[00:00:00] Speaker 00: Next case is Wells Fargo versus the United States, 2015, 5059. [00:00:08] Speaker 00: Ms. [00:00:08] Speaker 00: Del Sol. [00:00:12] Speaker 02: Good morning. [00:00:13] Speaker 02: Can't please the court. [00:00:15] Speaker 02: This appeal requires the court to decide whether interest netting was permissible in two test scenarios involving merged entities. [00:00:22] Speaker 02: Section 6621D of the Internal Revenue Code, which is the statute [00:00:25] Speaker 02: that authorizes the netting at issue here. [00:00:27] Speaker 04: Before you get into your argument, can you just explain to me, or maybe let me try out and see if I really understand what this netting is. [00:00:37] Speaker 04: The overpayment interest running and the underpayment interest running have to be the same exact time, right? [00:00:44] Speaker 02: Well, they could overlap. [00:00:47] Speaker 04: Right, but you only get it during the overlap. [00:00:49] Speaker 04: So you can't say have an overpayment that ran from January was resolved in March. [00:00:54] Speaker 04: and then have an underpayment that started in May and was resolved in July and net those two against each other. [00:01:00] Speaker 02: That is correct, Your Honor. [00:01:01] Speaker 02: They have to overlap or run simultaneously. [00:01:05] Speaker 02: But I think that one of the important things about the statute in terms of what it changed from prior law is that they don't have to be simultaneously outstanding in the sense that you could have an overpayment that ran from January to March and pay it [00:01:17] Speaker 02: And then subsequently discover that there was also an underpayment that ran from January to December. [00:01:23] Speaker 04: But for purposes of this statute, the period we're looking at is the overlapping period. [00:01:29] Speaker 04: That is correct, Your Honor. [00:01:30] Speaker 02: And what 6621D requires for the netting to be allowed is that the overpayment and the underpayment be made by the same taxpayer. [00:01:39] Speaker 02: And we think the Court of Federal Claims erred in both the test scenarios here because, in fact, we didn't have the same taxpayer making the overpayment and the underpayment. [00:01:48] Speaker 04: That's what I'd like to ask you about because I think that it seems like under Energy East you're probably right because Energy East looked at [00:01:58] Speaker 04: who made the underpayment or the overpayment. [00:02:01] Speaker 04: But isn't the point of this statute about the netting period and who's responsible for the interest during the netting period? [00:02:09] Speaker 04: And in a post-merger world, regardless of who made the underpayment or who made the overpayment originally, the new entity is gonna be responsible for paying the underpayment interest and are gonna be allowed to get the overpayment interest back, right? [00:02:26] Speaker 04: So why shouldn't they be allowed to net? [00:02:28] Speaker 02: Well, I think this is an important point that the Court of Federal Claims ever looked at. [00:02:31] Speaker 02: This court made clear in Energy Ease, which is the binding precedent. [00:02:34] Speaker 02: And there the court said, not only do you have to look at the particular point in time when the overpayment and the underpayment were made and compare the taxpayer at that point, but this court rejected the argument that it was a follow the liability kind of statute. [00:02:48] Speaker 02: So whoever inherited the liability and the right to the overpayment was entitled to netting. [00:02:53] Speaker 02: And the court said, no, you have to look at the particular time when that occurred. [00:02:57] Speaker 02: And I think there's a reason for that. [00:02:59] Speaker 04: I understand that, but this is what was a little fuzzy to me about Energy East, whether it was relying on that alone or whether it was also relying on the fact that in Energy East there was never a merger, that they were just consolidated but still retain their separate corporate entities. [00:03:16] Speaker 02: I think that was not the focus of the analysis in Energy East because that same argument was made. [00:03:22] Speaker 04: In Energy East, the taxpayer argued that the consolidation made them the same taxpayer, and the court said we don't have to reach that because we look at... But that's really what was the principal point of your brief in that case, that consolidated taxpayers aren't the same taxpayers. [00:03:37] Speaker 02: But whether they, and our position would be that they're not, but the court didn't reach that because it said you look at the time the overpayment and underpayment was made, not whether the same taxpayer ultimately ends up being responsible for... Do you see a difference between the consolidated taxpayers and energy ease, setting aside the rest of it and the merged taxpayer? [00:03:59] Speaker 04: If we were just looking at an overlapping period after the merger, [00:04:03] Speaker 04: they would be the same taxpayer. [00:04:05] Speaker 02: Well, I'm not sure that's correct, Your Honor, because in this case, in this situation, what you have to compare in situation one is the entities before a merger. [00:04:13] Speaker 04: No, no, I don't mean that. [00:04:14] Speaker 04: I'm sorry. [00:04:14] Speaker 04: I'm not clear. [00:04:15] Speaker 04: There's so many hypotheticals in this area here. [00:04:18] Speaker 04: But what I'm saying is, if you have this big, long, complicated merger, and after the merger happens, that company makes an underpayment or an overpayment, they're qualified for netting. [00:04:32] Speaker 02: Well, if there's a merger, [00:04:33] Speaker 02: And after the merger, both the overpayment and the underpayment were made by the surviving corporation after the merger. [00:04:39] Speaker 02: That would be the same taxpayer, but that's not the case. [00:04:42] Speaker 04: A hypothetical then about energy ease though. [00:04:45] Speaker 04: If after the consolidation, one company makes an overpayment, another consolidated company but still a separate corporate entity makes an underpayment, would the government's position be that even though they're consolidated, they're still separate entities so you don't net? [00:05:00] Speaker 04: or would you allow netting because they're now a consolidated company and the underpayment and overpayment were made afterwards? [00:05:06] Speaker 02: Well, it's not this case, Your Honor, but I think that our position would be depending on whether you could trace the overpayment and the underpayment to the entity with the same taxpayer identification number. [00:05:16] Speaker 02: And I think that's basically what the Magma Corps is looking at. [00:05:18] Speaker 04: I'm just trying to ask whether you would treat consolidated companies differently than merged companies. [00:05:23] Speaker 02: Well, I think there is. [00:05:26] Speaker 02: And with the merger, everything is one company. [00:05:29] Speaker 02: If everything was post-merger, then it would all be one company. [00:05:32] Speaker 02: But I think if it's a consolidated company, first of all, there are different elections that could be made by the company to either be to file consolidated returns or not, and they could change that from year to year. [00:05:43] Speaker 02: And so I think there would be more... [00:05:47] Speaker 02: position has been in the context of what the MAIMA court held is that there would have to be some sort of tracing element. [00:05:53] Speaker 02: So I think there is a difference if everything happens post-merger. [00:05:56] Speaker 02: But I think what we're dealing with here is the situation where either everything's pre-merger, which I think is just like energy. [00:06:02] Speaker 02: This case is indistinguishable from energy ease. [00:06:05] Speaker 02: And then if you look at what happens in our situation three in this case, you're comparing a pre-merger entity with a post-merger entity. [00:06:12] Speaker 02: And I think there's really no basis [00:06:14] Speaker 02: for holding those of the same taxpayer. [00:06:16] Speaker 02: And I think the reason Congress might have chosen the same taxpayer language, which does restrict who can net and doesn't sort of follow the liability and follow the transfer of assets and liabilities approach, is because there's a long history of Congress not wanting to encourage trafficking in tax benefits as a reason to merge. [00:06:37] Speaker 02: And Section 381 of the Code is an example of that. [00:06:41] Speaker 02: Congress was responding to trafficking that operating losses. [00:06:44] Speaker 02: And Congress was very well aware of how, you know, as the Treasury report demonstrates, we talk about in our reply brief about how they could have worded a statute to follow the liabilities and the assets, and the netting would have followed, but they should not. [00:06:57] Speaker 04: It seems to be a good reason to not allow retroactive netting before the merger. [00:07:03] Speaker 04: But after the merger, that entity, despite what happened before, continues to be on the line for the underpayment and overpayment interest [00:07:13] Speaker 04: and get hit with the penalty until it's resolved. [00:07:16] Speaker 02: Well, but on the other hand, it's a reason why a company might actually go shopping for a merger, because if you have a company with a large underpayment pre-merger that's found out about years later, so years have passed, and lots of interest has accrued, that's a reason for them to go out and shop for a company that they can acquire that has a big overpayment that can offset that interest. [00:07:39] Speaker 02: And that was the same taxpayer language [00:07:42] Speaker 02: prevents that being a motivation for a merger. [00:07:45] Speaker 02: And so I think there's a reason Congress would have chosen to do it that way. [00:07:48] Speaker 02: And so they've specifically chosen the same taxpayer language, which this court said in Energy East means you have to compare the entity at the time of the underpayment and the entity at the time of the overpayment. [00:08:00] Speaker 02: And as I said, I think situation one is indistinguishable from Energy East and I think... Can I ask you about situations two and three? [00:08:07] Speaker 03: So in situation two, you agree that that is the same entity, pre-merger and post-merger entity is the same, but in situation three, you do not. [00:08:16] Speaker 03: I'm having trouble with that. [00:08:18] Speaker 02: Well, I think same can have two meanings. [00:08:20] Speaker 02: It can mean completely identical, or it can mean the same and certain relevant essentials. [00:08:25] Speaker 02: And those are the same and relevant essentials, or key factors being the same, or completely identical, or the two... Completely identical, but in the same chain, or what? [00:08:34] Speaker 02: Exactly the same. [00:08:35] Speaker 02: No, I mean, completely identical would be what the lower port and energy east edge should be the test. [00:08:40] Speaker 02: exactly the same. [00:08:41] Speaker 02: And we haven't argued for that because we don't think corporations are ever exactly the same from year to year, that they change with time, as the magma court pointed out. [00:08:49] Speaker 02: But we think that TIN really is, under the code, the unique identifier of a taxpayer. [00:08:54] Speaker 02: And so we think the fact that between, in situation two, the one that we conceded, that the TIN is the same, which is really the key factor. [00:09:03] Speaker 02: It's the identifier of the taxpayer. [00:09:04] Speaker 02: And we would urge that that is an administrative test. [00:09:07] Speaker 02: Congress has repeatedly urged that [00:09:09] Speaker 02: the IRS adopts the sound administrative practice and we think that whether the TIN is the same [00:09:15] Speaker 02: It was the approach adopted by the Madman's Power Court and it gives an administratively manageable approach that lets you know predictably. [00:09:22] Speaker 03: Is it arbitrary though in that it just really matters on which one is the postman, which one is acquired and which one is the acquirer? [00:09:30] Speaker 02: Well, I think that it gives the taxpayers the freedom to choose how they structure their transaction to some extent, but I think it's really the only way of giving a predictable [00:09:41] Speaker 02: And we have posited in the alternative that another way of looking at it would be at least to let the TIN be one major factor, but also that you might look to whether the businesses were the same. [00:09:54] Speaker 02: But I think either of those analyses, the Court of Federal Claims, didn't reach the right result in this case and hoping that they were the same taxpayer. [00:10:03] Speaker 02: The Court below seemed to conclude that somehow a merger makes the merged entities the same taxpayer. [00:10:10] Speaker 02: just automatically by operation of law. [00:10:13] Speaker 02: And there's really no law that supports that proposition. [00:10:17] Speaker 02: The cases the Court of Federal Claims cited talk about a merger causing one to be drowned in the other or stepping into the shoes of the other. [00:10:26] Speaker 02: And as the First Circuit talked about in the Newark Act case, these are really metaphorical terms. [00:10:30] Speaker 02: And we look at the merger statutes under state law, what actually happens is that assets are transferred from one entity to another. [00:10:39] Speaker 02: and that that's not something that makes entities the same taxpayer. [00:10:42] Speaker 02: And I think if you look at federal tax law, it's really inconsistent with the idea that a merger can make the pre-merger or acquiring corporation the same taxpayer as the acquiring corporation because basically the acquiring corporation continues on and the acquiring corporation ceases to exist. [00:11:01] Speaker 02: Its TIN is terminated. [00:11:03] Speaker 02: It files a short year return for its income prior to the merger and the year of the merger. [00:11:08] Speaker 02: at the end of the merger year, they file one return together, the company that ceases to exist files its final return, its TAN comes to an end. [00:11:18] Speaker 02: And then Section 381 contemplates specifically that in a merger, you're transferring entities from one entity to another. [00:11:27] Speaker 02: And then I guess Metropolitan Edison on which Fargo relied, [00:11:34] Speaker 02: simply doesn't stand for the proposition that a merger makes entities the same taxpayer. [00:11:39] Speaker 02: If it ever did, it's displaced by 381. [00:11:40] Speaker 04: Let me ask you about situation three again. [00:11:42] Speaker 04: I'm sorry, situation three? [00:11:44] Speaker 04: Situation three, because it does seem that it's very close to situation two, and it would have been situation two if in the first union, core states merger, they had just designated core states the acquiring company, right? [00:11:57] Speaker 02: Assuming that the TIN test is the test, Your Honor. [00:11:59] Speaker 02: Right. [00:11:59] Speaker 02: Rather than looking at the bigger business, yes. [00:12:03] Speaker 04: Why should we make that matter, given that one of your reasons for why we need to look at who made the underpayment and overpayment is Congress didn't want to encourage people to acquire companies to offset underpayments. [00:12:18] Speaker 04: That doesn't apply in situation three because the underpayment that First Union is seeking netting for occurred well after the acquisition of core states. [00:12:31] Speaker 04: It's not like situation one where both of them were before the thing. [00:12:36] Speaker 04: So the rationale of purposeful acquisitions doesn't seem to apply to situation three. [00:12:44] Speaker 02: Well, I think, Your Honor, that certainly tax planning can have forward-looking aspect to it. [00:12:51] Speaker 02: And also, I think that just simply there's no basis in the law, as I said, for the idea that a pre-merger entity can be the same taxpayer as a post-merger entity. [00:13:01] Speaker 02: It's contrary to 381, which contemplates the idea that only certain attributes transfer from one to another. [00:13:08] Speaker 02: The concept of there being a particular TIN and an annual system of accounting. [00:13:14] Speaker 02: There's really nothing, it's very inconsistent with the tax law. [00:13:16] Speaker 02: And in particular, the state statutes that allow, some of the state merger statutes allow merging two different types of entities that would be under two different tax regimes. [00:13:26] Speaker 02: And to say, for example, if a limited partnership merged with a corporation, [00:13:30] Speaker 02: or LLC, which would be treated under the partnership tax regime, was merged with the corporation, and then they went forward to the corporation, you would be saying that something was taxed as a partnership with the same taxpayer as something that was taxed as a corporation. [00:13:42] Speaker 00: And I think that creates a whole different realm of play. [00:13:44] Speaker 00: Councilman, you've used most of your rebuttal time, but we'll give you two minutes back. [00:13:47] Speaker 02: Thank you very much, Your Honor. [00:14:00] Speaker 01: Good morning. [00:14:01] Speaker 01: May it please the court. [00:14:02] Speaker 01: I'm Jerry Caffe. [00:14:02] Speaker 01: I'm here representing Wells Fargo. [00:14:05] Speaker 01: The resolution of the issue of the meaning of the term same taxpayer in this case involving a merger is instructed by three separate but very complimentary legal principles. [00:14:16] Speaker 01: First, the legal effect of a merger. [00:14:19] Speaker 01: Second, the operation of 6402 which is the precursor to 6621D and remains in effect and was applied here [00:14:28] Speaker 01: to the very same situations that we're talking about in those contexts. [00:14:32] Speaker 01: And third, the authority and the practice of the IRS, where there is an underpayment and an overpayment situation in a merger, to look only at the successor corporation in collecting that underpayment or refunding that overpayment. [00:14:46] Speaker 01: Indeed, in this case, by its rules, the IRS required Wells Fargo, as it did, to file a claim in its name with respect to these amounts. [00:14:56] Speaker 01: The successor corporation, as the Supreme Court [00:14:58] Speaker 01: another court said the successor steps into the shoes not just for the assets and liabilities but the history let me address before i go to end in depth into any of those the energy east case because it is out there and we have to deal with it we don't disagree with the result on those facts but we have very different facts in a very different legal situation here factually that was a contractual acquisition it was not a merger which operates by operational law [00:15:28] Speaker 01: Three corporations, all three of them, the acquirer and the two subsidiaries that it acquired, all remained in existence. [00:15:34] Speaker 01: Yes, they did elect to file a consolidated return. [00:15:36] Speaker 04: I understand that. [00:15:37] Speaker 04: It's a very good factual distinction. [00:15:39] Speaker 04: But I've read that case several times in preparation. [00:15:43] Speaker 04: And it does not seem to me that the holding in that case rests on that factual finding that the entities in a consolidated merger aren't the same taxpayer. [00:15:52] Speaker 04: It seems to rest on the finding [00:15:55] Speaker 04: that you look to the date of the underpayments and the overpayments to see whether there is same taxpayer. [00:16:00] Speaker 01: The difference here is the legal effect. [00:16:02] Speaker 01: In a merger, what the state laws have said, what the Supreme Court has said, what the IRS says in its regulations under 368, the merger provisions of the code, a merger means by operational law, the assets and liabilities transfer become those of the, including tax underpayments and overpayments, become that of the successor, and the merge company ceases to exist. [00:16:24] Speaker 03: How does that work with situation one, where you look at, at the time of the overpayment and the underpayment, a supreme merger? [00:16:32] Speaker 01: The history also passes. [00:16:34] Speaker 01: The best example, perhaps, that we cited in our brief. [00:16:36] Speaker 04: Is your argument basically that once you have a merger, any entity that's merged into that company is retroactively considered the same company? [00:16:45] Speaker 01: Yes. [00:16:46] Speaker 01: And that is what the court down below said, Judge Firestone said, following the merger of the law, [00:16:52] Speaker 01: treats the acquired as though it had always been part of the surviving entity. [00:16:56] Speaker 01: The IRS has said exactly the same thing in published rulings as well as in its private rulings. [00:17:00] Speaker 01: In the published ruling, 62-60 involving employment taxes, it addressed the issue of what is the effect. [00:17:07] Speaker 01: They used the very term, same taxpayer, in addressing the successor corporation. [00:17:11] Speaker 01: They said there is no predecessor, successor relationship in a statutory merger but one continuing taxpayer. [00:17:18] Speaker 01: That's what we are saying. [00:17:20] Speaker 01: whether you have taxes or whether you have punitive damages, as was the case in Selva Tax, for example, outside of the tax area, the successor is liable for those, even when it is a unique liability. [00:17:33] Speaker 04: Let me ask you this hypothetical. [00:17:34] Speaker 04: If you have two separate entities that had overlapping underpayments and overpayments that were ultimately merged, and these were before the merger, they were completed before the merger, [00:17:50] Speaker 04: by the separate companies and they were acquired by a new company, but the statute of limitations hadn't run on seeking refunds. [00:17:57] Speaker 04: Could you seek a refund based upon netting these two acquired companies that had an overlapping period? [00:18:03] Speaker 01: I think you're positing very close to situation one. [00:18:05] Speaker 04: And my short answer with that... Well, situation one is I understand that the interest is still running. [00:18:11] Speaker 04: My hypothetical is the interest is not running anymore. [00:18:14] Speaker 04: It's been refunded. [00:18:15] Speaker 04: The overpayment has been refunded to one company with interest, the underpayment has been paid, and interest has been paid to the government. [00:18:22] Speaker 04: But because they're overlapping, and because there's a statute of limitations that allows you to seek refunds, this new merged company goes back and looks at the books and says, look, we can net these two companies that were completely separate at the time, but are now, under your legal theory, considered the same company and seek a further refund. [00:18:39] Speaker 01: Let me answer your question two ways. [00:18:41] Speaker 01: First through the back door and then through the front door. [00:18:44] Speaker 01: In that situation, if these were outstanding liabilities under 6402, the IRS would apply interest netting. [00:18:51] Speaker 01: In its discretion, it can do that. [00:18:53] Speaker 01: It does that. [00:18:53] Speaker 01: And there's no question here that that is their practice. [00:18:56] Speaker 04: I'm sorry, I'm not a tax lawyer. [00:18:57] Speaker 04: What do you mean by outstanding liability? [00:18:59] Speaker 01: In other words, if the amount of the underpayment and overpayment had not yet been paid, they were outstanding. [00:19:04] Speaker 04: Well, but that's not my hypothetical. [00:19:05] Speaker 01: But no, my point, though, is 6402 was the predecessor and indeed was cited multiple times in legislative history. [00:19:11] Speaker 01: The Treasury report looks at 6402 and says, [00:19:13] Speaker 01: There is really no difference from a policy matter or from a implementation matter to do this. [00:19:19] Speaker 01: They said it would be exactly the same to enact 6621D as the service was doing under 6402. [00:19:24] Speaker 01: That's the back door. [00:19:26] Speaker 01: The service has already done this and indeed in this case, it stipulated for situations one, two, and three, the government has applied interest netting where the balances were outstanding. [00:19:36] Speaker 01: Now to answer your question in terms of the front door, the history follows. [00:19:41] Speaker 01: In other words, [00:19:42] Speaker 04: One, when one becomes... The short answer is yes. [00:19:44] Speaker 04: You think that a company, if it's going out and acquiring two separate companies, can look back and as long as the statute of limitations hasn't run, can seek a refund based upon interest netting of closed tax years. [00:19:58] Speaker 01: And the IRS itself is so enrolled in very many private situations. [00:20:02] Speaker 01: I would direct the Court's attention to a field service advice just a couple years after enactment, 2002-12-02A. [00:20:08] Speaker 01: They went through, not in a casual way, but in a very detailed way, looking at nine situations. [00:20:13] Speaker 01: Situation five was situation one. [00:20:16] Speaker 01: And they said specifically that the successor corporation, I'm quoting, is entitled to file a claim for interest netting because it is entitled to the merged corporations pre-merger over and under payments. [00:20:26] Speaker 01: And then, in what I will call administrative dicta, it then went further and said, if the acquired corporation were still in existence, i.e. [00:20:33] Speaker 01: the energy situation, after the successor corporation acquired it, [00:20:38] Speaker 01: then the successor corporation would not be entitled to an interest netting. [00:20:45] Speaker 01: In other words, they drew the distinction saying in Energy East, we should win, we agree. [00:20:49] Speaker 01: They said in a merger, it's different. [00:20:51] Speaker 01: And they're relying on all of these authorities that they routinely rely on on a daily basis against hundreds of corporations saying the successor corporation is liable for the taxes. [00:21:02] Speaker 01: And under a 6601E, the interest follows the taxes and must be treated the same. [00:21:07] Speaker 01: for the interest. [00:21:08] Speaker 01: If the IRS is collecting from the successor corporation the underpayments of the merger company, and it requires the successor also to file any claims for refund for any overpayments made by the merger company, it's very difficult to understand how you can draw a distinction. [00:21:23] Speaker 04: Well, that seems to make sense for post-merger netting periods, because you continue to be liable. [00:21:30] Speaker 04: I mean, you are now solely reliable for the interest [00:21:33] Speaker 04: overpayment and will get the allowable interest back. [00:21:38] Speaker 04: But the hypothetical I ask you when it's closed and you're just going back in the books to seek an additional refund seems to run right into what your friend was saying. [00:21:48] Speaker 04: You shouldn't favor policies that allow structured mergers and acquisitions to basically buy tax benefits. [00:21:57] Speaker 01: But what the IRS has said, again, I'm going to refer to the 62 ruling, and there are others. [00:22:01] Speaker 01: We cite them in our brief. [00:22:02] Speaker 01: But the 62 is the closest. [00:22:03] Speaker 01: where they use the same taxpayer in a merger and they say it is a continuation of that taxpayer. [00:22:10] Speaker 01: It is the same taxpayer. [00:22:11] Speaker 01: They're not making any distinction between pre and post merger events. [00:22:16] Speaker 01: Having said that, let me turn my attention, if I may, first to the effect of the statute. [00:22:25] Speaker 01: What the statute did when it was enacted, Congress very carefully and it was a [00:22:30] Speaker 01: remedial provision intended to alleviate the burden that it had created over the course of the prior eight years, establishing and then increasing an interest differential for corporations between overpayments and unpayments. [00:22:42] Speaker 01: And they said, if they're all seeing it at the same time, it shouldn't happen. [00:22:44] Speaker 01: And oh, by the way, we know that you, the service, allow this under 6402. [00:22:48] Speaker 01: We want you to do that here as well. [00:22:51] Speaker 01: The service said, no, we can't. [00:22:52] Speaker 01: We need statutory authority. [00:22:53] Speaker 01: Treasury looked at it, and Treasury said, there's no reason not to. [00:22:58] Speaker 01: We should do this. [00:22:59] Speaker 01: We support the statute and we will follow your directive that you stated to us four times on the legislative history from 84 from 86 through 95 that said each time we ask that you impose and direct and implement the broadest, most comprehensive interest netting possible akin to 6402. [00:23:19] Speaker 01: They specifically cited 6402. [00:23:20] Speaker 01: Let me go back to what I said earlier, because I think it really is a critical point here under 6402. [00:23:27] Speaker 01: interest netting is allowed. [00:23:29] Speaker 01: Indeed, Congress had to amend 6402 when it enacted 6221 to make sure if there was an overlap between the two provisions, 6621D applied because it was broader. [00:23:41] Speaker 01: It was not limited to being prospective in effect only. [00:23:44] Speaker 01: It was applicable to all open statute limitations when it was enacted. [00:23:48] Speaker 01: So it was not a, let's see what happens in the future. [00:23:51] Speaker 01: Congress was presumed to understand when it did all that, the way merger has been [00:23:58] Speaker 01: dealt with by the service. [00:23:59] Speaker 01: Indeed, as I said, were it not the situation where the service looked to the successor, it would have to seek, either through transfer reliability or other mechanisms, an attempt to try to chase the liability of the merged corporation. [00:24:14] Speaker 01: It is no longer in existence. [00:24:16] Speaker 01: Its assets and liabilities became, by operation of law, the assets and liabilities of the successor. [00:24:22] Speaker 04: Can I ask you about energy use again? [00:24:26] Speaker 04: Would you agree that a consolidated company is not the same taxpayer? [00:24:32] Speaker 04: Yes. [00:24:34] Speaker 04: So even if they're consolidated, you can't net one company against another independent corporation within that consolidation thing. [00:24:43] Speaker 01: Consolidation does not make one the same taxpayer, no. [00:24:45] Speaker 01: It is merger. [00:24:46] Speaker 01: It is the by-operation of law. [00:24:48] Speaker 01: And what the Supreme Court, the state courts, the IRS, and the Israelis have always said, it is a continuation of that merged company. [00:24:56] Speaker 01: It is one and the same. [00:24:57] Speaker 01: This is a provision, while it is unique and for the first time the service or the code uses the word same taxpayer, but the service had used that same phrase a number of times in its prior ruling stating decades prior and it had applied 6402 to merged and successor corporations pre and post merger to allow netting as long as the balances were outstanding. [00:25:21] Speaker 01: And that is a provision Congress said, we like the way it works. [00:25:24] Speaker 01: We want to extend it to balances that are not outstanding. [00:25:27] Speaker 01: And we're going to extend it to all taxes, not just income taxes. [00:25:30] Speaker 03: And we're going to make it... Why didn't Lipson apply here? [00:25:33] Speaker 03: I mean, they didn't address the same taxpayer, but went through a similar situation or similar question and addressed, you know, that they had to be the same business entity. [00:25:42] Speaker 03: Why wouldn't that apply here? [00:25:43] Speaker 01: Lipson predates Section 381. [00:25:45] Speaker 01: And Lipson was a case that the taxpayer was [00:25:49] Speaker 01: The government was arguing not to allow a net operating loss. [00:25:53] Speaker 01: The tax attribute under 381 should be used by a successor corporation. [00:25:59] Speaker 01: It expressly excluded and chose not to deal with one of the two arguments the government made. [00:26:08] Speaker 01: The first argument the government made was it wasn't a continuation of business. [00:26:12] Speaker 01: The second argument was if you should not apply metropolitan because [00:26:19] Speaker 01: We just don't think it's right. [00:26:20] Speaker 01: And I was thinking of being in Neon's decision. [00:26:22] Speaker 01: What Supreme Court said in Lipson was it was unnecessary to discuss that issue since an alternative argument made by the government is positive of this case. [00:26:32] Speaker 01: So Lipson expressly kept in place Metropolitan. [00:26:36] Speaker 01: Metropolitan Edison was very precise in saying, we accept for federal purposes the state law effect. [00:26:43] Speaker 01: And again, that has now been replicated in the IRS regulations under 368-2B that says, [00:26:49] Speaker 01: a merger by operation of law moves the assets and liabilities so that they become those of the successor corporation, not just the amounts, but the history, whether they be punitive damages or whether they be a tax underpayment. [00:27:05] Speaker 01: The other thing I would point the court's attention to is revenue ruling 58-603, where the IRS itself said, we will not apply Lipson any further in a situation that is covered by 381. [00:27:19] Speaker 03: If we were to reverse, how significantly would that impact the way companies choose disruption or reverse? [00:27:24] Speaker 03: If we were to reverse on either situation one or situation four? [00:27:28] Speaker 01: The government has suggested that somehow this would cause tax planning or windfalls. [00:27:31] Speaker 01: Keep in mind, this is a provision to alleviate an interest differential that was created by Congress. [00:27:37] Speaker 01: It does not create any benefits. [00:27:39] Speaker 01: What it is doing is dealing with the time value of money. [00:27:41] Speaker 01: You have a situation where [00:27:43] Speaker 01: the amount paid to the government is nearly 5% greater than the amount the government pays back to the taxpayer over the same period of time. [00:27:50] Speaker 01: And they're saying that really shouldn't work that way when they're outstanding. [00:27:53] Speaker 04: Well, that seems to make sense for post-merger netting or pre-merger netting that continues to run or pre-merger under payments and over that continue to run into the post-merger period. [00:28:08] Speaker 04: But it doesn't seem to make sense to me when two separate entities [00:28:11] Speaker 04: one had an underpayment that was resolved well before the merger, one had an overpayment that was resolved well before the merger, can then be used post-merger to seek a refund when that unfairness, because it's all about the unfairness, wasn't present because those two companies weren't the same, and isn't unfair to you because you're not being subject to that conflicting interest, right? [00:28:35] Speaker 01: The difference, and it is the primary difference from Energy East, is that in [00:28:39] Speaker 01: the energy situation, those companies remained in existence. [00:28:43] Speaker 01: The government could still chase them, and indeed had to chase them, for their underpayments and overpayments. [00:28:48] Speaker 01: But pre or post merger, in a merger situation, that was not a merger, that was pre or post acquisition, in a merger situation such as we have, only one corporation remains, and that is too, government looks to push. [00:29:01] Speaker 04: I'm not sure that you're, that, I think you understand my hypothetical, but you keep blurring it into where the obligations [00:29:09] Speaker 04: are ongoing and the interest keeps running. [00:29:11] Speaker 04: I understand. [00:29:13] Speaker 04: It seems like you have a pretty good argument on that point, but it seems you're also, when you at least answered the prior hypothetical that said these two prior companies that were acquired had completely separate underpayments and overpayments that were overlapping. [00:29:27] Speaker 04: But they were resolved. [00:29:29] Speaker 04: So the acquiring company has no obligation, and both were paid. [00:29:34] Speaker 04: So one company got the refund, [00:29:37] Speaker 04: on the other payment the other company pay the interest on the other cup you've had when you have to be hypothetical as long as the federal limitations hadn't run you could go back and not those two companies against each other [00:29:49] Speaker 04: The acquiring company is not suffering the interest penalty for either of those two companies. [00:29:53] Speaker 01: It is, though, because it is now liable for that. [00:29:57] Speaker 04: But it's already been paid. [00:29:59] Speaker 01: No, it has not been paid. [00:30:00] Speaker 04: That's my hypothetical, though. [00:30:01] Speaker 04: This is why I wish you had listened to the question. [00:30:03] Speaker 01: I do hear it, Your Honor. [00:30:05] Speaker 04: But it's been paid. [00:30:07] Speaker 04: The statute of limitations for seeking a refund hasn't run. [00:30:10] Speaker 01: But it was paid at a four and a half percent higher rate than the other outstanding overpayment had an interest of running. [00:30:17] Speaker 01: but they became the same company. [00:30:20] Speaker 04: The successor and the successor also... It seems to me like you're asking for more than you need to ask for to win your pay. [00:30:31] Speaker 01: All I can tell you, Your Honor, is again, that's what the IRS has said and it's published and non-presidential private relics. [00:30:37] Speaker 01: We agree with that analysis. [00:30:39] Speaker 01: We think it should be continued here. [00:30:41] Speaker 00: Thank you. [00:30:41] Speaker 00: Thank you, Mr. Kafta. [00:30:42] Speaker 00: Ms. [00:30:43] Speaker 00: Del Sol, we'll give you three minutes of rebuttal. [00:30:52] Speaker 04: Why isn't energy use just different because it involved consolidated companies and not a merged company? [00:30:57] Speaker 04: I mean, it does seem to make sense that the IRS has treated merged companies different than consolidated corporations. [00:31:03] Speaker 02: Well, I think first of all, to the extent that Mr. Kafka discussed informal rulings, those are not presidential, and what does bind this court is energy. [00:31:11] Speaker 02: And in energy, the court was very clear that the question is not who inherits the liability, but rather a comparison of the taxpayer at the time that the overpayment and underpayment were made. [00:31:26] Speaker 03: And in both the situations... Did you leave open the question of what is the same taxpayer? [00:31:30] Speaker 03: You're looking at the timing, but it left open the question of what is the same taxpayer? [00:31:34] Speaker 02: That could be different as a merger. [00:31:36] Speaker 02: Well, situation one, I think, is exactly like Energy East in that they were both entirely separate at those particular times. [00:31:42] Speaker 02: You look at that window in time, and at that point they were separate. [00:31:45] Speaker 02: And what Energy East said is that the court declined to rewrite the statute to say that netting was allowed if interest was payable by the same taxpayer. [00:31:53] Speaker 02: So if ultimately the same [00:31:55] Speaker 02: taxpayer down the road or what became the same taxpayer or through transfers it ended up in the hands of the same taxpayer, that wasn't the question. [00:32:05] Speaker 02: The question was, did the same taxpayer make the overpayment and the underpayment? [00:32:09] Speaker 02: And you look at that window in time. [00:32:11] Speaker 04: But the energy use really never had to answer that question because they never became the same taxpayer. [00:32:17] Speaker 02: Well, I think the court said it doesn't matter. [00:32:19] Speaker 02: Isn't that addictive? [00:32:23] Speaker 02: Perhaps, but I think the analysis of the statute is consistent with that result. [00:32:30] Speaker 02: And I think because the court didn't reach that question, maybe it isn't, because if they didn't reach that question, they found it was unnecessary to decide that, because they obviously could have. [00:32:41] Speaker 02: concluded as energy use argued that the consolidation made them the same taxpayer, but they didn't reach it at all. [00:32:47] Speaker 02: And I think the fact that the court said all we look at at these points in time is what really matters. [00:32:51] Speaker 02: And so I guess I'm going to kind of say this is not dicta as we think about it further. [00:32:54] Speaker 02: And I think the other thing about merger is that [00:32:59] Speaker 02: Mr. Cox has suggested that there's this inheriting the history and that the merger by operation of law makes them the same historically. [00:33:06] Speaker 02: And I think if you look at the merger statutes, that's not what happens. [00:33:09] Speaker 02: There's a transfer of assets and liabilities and still it of it having to be spelled out in a contract. [00:33:15] Speaker 02: When you sign an agreement of merger, the statute spells out certain transfers happen. [00:33:20] Speaker 02: But it's not like companies, I mean, if they became the same taxpayer, [00:33:24] Speaker 02: You would see routinely that for the year of the merger they would file one return as opposed to the two separate returns as I discussed with the final return being filed for the company that ceases to exist. [00:33:36] Speaker 02: And you'd also see them going back and amending their returns to adjust all the things that might be different when you've got the benefit of the two of them. [00:33:43] Speaker 02: But what Congress has provided specifically is that it sets forth in 381 a regime [00:33:49] Speaker 02: where things are transferred from one to the other, that statute clearly reflects the concept that you're dealing with two separate entities from which certain assets and liabilities are transferred. [00:34:00] Speaker 02: And energy makes clear that this statute, 6621D, contemplates that they have to be the same tax grade of the outset, not just that the overpayment and underpayment rights and liabilities end up in the same hands. [00:34:16] Speaker 02: And I think that there's nothing that indicates the nature of a merger as otherwise. [00:34:21] Speaker 02: And 381 supersedes that earlier law, and the reason that after Lipson Shops there's been nothing more on that is because 381 makes that clear. [00:34:29] Speaker 02: And I think that Metropolitan Edison could be read as suggesting that merger makes entities the same taxpayers. [00:34:37] Speaker 02: We lay out in our briefs, that's a really questionable proposition. [00:34:41] Speaker 00: power case in the tax court.