Wells Fargo & Co. filed a federal case concerning refunds in interest payments from companies with which it had merged. The appeals court recently ruled on the case in a partial win for the banking company. What does this have to do with you?
The ruling could have far-reaching implications for other businesses in the financial services industry. It sets a precedent that could benefit other companies that have grown through mergers and acquisitions.
Companies pay taxes under rules that are not crystal clear
Companies pay a variety of taxes - payroll taxes, taxes on earnings, excise taxes, and other levies. It is possible to make an underpayment of one tax and thus owe the money with interest to the IRS. At the same time, an overpayment of another tax may lead to a refund with interest.
Existing law allows a company to net out the interest it owes with any owed to it by the IRS. This may even result in a zero interest balance. But payments must belong to the "same taxpayer."
The law has not been clear when the payments are made by companies that have been acquired by a merger or acquisition. Are the two companies considered the "same taxpayer" for purposes of interest netting?
Two companies can be considered one taxpayer
A three-judge panel ruled that, under certain cases, the two companies can be considered the same taxpayer even if one company made an over or underpayment before the merger or acquisition.
This particular case involved CoreStates Financial Corp, which overpaid its taxes in 1992. CoreStates merged with First Union Corp in 1998, which had underpaid its taxes in 1999. The combined company merged with Wachovia in 2001. Wells Fargo acquired the combined company in 2008.
The court ruled that CoreStates and First Union would be considered the same taxpayer for the purpose of interest netting because the underpayment of taxes occurred after the merger and thus could be claimed by Wells Fargo for a refund. However, the court also ruled that Wachovia and First Union could not be considered the same taxpayer for the purpose of interest netting because the underpayments and overpayments of both companies occurred before they merged.
The case was sent back to the U.S, Court of Federal Claims so that it might apply the higher court's guidance to Wells Fargo's claims. How much of a refund the company will get is still unclear, but it is pretty clear that the ruling is going to have wide-reaching implications for the tax consequences of mergers and acquisitions.
The morale: Get good tax advice
If you are a small business owner or a self-employed person you may wonder how this ruling affects you. Even if you are not involved in a merger or acquisition, it is easy to make mistakes that affect what you owe the IRS. Seek the guidance of a skilled tax attorney when back taxes are at issue. You may have options to limit penalties and interest.