In Program Manager Technical Advice (PMTA), IRS advised managers on the effect of the Court of Federal Claims' 2009 decision in Coca-Cola v. U.S., in which the Court awarded Coke interest on taxes that were recaptured and subsequently abated, on its current procedures for calculating statutory interest under Code Sec. 6611. IRS determined that the Coca-Cola case didn't provide any blanket rule for computing overpayment interest, and stated that the "mere existence of a recapture of a tentative allowance" didn't necessarily warrant similar treatment to that received by Coke.
Statutory background. Under Code Sec. 6621, a taxpayer who receives a refund or a credit is entitled to statutory interest on the amount of the overpayment. However, under Code Sec. 6611(e), no interest is allowed on any overpayment that is refunded within 45 days after the original due date of the return covering the tax to which the overpayment relates (or if the return was filed after the original due date, within 45 days after the filing date).
If the overpayment is refunded, then interest stops accruing on a date (determined by IRS) not more than 30 days before the date of the refund. If the overpayment is applied against an outstanding tax liability, then interest is allowable from the date of the overpayment to the payment due date of the amount against which the credit is applied. (Code Sec. 6611(b)) Accordingly, if an overpayment is credited against an outstanding liability that was due before the overpayment arose, then the overpayment is credited without interest.
Background on the Coca-Cola case. On Sept. 15,'85, Coke filed an application for a tentative refund in the amount of $18,682,973 from its'81 tax year, based on its assertion of an net operating loss (NOL) carryback from its'84 tax year. IRS allowed the carryback and issued the tentative refund 12 days later, but then determined on Jan. 23,'91 that the amount of Coke's claimed carryback from'84 to'81 was incorrect. It reversed roughly two-thirds of that carryback ($12,448,079), thereby increasing Coke's'81 tax liability. Coke paid $9,772,827 in additional tax and $3,780,719 in deficiency interest. On Apr. 8,'91, Coke filed a claim for a refund of $13,086,842 plus interest.
On Jan. 8,'97, in a suit initiated by Coke, a stipulated Tax Court decision determined that there was an overpayment of $12,352,648 for tax year'81 and that a claim for refund for this amount was filed on Apr. 8,'91. As a result, on May 19,'97, IRS abated $12,352,648 in taxes and $5,531,965.47 in deficiency interest. This abatement originated from an increase in the carryback that Coke initially asserted in'85. However, IRS did not post any overpayment interest to Coke's'81 tax account.
Coke filed a complaint in the Court of Federal Claims on May 6, 2003, claiming $2,749,852.98 in interest based on the interim overpayment of $12,352,648 that existed between Mar. 15,'85 and Sept. 27,'85 after IRS abated the'81 taxes. IRS argued that its initial return of the requested amount within the 45-day period, despite its subsequent recapture, precluded any interest under Code Sec. 6611(a).
The Court of Federal Claims agreed with Coke, noting that IRS's tentative refund, errant recapture, and subsequent abatement caused an overpayment in Coke's tax account, and that it couldn't ignore IRS's subsequent recapture of the refund. The Court reasoned that the term "refunded," as used in Code Sec. 6611(e), necessarily implies that the taxpayer actually retain the funds. Accordingly, Code Sec. 6611(a) compelled that interest be paid on the overpayment.
Request for assistance. The issue addressed in the PMTA is what effect, if any, the Coca-Cola case has on how IRS computes statutory interest under Code Sec. 6611 in situations involving a tentative carryback allowance that is subsequently reduced (also referred to as a "recapture of the tentative allowance") after an audit in which a general adjustment overpayment is also determined.
New guidance. Noting that Coca-Cola didn't provide any "blanket rule" for computing interest, IRS urged interest computation specialists to evaluate the facts of each situation and to continue to apply the general rules of Code Sec. 6601 and Code Sec. 6611. Interest specialists were also instructed to "resist the urge to draw parallels between what are unrelated issues" based solely on the presence of a recapture of a tentative carryback allowance. Three fact patterns were set out to illustrate the analysis.
Illustration 1: For calendar year 2003, B Corp filed a tentative refund claim on Sept. 15, 2004, carrying back an NOL deduction to 2001. IRS issues the resulting $50,000 overpayment to B Corp as a refund on Oct. 12, 2004 (i.e., within 45 days), without interest under Code Sec. 6611(e) and Code Sec. 6611(f)(4). On Aug. 5, 2005, IRS completed an examination of B Corp's Form 1120 for tax years ending 2001 through 2003, finding a general adjustment overpayment of $5,000 for 2001 and a complete recapture of the tentative carryback refunded without interest on Oct. 12, 2004, for a net tax increase of $45,000.
Result. IRS concluded that the Coca-Cola case is factually distinguishable from this situation, and that B Corp isn't entitled to overpayment interest from Mar. 15, 2003 to Oct. 12, 2004 on the $5,000 adjustment. Deficiency interest may accrue under Code Sec. 6601 on the $45,000 net adjustment, but overpayment interest isn't allowed.
Illustration 2: The facts are the same as those in Illustration 1, except that the carryback recapture is a partial recovery of $30,000, yielding a net adjustment of $25,000.
Result. Again, no interest is allowed on the interim overpayment.
Illustration 3: C Corp timely filed its'93 Form 1120 on the extended Sep. 15,'94 due date. On Dec. 15,'99, C Corp filed a Form 1139 seeking to carry its'98 loss to its'93 year, requesting a refund of $10 million, which IRS refunds without interest on Jan. 10, 2000 (i.e., within 45 days). On Apr. 11, 2005, IRS recaptured the tentative allowance by transferring overpayment credits, in the amounts of $8 million and $2 million, from C Corp's respective'94 and'95 years, into the'93 account. C Corp argues that a new overpayment balance was established as of Mar. 15,'99 by virtue of the'93 application of the $10 million in'93, and that it is separate from both the original $10 million tentative allowance and the interest-free period that was applied thereto. Thus, C Corp requests overpayment interest on the $10 million from Mar. 15,'99 (the due date of the'98 return) to Jan. 10, 2000 (the date on which IRS issued the refund claimed on the Form 1139 for'93).
Result. Since IRS satisfied the recapture of the tentative allowance as of Apr. 11, 2005, it has the discretion under Code Sec. 6402(a) to apply an overpayment (plus any interest thereon) against another liability of the taxpayer. Although interest on the amounts transferred to'93 from the'94 and'95 accounts might accrue overpayment interest that could be applied to the'93 liability, that interest would accrue based on the facts of'94 and'95, not'93. Thus, IRS determined that C Corp is not entitled to overpayment interest for'93 on amounts transferred in from other tax periods to satisfy the underpayment for that year, because the due date of the'93 payment preceded the due date of the'94 payment.
References: For interest on tax overpayments, see FTC 2d/FIN ¶T-8002; United States Tax Reporter ¶66,214; TaxDesk ¶807,001; TG ¶70901.