Bank of Am. Corp. v. United States

656 F.Supp.3d 574

BANK OF AMERICA CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

3:17-cv-00546-RJC-DSC

United States District Court, W.D. North Carolina, Charlotte Division

Signed February 14, 2023

Brian K. Kittle, Pro Hac Vice, Geoffrey M. Collins, Pro Hac Vice, Mayer Brown LLP, New York, NY, Marjorie Mallin Margolies, Pro Hac Vice, Samantha Bear, Pro Hac Vice, Mayer Brown LLP, Chicago, IL, Cory Stuart Menees, Mayer Brown LLP, Charlotte, NC, for Plaintiff.

Jason Bergmann, Stephanie Sasarak, U.S. Department of Justice, Tax Division, Washington, DC, for Defendant.

ORDER

Robert J. Conrad, Jr., United States District Judge

THIS MATTER is before the Court on cross-motions for partial summary judgment filed by Bank of America and the United States (Doc. Nos. 67, 68). Those motions concern interest imposed on tax obligations under the Internal Revenue Code.

When a taxpayer owes tax to the government, the Code requires the taxpayer to pay interest on the outstanding tax. 26 U.S.C. § 6601(a). This is called "underpayment interest." When the government owes money to a taxpayer, the government must also pay interest on the amount due, id. § 6611(a), though the government pays interest to a corporate taxpayer at a lower rate, id. § 6621(a). This is called "overpayment interest." Sometimes, a taxpayer and the government owe equivalent amounts to each other. In this situation, the taxpayer would owe no net tax. Yet because a corporate taxpayer's interest rate exceeds the government's, a corporate taxpayer would still owe interest to the government.

26 U.S.C. § 6621(d) addresses such a period of mutual indebtedness. Under § 6621(d), when "underpayments and overpayments by the same taxpayer" offset each other, no interest is due: the net interest rate is zero while the offset lasts. Nullifying the interest rate in this way is called "interest netting."

This case presents a question of statutory interpretation: after a corporation with preexisting overpayments merges into a corporation with a preexisting underpayment, can the surviving corporation net those overpayments against its underpayment? As explained below, it cannot. Interest netting is available under § 6621(d) only when underpayments and overpayments are made "by the same taxpayer." Because two corporations are separate taxpayers before they merge, their premerger underpayments and overpayments were not made by the same taxpayer, so the corporation that survives the merger cannot use the payments to net its interest under § 6621(d).

For this reason, as elaborated below, the United States' Motion for Partial Summary Judgment (Doc. No. 68) is GRANTED, and Bank of America's Motion for Partial Summary Judgment (Doc. No. 67) is DENIED.

I. FACTUAL BACKGROUND

Bank of America alleges that the IRS wrongly declined to net the bank's interest under 26 U.S.C. § 6621(d), resulting in improper interest charges. Pl.'s Mot. Part. Summ. J. 1-2, Doc. No. 67. Specifically, the bank, which survived a merger with Merrill Lynch in 2013, Stip. ¶ 11, Doc. No. 66, argues that it should be able to net two overpayments made by Merrill against its own underpayment, Pl.'s Mot. Part. Summ. J. 2, 12-13. The IRS maintains that the bank is unable to net Merrill's overpayments under § 6621(d) because, when those overpayments were made, Merrill and the bank were two different corporations and thus two different taxpayers. Def.'s Mot. Part. Summ. J. 4, Doc. No. 69.

Since this case concerns the tax implications of multiple transactions, the parties narrowed the issues to two test cases. Certif. Init. Att'y Conf. 2, Doc. No. 60; Mot. Summ. J. Briefing Sched. 2, Doc. No. 63. Resolving those test cases via cross-motions for partial summary judgment will resolve the rest of the parties' dispute. Certif. Init. Att'y Conf. 2; Pl.'s Mot. Part. Summ. J. 6; Def.'s Mot. Part. Summ. J. 3. Both test cases involve the same underpayment by Bank of America, but they involve two different overpayments by Merrill.

A. Test Case 1

In Test Case 1, Bank of America's underpayment tax year was 2005. Mot. Summ. J. Briefing Sched. 2. Merrill's overpayment tax year was also 2005, and the payments overlapped from March 15, 2010 until June 30, 2014. Id.

B. Test Case 2

In Test Case 2, Bank of America's underpayment tax year was, again, 2005. Mot. Summ. J. Briefing Sched. 2. Merrill's overpayment tax year was 1999, and the payments overlapped from (i) March 15, 2006 through March 15, 2007 and (ii) April 15, 2009 through August 26, 2009. Id.

II. DISCUSSION

As explained above, the two test cases present a straightforward question of law: whether, under 26 U.S.C. § 6621(d), a corporation that survived a merger can net the acquired corporation's premerger overpayments against the surviving corporation's premerger underpayment. The answer to that question is found in the text of § 6621(d), which allows interest netting only when there are "underpayments and overpayments by the same taxpayer."¹

In "all cases involving statutory interpretation," courts "begin" with "the text of the governing statute." United States v. Muhammad, 16 F.4th 126, 128 (4th Cir. 2021) (citing Snyder's-Lance, Inc. v. Frito-Lay N. Am., Inc., 991 F.3d 512, 516 (4th Cir. 2021)). When statutory text is "plain," the "sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms." Id. (quoting United States v. Wayda, 966 F.3d 294, 303 (4th Cir. 2020)). In interpreting a statute, the text is given its "ordinary, contemporary, common meaning." Star Athletica, L.L.C. v. Varsity Brands, Inc., 580 U.S. 405, 414, 137 S.Ct. 1002, 197 L.Ed.2d 354 (2017) (quoting Walters v. Metro. Educ. Enters., Inc., 519 U.S. 202, 207, 117 S.Ct. 660, 136 L.Ed.2d 644 (1997)).

In full, § 6621(d) states:

Elimination of interest on overlapping periods of tax overpayments and underpayments.

To the extent that, for any period, interest is payable under subchapter A [underpayment interest] and allowable under subchapter B [overpayment interest] on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.

26 U.S.C. § 6621(d).

The statute allows interest netting only when there are "underpayments and overpayments by the same taxpayer." Id. As explained by the Federal Circuit, that "plain language" has a temporal element: "the statute provides an identified point in time at which the taxpayer must be the same, i.e., when the overpayments and underpayments are made." Energy E. Corp. v. United States, 645 F.3d 1358, 1361 (Fed. Cir. 2011); see also Wells Fargo & Co. v. United States, 827 F.3d 1026, 1035 (Fed. Cir. 2016) ("[I]t is the identity of the corporation at the time of the payments that matters.").

At the time of Merrill's overpayments and Bank of America's underpayment, the two were different corporations and different taxpayers.² The payment dates in both test cases precede the corporations' merger in 2013. When "the payments were . . . made before [a] merger," then "the payments were made by two separate corporations" that were not the "same taxpayer." Wells Fargo, 827 F.3d at 1034-35; see also Ford Motor Co. v. United States, 908 F.3d 805 (Fed. Cir. 2018) ("[T]here is no dispute that two separate, unrelated corporations are different taxpayers . . . . Because tax laws usually treat formally separate corporations as distinct taxable entities that must file their own returns, they will normally be different taxpayers under § 6621(d) as well."). "[L]ater changes in corporate structure" cannot "retroactively change a taxpayer's status as to earlier payments." Wells Fargo, 827 F.3d at 1035. And the fact that "the two entities later merged does not change the fact that they were separate at the time of the original payments." Id.

To provide further support for the Federal Circuit's interpretation of § 6621(d), the government cites dictionary definitions of the word "by." Def.'s Resp. 9, Doc. No. 74; see 26 U.S.C. § 6621(d) (allowing interest netting only when there are "underpayments and overpayments by the same taxpayer" (emphasis added)). According to the government's definition, "by" means "through the agency, means, instrumentality, or causation of." The Oxford American Dictionary and Language Guide 127 (1999); see also id. (providing the examples "bought by a millionaire" and "by proxy"); Webster's Ninth New Collegiate Dictionary 192 (1983) (defining "by" as "through the agency or instrumentality of"); Def.'s Resp. 9 (quoting these dictionaries). But Bank of America, citing other definitions of the word "by,"³ argues that "[t]he phrase 'by the same taxpayer' does not impose a temporal limitation: it means that the under-and overpayments must be 'concerning' or 'with respect to' the same taxpayer." Pl.'s Reply 13, Doc. No. 76; see Oxford American Dictionary, supra (alternatively defining "by" as "concerning" and "in respect of," as in "all right by me"); Webster's, supra (alternatively defining "by" as "with respect to"). Since the bank, as the surviving corporation, is now both liable for any underpayments previously made by Merrill and eligible to receive refunds for Merrill's past overpayments, the bank argues that the same-taxpayer requirement is satisfied. See Pl.'s Reply 3 ("[T]he word 'by' can also mean 'concerning' or 'with respect to.' And both overpayments owed to and underpayments owed by a taxpayer are certainly 'concerning' or 'with respect to' that taxpayer.").

However, Bank of America concedes that the interpretation adopted by the Federal Circuit and advanced by the government here would be correct if the statute contained the word "made" before "by the same taxpayer." See Pl.'s Reply 3 ("[The government's] argument makes sense only if you add 'made' to the statute: 'equivalent underpayments and overpayments [made] by the same taxpayer.' " (second alteration in original)). B...