INTEREST ON UNDERPAYMENT, WHICH WAS SATISFIED WITH SUBSEQUENT YEAR'S OVERPAYMENT, RUNS FROM DATE UNDERPAYMENT WAS DUE UNTIL SUBSEQUENT RETURN IS FILED.

Rev. Rul. 88-97

ISSUE

If a liability for one tax year is satisfied by the credit of an overpayment for a subsequent year, to what date does interest run on the underpayment?

FACTS

SITUATION 1. A, an individual who files income tax returns on a calendar year basis, timely filed Form 1040, U.S. Individual Income Tax Return, for 1984 showing tax due of 10x dollars. A did not pay the amount due. On February 15, 1986, A filed Form 1040 for 1985 showing tax of 20x dollars and income tax withhholding of 40x dollars.

SITUATION 2. The facts are the same as in SITUATION 1, except that A filed Form 1040 for 1985 on August 15, 1986, after having filed a timely application for an automatic four-month extension of time to file.

SITUATION 3. The facts are the same as in SITUATION 1, except that A filed Form 1040 for 1985 on December 15, 1986.

LAW AND ANALYSIS

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

Section 6601(f) of the Code provides that if any portion of a tax is satisfied by credit of an overpayment, then no interest shall be imposed under section 6601 on the portion of the tax so satisfied for any period during which, if the credit had not been made, interest would have been allowable with respect to the overpayment.

Section 6611 of the Code sets forth rules for determining the period for which interest is allowed on overpayments. Section 6611(b)(1) provides that, in the case of a credit, interest is allowable from the date of overpayment. In the case of a refund, section 6611(b)(2) provides that interest is allowable from the date of the overpayment.

Section 301.6611-1(d) of the Regulations on Procedure and Administration provides that in the case of advance payment of tax, payment of estimated tax, or credit for income tax withholding, the provisions of section 6513 (except for section 6513(c)) of the Code are applicable in determining the date of overpayment for purposes of computing interest.

Under section 6513(b) of the Code, taxes withheld at the source or paid as estimated taxes are deemed paid on the due date of the return (determined without regard to any extension of time for filing).

For returns filed after October 3, 1982, section 6611(b)(3) of the Code, as enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), section 346(a), 1982-2 C.B. 462, 579, provides that, notwithstanding section 6611(b)(1) or (2), in the case of a return of tax that is filed after the last date prescribed for filing (determined with regard to extensions), no interest shall be allowed or paid for any day before the date the return is filed.

Section 6601(f) of the Code is intended to prevent the imposition of interest on any portion of an underpayment relating to one taxable year that is satisfied by credit of an overpayment relating to a subsequent taxable year for the period during which interest would run on the overpayment so credited if the credit had not been made (e.g., if the overpayment had instead been refunded). See S. Rep. No. 1983, 85th Cong., 2d Sess. 99 (1958), 1958-3 C.B. 922, 1155.

In SITUATION 1 and SITUATION 2, if there had been no outstanding liability for 1984 and A's 1985 overpayment had therefore been refunded, interest would not have been allowable for any period before the due date for filing the 1985 return (determined without regard to extensions) because section 301.6611-1(d) of the regulations and section 6513(b) of the Code establish the due date as the date of overpayment. Under section 6601(f), therefore, the due date for the 1985 return is the date to which interest on the 1984 underpayment is imposed in both situations. See sections 3.02(3) and 3.02(5)c. of Rev. Proc. 60-17, 1960-2 C.B. 942.

In SITUATION 3, if the overpayment had been refunded, interest would only have been allowable from the date the return was filed, because section 6611(b)(3) of the Code does not allow interest for any period prior to the filing date. The date the return was filed is therefore the date to which interest on the 1984 underpayment is imposed under section 6601(f).

HOLDINGS

SITUATION 1. Interest on a liability for one year that is satisfied by the credit of an overpayment from a return for a subsequent year filed on or before the original due date runs from the due date of the return for the earlier year to the due date of the subsequent year's return. A owes interest for the period from April 15, 1985, to April 15, 1986.

SITUATION 2. Interest on a liability for one year that is satisfied by the credit of an overpayment from a subsequent year's return filed after the original due date but within a valid extension period also runs to the due date of the subsequent year's return (determined without regard to extensions). A owes interest for the period from April 15, 1985, to April 15, 1986.

SITUATION 3. Interest on a liability for one year that is satisfied by the credit of an overpayment claimed on a delinquent return for a subsequent year runs from the due date of the return for the earlier year to the date the return for the subsequent year is filed. A owes interest for the period from April 15, 1985, to December 15, 1986, the date on which the late return was filed.

DRAFTING INFORMATION

The principal author of this revenue ruling is Clement P. Frenchy of the Office of Assistant Chief Counsel (Income Tax and Accounting Division). For further information regarding this revenue ruling contact Mr. Frenchy on (202) 566-3842 (not a toll-free call).