Rev. Rul. 68-258

Advice has been requested concerning the computation of interest on a deficiency under the circumstances described below.

On or before the due date of its income tax return a corporation filed a Form 7004, Application by a Corporation for Automatic Extension of Time to File U.S. Income Tax Return, showing an anticipated income tax liability for the year in the amount of $100,000. At the same time it elected, pursuant to section 6152 of the Internal Revenue Code of 1954, to pay the tax in two installments by paying $50,000, one-half of the tax shown on the Form 7004. The corporation later filed its income tax return, Form 1120, showing a tax liability for the year in the amount of $80,000 and paid $30,000 as the last installment of the tax due for the year. Upon examination of the return a deficiency in the amount of $10,000 was determined. The question presented is how the interest due on the deficiency should be computed.

Under the provisions of section 6081(b) of the Code and section 1.6081-3 of the Income Tax Regulations a Form 7004 is required to be filed to obtain an automatic three-month extension of time to file a final income tax return. A corporation may also elect to pay its income tax in installments, as provided by section 6152 of the Code, when filing a Form 7004. Section 1.6152-1(a)(2)(ii) of the regulations and the instructions on the Form 7004 both provide that the installment privilege is limited to the unpaid amount of tax shown on the Form 7004.

Section 6601(a) of the Code provides that if any amount of tax imposed by the Code (whether required to be shown on a return, or to be paid by stamp or by some other method) is not paid on or before the last date prescribed for payment, interest on such amount shall be paid at the rate of 6 percent per annum from such last date to the date paid. Section 6601(c)(2)(B) of the Code provides that in the case of an election under section 6152(a) to pay the tax in installments the last date prescribed for payment of the first installment shall be deemed the last date prescribed for payment of any portion of the tax not shown on the return . The Form 7004 has been held to be a return for purposes of section 6601(c)(2)(B). Hayden Publishing Company, Inc. v. United States , 341 F.2d 646 (1965).

Since a Form 7004 is `the return' for the purpose of computing interest under section 6601(c)(2)(B), it follows that interest on underpayments of installments of the tax shown on the Form 7004 should be computed only from the respective installment dates, unless the installment privilege is terminated by the issuance of a notice and demand for the entire balance of tax due, as provided by section 6152(d).

In this instance the taxpayer has complied with all the requirements for obtaining an extension of time to file its income tax return; has duly elected and become entitled to pay its reported tax for the year in installments; and has in fact timely paid all of the tax shown on `the return'.

Under section 6152(b) of the Code the due date of each installment is prescribed. For this reason tax paid as an installment does not bear interest except where that installment is paid late. In such case interest is computed on the amount of the installment from the due date of the installment.

Section 6152(c) of the Code provides for proration of deficiencies in tax to the installments for payment purposes, but the due date of each prorated part of a deficiency is not made to coincide with the due date of the installment to which it is prorated. That part of a deficiency which is prorated to an installment that is not due at the time the deficiency is assessed does not have to be paid before the due date of the installment. However, under the provisions of section 6601(c)(2)(B) of the Code, interest on all of the deficiency is computed from the last date prescribed for payment of the first installment of the tax for the year involved to the date the deficiency is paid with respect to any portion of the tax not shown on the return.

In this case the taxpayer paid $50,000 as the first installment of the tax shown on the return (the Form 7004 in this instance, which is treated as the return for purposes of applying section 6601(c)(2)(B) of the Code). This was the amount required to be paid at the time in order to elect the installment privilege. This payment exceeded the amount of the proper first installment, as determined from the subsequently filed income tax return, by the amount of $10,000 and even exceeded the amount the installment would have been, had the correct tax for the year been reported on the income tax return, by the amount of $5,000. The Government, therefore, received as of the due date of the tax for the year (which is the due date of the first installment of reported tax) and thereafter retained at all times more than was required to be paid as the first installment.

On the date prescribed for filing the income tax return, as properly extended, the Internal Revenue Service received a second installment payment in the amount of $30,000. After receiving this payment the Service was in the position of having timely received all of the tax due for the year except the $10,000 deficiency. It is noted, however, that $10,000 is the difference between the $30,000 paid with the income tax return, Form 1120, as the second installment of the tax reported on the Form 7004 and the $40,000 which the income tax return, as filed, disclosed to be the proper second installment. In other words, $10,000 is the amount by which the second installment remained unpaid at the time the deficiency was determined.

Interest runs from the due date of the income tax return only on unpaid tax not shown on the Form 7004. Interest on any unpaid tax reported on the Form 7004, with respect to which the installment privilege has been properly acquired, runs only from the installment dates. Once having properly acquired the installment privilege with respect to a declared amount of tax, the taxpayer does not lose the privilege by underpaying a subsequent installment, unless the installment privilege is revoked pursuant to the provisions of section 6152(d) of the Code.

It follows that interest is computed on the $10,000 underpayment in the instant case from the due date of the second installment to the date paid.