TAX INTEREST
Bank of America Corporation v. United States of America
Date: May 28, 2024
Issue: Whether Bank of America was entitled to net the interest on Merrill Lynch’s tax liabilities after the two companies merged.
Case Summary: The American Bankers Association filed a coalition amicus brief urging the Fourth Circuit to reverse a North Carolina federal court’s ruling that BofA was not entitled to net the interest on the tax liabilities of Merrill Lynch after the two companies merged.
Internal Revenue Code (IRC) Section 6621(d) allows taxpayers’ overpayments and underpayments to cancel each other out without incurring interest, known as interest netting. From 1987 to 2009, seven banks, including Merrill Lynch, merged into BofA. Each bank had outstanding overpayments and underpayments spanning 23 years. BofA filed three administrative claims with the IRS seeking refunds. However, the IRS rejected two of the claims and did not act on the third. In 2017, BofA sued the IRS alleging it was owed $163 million. In 2023, the district court concluded because BofA and Merrill were different corporations and thus different taxpayers when the underpayment and overpayments were made, BofA was not entitled to interest netting in the two test cases. BofA appealed the district court’s decision.
ABA filed its amicus brief supporting BofA. First, ABA argued the district court’s interpretation rewrites Section 6621(d) and does not reflect other IRC provisions. By disregarding the plain language of section 6621(d), the district court carved out an arbitrary exception to interest netting absent from the text. The district court held that the taxpayer with the overpayment and the taxpayer with the underpayment must be “the same taxpayer” at the time the payments are “made.” However, ABA pointed out the word “made” does not appear in Section 6621(d). Moreover, Section 6621(d) contains no temporal requirements. In ABA’s view, the district court re-wrote the statute in a manner imposing new and atextual limits on the applicability of interest netting, creating an exception to the relief provided by the provision.
ABA also noted Section 6621(d) should be interpreted consistently with other provisions of the IRC. The district court’s interpretation of Section 6621(d) strays from IRC Section 6402(a), which declares the IRS has the authority to credit any “overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to [certain limitations], refund any balance to such person.” ABA noted that merged entities are treated as the same “person” under Section 6402(a). Additionally, the district court’s interpretation of Section 6621(d) strays from Section 368(a), which recognizes a post-merger entity succeeds to all pre-merger assets and liabilities. ABA also stressed Congress has imposed temporal limits throughout the IRC and knows how to impose such limitations when it wants to. It did not do so in Section 6621(d).
Second, ABA argued the district court’s approach undermines Section 6621(d)’s purpose, which conferred broad interest-netting authority to address a fundamental inequity in the IRC. Congress enacted Section 6621(d) because it recognized differential interest rates could have inequitable consequences in specific circumstances. Because a corporate taxpayer pays interest at a “higher underpayment rate” and receives interest at a “lower overpayment rate,” the taxpayer is unfairly “assessed a net interest charge, even if the amount of the overpayment and underpayment are the same.” In this scenario, the taxpayer is charged interest the taxpayer does not owe. ABA highlighted the court should reject any interpretation of Section 6621(d) promoting the very unfairness the statute was designed to address.
Third, ABA argued the district court’s approach ignores the realities of tax compliance. At the time of a merger, the merging entities are unlikely to be aware of any potential over-and underpayment for all pre-merger tax years. Once tax liability is finally decided, the post-merger entity handles paying for any underpayment or receiving an overpayment refund. To deny interest netting to the post-merger entity artificially separates tax liability from interest.
Finally, ABA argued the fundamental unfairness of the district court’s interpretation would harm many businesses. Corporations frequently undergo mergers, acquisitions, and other transactions that change their structure. Given the frequency of mergers, adopting the government’s approach could deny interest netting to the intended beneficiaries of Section 6621(d) in numerous cases. ABA claimed such a result reintroduces the very inequity Congress sought to address.
Bottom Line: The United States’ reply brief is due July 29, 2024.
Documents: Brief
