Practice & Procedure
The Court of Federal Claims held that, for purposes of interest netting under Sec. 6621(d), a taxpayer was the same taxpayer if it had the same identification number in the underpayment and overpayment years. Therefore, a corporation that had an underpayment before it became part of a consolidated group could net the interest on the underpayment against interest on an overpayment the corporation made in a year after it became part of the group.
Background
Magma Power Co. is a Nevada corporation with its principal place of business in Iowa. In 1995, Magma was acquired by CalEnergy Co. Inc. (CalEnergy). In all relevant respects Magma Power was the same company both before and after it became affiliated with CalEnergy. It has conducted the same operations, maintained the same place of business, and kept the same name. On the tax return immediately preceding the acquisition by CalEnergy, for the tax year ending December 31, 1993, the IRS assessed Magma Power a deficiency of $9,953,525. The company satisfied the delinquency and paid an additional $9,235,206 in interest in 2000 and 2002.
Since being acquired by CalEnergy, Magma Power has been included on the parent company’s consolidated tax returns along with several other subsidiaries. Magma Power continues to pay taxes other than income tax independently. Throughout all relevant periods, Magma Power retained its separate and distinct employer identification number (EIN), used by the IRS as a means of specifically identifying the corporate taxpayers within the consolidated group. For the tax years 1995–1998, the IRS determined that the consolidated group was entitled to refunds resulting from tax overpayments. Accordingly, between August 2004 and October 2005, the IRS refunded the overpaid amount plus interest to the agent of the consolidated group, MidAmerican, which was CalEnergy’s successor. The total interest paid was almost $5.9 million.
Magma Power contended that a substantial portion of the overpayments was generated by an IRS audit and subsequent tax adjustment and was directly attributable to the company. Magma Power also established that overlapping periods of interest extended from the due date of the returns resulting in the consolidated overpayments through the date on which the company satisfied its underpayment liability. Accordingly, Magma Power sought relief under the interest-netting provision in Sec. 6621(d), claiming that it was entitled to a net interest rate of zero on its 1993 tax liability to the extent its 1993 underpayment was equivalent to its share of the consolidated group’s overpayments in subsequent tax years. Specifically, Magma Power sought $2,190,234, representing the company’s payment of interest on its tax deficiency as well as compensation for additional allowable overpayment interest in the same amount.
On behalf of Magma Power, Mid-American pursued a claim for refund and request for abatement on May 31, 2007. On June 25, 2007, the IRS disallowed the plaintiffs’ claim, stating that “[s]ection 6621(d) does not allow for the netting of interest between an overpayment of a consolidated group’s income tax for one taxable year and an underpayment of a member’s income tax for a prior taxable year because the consolidated group and the member are not ‘the same taxpayer’ for purposes of both the overpayment and the underpayment.” MidAmerican filed an appeal with the IRS, which the IRS denied. MidAmerican and Magma Power subsequently filed a refund suit in the Court of Federal Claims.
Court of Federal Claims Decision
The Court of Federal Claims held that “same taxpayer” status applied to underpayments and overpayments attributable to a corporate entity with the same EIN, irrespective of intervening merger activity. Therefore, Magma Power was the same taxpayer before and after it became part of the MidAmerican consolidated group and was eligible for interest netting.
The IRS argued that the plain meaning of the statute required a complete identity between the entities reflected on the tax returns in question, regardless of which specific taxpayers are responsible for underpayments and overpayments. According to the IRS, Magma Power’s association with the consolidated group caused the company to lose its separate identity.
The court found that consolidated group membership did not factor directly into the determination of whether the taxpayer was the same taxpayer. Under the consolidated rules, the separate corporations were the taxpayers, and the consolidated group was only a tax-computing unit, not a taxable unit. Payments made by the consolidated group were not attributable to the parent company of the group but were payments of the member companies. In addition, the tax liability of the consolidated group is not treated as belonging to the parent company, but allocated either per an election made by the parent or by default under Sec. 1552(a).
The court, looking at the way the IRS identifies a taxpayer when collecting revenue, determined that the term “same taxpayer” meant the taxpayer with the same identification number (in the case of a corporation, an EIN). Thus, in determining whether interest netting is appropriate, the court considered only the individual member of the group, as identified by EIN, which is responsible for equivalent amounts of underpayments and overpayments in separate tax years.
The Court of Federal Claims had addressed interest netting in an earlier case, Energy East Corp. , 92 Fed. Cl. 29 (2010), aff’d, 645 F.3d 1358 (Fed. Cir. 2011), and the IRS had relied heavily on this case for support of its same taxpayer argument. However, the court concluded that the IRS erred in relying on this case because it was not truly a same taxpayer case. Instead, in Energy East , the taxpayers had been entirely unrelated during the period when the underpayments and overpayments in question occurred and only had merged afterwards; therefore, the taxpayer was disputing the point in time at which the party requesting a refund must be the same taxpayer to be eligible for interest netting. Because of the difference in the facts, the court found that the opinion in Energy East was of little use to either party.
Although it had not been necessary to determine whether the taxpayer was the same taxpayer in Energy East , the court did a plain-meaning analysis of the statute and found, as the IRS argued in the present case, that a taxpayer is the same taxpayer only if it is identical in both the underpayment and overpayment years. Because on appeal the Federal Circuit had not rejected or adopted this aspect of the trial court’s opinion in Energy East , the court in the present case did not feel it was bound by the Energy East trial court’s analysis and declined to follow it. The court stated that the definition from the Energy East opinion was artificially inflexible and would in practice improperly exclude many large companies from qualifying for interest netting.
Reflections
The Court of Federal Claims noted that in two legal opinions issued by the IRS Office of Chief Counsel involving facts very similar to those in Magma Power’s case, the IRS had taken the position espoused by the company. The court further explained that this position was consistent with precedent in bankruptcy cases involving a member of a consolidated group. In that context, a member in bankruptcy has been held to be entitled to a refund resulting from that member’s overpayment.
Since the IRS is normally insistent that “[t]he key for identifying a single taxpayer is the . . . TIN [taxpayer identification number]” (Field Service Advice 199924017), it would seem difficult (not to say inconsistent) for it to plausibly argue that a taxpayer with the same EIN is not the “same taxpayer” or that the EIN is irrelevant for these purposes. The court in this case found that the IRS’s focus on Magma Power’s association with the consolidated group “obfuscates the central issue of whether the same taxpayer” is responsible for the interest accrued on the underpayments and due on the overpayments.
Magma Power Co. , No. 09-419T (Fed. Cl. 10/28/11)
