In Wells Fargo, the Court of Federal Claims held that a taxpayer may net underpayment balances and overpayment balances among merged entities under Section 6621(d). Section 6621(d) provides that, to the extent the “same taxpayer” has overpayments and underpayments of the same amount outstanding, the net rate of interest during such period is zero. The issue in the case was whether merged entities are the “same taxpayer” for purposes of Section 6621(d), such that their overpayment and underpayment balances may be netted.
The taxpayer argued that the term “same taxpayer” includes both predecessors of the surviving corporation in a statutory merger because the entities become one and the same entity as a matter of law. The government, however, argued that entities are only the “same taxpayer” if they have the same taxpayer identification number at the time of the initial tax overpayment or underpayment.
The Court of Federal Claims agreed with the taxpayer and found that a taxpayer may net underpayment balances and overpayment balances among merged entities because the acquiring corporation becomes one and the same with the target corporation by operation of law. Because the surviving corporation steps into the shoes of the acquired entity and the surviving corporation is liable for the tax payments of its predecessors, it is irrelevant whether the underpayment and overpayment balances arose before or after the merger.
This decision is very significant. The Court of Federal Claims rejected the government’s overly narrow view of interest netting and correctly allowed netting in the context of merged corporations. The court’s reasoning presents a strong case for extending the holding to other situations such as liquidations and acquisitions when the acquiring corporation legally assumes the target’s tax liabilities, whether by operation of law or contractually. The opinion of the Court of Federal Claims is available here.