The Court of Appeals for the Federal Circuit has affirmed a decision by the U.S. Court of Federal Claims (Fed Cl, 2017-1 USTC ¶550,239) which denied Ford Motor Company’s (Ford) claim that the Parent and its wholly owned Foreign Sales Corporation (FSC) were the “same taxpayer” for purposes of global interest netting. This decision regarding the definition of “same taxpayer” for purposes of interest netting allowed by IRC section 6621(d) helps taxpayers understand under which situations the courts will allow corporations and subsidiaries to perform interest netting.
Ford tried to argue that the form of the FSC should be ignored as it lacked economic substance and a business purpose other than to reduce Ford’s tax liability. But the Court noted the FSC retained an office and records, maintained a principal bank account, held board of directors and shareholder meetings and paid certain expenses directly. Also, during the years the overpayments and underpayments were made, the FSC filed seperate tax returns using a separate taxpayer identification number (TIN). In order to receive tax benefits under the FSC rules, the FSC was required to establish itself as a foreign corporation with a separate identity. Finally, the Court did not agree that the corporate identity of the FSC would be viewed one way for the FSC rules and another for purposes of interest netting.
The Court of Appeals decision did not mention two other previous decisions regarding the issue of “same taxpayer” provision of section 6621(d). Both the Energy East (Energy E. Corp. v. United States [ 2011-1 USTC ¶50,460], 645 F.3d 1358 (Fed. Cir. 2011)) and Wells Fargo ([ 2016-2 USTC ¶50,333], 827 F.3d 1026) decisions addressed the issue of the allowance of interest netting between separate entities with different TINs making the underpayments and overpayments prior to a merger or acquisition. The court in both cases denied interest netting because they were different taxpayers at the time of the payments. Ford and the FSC were separate entities with separate TINs at the time of the underpayments by FSC and the overpayment by Ford. This issue and the Energy East and Wells Fargo decisions were mentioned in the original Court of Claims cited above but was not included in Ford’s claim. Attorneys for Ford apparently believed any claim with a netting fact pattern similar to Energy East or Wells Fargo would be denied by the courts. Therefore, Ford attempted to argue the substance verses form of the FSC but did so without success.