Exxon Mobil wins global interest netting claim under a special statute of limitations rule

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Exxon Mobil wins global interest netting claim under a special statute of limitations rule
TAX ALERT | August 30, 2012 Exxon Mobil Corp. recently won an important victory over the IRS when the U.S. Court of Appeals for the Second Circuit affirmed the Tax Court's holding that Exxon Mobil's interest netting claim was timely filed even though the statute of limitations had expired on some of the years included in the claim. 1 At issue was a special rule created by Congress in conjunction with the enactment of the section 6621(d) interest netting rules. This special rule allows all overlapping periods of underpayment and overpayment to be included in an interest netting claim as long as the statute of limitations has not expired. Exxon Mobil interpreted the special rule to require the statute of limitations to be open on either the overpayment year or the underpayment year for a valid netting claim to be filed. However, the IRS asserted that the statute of limitations (for either assessment or claims) must be open for both the underpayment and the overpayment legs of the claim. 2 Both the Tax Court and the Second Circuit held that the special rule must be read broadly, such that global interest netting may be applied when at least one leg of the overlapping periods (of overpayment or underpayment) is not barred by the applicable statute of limitations. Corporations that have paid interest on tax deficiencies and have also received interest-bearing refunds of overpayments that were outstanding during the same periods of time may benefit from this broad reading of the special rule and be eligible to claim interest refunds. AUTHORS

Patti Burquest
Principal

Interest rates applicable to corporations

The IRS pays interest on corporate overpayments at the overpayment rate (the federal short-term rate plus 2 percent) unless
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Exxon Mobil wins global interest netting claim under a special statute of limitations rule

1/14/14 7:09 AM

the refund for any year equals or exceeds $10,000. In that case, the corporate overpayment interest rate drops to the federal short-term rate plus 0.5 percent. In contrast, if a corporation owes money to the IRS, it pays interest at the corporate underpayment rate (the federal short-term rate plus 3 percent) or the large corporate underpayment rate (the federal short-term rate plus 5 percent). The interest rate differential between overpayments and underpayments can be as great as 4.5 percentage points, resulting in significant underpayment interest liabilities.

History behind global interest netting rules

When Congress in 1986 enacted this interest rate differential for corporations, it recognized that it would be unfair for a corporation to owe interest to the IRS when it had no net tax liability because of overpayments and underpayments that existed during the same time, but in different tax years. In the conference report that accompanied the 1986 legislation, Congress instructed the IRS to implement comprehensive interest netting rules during the succeeding three years to eliminate the inequity that could result from the interest rate differential. Ten years later, the IRS had not adopted any formal interest netting procedures. In 1996, the Treasury issued a report to Congress on the netting of interest on tax overpayments and underpayments that provided options and recommendations. In 1997, Congress enacted section 6621(d), which mandates global interest netting where the interest on overpayments and underpayments of any tax can be netted, producing a net rate of zero during periods when the overpayments and underpayments co-exist in equivalent amounts. Congress rejected most of the Treasury's recommendations, with the exception of the use of a net rate of zero calculation vehicle to eliminate the interest inequity. The enactment marked the birth of global interest netting.

The special rule for inclusion of years prior to July 22, 1998
Because Congress in 1986 had directed the IRS to solve the interest differential inequity on its own (and the IRS had not done so), the IRS sought to extend interest netting to corporations for years predating the enactment of section 6621(d). An uncodified special rule

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Exxon Mobil wins global interest netting claim under a special statute of limitations rule

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accompanied the legislation enacting section 6621(d) and allowed for global interest netting between tax overpayments and underpayments if either the overpayment statute of limitations or the underpayment statute of limitations was open during the year to which the interest netting claim applied. Under this rule, taxpayers argued that only one leg of the netting equation had to have an open statute. The IRS took a contrary position, reading the special rule to require that, on the date of enactment of the legislation (July 22, 1998), both the overpayment leg and the underpayment leg of the equation had to have an open statute in order to claim interest netting. The IRS issued Revenue Procedure 99-43, which states that the special rule requires both periods of limitation to be open on July 22, 1998. Litigation on the special rule ensued. First, Fannie Mae litigated the statute of limitations issue (claiming only one leg overpayment or underpayment was required to have an open statute). The Federal Circuit Court of Appeals sided with the IRS position. Federal National Mortgage Association v. U.S., 379 F.3d 1301 (Fed Cir. 2004). Later, Exxon Mobil litigated the issue in the Tax Court and won. The Tax Court held that only one leg of the netting computation (either the overpayment or the underpayment) had to have an open statute of limitation to claim global interest netting. The IRS appealed the Tax Court's decision. As discussed above, the Second Circuit on Aug. 8, 2012 affirmed the judgment of the Tax Court in Exxon Mobil's favor.

Takeaways from Exxon Mobil

So what does this mean for corporations? If a corporation has paid deficiency interest in any year and, when the interest was paid, also had unrefunded overpayments in other years (which would earn overpayment interest), the corporation could be due an interest refund based on global interest netting if either the overpayment year or the underpayment year is open under the statute of limitations for assessment or refund. Conversely, if the IRS paid the low interest rate on overpayments and later charged the higher rate of interest on underpayments, the corporation may be due a refund if the overpayment period and underpayment period overlapped and the statute of limitations for assessment or refund is open on either year. Surprisingly, this interest refund opportunity can involve years that were thought to be old and cold, as long as the period during

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Exxon Mobil wins global interest netting claim under a special statute of limitations rule

1/14/14 7:09 AM

which the overpayment or underpayment existed also has offsetting underpayments or overpayments and the statute of limitations on either the overpayment years or the underpayment years is open. Corporations with any of the fact patterns discussed above should consult with an interest specialist to review tax account information and transcripts and determine any benefits available under global interest netting. Patti Burquest, principal, Washington National Tax
Mobil Corp. v. Commissioner, No.11-2814 (2d Cir. Aug. 8, 2012). The IRS also argued that the special rule constituted a waiver of sovereign immunity, and thus, the statutory language of the special rule should be strictly construed in favor of the government. Both the Tax Court and the Second Circuit rejected this argument.
2 1 Exxon

Disclaimer The information contained herein is general in nature and based on authorities that are subject to change. McGladrey LLP 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. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of McGladrey.

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