Eleventh-hour release of year-end interest netting guidance.

Just in time for the holiday season, the Internal Revenue Service on November 10, 1999, released Rev. Proc. 99-43, which modifies and supersedes the earlier guidance(1) on interest netting for interest accruing for periods beginning prior to the effective date of interest netting legislation.(2) The new guidance provides that taxpayers with overlapping periods of overpayment and underpayment that have at least one year open after December 31, 1999, do not have to file claims for interest netting by that date. The original guidance would have required most taxpayers to file by that date, creating a burden for both taxpayers and the IRS. The new guidance clarifies what actions taxpayers should take before December 31, 1999, in order to preserve their rights to interest netting on open years and to maximize the benefit afforded by the interest netting relief legislation passed by Congress in 1998.(3)

When Congress passed global interest netting legislation, it established a net interest rate of zero on equivalent amounts of overpayment and underpayment that exist for any tax and any period for interest accruing on or after october 1, 1998. It provided limited relief for taxpayers with interest accruing before this date. Many practitioners felt that the, IRS's first guidance implementing this legislation, Rev Proc. 99-19, was ambiguous in several areas and therefore limited the relief available to taxpayers. Rev. Proc. 99-43 makes several minor modifications and clarifications.(4)

This article discusses the modified guidance, including what steps taxpayers need to take before the end of 1999 to preserve their rights to interest netting for interest accruing in pre-enactment periods, as well as certain actions which may need to be taken after such dates.

A Break for Taxpayers

The new revenue procedure provides that a taxpayer with overlapping overpayments and underpayments must file a claim only if the applicable statute of limitations for both the overpayment and underpayment will be closed on or before December 31, 1999. (Revenue Procedures 99-19 and 99-43 require that both statutes of limitation had to be open on July 22, 1998.) If one of the two statutes of limitation periods (either the overpayment or underpayment) is still open on December 31, 1999, the taxpayer does not have to file until the date on which the last applicable period of limitation closes. This is a positive development for many large corporate taxpayers, granting them additional time to qualify for interest netting relief.

Remaining Issues/Unanswered Questions

The new guidance, consistent with Rev. Proc. 99-19,(5) does not permit interest netting involving interest-free periods. Also, with regard to overpayments and underpayments that occurred in periods before October 1, 1998, both statutes of limitation must have been open on July 22, 1998. Unfortunately, the new guidance fails to clarify "who is the taxpayer" for netting purposes. The statute states that interest netting will apply to all types of tax and all years of the "same taxpayer." So far, the IRS has generally taken the position that this passage in the legislation limits interest netting to taxpayers with the same taxpayer identification number. Exceptions to the general rule have been made on a case-by-case basis. Many practitioners believe, however, that there are many instances involving affiliated entities when interest netting should be allowed as a matter of course, such as parent and subsidiary corporations and wholly-owned foreign sales corporations. Sources within the IRS National Office indicate that guidance with respect to this issue is not anticipated in the near-term.

Filing a Netting Claim

In general, the new revenue procedure states that taxpayers must file a netting claim by December 31, 1999, only if both applicable periods of limitation will be closed on or before that date. If at least one of those periods will remain open past that date, taxpayers need not take any action by December 31, 1999. Instead, taxpayers are only required to file a claim on or before the date the last open period is scheduled to close.(6) If the statutes of limitations for both the overpayment and underpayment year used in an interest netting computation have expired or will expire by December 31, 1999, the taxpayer must make the appropriate filing before year-end.

The new revenue procedure requires taxpayers generally to file a Form 843, Claim for Refund and Request for Abatement. The new revenue procedure generally follows the requirements laid out in Rev. Proc. 99-19, with three minor modifications and a clarification:

* The taxpayer must send the interest netting request to a specific address: Internal Revenue Service, Net Rate Interest Netting Claim, P.O. Box 9987, Ogden, Utah 88409;

* The taxpayer must label the submission "Request for Net Interest Rate of Zero Under Rev. Proc. 99-43" at the top of Form 843;

* The interest netting should generally be made using a computation that reduces underpayment interest, except as provided by the revenue procedure; and

* If the full amount of the overpayment or underpayment is not used in a netting computation with a given year, the remaining portion may be used in a netting computation with another year.

Otherwise, the claim submitted by the taxpayer must:

* Identify the taxable periods for which the taxpayer overpaid and underpaid its liability;

* Explain when the taxpayer paid the tax if the underpayment is no longer outstanding;

* Explain when the taxpayer received a refund of tax if the overpayment is no longer outstanding;

* Identify and establish overlapping periods, including appropriate documents (such as copies of examination reports, notices, or prior interest computations provided by the IRS);

* State that the relevant periods have been used once in a request to obtain the net interest rate of zero (though, as noted previously, if the full amount of the overpayment or underpayment is not used in a netting calculation, the remaining portion may be used in another netting calculation); and

* To the extent possible, provide a computation of the amount of interest to be credited, refunded or abated in order to reach a rate of zero for the period of overlap. The computation generally should be made by applying section 6621(d) of the Internal Revenue Code to reduce the taxpayer's underpayment interest payable to the IRS. (If Form 843 is filed after the end of the year and only the period of limitation for claiming additional overpayment interest is open on that filing date, the computation should be made by applying section 6621(d) to increase the taxpayer's overpayment interest payable by the IRS.)

Returns Under Audit, In Appeals, or In Federal Court

The revenue procedure establishes a special process for taxpayers with potential netting claims related to returns that are under examination, in Appeals, or in a case before a federal court that requires a computation of interest by any function of the ERS. Taxpayers in these situations need not file a Form 843, but rather, must furnish a letter or written statement to the appropriate IRS function office requesting interest netting under section 6621(d). The letter should provide relevant information, including the type of tax and type of return that affects the interest computation and the affected periods.

Taxpayers should obtain a signed and dated receipt from the applicable IRS office acknowledging the receipt of the letter or written statement. Taxpayers entering into agreements such as partial agreements on the examination level, closing agreements on specific issues, etc., should consider including in such agreements a provision providing for the most comprehensive netting possible for years covered by such agreements.

Err On the Side of Caution

Taxpayers who are relying on the statute of limitations for statutory interest as defined in section 6611 should keep in mind that the filing of a claim does not toll the running of the statute.(7)

   Example: Y is a calendar-year corporation. The IRS examined Y's Form 1120,
   Corporation Income Tax Return, for the 1990 and 1992 taxable years. For the
   1990 taxable year, the IRS determined that Y was entitled to a refund of
   $40,000. The IRS-initiated refund was made on November 21, 1994, with
   interest computed from March 15, 1991, to September 28, 1994. For the 1992
   taxable year, the IRS determined that Y underpaid its income tax by
   $60,000. The IRS sent Y a notice and demand for payment dated October 3,
   1996, which Y paid on October 12, 1996, with interest computed from March
   15, 1993, to October 3, 1996. On July 22, 1998, both the 6-year period of
   limitation for claiming additional overpayment interest on Y's 1994 refund
   and the 2-year period of limitation for claiming a refund of underpayment
   interest paid in 1996 were open. On December 31, 1999, the 6-year period of
   limitation for claiming additional overpayment interest will be open, but
   the 2-year period of limitation for claiming a refund of underpayment
   interest paid in 1996 will not be open. After December 31, 1999, but on or
   before the close of the 6-year period of limitation for claiming additional
   overpayment interest on Y's 1994 refund, Y files a Form 843 requesting the
   net interest rate of zero under section 6621(d) for the overlap period from
   March 15, 1993, to September 28, 1994. The IRS will pay additional
   overpayment interest to Y in an amount equal to the difference between the
   underpayment interest paid on $40,000 for the period from March 15, 1993,
   to September 28, 1994, and the overpayment interest computed and paid on
   $40,000 for that period.

In the foregoing example, which is condensed from Examples 3 and 4 in Rev. Proc. 99-43, both the overpayment and underpayment statutes of limitation were open on July 22, 1998, but only the 6-year period for claiming additional overpayment interest is open past December 31, 1999. Assuming the overpayment was allowed on November 21, 1994, the 6-year statute will expire on this refund on November 21, 2000. If the taxpayer has not received its refund based on netting the overpayment against the deficiency year (which no longer has an open statute of limitation) by that date, it must file suit by November 21, 2000, to protect its right to the refund. Merely filing a claim by November 21, 2000, does not toll the running of the statute of limitations.

The question has also been raised by many taxpayers regarding the need to file a statement on or before December 31, 1999, for years currently under audit, in Appeals, or in litigation. Although there may be no need to file based on a literal reading of the revenue procedure, business prudence would, in many cases, require that a filing be made. For interest accruing prior to October 1, 1998, interest netting is not a statutory mandate. A taxpayer must request that netting be applied to interest accruing prior to that date and reasonably identify and establish periods of tax overpayments and underpayments.(8) This statutory requirement is unchanged by Rev. Proc. 99-43; the deadline by which such request must be made has merely been deferred for some taxpayers.

Taxpayers with cases pending in one or more jurisdictions should carefully consider filing a letter or statement with the appropriate jurisdiction prior to December 31, 1999, requesting the netting application for interest accruing in periods beginning prior to the enactment of the interest netting legislation. There is no downside to filing such a statement or letter. If a statement is filed, the taxpayer should (1) specifically request the net interest rate of zero under section 6621(d), (2) indicate the type of tax and years under the applicable jurisdiction, and (3) request that upon resolution of the tax issues in this jurisdiction that interest netting be applied to the years at issue and any other tax years/periods of the taxpayer which were open on or after July 22, 1998, where there are overlapping underpayments and overpayments.

The letter (or statement) should be filed with the appropriate function and a request be made to associate such letter with the administrative file where it will be readily accessible to the technicians computing interest when the case closes. For example, if a case is pending before Appeals, the Appeals officer would be the logical recipient of the letter. If a case is currently before the Tax Court, the District Counsel attorney is the appropriate recipient. A signed and dated receipt should be obtained for each submission. This action should maximize the taxpayer's ability to net these amounts whenever the tax issues are resolved (which may be several years from now) and minimize the possibility that interest netting will not be available (or might be overlooked) upon resolution of the tax issues. Once the tax issues are resolved, the taxpayer should bring to the attention of the appropriate function the type(s) of taxes and periods where there are overlapping underpayments and overpayments that should be used in the interest computations.

Not only is the taxpayer required to initiate interest netting with respect to "pre-enactment periods," but it is not really practical to assume on a prospective basis that the IRS will be able to review the taxpayer's various accounts and determine which accounts should be netted to the greatest benefit of the taxpayer. Stated differently, given current IRS resources, taxpayers should assume the responsibility of identifying netting opportunities for interest accruing after October 1, 1998.

Conclusion

Absent Rev. Proc. 99-43, every taxpayer in the United States could have reasonably assumed that a filing by December 31, 1999, on all years "open" under any applicable statute of limitations was required to protect the taxpayer's right to interest netting for interest accruing in periods beginning prior to October 1, 1999. This would include taxpayers (including individuals) who had never had any prior history with the IRS, and, based on the types of items in the returns, could reasonably (but not absolutely) anticipate no future contact with the IRS other than timely return filing. The amount of paper that would have been filed between now and year-end would have been overwhelming, and, in numerous cases, entirely meaningless. In light of Rev. Proc. 99-43, taxpayers should carefully review their own situations where interest netting for interest accruing in pre-enactment periods might exist. If the taxpayer has any concern that it will lose an interest netting benefit for such periods, a letter or claim as described in Rev. Proc. 99-43 should be filed by December 31, 1999.

(1) See "Interest Netting Encounters Less Than 'Global' Enthusiasm from the IRS and Treasury," 51 Tax Executive 248 (May-June 1999).

(2) The provision is effective for calendar quarters beginning after July 22, 1998 (the date of enactment of the legislation) -- i.e., interest accruing after September 30, 1998.

(3) Internal Revenue Service Restructuring and Reform Act of 1998, Public Law No. 105-206. The legislation added a new section to the Internal Revenue Code, section 6621(d), which allows interest netting relief.

(4) The modified guidance does not apply to interest netting for periods beginning after July 22, 1998 (i.e., interest accruing on or after October 1, 1998). The IRS intends to issue further guidance for those periods.

(5) For a detailed discussion of the procedure, see "Interest Netting Encounters Less Than 'Global' Enthusiasm from the IRS and Treasury," supra note 1.

(6) This issue is discussed more fully in the text that follows. The distinction between statutes of limitation on deficiency interest and statutory interest could prove a trap for the unwary.

(7) See Rev. Rul. 56-506, 1956-2 C.B. 959, and Rev. Rul. 57-242, 1957-1 C.B. 452.

(8) Public Law No. 105-206, [sections] 3301(c)(2) (as amended by Public Law No. 105-277, [sections] 4002(d)).

KATHY L. EVERIDGE is a partner at Ernst & Young LLP, and is the firm's National Director, IRS Accounts and Interest Services. She received her B.S. degree in accounting and her M.S. degree in taxation from the University of North Texas. Ms. Everidge is a member of the AICPA and the Texas Society of CPAs. CRAIG C. LEBAMOFF of Ernst & Young's National Tax Office in Washington, D.C., assisted in the preparation of this article.