WELLS FARGO & COMPANY, Plaintiff, v. The UNITED STATES, Defendant.
No. 11-808T
United States Court of Federal Claims.
(Filed: October 20, 2014)
119 Fed. Cl. 27
Jason Bergmann, Tax Division, United States Department of Justice, Washington, DC, with whom were Kathryn Keneally, Assistant Attorney General, and David I. Pineus, Chief, Court of Federal Claims Section, for defendant.
Tax; Interest Netting under
AMENDED OPINION
FIRESTONE, Judge.
This case presents an issue of first impression regarding the application of Internal Revenue Code (“I.R.C.” or “Code“)
Now pending before the court are the parties’ cross motions for partial summary judgment under Rule 56 of the Rules of the United States Court of Federal Claims (“RCFC“) with regard to the proper interpretation of “same taxpayer” in the context of three separate test claims arising from specific Wells Fargo mergers, representing the three varieties of transaction that occur in this case.4 Oral argument was held on June 6, 2014. For the reasons set forth below, the court GRANTS plaintiff‘s motion for partial summary judgment and DENIES the government‘s cross-motion for partial summary judgment.
I. BACKGROUND
The relevant facts are undisputed. The claims in this case arise from seven mergers which culminated in the formation of Wells Fargo as it currently exists. Consol. Stmt. of Uncont. Facts ¶ 4. These mergers can be divided into two lines: the Wells Fargo line and the Wachovia line.
a. Wells Fargo Line of Mergers
In 1998, Norwest Corporation (“Norwest“) acquired Wells Fargo & Company (“Old Wells Fargo“) through a forward triangular merger under
In 2008, Wells Fargo and Wachovia Corporation (“New Wachovia“) carried out a merger under
b. Wachovia Line of Mergers
In 1996, First Union acquired First Fidelity Bancorporation (“Fidelity“) through a forward triangular merger under
In 1998, FCNJ and First Union carried out a merger under
In 1997, First Union and Signet Banking Corporation (“Signet“) carried out a merger under
In 1998, First Union and CoreStates Financial Corporation (“CoreStates“) carried out a merger under
In 2001, First Union and Wachovia Corporation (“Old Wachovia“) carried out a merger under
c. Procedural History
Beginning in 2009, Wells Fargo filed three administrative claims with the IRS seeking, among other things, refunds based on interest netting between interest paid on tax underpayments and interest paid on tax overpayments, relying on
On December 1, 2011, plaintiff timely filed a complaint in this court. After the government moved to dismiss some of plaintiff‘s claims under
Scenario One: This scenario is intended to address whether interest netting is allowed in connection with underpayments and overpayments between a pre-merger acquiring corporation and a pre-merger acquired corporation. It involves underpayment interest on First Union‘s 1999 income tax account against overpayment interest on Old Wachovia‘s 1993 income tax account.
Scenario Two: This scenario is intended to address whether interest netting is allowed in connection with underpayments and overpayments between a pre-merger acquiring corporation and the post-merger surviving corporation. It involves underpayment interest on First Union‘s 1999 income tax account against overpayment interest on First Union‘s 1993 income tax account.
Scenario Three: This scenario is intended to address whether interest netting is allowed between the pre-merger acquired corporation and the post-merger surviving corporation. It involves underpayment interest on First Union‘s 1999 income tax account against overpayment interest on CoreStates‘s 1992 income tax account.
II. STANDARD OF REVIEW
Under RCFC 56, summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” RCFC 56(a). This case is especially appropriate for summary judgment because the material facts are not in dispute and the parties have presented a purely legal question for the court to resolve. RCFC 56(a).
III. DISCUSSION
As discussed above, because interest netting is allowed by the “same taxpayer,” the
Plaintiff argues that
a. The Statutory Language and Legislative History Do Not Provide a Plain Meaning for “Same Taxpayer”
As with any case involving a question of statutory interpretation or construction, we begin with the language of the statute itself. Duncan v. Walker, 533 U.S. 167, 172 (2001). Here, as noted above,
To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.
Plaintiff argues that any temporal requirement is met once a statutory merger is completed. Specifically, plaintiff argues that any temporal requirement is satisfied once the corporations become the same legal entity by operation of law by completing the statutory merger. Thus, plaintiff contends that where, as here, interest on overpayments and underpayments for the same period were identified
The parties also disagree on the need to look to the legislative history in order to resolve this dispute. The government argues that resorting to the legislative history is not necessary because the statutory text‘s meaning is plain. Plaintiff argues that the legislative history supports its view that the statute must be given a liberal construction as a remedial statute. As noted by the parties, the term “same taxpayer” is not defined in the statute and is not self-defining. Accordingly, the court finds that the meaning is not plain and turns to the legislative history for guidance.
A review of the legislative history reveals that Congress intended for
Having considered the parties arguments, the court finds that the plain language of
b. Corporations formed through statutory mergers, in contrast to members of affiliated groups, are the “same taxpayer” for purposes of § 6621(d) .
The government argues that the legal right to net interest depends on the whether the overpayment and underpayment were made by the taxpayer with the same TIN at the time of the payments. This argument is derived in large part from two cases: Energy E. Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011), and Magma Power Co. v. United States, 101 Fed. Cl. 562 (2011). In Energy East, the Federal Circuit held that a parent corporation and subsidiary that were not affiliated at the time they each made tax payments could not net interest under
Plaintiff argues that the government‘s reliance on Energy East and Magma Power is misplaced because those cases dealt with affiliated corporations filing consolidated returns and not with the change in legal status of the acquired and acquiring corporations following a statutory merger. According to plaintiff, the legal status of a surviving corporation is significantly different from that of the relationship between a parent and subsidiary within a consolidated group. In the case of a merger, plaintiff explains, the acquired and acquiring corporations become one and the same as the surviving corporation and thus share a common history. In the case of parent and subsidiaries or other affiliated corporations that are part of a consolidated group, by contrast, each corporation retains its separate legal identity. Energy East and Magma Power are different from the present case, plaintiff argues, because the corporation seeking to net interest in this case, unlike the corporations in those cases, has now assumed the identity of the acquired entity by operation of law.
The court finds that a review of the facts in Energy East and Magma Power supports the plaintiff‘s contention that those cases involve factual scenarios that are very different from the ones presented in this case. In Energy East, the plaintiff acquired two other corporations, including their subsidiaries. 645 F.3d at 1359. As the new parent to these subsidiaries, the plaintiff sought to net interest between itself and the new subsidiaries in its consolidated income tax return under
Magma Power also involved an effort at interest netting between parent and subsidiary corporations. The subsidiary was acquired by a consolidated group, after which it was included in the consolidated income tax return of the parent corporation, although it paid some other taxes separately. 101 Fed. Cl. at 565. The group sought to net interest on the subsidiary‘s pre-acquisition underpayment against post-acquisition overpayments by the parent. Id. The parties did not dispute that the subsidiary was responsible for the overpayment, but disputed whether or not the group was permitted to net the subsidiary‘s pre-acquisition underpayments against post-acquisition overpayments by the group as a whole. The plaintiffs argued that the interest could be netted, as “a substantial portion of the overpayments were generated by an IRS audit and subsequent tax adjustment and were directly attributable to [the subsidiary].” Id. The Magma Power court, after finding that the Code does not define “same taxpayer,” concluded that the TIN is the best point of reference for the “same taxpayer” determination, as it remained constant despite changes in corporate structure. Id. at 569-71. Rejecting the government‘s argument that a taxpayer could not net interest between payments made individually and payments made as part of a consolidated group, the court found that payments that could be traced to a particular TIN could be netted by the taxpayer with that TIN. Id. at 569-70.
The fact that the taxpayers in Energy East and Magma Power filed consolidated returns does not alter the court‘s analysis. In a consolidated group, assets and liabilities do not pass by operation of law, and an acquired corporation retains its individual identity. Those corporations do not become the same by operation of law. Indeed, members of a consolidated group may file a single consolidated income tax return, but are not required to do so. See
It is for this reason, as well, that the TIN at the time that a tax is paid is not determinative of a taxpayer‘s legal status following a merger. An acquired corporation loses its TIN as part of a statutory merger because the surviving corporation becomes liable for any taxes owed by the acquired corporation. In this connection, the surviving corporation is also entitled to any refund due from tax overpayments made by the acquired corporation if the government has not yet paid the refund. In Magma Power, the court noted that the TIN served as a useful analog for sameness because it remained constant despite frequent changes in corporate structure. 101 Fed. Cl. at 570-71. However, where, as in this case, the acquired corporation discards its TIN following a merger and ceases to exist while the business of the corporation continues, it is clear that the TIN does not account for this type of change in corporate structure, which was not foreseeable based on the facts in Magma Power. Accordingly, the court finds that where a statutory merger has occurred, the surviving corporation is the “same taxpayer” as the acquired corporation for purposes of
In this connection, the court notes that this holding is in accordance with the well-established principle that statutory mergers result in a complete merging of the identities of the two predecessor corporations under other federal statutes. Most particularly, the Anti-Assignment Act,
Finally, as discussed below, this holding is consistent with the positions that the IRS has taken in connection with the legal status of corporations following a statutory merger.
c. The IRS has consistently applied its rules to find that the parties to a statutory merger are the same following the merger.
For purposes of section 368(a)(1)(A), a statutory merger or consolidation is a transaction effected pursuant to the statute or statutes necessary to effect the merger or consolidation, in which transaction, as a result of the operation of such statute or statutes, the following events occur simultaneously at the effective time of the transaction—
(A) All of the assets (other than those distributed in the transaction) and liabilities (except to the extent such liabilities are satisfied or discharged in the transaction or are nonrecourse liabilities to which assets distributed in the transaction are subject) of each member of one or more combining units (each a transferor unit) become the assets and liabilities of one or more members of one other combining unit (the transferee unit); and
(B) The combining entity of each transferor unit ceases its separate legal existence for all purposes; provided, however, that this requirement will be satisfied even if, under applicable law, after the effective time of the transaction, the combining entity of the transferor unit (or its officers, directors, or agents) may act or be acted against, or a member of the transferee unit (or its officers, directors, or agents) may act or be acted against in the name of the combining entity of the transferor unit, provided that such actions relate to assets or obligations of the combining entity of the transferor unit that arose, or relate to activities engaged in by such entity, prior to the effective time of the transaction, and such actions are not inconsistent with the requirements of paragraph (b)(1)(ii)(A) of this section.
Treas. Reg. § 1.368-2(b)(1)(ii). Thus, under these rules, the assets and liabilities of a premerger corporation become the assets and liabilities of a post-merger surviving corporation and the pre-merger corporations cease their separate legal existence.
The government argues that regardless of whether the acquiring corporation becomes liable for the acquired corporation‘s tax obligations, including interest owed on any tax, interest netting is not a tax itself but rather is a “tax attribute” and as a result does not necessarily transfer in a statutory merger. The government further argues that Congress has declined to include interest netting in
Plaintiff argues that the government‘s reliance on § 381 is not relevant. Plaintiff argues that interest netting is not a tax attribute but rather is an element of the tax itself. Specifically, plaintiff argues that interest is part of the tax and interest netting is a calculation of tax overpaid or underpaid and
The court agrees with plaintiff and finds that § 6601 is a general statement regarding interest and is not limited to collections, as indicated by § 6601(a)‘s “General rule,” which expressly refers to the Code, stating:
If any amount of tax imposed by this title (whether required to be shown on a return, or to be paid by stamp or by some other method) is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid.
The court also finds that that the government‘s position regarding whether the parties to a statutory merger become the “same taxpayer” for tax purposes is not consistent with the few rulings by the IRS on the question of the tax liability of a surviving corporation for the tax of an acquired corporation following a merger. As discussed below, 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. Thus, when the IRS considered employment taxes under the Federal Unemployment Tax Act (“FUTA“), it concluded that “where a corporation is absorbed by another corporation in a statutory merger or consolidation the resultant corporation should be regarded as the same taxpayer and the same employer for [FUTA] purposes.” Rev. Rul. 62-60, 1962-1 C.B. 186, 1962 WL 13492 at 1 (1962). A similar result was reached in a ruling involving excise taxes under § 5705(a). In Rev. Rul. 66-125, the IRS held that following a merger the surviving corporation was entitled to a refund when it removed relevant products from the market. 1966-1 C.B. 342, 1966 WL 15263 at 1 (1966). The IRS stated that the surviving corporation “should be considered the ‘manufacturer’ within the intent of [the provision] since that corporation is the successor to the manufacturing corporation and, therefore, is entitled to file claim for credit or refund....” Id. In a third ruling, the IRS determined that an acquired corporation‘s income should be included along with the surviving corporation‘s income in applying a now-repealed provision. Rev. Rul. 72-356, 1972-2 C.B. 452, 1972 WL 29569 at 1 (1972). Finally, in Rev. Rul. 80-144, the IRS determined that the unused foreign tax credits of an acquired corporation could transfer over to the surviving corporation. 1980-23 I.R.B. 7, 1980-1 C.B. 80, 1980 WL 129701 at 1 (1980).
While none of these IRS rulings deal with interest netting, they demonstrate that the IRS has consistently treated the surviving
In fact, a review of several IRS internal memoranda prepared by individual IRS attorneys, referred to as Chief Counsel Advice (“CCA“) and Field Service Advice (“FSA“), demonstrates that interest netting involving merged corporations was authorized. While this guidance is not precedential, even within the agency,12 as in other cases, the court here finds that the guidance in these memoranda is helpful in determining the position of the IRS. See Rowan Cos. v. United States, 452 U.S. 247, 262 n.17 (1981) (“Although these rulings have no precedential force, ... they are evidence .... ” (citations omitted)); Magma Power, 101 Fed. Cl. at 571-72.
In one FSA,13 the IRS discussed whether the surviving corporation in a statutory merger could net interest between the overpayment of the acquired corporation and the underpayment of the acquiring corporation. The FSA concluded that, as a result of the merger, “[the acquiring corporation] assumed [the acquired corporation‘s] liabilities,” and therefore is entitled to net the overpayment against its own underpayment. I.R.S. Field Serv. Advice Mem. 200212028 (Mar. 22, 2002), 2002 WL 442928.14 The FSA noted that “[i]t is important that [the acquiring corporation] assume [the acquired corporation‘s] liabilities” and that the former would not be entitled to net interest if the latter continued to exist. Id. Of the two memoranda in which the corporations were not found to be the “same taxpayer,” both involved subsidiaries and parent corporations, which, as the court found above with respect to Energy East and Magma Power, are factually distinct from the present case. I.R.S. Chief Counsel Advice 201225011 (June 22, 2012), 2012 WL 2361303; I.R.S. Chief Counsel Advice 201222001 (June 1, 2012), 2012 WL 1961411.15 As a result, the court finds that IRS guidance is consistent with the plaintiff‘s view that mergers are distinct from other consolidated corporate relationships and that in the case of mergers, interest netting is allowed because the merged corporations are considered to be the same taxpayers for purposes of
Finally, the court finds that IRS guidance under an analogous provision of the Code is also consistent with the court‘s conclusion that an acquired corporation is the “same taxpayer” as the surviving corporation following a statutory merger. Specifically, plaintiff notes that
In the case of any overpayment, the [IRS], within the applicable period of limitations,
d. Wells Fargo is Entitled to Net Interest in Each of The Test Claims.
The court thus concludes that merged corporations are the “same taxpayer” for purposes of
i. Scenario One
Under this fact pattern, plaintiff proposes to net underpayment interest on First Union‘s 1999 income tax account against overpayment interest on Old Wachovia‘s 1993 income tax account. Specifically, plaintiff seeks to net interest for the periods from March 15, 2000 to December 26, 2001 and from January 25, 2002 to March 15, 2004. Thus, plaintiff seeks to net interest between the pre-merger acquired corporation and the pre-merger acquiring corporation. Contrary to the government‘s contention, the court finds that this scenario is not controlled by Energy East because this scenario involves interest netting in connection with merged corporations rather than consolidated groups. Old Wachovia merged with First Union in 2001, and became one and the same with First Union (now Wells Fargo) on the date of that merger, after which the surviving corporation shared the past of both the acquired and acquiring corporations. Accordingly, based on the authorities discussed above, the court finds that Old Wachovia and First Union became the “same taxpayer” by operation of law and thus interest netting is allowed.
ii. Scenario Two
Under this fact pattern, plaintiff seeks to net underpayment interest on First Union‘s 1999 income tax account against overpayment interest on First Union‘s 1993 income tax account, representing a pre-merger acquiring corporation and the post-merger surviving corporation. Specifically, plaintiff seeks to net interest on the periods from January 25, 2002 to March 15, 2002. For the same reasons as the court has discussed
iii. Scenario Three
Under this fact pattern, plaintiff seeks to net underpayment interest on First Union‘s 1999 income tax account against overpayment interest on CoreStates‘s 1992 income tax account, representing a pre-merger acquired corporation and a post-merger surviving corporation. Specifically, plaintiff seeks to net interest on the period from March 15, 2000 to March 15, 2002. Based on the same reasoning discussed above, the court finds that the entities became the “same taxpayer” by operation of law through the statutory merger and thus the court finds that interest netting is allowed.
IV. CONCLUSION
For the reasons set forth above, plaintiff‘s motion for partial summary judgment is GRANTED and the government‘s cross-motion for partial summary judgment is DENIED.
Pursuant to
IT IS SO ORDERED.
Notes
Elimination of interest on overlapping periods of tax overpayments and underpayments.—To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.
The acquisition by one corporation, in exchange for stock of a corporation (referred to in this subparagraph as “controlling corporation“) which is in control of the acquiring corporation, of substantially all of the properties of another corporation shall not disqualify a transaction under paragraph (1)(A) ... if—
(i) no stock of the acquiring corporation is used in the transaction, and
(ii) in the case of a transaction under paragraph (1)(A), such transaction would have qualified under paragraph (1)(A) had the merger been into the controlling corporation.
S. Rep. No. 83-1622, at 4915 (1954) (Conf. Rep.). Thus, the government‘s reliance on § 381 is misplaced.[t]he section is not intended to affect the carryover treatment of an item or tax attribute not specified in the section or the carryover treatment of items or tax attributes in corporate transactions not described in subsection (a). No inference is to be drawn from the enactment of this section whether any item or tax attribute may be utilized by a successor or a predecessor corporation under existing law.