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Taxpayer Wins In Interest Netting Case

22 Nov 2012

The Internal Revenue Code (IRC) is notorious for complicated rules, confusing provisions and differing interpretations of its most simple provisions. This was evident with what was the global interest netting provision. Taxand USA looks at a recent case which finally cleared up confusion about the provision's rules.

Enacted to benefit corporate taxpayers by eliminating the interest rate differential on underpayment and overpayment of federal taxes (including income, employment, etc.) by the same taxpayer, the confusion over the special rule that accompanies the provision has created a burden for some taxpayers.

Exxon Mobil tried to apply the interest rate netting rule so that they did not owe retrospective interest on their taxes. The Commissioner disagreed with this and the case was taken to the Tax Court in 2011. The Court ruled against precedent and agreed with Exxon Mobil. The US government then appealed to the Second Circuit, however the Tax Court's decision was upheld, and Exxon Mobil was allowed the relief offered under the special interest rate netting rule.

The Second Circuit also dealt a blow to the Commissioner's reliance on sovereign immunity as a defence to a request for zero interest rate for no net tax due situations. They referred to IRC Section 6611 as the express waiver of sovereign immunity (including cases that examined the issue and agreed) for taxpayers to claim interest on overpayments from the US government.

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Taxand's Take

The recent decision in the Exxon Mobil case is a clear victory for the taxpayers who have filed requests for retrospective interest netting under the special rule in IRC. In more broad terms, taxpayers will benefit from the Exxon Mobil case as it provides precedent for challenging the broad assertion of sovereign immunity in tax cases.

Your Taxand contact for further queries is:
Layne Albert
T. +1 212 763 9655

Taxand's Take Author