Bank of America Meets Wary Court in Bid for Merger-Linked Refund

A panel of appeals court judges expressed skepticism Tuesday toward Bank of America Corp.‘s bid to recoup $167 million from the IRS that Merrill Lynch overpaid in taxes before the two companies’ 2013 merger.

Counsel for Bank of America told the US Court of Appeals for the Fourth Circuit that it should be able to collect what Merrill Lynch overpaid for its 2005 tax year under IRC Section 6402, which lets merged companies “net” overpayments and underpayments from past tax years to avoid paying interest to the government.

The provision entitles the bank to the refund as part of other obligations it absorbed from Merrill Lynch during the merger, said the bank’s attorney, Nicole Saharsky of Mayer Brown LLP.

But the judges pushed back on that argument.

“I’m struggling with the fact that the Internal Revenue Code sets a date for when overpayment happened and when underpayment happened,” Judge Allison Jones Rushing said. “Those happened at a fixed time in the past,” so why isn’t the inquiry whether the two companies were “the same taxpayer when you made an overpayment or an underpayment?” she asked.

BofA assumed many of Merrill Lynch’s other obligations when the companies merged, such as contract liabilities, environmental concerns, and torts, Saharsky said.

The bank sued in 2017 after the IRS denied its refund claim. The US District Court for the Western District of North Carolina sided with the IRS in 2023, prompting Bank of America’s appeal.

An amicus brief led by the US Chamber of Commerce backed the bank, saying that the IRS’s argument “inserts incongruity into the interpretation” of the tax code to benefit the government.

Saharsky told the panel that both companies paid their taxes for 2005 and had zero balances. It wasn’t until 2014—after the merger—when the IRS “retroactively” determined new tax deficiencies that were “deemed to have occurred” for the 2006 and 2008 tax years that applied for the 2005 tax year, Saharsky said.

The two companies’ tax obligations therefore must rely on the context of IRS determinations that changed with time. The government’s contrary view “requires you to freeze the statute in time in a way that it’s not frozen,” she said.

Saharsky noted that IRS revenue rulings on excise tax and unemployment tax treat merged companies as one entity. “For every purpose we can find except this interest-netting purpose, they recognize we are the same taxpayer,” she said.

‘Foundational Basis’

Judge James Andrew Wynn asked what the “foundational basis” of the dispute should be if the taxes paid were incorrect in 2005 because the bank hasn’t cited any instance in 2005 where the government erred.

If Merrill Lynch “had done it correctly in 2005, would those things that occurred after 2005 have made any difference?” Wynn asked. “Or would they have a basis for anything if it was correct in 2005?”

Ellen DelSole of the Justice Department, who represented the IRS, said IRC Section 6621(d) says interest on overpayments and underpayments can’t be netted because the companies in their pre-merger state aren’t the same entity.

She added that the Federal Circuit ruled in 2016 that Wells Fargo couldn’t net the over and underpayments of several entities it acquired over the years.

Judge G. Steven Agee questioned the Wells Fargo decision and disagreed when DelSole argued that merged companies don’t retroactively assume obligations of their predecessors.

“That just sounds completely wrong to me on Delaware law,” Agee said. “They’re pretty clear on the effects of merger that the surviving corporation takes on all the aspects of corporations.”

The case is Bank of America Corp. v. United States, 4th Cir., No. 23-02319, oral arguments held 5/6/25.