The need for global interest netting.

On September 4, 1996, Tax Executives Institute testified at a public hearing sponsored by the Internal Revenue Service on the issues raised by Notice 96-18, relating to comprehensive, or global, interest netting The Institute's testimony was presented by Robert L. Ashby, chair of the Institute's IRS Administrative Affairs Committee, and highlights the position set forth in TEI's June 28, 1996, written comments on Notice 96-18. (The Institute's comments were reprinted in the July-August 1996 issue of The Tax Executive.) Mr. Ashby's prepared statement is reprinted below.

Good morning. I am Robert Ashby, Vice President of Taxation for Northern Telecom in Nashville. I am also the current chair of the IRS Administrative Affairs Committee of Tax Executives Institute. On behalf of the Institute, I am pleased to offer testimony on Notice 96-18. The Institute submitted written comments in June and rather than restate those remarks I would like to focus on the Institute's consistent position since 1986. Comprehensive netting of interest on over- and underpayments represents sound tax policy and is needed -- now, not later.

"The underlying objective of the (interest provisions) is to determine, in a given situation, whose money it is and for how long the other party had use of it. "That statement, a slight paraphrase of Revenue Procedure 60-17, has been a cornerstone of IRS policy on the calculation of interest since 1960. TEI believes that statement should be reaffirmed and built upon in developing the comprehensive netting procedures that Congress has instructed the IRS, on three separate occasions, to implement. Whenever there is mutual indebtedness between the taxpayer and the government -- whenever a taxpayer owes a liability to the government and the government contemporaneously owes a refund to the taxpayer -- the amount of interest for the period of mutual indebtedness should net to zero. As reflected in the statement from Revenue Procedure 60-17, an interest charge represents compensation for the use of money -- nothing more; nothing less. It is not a penalty for underpayment of tax. It is not -- when properly viewed -- a revenue device.

Ten long years have elapsed since Congress created the interest-rate differential on tax assessments and refunds and simultaneously directed the IRS to implement "the most comprehensive netting procedures that are consistent with sound administrative practice." If a corporate tax executive or information system specialist, over a ten-year period, kept telling a CFO that "everyone agrees on who owes who what for which prescribed period of time, but the company's computer software or hardware is old or has bugs and that prevents the development of interest calculations which treats every situation alike" -- well, frankly, that person or persons would no longer be employed. At the risk of sounding melodramatic, I suggest that the IRS's failure to implement interest netting procedures, notwithstanding several congressional directives, has contributed to an atmosphere where politicians and pundits recommend that the tax system be pulled out by its roots and that the IRS be abolished. TEI laments this "IRS bashing" but sincerely believes that the fundamental unfairness of the Code's interest provisions -- and how they are interpreted -- cannot help but encourage attacks on the IRS.

In fairness, we acknowledge that current IRS procedures permit over-payment and underpayment years to be offset in the calculation of interest where multiple tax years are closed out together. Anecdotal reports have surfaced, however, suggesting that well-informed agents, as well as appeals officers, have floated settlement proposals which "permit" the offsetting of overpayment and underpayment years in exchange for concessions on underlying tax disputes. At an absolute minimum, the IRS should immediately instruct the field that its policy with respect to offsetting has not changed, notwithstanding the IRS's dubious victory in the Northern States Power decision. Taxpayers should not be compelled to call an agent or appellate officer's bluff concerning offsets in order to settle a case.

The proper scope of a comprehensive netting scheme, however, can and should be much broader than mere offsetting. We agree with others that any time an interest calculation must be performed, global netting should be employed, even if subsequent events, such as a loss carryback, loss carryback adjustment, amended returns, and audit adjustments may alter those computations. The numerous written comments on Notice 96-18 identified the issues and circumstances that must be addressed by the IRS. The Commissioner's Advisory Group has also addressed the interest-netting issue and proposed an interest equalization computation to achieve the same mathematical result as the more cumbersome process of offsetting actual tax liabilities and refunds. Consequently, we're not sure what more information or examples can be supplied to alleviate the administrative concerns or resource-allocation challenges that have so far inhibited action on this matter.

For the vast majority of taxpayers, individuals and small corporations mostly, the IRS's current system for calculation of interest will work because the vast majority of tax-payers will not have concurrent over-payments and underpayments in their tax accounts. To the contrary, TEI members are employed by companies that are subject to multi-year CEP audits. Those same companies often file amended returns or carry-back claims and, on occasion, receive adjustments from the IRS. In addition, many IRS adjustments rollover or reverse in subsequent tax years and different audit cycles. Because of the complex factual situations presented CEP cases,when tax liabilities of these companies are settled currently theinterest computations are already made "manually" by interest specialists in the District or the Service Center. In our view, the incremental burden posed by global interest netting in these cases will be not materially significant.

Indeed, where the fisc benefits, whether from netting of liabilities, as in the Pettibone case, or from non-netting, as in Northern States Power, the government seemingly has no trouble finding adequate resources to do the job. Nonetheless, in order to reduce the initial administrative burden on the IRS we believe it would reasonable for the government to place responsibility on the taxpayer to make a claim for netting relief and provide reasonable documentation and computations to support its claim. However, in the long term, say two years, the IRS should either purchase or develop the software necessary to implement global netting.

In conclusion, Tax Executives Institute commends the IRS and Treasury for undertaking the interest netting study and thanks you for your attention. I will entertain any questions the panel may have.