Eleventh-hour release of year-end interest netting guidance.

• Author: Everidge, Kathy L.
• Position: IRS guidance

Just in time for the holiday season, the Internal Revenue Service on November 10, 1999, released Rev. Proc. 99-43, which modifies and supersedes the earlier guidance(1) on interest netting for interest accruing for periods beginning prior to the effective date of interest netting legislation.(2) The new guidance provides that taxpayers with overlapping periods of overpayment and underpayment that have at least one year open after December 31, 1999, do not have to file claims for interest netting by that date. The original guidance would have required most taxpayers to file by that date, creating a burden for both taxpayers and the IRS. The new guidance clarifies what actions taxpayers should take before December 31, 1999, in order to preserve their rights to interest netting on open years and to maximize the benefit afforded by the interest netting relief legislation passed by Congress in 1998.(3)

When Congress passed global interest netting legislation, it established a net interest rate of zero on equivalent amounts of overpayment and underpayment that exist for any tax and any period for interest accruing on or after october 1, 1998. It provided limited relief for taxpayers with interest accruing before this date. Many practitioners felt that the, IRS's first guidance implementing this legislation, Rev Proc. 99-19, was ambiguous in several areas and therefore limited the relief available to taxpayers. Rev. Proc. 99-43 makes several minor modifications and clarifications.(4)

This article discusses the modified guidance, including what steps taxpayers need to take before the end of 1999 to preserve their rights to interest netting for interest accruing in pre-enactment periods, as well as certain actions which may need to be taken after such dates.

A Break for Taxpayers

The new revenue procedure provides that a taxpayer with overlapping overpayments and underpayments must file a claim only if the applicable statute of limitations for both the overpayment and underpayment will be closed on or before December 31, 1999. (Revenue Procedures 99-19 and 99-43 require that both statutes of limitation had to be open on July 22, 1998.) If one of the two statutes of limitation periods (either the overpayment or underpayment) is still open on December 31, 1999, the taxpayer does not have to file until the date on which the last applicable period of limitation closes. This is a positive development for many large corporate taxpayers, granting them additional time to qualify for interest netting relief.

Remaining Issues/Unanswered Questions

The new guidance, consistent with Rev. Proc. 99-19,(5) does not permit interest netting involving interest-free periods. Also, with regard to overpayments and underpayments that occurred in periods before October 1, 1998, both statutes of limitation must have been open on July 22, 1998. Unfortunately, the new guidance fails to clarify "who is the taxpayer" for netting purposes. The statute states that interest netting will apply to all types of tax and all years of the "same taxpayer." So far, the IRS has generally taken the position that this passage in the legislation limits interest netting to taxpayers with the same taxpayer identification number. Exceptions to the general rule have been made on a case-by-case basis. Many practitioners believe, however, that there are many instances involving affiliated entities when interest netting should be allowed as a matter of course, such...