Interest netting redux: December 30, 1996 - 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 formally reiterated its intention that netting procedures be developed (in 1990 and 1994), the IRS has argued in court (in the Northern States Power case) both that netting is not required and that the Code's interest differential even permits the government to exact interest payments from a taxpayer who at all times is a net creditor of the government. Such heavy-handed actions even if defensible under a literal reading of the Code, prompted Congress in the recently enacted Taxpayer Bill of Rights 2 (T2) legislation to mandate a joint IRS-Treasury Department study on interest netting.

TEI is very pleased to have participated in the joint IRS-Treasury study, which was initiated even before T2 was enacted pursuant to IRS Notice 96-18. On June 28, 1996, the Institute submitted detailed comments, which not only addressed the unquestionable need for interest netting, but also spelled out precisely how such netting could be accomplished. And on September 4, TEI testified at an IRS public hearing on interest netting, at which we suggested that the IRS's failure to implement interest netting procedures -- notwithstanding several congressional directives -- had contributed to an atmosphere where politicians and pundits recommend that the tax system be pulled out by the roots and that the IRS be abolished. The Institute continued that it had long lamented "IRS bashing," but that the fundamental unfairness of the Code's interest provisions -- and how they are interpreted by the IRS -- cannot help but encourage attacks on the legitimacy of the IRS.

Mr. Secretary, TEI earnestly believes that the prompt resolution of the interest netting controversy is essential to the fair and orderly operation of the tax system. Consequently, we urge the Treasury Department and IRS to complete their interest netting study without delay and to propound specific recommendations for how interest netting should be effected. Based on comments by Treasury officials at and since the September 4 public hearing, the Department of the Treasury apparently now questions whether it has sufficient authority to resolve the decade-old interest netting problem. As previously stated, TEI believes that Congress empowered the Treasury and IRS to implement comprehensive netting procedures, and we note that Chairman Bill Archer of the House Committee on Ways and Means wrote you this fall expressing the same view.

If, after 10 years of promises, the Treasury Department ultimately concludes that legislation is necessary to effect a solution to the interest netting conundrum, Tax Executives Institute urges the Treasury Department to announce that decision as soon as possible and, moreover, to put forth a detailed recommendation about the shape of any legislative solution. Indeed, TEI strongly recommends that the Clinton Administration address the interest netting issue in its fiscal year 1998 budget. Giving the interest netting problem such high visibility and priority would underscore the Administration's intention to stop temporizing and to resolve the issue. It would underscore the Administration's commitment to make the U.S. tax system the most efficient and fairest in the world. Finally, should the Treasury Department conclude that interest netting cannot be accomplished within the confines of the current tax system (for example, because of the shortcomings of the IRS's computer system), TEI recommends that the interest rate differential be eliminated from the Code as inimical to a fair tax system.

Tax Executives Institute appreciates this opportunity to comment on the very important subject of interest netting. If you should have any questions about this matter, please do not hesitate to call either Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs, at (202) 638-5601 or me at (503) 731-2117.

COPYRIGHT 1997 Tax Executives Institute, Inc.
COPYRIGHT 2004 Gale Group