Interest netting redux: December 30, 1996.

• Author: Murray, James R.
• Position: Letter from Tax Executive Institute to Treasury Secretary Robert Rubin regarding interest netting rules

On December 30, 1996, TEI President James R. Murray sent the following letter to Robert E. Rubin, U.S. Secretary of the Treasury, concerning the need for the Treasury Department to moue expeditiously to complete its "interest netting" study. The letter was prepared under the aegis of the Institute's IRS Administrative Affairs Committee whose chair is Robert L. Ashby of Northern Telecom Inc.

On behalf of Tax Executives Institute, I am writing to urge the Clinton Administration to move expeditiously to end the inequitable treatment of taxpayers caused by the Internal Revenue Code's differential interest rate provisions. Specifically, TEI recommends that the Treasury Department promptly issue regulations calling for the "netting" of interest where a taxpayer simultaneously owes and is owed interest by the federal government. In the event the Treasury Department concludes that it does not possess sufficient legal authority to promulgate such regulations, we urge the Administration to call for legislation authorizing interest netting as part of the President's fiscal year 1998 budget.

Tax Executives Institute is the professional association of corporate tax executives in North America. The Institute's 5,000 members handle the tax affairs of the top 2,700 companies in the United States and Canada, and deal with the tax laws on a daily basis. As a broad-based organization dedicated to fair and efficient tax administration, TEI has long been concerned about the harsh effects of the "interest rate differential," pursuant to which the interest rate imposed on tax underpayments (or deficiencies) is higher than the rate paid on tax overpayments (or refunds). We believe that the Code's interest provisions should be designed not to penalize taxpayers but rather simply to compensate taxpayers or the government for the use or forbearance of money. Consequently, we opposed the interest rate differential when it was enacted in 1986, and were pleased when Congress signaled its desire to ameliorate the differential's unfairness by calling on the Internal Revenue Service to issue regulations providing for the netting of tax underpayments and overpayments.

Notwithstanding the legislative history of the Tax Reform Act of 1986, in the intervening decade the IRS has not developed any netting rules (though some relief from the punitive effects of the interest rate differential has been permitted on a case-by-case basis). Indeed, even though Congress has twice...