Rev. Rul. 83-111

ISSUE

What effect does application of a preceding year's overpayment of income tax as a credit against estimated income tax for the succeeding year have on computation of the addition to tax for underpayment of estimated tax?

FACTS

Situation 1. X corporation files its federal income tax returns on a calendar year basis. On March 15, 1980, X filed Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, showing a tentative 1979 income tax liability of 6x dollars and elected to pay the tax in installments by depositing 3x dollars as the first installment. On June 15, 1980, X deposited 3x dollars as the second installment payment of the tentative liability. On that same date X requested and was subsequently granted an additional 3 month extension of time to file. On September 15, 1980, X filed Form 1120, U.S. Corporation Income Tax Return, for 1979 showing an income tax liability of 4x dollars. X elected to apply the 2x dollar overpayment shown on the return as a credit against 1980 estimated tax.

For 1980, X made installment payments of estimated tax. The first installment payment, made on April 15, 1980, was underpaid by 2x dollars. The remaining installments were timely made and met the minimum requirements of section 6655(b) of the Internal Revenue Code.

Situation 2. A, an individual who files federal income tax returns on calendar year basis, made timely estimated tax payments for 1979 of 100x dollars. On April 15, 1980, A filed Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and received a 2-month extension of time to file. On June 15, 1980, A filed Form 1040, U.S. Individual Income Tax Return, showing a tax liability of 80x dollars. A elected to apply the 20x dollar overpayment against A's 1980 estimated tax.

For 1980, A made installment payments of estimated tax. The first installment payment, made on April 15, 1980, was underpaid by 10x dollars. The remaining installments were timely made and met the minimum requirements of section 6654(b) of the Code. LAW AND ANALYSIS

Sections 6153 and 6154 of the Code provide that calendar year taxpayers must generally pay estimated tax in four equal installments on April 15, June 15, September 15, and December 15 (January 15 for individuals).

Section 6402(b) of the Code authorizes the Secretary to prescribe regulations providing for the crediting against estimated income tax for any tax year of the amount determined by the taxpayer to be an overpayment of the tax for a preceding tax year.

Section 301.6402-3(a)(5) of the Regulations on Procedure and Administration provides that if the taxpayer elects to have all or part of the overpayment shown on a return applied to the taxpayer's estimated income tax for the succeeding tax year, no interest will be allowed on the portion of the overpayment credited and the amount will be applied as a payment on account of the estimated income tax for the succeeding year or the installments thereof.

Sections 6654(a) and 6655(a) of the Code provide for additions to tax for underpayments of estimated tax by individuals and corporations respectively. The additions to tax are determined at an annual rate established under section 6621 on the amount of the underpayment for the period of the underpayment.

Sections 6654(b) and 6655(b) of the Code define underpayment as the excess of (1) the amount of the installment that would be required to be paid if the estimated tax were 80% of the tax shown on the return (66-2/3% for certain farmers and fishers and 90% for corporations for tax years beginning after December 31, 1982), over (2) the amount of the installment paid on or before the due date of the installment.

Under sections 6654(c) and 6655(c) of the Code, the period of underpayment runs from the date the installment was required to be paid to the earlier of (1) the 15th day of the fourth month (third month for corporations) following the close of the tax year, or (2) the date on which the underpayment is paid. A payment of estimated tax on any installment date is considered a payment of a previous underpayment only to the extent the payment exceeds the amount of the installment determined under sections 6654(b) and 6655(b).

Rev. Rul. 77-475, 1977-2 C.B. 476, considered facts similar to those in situation 1. Rev. Rul. 77-475 concluded that the significant date for determining which installment of estimated tax the overpayment would be applied against was the date of the payment that caused the overpayment. Thus, Rev. Rul. 77-475 held that the period of the underpayment of the April 15 installment was terminated on June 15 because that was the date of the 3x dollar payment that caused the 2x dollar overpayment.

In Avon Products, Inc. v. United States, 588 F. 2d 342 (2d Cir., 1978), the court held that when a deficiency was later asserted against a taxpayer which had previously elected to apply its overpayment as a credit against the next year's estimated tax, interest ran from the date the election was made, not the due date. In Rev. Rul. 83-112, page 247, this Bulletin, the Service announced that it will follow Avon Products and modified Rev. Rut. 76493, 1976-2 C.B. 429, concerning computation of interest on deficiencies when an overpayment is applied against a subsequent year's estimated tax. Thus, in situation 1, if a deficiency of 1x dollars was asserted against X for 1979, X would owe interest from September 15, 1980, to the date the deficiency was paid. Because the same amount of overpayment cannot be applied against separate liabilities during the same period of time, the Service has reconsidered Rev. Rul. 77-475.

The relevant date for determining both the starting date for interest on a deficiency assessed for the earlier year and the period of underpayment for any underpayment of estimated tax for the subsequent year is not the date the payment causing the overpayment was made, as was previously held, but the date the election was made to apply that overpayment as a credit against the subsequent year's estimated tax. Thus, if the election to credit the overpayment is made after the due date of the first installment of estimated tax for the subsequent year, it may be credited only against an installment of estimated tax due on or after the date the election was made ' If the amount of the credit exceeds the minimum amount required to be paid in order to avoid an underpayment under sections 6654(b) and 6655(b) of the Code, the excess may, under sections 6654(c) and 6655(c), be applied as a payment of any previous underpayment of estimated tax. Any portion of the credit remaining after satisfaction of the previous underpayment or underpayments may be credited against other estimated tax installments due.

However, if an election to apply an overpayment of income tax for one year against estimated tax for a succeeding year is made on or before the due date of the first installment of estimated tax for the succeeding year, the overpayment is available for credit against any installment of estimated tax for the succeeding year and will be credited in accordance with the taxpayer's election.

Situation 1. The election under section 301.6402-3(a)(5) of the regulations was made on September 15, 1980. Accordingly, the credit arising from overpayment of the 1979 tax will be applied against the September 15 installment of estimated tax for 1980. Thus, the addition to tax for the April 1980 underpayment of 2x dollars was not eliminated by the overpayment. The period of underpayment for the underpayment of the April 1980 installment was terminated by the 1979 overpayment shown on the taxpayer's Form 1120 filed on September 15, 1980.

Situation 2. The election under section 301.6402-3(a)(5) of the regulations was made on June 15, 1980. Accordingly, the credit arising from overpayment of the 1979 tax will be applied against the June 15 installment of estimated tax for 1980. Thus, the addition to tax for the April 1980 underpayment was not eliminated by the 1979 overpayment. The period of underpayment for the underpayment of the April 1980 installment was terminated by the 1980 overpayment shown on the taxpayer's Form 1040 filed on June 15, 1980.

PROSPECTIVE APPLICATION

Under the authority of section 7805(b) of the Code, the holding in this revenue ruling will not apply to elections to apply overpayments to a subsequent year's estimated tax made before January 1, 1984.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 77-475 is revoked.