Rev. Rul. 83-113

ISSUE

How is interest computed when an overpayment of tax is applied as a credit against interest assessed on a deficiency?

FACTS

The taxpayer executed a consent extending the period of limitations on assessment for tax year 1974 until April 15, 1981. Examination of the taxpayer's income tax returns for 1974 and 1977 disclosed a deficiency of $1,000 for 1974 and a net operating loss for 1977. The 1977 net operating loss was carried back to 1974, causing a reduction in tax of $2,000, which extinguished the deficiency and created a net overpayment of $1,000 for 1974. On May 7, 1980, $199 in interest was assessed on the deficiency-from the due date of the 1974 return (April 15, 1975) to the date the overpayment arose (January 1, 1978). The $199 was offset by $199 from the $1,000 overpayment. The taxpayer contends that the Government should pay interest on the entire $1,000 overpayment from January 1, 1978, including $31 on that portion of the overpayment applied against the $199 deficiency interest, computed from January 1, 1978, (the date the overpayment arose) to May 7, 1980, (the date the interest was assessed.)

LAW AND ANALYSIS

Section 6611(a) of the Internal Revenue Code provides for the payment of interest on any overpayment of tax at a rate established under section 6621. Under section 6611(b), when the overpayment is credited rather than refunded, interest must be allowed and paid from the date of overpayment to the due date of the amount against which the credit is taken. For interest accruing before October 4, 1982, the effective date of section 346(c) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 580 (the Act), section 6611(f) provides that when the overpayment results from a net operating loss carryback, the overpayment is deemed to have been made no earlier than the close of the tax year in which the net operating loss arises (loss year).

Section 6601(e)(2) of the Code, before its repeal by section 344 of the Act effective January 1, 1983, provided that no interest is charged on interest.

Under section 301.6611-1(b) of the Regulations on Procedure and Administration, there can be no overpayment of tax until the entire tax liability (including any interest, addition to the tax, or additional amount) has been paid.

Section 301.6611-1(h)(2)(i) of the regulations sets the due date (for purposes of section 6611(b)) as the date fixed by law or regulations for payment. Under section 301.6611-1(h)(2)(v), when there is a credit against assessed interest the due date is the date of assessment of the interest.

Rev. Proc. 60-17, 1960-2 C.B. 942, modified by Rev. Proc. 62-27, 1962-2 C.B. 495, and Rev. Proc. 65-20, 1965-2 C.B. 1003, provides in sec. 3.02(3)e that if the amount of tax satisfied by credit of an overpayment is a deficiency extinguished by an overassessment attributable to a net operating loss carryback, interest is assessed and collected from the due date of the tax to the last day of the loss year.

Rev. Proc. 83-58, page 575, this Bulletin, revoked section 3.02(4)b.(b) of Rev. Proc. 60-17, to provide that if an overpayment is applied as a credit to unpaid interest, penalty, or addition to tax for the same year and type of tax, interest is allowed from the date of overpayment to the date of assessment of the amount to which the credit is applied.

Consequently, the $1,000 overpayment arising on January 1, 1978, accrued interest from that date. The $199 of interest which had accrued from April 15, 1974, to January 1, 1978, did not bear interest pursuant to section 6601(e)(2) of the Code. See Fruehauf Corp. v. United States, 477 F.2d 568 (Ct. Cl. 1973); Tami Sportswear Inc. v. United States, No. C730410-OJC (N.D. Cal., August 13, 1974).

HOLDING

The taxpayer is entitled to receive interest at the rate established under section 6621 of the Code on the entire $1,000 1974 overpayment from January 1, 1978, to May 7, 1980. Additionally, the taxpayer should only receive $801 of the $1000 overpayment because $199 was applied against interest accruing on the potential deficiency from April 15, 1975, to January 1, 1978.

This holding also applies to cases arising after the effective dates of the Act subject to the modifications in this paragraph. Under section 6622 of the Code, which was added by section 344 of the Act effective for interest accruing after December 31, 1982, the amount of interest to be paid on both liabilities and overpayments is compounded daily. Section 344 of the Act also repealed the rule formerly found in section 6601(e)(2) of the Code prohibiting the charging of interest on interest. Thus, for interest accruing after December 31, 1982, interest will run on the interest on the deficiency accrued at the date the deficiency is offset. Interest will also run on the overpayment. Additionally, under sections 6601(d) and 6611(f) of the Code, as amended by section 346(c) of the Act, the allowable interest accruing after October 3, 1982, with respect to certain carrybacks will run from the filing date of the loss year, rather than from the close of that year.