Rev. Rul. 83-112

ISSUE

In the situations described below, from what date or dates will the interest on deficiencies run?

FACTS

Situation 1. X corporation files its federal income tax returns on a calendar year basis. For 1979, X made timely estimated tax payments of 100x dollars. On March 15, 1980, X filed Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, and received a 3-month extension of time to file. The Form 7004 showed tentative tax of 220x dollars. X paid 60x dollars, one-half of the balance of 120x dollars, on March 15, 1980, and the remaining 60x dollars on June 15, 1980. On June 15, 1980, X filed Form 7005, Application for Additional Extension of Time to File Corporation Income Tax Return, and received an additional 3 months to file Form 1120, U.S. Corporation Income Tax Return. On September 15, 1980, X filed Form 1120 for 1979 showing tax of 210x dollars and elected to have the overpayment of 10x dollars credited against its 1980 estimated tax. In 1981, the Internal Revenue Service examined X's 1979 return and determined a deficiency of 5x dollars.

Situation 2. Same facts as in Situation I except that X requested that the 10x dollar overpayment shown on the return be refunded. The 10x dollars was refunded to X within 45 days.

Situation 3. Same facts as in Situation 1, except that the tentative tax shown on Form 7004 was 90x dollars. Thus, X paid nothing on March 15, 1980 or June 15, 1980. X's 1979 return showed a tax of 80x dollars and a 20x dollar overpayment. In 1981, the Service determined a deficiency of 5x dollars on X's 1979 return.

Situation 4. A, an individual, files federal income tax returns on a calendar year basis. In 1979, A made timely estimated tax payments 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 tax due of 80x dollars. A requested that the 20x dollar overpayment be refunded. The refund was made within 45 days. In 1981, the Internal Revenue Service examined A's 1979 return and determined a deficiency of 25x dollars.

LAW AND ANALYSIS

Section 6152(a)(1) of the Code, before its repeal by section 234(b)(1) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 51 1, allowed a corporation to pay the unpaid amount of its income taxes in two equal installments.

Section 6152(b)(2) of the Code, before its repeal, provided that the first installment must be paid on the date prescribed for payment of the tax and the second installment must be paid within 3 months of that date.

Section 301.6402-3(a)(5) of the Regulations on Procedure and Administration provides that a taxpayer may elect to apply all or part of the overpayment shown by its return to its estimated tax for the succeeding tax year by so indicating on its return. No interest is allowed on the portion of the overpayment credited.

Section 6601(a) of the Code provides that if any amount of tax is not paid on or before the last date prescribed for payment, interest will be paid on that amount from that date to the date paid.

Section 6601 (b) of the Code provides rules for determining the "last date prescribed for payment." Under section 6601(b)(1), that date is determined without regard to any extension of time for payment. Under section 6601(b)(2), if an election under section 6152(a) was made, the date prescribed for payment of each installment was determined under section 6152(b) and the last date described for payment of any part the tax not shown on the return was the last date for payment of the first installment.

Rev. Rul. 76-493, 1976-2 C.B. 429, considered facts similar to those in Situation 3, and concluded that the corporation could not elect the installment privilege under section 6152 of the Code because there was no unpaid tax liability shown on Form 7004. Rev. Rul. 76-493 held that because the last date prescribed for payment was the original due date of the return (March 15, 1980, in Situation 3), interest ran on the deficiency from the original due date to the date paid.

In Avon Products, Inc. v. United States, 588 F.2d 342 (2d Cir., 1978), the court considered facts similar to those in Situation 1. The question the court was presented with was whether interest ran on the deficiency from the due date for the second installment (June 15) or from the date the taxpayer elected to have the overpayment shown on the return applied to the next year's estimated tax (September 15). The court interpreted section 6601(a) of the Code to mean that interest could only be charged when the tax was both due and unpaid, reasoning that interest was charged only for the loss of the use of money. While the tax was due on the due date of the second installment, it did not become unpaid until the taxpayer elected to have it applied against the subsequent year's tax. The government was not deprived of use of the money between June 15 and September 15. Thus, the court held that interest began to run on the deficiency only on the date the government was so deprived, or on the date the taxpayer filed its return and elected to have the overpayment applied.

The Internal Revenue Service will follow the decision in Avon Products. Thus, in Situation 1, while the amount of the deficiency was due on June 15, 1980 (the date prescribed for payment under section 6152(b) of the Code as in effect then), it was not unpaid until September 15, 1980, when Y elected to have the overpayment shown on its 1979 return applied to its 1980 estimated tax.

Similarly, in Situation 2, the deficiency was not unpaid between June 15, 1980, and September 15, 1980. X's election to have the 10x dollar overpayment refunded rather than credited does not affect the result. However, if the refund was not made within 45 days, interest would have been paid to X under section 6611(e) of the Code from June 15, 1980. In that case, the deficiency would have been both due and unpaid from June 15, 1980.

In Situation 3, Rev. Rul. 76-493 correctly concluded that X could not make an election under section 6152. Under Avon Products, however, the making of such an election does not affect the interest computation date when the amount paid before the original due date exceeds the amount shown on the return, plus the amount of any deficiency assessed. The result in Situation 3 is identical to that in Situation I if X elected to have the 20x dollar overpayment applied to the 1980 estimated tax and identical to Situation 2 if X elected to have the overpayment refunded.

In Situation 4, A's liability, while due on April 15, 1980, was not completely unpaid until June 15, 1980. Under Avon Products, interest on 20x dollars of the deficiency did not begin to run until the date the 1979 return was filed. Interest computation on the other 5x dollars of the deficiency is not affected by Avon Products, however, because the Government never had use of that portion of the deficiency. If the Service did not refund the 20x dollar overpayment within 45 days, the rule discussed in Situation 2 would apply.

HOLDING

If a taxpayer has overpaid its liability as of the date prescribed for payment of the tax and the overpayment is either applied against the next year's estimated tax or refunded without interest, interest on that part of a deficiency that is less than the original overpayment will run from the date the return is filed. In Situations 1, 2, and 3, interest on the deficiency runs from September 15, 1980, to the date the deficiency is paid. In Situation 4, interest runs from June 15, 1980, to the date the deficiency is paid on 20x dollars. Interest runs from April 15, 1980, to the date the deficiency is paid on 5x dollars.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 76-493 is superseded.

To determine which installment of estimated tax the credit in Situation I will be applied to, see Rev. Rul. 83-1, page 245, this Bulletin.