IRS narrowly interprets scope of interest netting rules.

• Author: Galib, Nancy M.

Despite Congress's intent to have interest netting apply as broadly as possible, the IRS has interpreted the interest netting rules narrowly, to the disadvantage of many taxpayers. On Mar. 29, 1999, the Service issued Rev. Proc. 99-19 to provide guidance on the interest netting provisions under Sec. 6621(d), as added by the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98). Rev. Proc. 99-19 establishes procedures for applying this provision to interest periods beginning before July 22, 1998 (i.e., using quarterly interest periods, to interest accruing before Oct. 1, 1998). Simply stated, the interest netting rule is "to the extent that, for any period, interest is payable ... and allowable ... on equivalent underpayments and overpayments by the same taxpayer ..., the net rate of interest ... on such amounts shall be zero for such period."

The scope of the revenue procedure is limited to the three conditions set forth in the IRSRRA '98: (1) any applicable statute of limitations (SOL) has not expired with regard to either a tax underpayment or overpayment, (2) the taxpayer reasonably "identifies and establishes" the periods for which the zero net rate applies and (3) the taxpayer requests application of the zero net rate by Dec. 31, 1999. This language, which was not codified, is the exclusive rule for applying the zero net interest rate to interest periods beginning before July 22, 1998.

SOL Requirement

The awkward language in the IRSRRA '98 concerning the SOLs raised the question of whether the SOL for both the tax years of the overpayment and the underpayment had to be open, or whether Sec. 6621(d) would apply retroactively if only one were still open. The IRSRRA '98 states that Sec. 6621(d) applies retroactively, "[s]ubject to any applicable statute of limitations not having expired with regard to either a tax underpayment or a tax overpayment ..."

Initially, the IRSRRA '98 did not contain specific language for which limitations periods were required to be open for the zero net rate to apply retroactively. The legislative history indicates, however, that Congress intended the netting provisions to apply as broadly as possible and would require only one limitations period to be open. The Senate Finance Committee Report states that "the Committee continues to expect that the Secretary will implement the most comprehensive interest netting procedures that are consistent with sound administrative practice, and not...