Part III. — Internal Revenue Bulletin 1996-14

Interest Netting Study

Notice 96–18

This Notice invites public comment in connection with the Internal Revenue Service’s and Treasury’s study of ‘‘interest netting.’’ This study was initially described in Announcement 96–5, ‘‘Administrative Initiatives to Enhance Taxpayer Rights,’’ 1996–4 I.R.B. 99 at 101 (January 22, 1996).

BACKGROUND

The Internal Revenue Code provides that taxpayers who underpay their taxes generally must pay interest to the government for the period of the underpayment. Section 6601. The IRS has limited authority to abate the interest that is required by statute. Section 6404.

The Code likewise generally requires the government to pay interest to taxpayers with respect to any overpayment of taxes. Section 6611. There are, however, a number of limitations on the government’s liability for interest, including the rule that no interest is payable with respect to a tax refund claimed for a current year if the refund is issued within 45 days of the last day prescribed for filing a return claiming the refund. Section 6611(e).

Prior to enactment of the Tax Reform Act of 1986, the same interest rate applied to underpayments and overpayments. The Tax Reform Act of 1986, however, provided for the interest rate charged on underpayments to be one percentage point higher than the interest rate paid on overpayments. See §§ 6621(a)(1) and (2). The Omnibus Budget Reconciliation Act of 1990 added that, under certain conditions, the interest rate on large corporate underpayments would be 3 percentage points higher than the interest rate on overpayments. The Uruguay Round Agreements Act, enacted in 1994, increased the differential between large corporate underpayments and certain corporate overpayments to 4.5 percentage points. See §§ 6621(a)(1) and (c).

If an overpayment is credited against an underpayment, the effect of these interest rate differences is reduced. Section 6601(f) provides:

If any portion of a tax is satisfied by credit of an overpayment, then no

interest shall be imposed ... on the portion of the tax so satisfied for any period during which, if the credit had not been made, interest would have been allowable with respect to such overpayment.

Section 6402(a) provides general authority for the IRS to credit an overpayment against an underpayment. This section states:

In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall ... refund any balance to such person.

Section 301.6402–1 of the Regulations on Procedure and Administration provides that the Commissioner may credit any overpayment of tax against any ‘‘outstanding liability’’ for any tax.

Congress has recognized the potential burden that the interest rate differential places on taxpayers who have both overpayments and underpayments. Thus, each time Congress has increased the interest rate differential, Congress has stated in legislative history that the Service should implement the most comprehensive procedures ‘‘consistent with sound administrative practice’’ to allow overpayments to be credited against underpayments. See H.R. Conf. Rep. No. 841, 99th Cong., 2d. Sess., 1986–3 C.B. (Vol. 4) 785 (accompanying the Tax Reform Act of 1986); H.R. Conf. Rep. No. 964, 101st Cong., 2d Sess., 1991–2 C.B. 591 (accompanying the Omnibus Budget Reconciliation Act of 1990); H.R. Rep. No. 826, 103d Cong., 2d Sess., 1995–1 C.B. 254 (accompanying the Uruguay Round Agreements Act).

The Service has developed substantial crediting procedures to implement interest netting. For example:

(a) The Service will consider all increases and decreases in a taxpayer’s liabilities within a single tax year before applying the statutory interest rules to that year. Rev. Proc. 94–60, 1994–2 C.B. 774, provides that a taxpayer will not be charged the differential interest rate under § 6621(a) on an underpayment that is satisfied by credit of an overpayment arising in the same taxable year. This interest netting procedure is referred to as ‘‘annual interest netting.’’

(b) The Service permits crediting of overpayments against underpayments for the period of time when the underpayments and overpayments are both unpaid and outstanding, even if they are from different tax years or for different types of tax. This procedure for interest netting is referred to as ‘‘offsetting.’’

The Service, however, generally does not net interest where a taxpayer realizes an overpayment in one tax year that overlaps with a deficiency that a taxpayer has already paid for a different tax year. Likewise, the Service generally does not net interest where an unpaid deficiency in one tax year overlaps with an overpayment that the Service has already paid for a different tax year. This kind of interest netting is referred to as ‘‘global interest netting.’’

The Eighth Circuit recently addressed whether the Service is required to perform global interest netting calculations. Northern States Power Co. v. United States, 73 F.3d 764 (8th Cir. 1996). Interpreting §§ 6402(a) and 301.6402–1, the Eighth Circuit held that where the taxpayer’s liability was fully paid, there was no ‘‘outstanding liability’’ against which to net the taxpayer’s subsequent overpayment. The court further held that the Service, in any event, has the discretion whether to credit overpayments against underpayments.

REQUEST FOR PUBLIC COMMENT

Many taxpayers and practitioners have suggested that the Service adopt global interest netting procedures. Global interest netting, however, raises a number of legal, policy and administrative issues. Thus, Announcement 96–5 states that the Service will conduct a study of these issues and solicit public comments for the study.

Legal and Policy Issues of Global Interest Netting

As described above, global interest netting would allow the taxpayer or the Service to recalculate interest for a certain period of time whenever a taxpayer has either a new overpayment that overlaps with an underpayment that the taxpayer has already paid to the Service, or a new underpayment that overlaps with an overpayment that

the Service has already paid to the taxpayer. The Service requests comments on the following issues:

In view of the policy generally favoring the finality of tax determinations, should a rule concerning the finality of global interest netting computations be adopted, and, if so, what should that rule be? What effect, if any, should the statute of limitations have on global interest netting, particularly considering the language in § 6402(a) regarding the applicable period of limitations? Should the statute of limitations be kept open longer in light of global interest netting?
When would it be appropriate for the Service to net interest globally for a particular tax year or period? For example, would it be appropriate to net interest globally before the final decision of an appeal or court decision for a tax period overlapping with the period at issue that might affect the interest calculation for such period? Would it be appropriate to net interest globally before the final decision of an appeal or court decision for a tax period that does not overlap with the period at issue, if such decision could produce an adjustment, such as a net operating loss or credit, that might affect the interest calculation for such period?
What would be the effect of carrybacks and carryforwards (e.g., net operating losses, various credits, etc.) on the global interest netting calculation for a certain period? Would carrybacks and carryforwards always require a recalculation of interest for such period? Or should global interest netting calculations only be made after carryforwards and carrybacks that might affect the period at issue are finally determined? How would the analysis be affected by the restricted interest provisions of §§ 6601(d) and 6611(f)?
Does global interest netting present any unique implications for taxpayers filing consolidated returns?
How would global interest netting affect § 861 allocations or interact with other U.S. international tax provisions?

Administrative Issues

The Service’s computer system does not have the data storage capacity to keep information concerning paid deficiencies and paid refunds on line. The Service thus cannot make global interest netting calculations on its computer

system but must instead retrieve the data on paid deficiencies and paid refunds from its computer storage files and then manually make the interest calculations. This procedure could entail a significant additional commitment of IRS resources, primarily because of the need to verify the accuracy and completeness of the data necessary to make a global interest netting calculation and ensure an accurate calculation. Accordingly, the Service requests the following comments:

To the extent that taxpayers or practitioners currently make global interest netting calculations for themselves or their clients, the Service would like to receive a detailed description of how those calculations are performed, the cost of performing those calculations, and the reasons why the method used by particular taxpayers or practitioners would be appropriate for the Service to apply to large numbers of taxpayers without requiring significant additional Service resources.
How should the Service fulfill its obligation to verify the accuracy and completeness of all taxpayer data relevant to make a global interest netting calculation for a particular period, given the Service’s computer data storage limitations?

Time and Address for Comments

(Branch 1) Room 5228 Washington, DC 20044 The comments you submit will be available for public inspection and copying.

DRAFTING INFORMATION

For further information regarding this notice, contact Joel Rutstein on (202) 622-4530 (not a toll-free call).

Study of Certain Joint Return and Community Property Issues For Divorced and Separated Taxpayers

Notice 96–19

This Notice invites public comments

The Service and Treasury would appreciate written comments on the above issues. Comments should be submitted by June 30, 1996, to:

Internal Revenue Service P.O. Box 7604 Ben Franklin Station Attn: CC:DOM:CORP:T:R:IT&A

for a study being conducted by the Service and Treasury on certain joint return and community property issues, particularly as they affect divorced and separated taxpayers. This study was initially described in Announcement 96–5, ‘‘Administrative Initiatives to Enhance Taxpayer Rights,’’ 1996–4 I.R.B. 99 at 101 (Jan. 22, 1996).

BACKGROUND

Section 6013(a) of the Internal Revenue Code generally provides that spouses may file a joint return even though one of the spouses has neither gross income nor deductions. Section 6013(d)(3) states that spouses are jointly and severally liable for the taxes on a joint return.

For married taxpayers who filed jointly but then divorce or separate, joint and several liability means that a former spouse remains liable for all taxes, additions to tax, penalties and interest due with respect to the joint return even if all the income was earned by the other spouse. This liability remains regardless of the terms of any divorce decree or separation agreement.

Congress was concerned that the joint and several liability standard could unfairly attribute tax liability on a joint return to a spouse who should not be held liable for such taxes under certain circumstances. Congress thus enacted the innocent spouse provisions of § 6013(e). Section 6013(e), however, establishes a detailed set of requirements that must be met to obtain innocent spouse relief. As a result, the innocent spouse provisions do not apply in many situations.

‘‘Community property’’ laws also present unique issues for divorced or separated taxpayers. Community property laws generally consider each

community property laws, the Supreme Court in 1930 held that spouses who live in community property jurisdictions but file separate returns must each include half of the community income in his or her return, even if all the income was earned by one spouse. Poe v. Seaborn, 282 U.S. 101 (1930). Under this rule, each spouse would be liable for taxes, additions to tax, penalties and interest due with respect

the specific requirements of §§ 66 and 6013(e), particularly with respect to divorced and separated taxpayers.

Are there situations in which the innocent spouse provisions do not function in an appropriate manner? Describe these situations.
Are there situations in which expanded innocent spouse relief could be abused by taxpayers seeking inappropriate relief? If so, what limitations would prevent such abuses?
Are there changes to the Service’s administrative practices that should be made with respect to the innocent spouse provisions?

to the amount required to be reported on his or her return.

Congress recognized that the rule of Poe v. Seaborn could cause hardship for taxpayers in community property states. Congress thus amended the Internal Revenue Code to provide that under certain conditions, the community property laws would be disregarded in determining certain types of income for federal income tax purposes. In particular, §§ 66 and 879(a) overrule Poe v. Seaborn, in part, generally by taxing income to the spouse who earned, managed or controlled such income. The requirements of these sections, however, can be difficult to meet and they do not apply in many situations.

The community property laws also present unique issues regarding which assets and income may be collected to satisfy federal tax liabilities. For example, all or a portion of the community property of the spouses may be used to satisfy a separate tax obligation of one spouse, even if the tax arose before the marriage or even during a previous marriage.

REQUEST FOR PUBLIC COMMENT

The Service and Treasury are studying the effects of certain proposals to change current law regarding the tax treatment of divorced and separated taxpayers. The Service and Treasury request comments on the following proposals:

A. Replace the Joint and Several Lia-

bility Standard with a Proportionate Liability Standard

A proportionate liability standard would hold each spouse liable for only that portion of the tax attributable to a joint return that relates to that spouse’s contribution to the aggregate joint return tax liability of both spouses. Please comment on the effects of changing the current joint and several liability standard to a proportionate liability standard, particularly as it would affect divorced and separated taxpayers. Comments on the following issues would be particularly helpful:

How would such a system work if the former spouses are not cooperating with one another, or with the Service, regarding their respective shares of the tax liability?
Would a proportionate liability standard allow taxpayers to take undue

advantage of the tax system by interspousal property transfers, particularly in view of the nonrecognition of gain on such transfers under § 1041?

Under a proportionate liability standard, how would the Service trace assets and allocate deductions and credits between the spouses to determine each spouse’s correct tax liability and to collect amounts due in the most efficient manner possible?
Would a proportionate liability standard create burdensome filing requirements by requiring additional schedules or columns for reporting the items attributable to each spouse, such as those on some state income tax returns?
If a proportionate liability standard is adopted, what changes would be necessary to the current rules concerning communications with taxpayers, examinations, assessments, collections, payments and refunds of tax, penalties and interest?
How would adoption of a proportionate liability standard affect state, local, and other tax systems?

B. Base the Respective Spouses’ Tax

Obligations and Liabilities on the Terms of a Divorce Decree, Separa- tion Agreement or Other Property Settlement

Please comment on the effects of basing the respective spouses’ tax obligations and liabilities on the terms of a divorce decree, separation agreement or other property settlement. In particular, please comment on the following:

Would the Service be required to be a party to divorce or separation proceedings? If not, how could the interests of the government be represented in such cases?
What rule would apply if the divorce decree or separation agreement did not provide for allocation of tax liability?
How would this proposal affect those spouses less able to influence the terms of a divorce decree or separation agreement (e.g., because of limited financial or legal resources)?

C. Reform the Innocent Spouse Provisions

Under the current joint and several liability standard, please comment on

E. Limit the Amount of Community

Property Subject to Collection Actions

Please comment on the effects of limiting the amount of community property that is subject to collection actions to satisfy the separate tax liabilities of one of the spouses that arose before the couple’s marriage.

Would this proposal require changes to state or federal law?
What specific changes, if any, would be required?

Time and Address for Comments

The Service and Treasury would appreciate written comments on the

D. Further Limit the Income-Splitting

Effect of Poe v. Seaborn in Com- munity Property Jurisdictions

Please comment on the effects of further limiting the income splitting rule of Poe v. Seaborn in favor of some form of income tracing, such as in § 879, particularly as it would affect divorced and separated taxpayers.

Would this proposal present the same issues as those raised above with respect to proportionate liability? Why or why not?
How would this proposal work if the divorced or separated taxpayers live in different jurisdictions with different property laws?
Would further limiting Poe v. Seaborn affect the assets or income of a divorced or separated spouse that could be collected to satisfy the federal income tax liability of each spouse?

above issues. Comments should be submitted by June 30, 1996, to:

Internal Revenue Service P.O. Box 7604 Ben Franklin Station Attn: CC:CORP:T:R:ITA (Branch

4), Room 5228 Washington, D.C. 20044

The comments you submit will be available for public inspection and copying.

DRAFTING INFORMATION

For further information regarding this notice, contact Joel Rutstein on (202) 622-4530 (not a toll-free call).

Specifications for filing Form 1042– S, Foreign Person’s U.S. Source Income Subject to Withholding, Magnetically or Electronically

Notice 96–20

The format for the country and

postal codes (positions 324–332 of the ‘‘Q’’ record) was listed incorrectly in Internal Revenue Bulletin 1996–2, Revenue Procedure 96–11, January 8, 1996, reprinted as Publication 1187 (Rev. 1–96), Specifications for Filing Form 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding, Magnetically and Electronically. Listed below is the correct format to be used in the ‘‘Q’’ record when submitting the Form 1042–S magnetically or electronically:

RECORD NAME: RECIPIENT ‘‘Q’’ RECORD—CONTINUED

Positions Field Title Length Description and Remarks

324–332 Postal Code 9 Enter a Foreign or U.S. Postal Code (ZIP Code). A Postal Code is REQUIRED for United States and U.S. Territories, Canadian, and Australian addresses. Withholding Agents should make an effort to obtain postal codes for all other countries. Only alphabetic, numeric, and blank characters are valid. Do not omit any blanks that may appear in the ZIP code. Use the following table to format Postal Codes for the three required countries (‘‘a’’ denotes alpha characters, ‘‘n’’ denotes numerics, ‘‘b’’ denotes a blank). All postal codes should be left-justified and blank filled.

Country Postal Code Format United States and U.S. Territories nnnnnbbbb or nnnnnnnnn Canadian anabnanbb Australian nnnnbbbbb

final regulations which is the subject of FR Doc. 95–30685, is corrected as follows:

On page 66140, column 2, in the preamble under the paragraph heading ‘‘ Additional month to provide Forms W–2 and W–3 to SSA ’’, last line, the language ‘‘the final Form 941 is due.’’ is corrected to read ‘‘the end of the quarter.’’

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

February 26, 1996, 8:45 a.m., and published in the issue of the Federal Register for February 27, 1996, 61 F.R. 7214)

Actuarial Tables Exceptions; Correction

Notice 96–22 AGENCY: Internal Revenue Service (IRS), Treasury.

Time for Furnishing Wage Statements on Termination of Employer’s Operations; Correction

Notice 96–21

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to final regulations.

SUMMARY: This document contains a correction to final regulations [TD 8636 (1996–4 I.R.B. 64)] which were published in the Federal Register for Thursday, December 21, 1995 (60 FR 66139). The final regulations relate to the time for furnishing wage statements to employees and for filing wage statements with the Social Security Administration upon the termination of an employer’s operations.

EFFECTIVE DATE: January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Jean M. Casey, (202) 622-6040 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of this correction are under section 6051, 6071, and 6081 of the Internal Revenue Code.

Need for Correction

As published, TD 8636 contains a typographical error that is in need of clarification.

Correction of Publication

Accordingly, the publication of the

ACTION: Correction to final regulations.

SUMMARY: This document contains a correction to final regulations [TD 8630 (1996–3 I.R.B. 19)] which were published in the Federal Register for Wednesday, December 13, 1995 (60 FR 63913). The final regulations relate to income, estate, and gift tax regulations regarding exceptions to the use of valuation tables.

EFFECTIVE DATE: December 13, 1995.

FOR FURTHER INFORMATION CONTACT: William L. Blodgett, (202) 622-3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of this correction are under sections 170, 642, 664, 2031, 2512 and 7520 of the Internal Revenue Code.

Need for Correction

As published, TD 8630 contains a typographical error that is in need of clarification.

Correction of Publication

Accordingly, the publication of the final regulations which is the subject of FR Doc. 95–30272, is corrected as follows:

On page 63913, column 1, in the preamble in the caption ‘‘EFFECTIVE DATE,’’ line 2, the language ‘‘effective December 13, 1995.’’ is corrected to read ‘‘effective December 13, 1995, and applicable for transfers after December 13, 1995.’’

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

February 29, 1996, 8:45 a.m., and published in the issue of the Federal Register for March 1, 1996, 61 F.R. 7991)

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also Part I, Sections 62, 162, 267, 274; 1.62–2, 1.162–17, 1.267(a)–1, 1.274–5T, 1.274(d)–1(a).)

Rev. Proc. 96–28