Wholly Owned Corp and Parent Not the “Same Corporation” for Interest Netting

Published Categorized as IRS Interest, Tax Procedure
Wholly Owned Corp And Parent Not The “same Corporation” For Interest Netting
Wholly Owned Corp And Parent Not The “same Corporation” For Interest Netting

In Ford Motor Co. v. United States, No. 14-458T (Ct. Cl. 2017), the court addressed whether a wholly owned corporation and its parent were the “same corporation” when computing the amount of interest the taxpayer owed to the IRS. This “same corporation” issue is one that comes up in most interest-netting cases.

The Interest Netting Rules

Taxpayers who are under continuous audit by the IRS will often owe the IRS for some periods and the IRS will owe the taxpayer for some periods. The IRS is required to net or offset the interest owed and interest payable in these cases. The IRS often fails to do so and, if it does, it fails to do so correctly. Taxpayers typically have to file refund claims to recoup the overpaid net interest.

For larger Fortune 500 taxpayers, they typically have to file these claims about every ten years. These claims are usually filed for tens of million of dollars of interest, but, given the size of the IRS adjustments they are accustomed to, they are often regarded as smaller clean-up issues by Fortune 500 taxpayers.

Interest netting does not only apply to Fortune 500 companies, however. Even smaller taxpayers who have under and overpayments to the IRS can benefit. There are quite a few firms that help file these refund claims and many of them do so on a contingency fee basis.

The Wells Fargo Case

This “same taxpayer” rule was addressed last year in Wells Fargo v. United States, No. 20155059 (Fed. Cir. 2016). In that case, the court addressed the “same taxpayer” rule in the context of companies that had undergone mergers. The court viewed this as a timing issue, asking whether the new and old companies were the “same corporation” at the time the overpayments and underpayments were made.
This brings us to the Ford Motor Co. case.

The Ford Motor Co. Case

The Ford Motor Co. case involved a parent and consolidated entities plus a corporation that qualified as a IC-DISC (technically, it was an entity qualified under the prior IC-DISC laws). The IC-DISC basically allows the parent entity to qualify for lower dividend tax rates for certain exports.
There was no timing issue in this case, as the taxpayer owned the IC-DISC at the same time as the under and overpayments were made to the IRS.

If you have been reading our articles, you may recall that in Summa Holdings v. Commissioner, No. 16-1712 (6th Cir. 2017), the court recently rejected the IRS’s argument that the sham transaction doctrine applied to an IC-DISC. The court reasoned that the sham transaction doctrine could not be used to ignore the IC-DISC’s existence as a separate legal entity for Federal tax purposes.

In this case, Ford argued that the IC-DISC’s existence as a separate legal entity for Federal tax purposes should be disregarded. It essentially argued that its IC-DISC was a sham transaction for purposes of the “same corporation” rule for interest netting. Consistent with Summa Holdings, without citing the case, the court refused to disregard the IC-DISC’s existence as a separate legal entity.

The court does not address a situation where the IRS has determined that the sham transaction doctrine applies to an entity. In those cases, it would seem that the “same corporation” rule would be satisfied for purposes of interest netting.

Watch Our Free On-Demand Webinar

In 40 minutes, we'll teach you how to survive an IRS audit.

We'll explain how the IRS conducts audits and how to manage and close the audit.