code Sec. 6621(d) based on the undisputed principles of corporate law, as well as IRS rules governing statutory mergers and IRS guidance. Thus, for each of the three scenarios presented, the court allowed interest netting.

The court also found the IRS's position regarding whether the parties to a statutory merger become the "same taxpayer" for tax purposes inconsistent with the few IRS rulings on the question of the tax liability of a surviving corporation for the tax of an acquired corporation following a merger. According to the court, whenever the IRS has determined sameness in situations involving statutory mergers, as opposed to those involving consolidated groups, the IRS has found that the acquired corporation is the same taxpayer as the surviving corporation.

For a discussion of the interest netting rule of Code Sec. 6621(d), see Parker Tax ¶261,550. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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