THE INS, OUTS, OVERS, AND UNDERS OF THE NEW GLOBAL NETTING RULES - PDF document

THE ‘INS,’ ‘OUTS,’ ‘OVERS,’ AND ‘UNDERS’ OF THE NEW ‘GLOBAL NETTING’ RULES by James E. Salles responding to pressure to alleviate the whipsaws facing individual and corporate taxpayers that simul- James E. Salles is a shareholder in Caplin & taneously owed, and were owed, money in different Drysdale, Chartered of Washington, D.C. This ar- tax accounts. These whipsaws were exacerbated by ticle is a revision and expansion of “Navigating various statutory changes made since 1986. The new the Global Netting Rules,” serialized in the provision 2 generalized the principles, if not the precise December 10, 1998, and January 12, 1999, editions rules, that have long applied when particular over- and of Practical U.S./International Tax Strategies. underpayments are offset (“netted”) against one This article reviews the background of “global another — this netting is frequently referred to as the netting,” summarizes the applicable statutory “global netting” of interest. provisions and provisions of Rev. Proc. 99-19, and discusses some of the issues that may arise in the As usual, however, the devil lies in the details of implementation. Congress evidently intended to administration of the new rules and any legisla- tive revisitation of the area. simplify administration of the new provision both by providing the Internal Revenue Service with some flexibility to design substantive rules within the limits of its existing management structures and computer Table of Contents systems and by requiring taxpayers seeking retroactive application to notify the Service within a limited “win- I. The Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 dow period.” Both efforts seem to have backfired badly, A. Different Rates . . . . . . . . . . . . . . . . . . . . . . . . 544 compounding, rather than reducing, confusion. B. Other Tax Consequences . . . . . . . . . . . . . . . 544 The deceptively simple tax code provision involves II. Offsets and Interest Tolling . . . . . . . . . . . . . . . 544 three key concepts. First, a “net interest rate of zero” A. Interest Tolling Provisions . . . . . . . . . . . . . . 545 is prescribed for the future on “overlapping” under- B. Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545 and overpayments. Second, a transition rule provides C. Sequential Settlements: Northern States that this “global netting” may be applied retroactively, Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546 if the relevant statutes of limitation are open. Finally, III. Global Netting: The Concept . . . . . . . . . . . . . 547 this retroactivity is further conditioned on the taxpayer filing a request by December 31, 1999, that “reasonably IV. Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547 identifies” the over- and underpayments that it wants V. ‘Net Interest Rate of Zero’ . . . . . . . . . . . . . . . . 549 netted. 3 Left open were basic questions about all of these issues: how a “net interest rate of zero” will trans- VI. Statute of Limitations . . . . . . . . . . . . . . . . . . . . 550 late into interest to be assessed, allowed, or abated; A. Basic Approaches . . . . . . . . . . . . . . . . . . . . . . 550 what exactly are the applicable statute(s) of limitations; B. Choice Among Statutes of Limitations . . . . 551 and whether some taxpayers that would benefit from C. Potential Legislative Solutions . . . . . . . . . . 553 retroactive relief will be able to make the necessary VII. ‘Retroactive’ Claims . . . . . . . . . . . . . . . . . . . . . . 554 “reasonable identification” before December 31, 1999. A hurried “technical correction” in the extenders legislation passed in late 1998 4 served only to spawn The Internal Revenue Service Restructuring and Reform Act (IRS reform act) 1 enacted in 1998 contained 2 IRS reform act section 3301, codified at section 6621(d). a mandate that the same interest rate apply to under- Except as specified, all section references are to the Internal and overpayments of tax that are outstanding for the Revenue Code of 1986, as amended, and the Treasury regula- same taxpayer at the same time. Congress was tions thereunder. 3 IRS reform act section 3301(a), codified at section 6621(d); id . section 3301(c)(2), as amended by Tax and Trade Relief Extension Act of 1998 (TTREA), Pub. L. No. 105-277, section 4002(d). 1 Internal Revenue Service Restructuring and Reform Act of 4 TTREA section 4002(d), supra . 1998, Pub. L. No. 105-206. TAX NOTES, April 26, 1999 543