Last month, the Court of Federal Claims decided Wells Fargo & Co. v. United States, which was a fairly important and taxpayer friendly holding regarding who qualifies as the “same taxpayer” for the net zero interest rate for overlapping periods of underpayments and overpayments under Section 6621(d). We discuss this case, and the “same taxpayer” requirement in great depth in the revised Satlzman and Book IRS Practice and Procedure ¶6.08[1][b], which should be released this fall, but we also wanted to briefly flag the case to make sure our readers were aware of the development. Below is a brief recitation of the facts, a quick discussion of the status of the law, and the holding.
The Facts – Together we’ll go far…to get some tax benefits.
So, this case involves bank mergers that Wells Fargo has been involved with over the last 15 years; all of which were statutory mergers. Following the actual mergers is a little confusing, and the specifics of those mergers are not that important to the holding. What does matter is the issue, as stated by the Court, which was:
It concerns whether plaintiff…Wells Fargo…is 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 United States to Wells Fargo on overpayments made by First Union or other companies acquired by Wells Fargo through various corporate mergers.
Positions and the law.
Section 6621(d) was enacted in 1998 to allow overpayment and underpayment interest rates to be netted against each other at a zero percent interest rate when the same taxpayer has overpayments and underpayments of tax. Corporate overpayments and underpayments, otherwise, would be at different rates. The key issue before the court was the definition of “same taxpayer”.
Wells Fargo argued that the “same taxpayer” was both the predecessors and the surviving corporation of statutory mergers, so that the surviving entity could benefit from the tax attributes of all prior corporations. The IRS argued for a more narrow view of “same taxpayer”, stating that a taxpayer is only the same if it has the same taxpayer identification number before and after the merger.
The Service had previously been successful with this position in Magma Power and Energy East, and had repeatedly taken this position in rulings and Counsel Advice.
And the Court of Federal Claims says…
The Court of Federal Claims took the taxpayer friendly, and I believe correct, approach to the issue, and held that a TIN is not fully determinative of legal status in the merger context. The Court stated that because Energy East and Magma involved fully separate but affiliated corporations, they did not control the Wells Fargo case. The Court further stated:
In a merger, the acquired and acquiring corporations have no post-merger existence beyond the surviving corporation; instead, they become one and the same by operation of law, and thereafter the surviving corporation is liable for the pre-merger tax payments of both the acquired and acquiring corporations.
Affiliated corporations are still probably out of luck in terms of being treated as the “same taxpayer”. Wells Fargo, however, provides a holding on corporate mergers that should apply to various other situations the Service stated were not entitled to the “same taxpayer” treatment in various mergers and acquisitions. Overall, this is a good result, and a very well written and thought out opinion. It will be interesting to see the Service’s reaction to the holding.