TEI comments on clarification of interest netting rules.

May 24, 2000

On May 24, 2000, TEI's President Charles W. Shewbridge, III sent the following letter to Senator William V. Roth, Jr., Chairman of the Senate Committee on Finance, concerning the need for a technical clarification of the interest netting rules. The Institute's comments were prepared under the aegis of its IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. of Getronics NV.

On behalf of Tax Executives Institute, I am writing to urge a clarification of the interest netting rules, which were adopted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No.105-206, [sections] 3301. A revenue procedure issued last year narrowly construes the new statute and, we believe, undermines Congress's intent to provide equitable relief when there are mutual periods of indebtedness between the government and the taxpayer. A correction is therefore needed to remedy the situation.

Tax Executives Institute is the principal association of corporate tax professionals. Our 5,000 members represent the largest 2,800 companies in the United States, Canada, and Europe. The Institute has closely followed the interest netting issue for more than a decade.

Interest netting issues arise because of the difference in the rates of interest charged on over- and underpayments of tax. For the past 13 years, the statutory rate of interest on underpayments has exceeded the rate of interest on overpayments by as much as 4.5 percentage points. The differential is especially egregious when there are cross-payments due -- which may net to zero (or even result in the taxpayer's being a net creditor of the government) -- and yet those payments create an interest charge to the taxpayer.

Congress addressed this inequity in the IRS Restructuring Act by revising the interest calculation for periods in which a taxpayer has both an overpayment and an underpayment. Section 6621(d) of the Internal Revenue Code now provides that "[t]o 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 enactment of section 662 l(d) signalled Congress's desire to return fairness and equity to the Code's rules on charging for the use of funds. Regrettably, the Treasury Department's administrative actions do not further congressional intent. Last year, the Treasury Department and IRS issued Revenue Procedure 99-19, 1999-14 I.R.B. 10 (March 16, 1999), which interprets the new statute quite narrowly. Specifically, the procedure provides that the interest netting is not available in respect of any period during which interest was not "allowable" or "payable" by law; an example of this disallowance is the 45-day interest-free period the government has after a return is filed in which to issue a refund of taxes paid.

In TEI's view, the IRS's interpretation runs afoul of congressional intent in enacting section 6621(d). Congress has recognized that charging a taxpayer interest for a period of underpayment that runs concurrently with a non-interest bearing overpayment is fundamentally unfair. On a net basis, the government is not harmed during that period, and no net interest should be due. Moreover, from an administrative viewpoint, the procedure complicates an already complex calculation. The calculation should clearly take into account all periods of mutual indebtedness, even those periods considered interest-free under current law.

The Taxpayer Bill of Rights 2000 -- recently passed unanimously by the House of Representatives -- includes a provision that prospectively addresses the interest netting issue in respect of individuals. See H.R. 4163, [sections] 106. TEI urges the Committee to expand the provision to include business taxpayers. We also urge that the provision be effective as of the date of enactment of the IRS Restructuring Act.

If you have any questions, please do not hesitate to contact me, at [phone], or Timothy J. McCormally of the Institute's professional staff, at [phone].