ADVANCE PAYMENT OF DEFICIENCY PLUS INTEREST DOES NOT CONSTITUTE AN OVERPAYMENT OF TAX AND ENTITLE THE TAXPAYER TO A REFUND

Rev. Rul. 85-67

ISSUES

1. Whether the Internal Revenue Service may assess a payment of tax made on an agreed deficiency, plus interest, which was received but not assessed before the running of the period of limitations for assessment.

2. If such amount of tax cannot be assessed, whether such an advance payment of the unassessed deficiency and interest constitutes an overpayment of tax that may be refunded to the taxpayer.

FACTS

Upon examination of A's income tax return, the District Director Determined a tax deficiency. A paid the amount of the deficiency, plus interest. The Service received the payment of tax and interest within the period prescribed for assessment by section 6501(a) of the Internal Revenue Code but failed to assess during that period. A filed a claim for refund on the basis that the tax was not timely assessed and, thus, was not owed.

LAW AND ANALYSIS

Section 6201(a) of the Code provides that the Secretary or his delegate is authorized and required to make the assessment of all taxes (including interest).

Section 6601(e)(1) of the Code provides that interest shall be assessed and collected in the same manner as taxes.

Section 6501(a) of the Code provides the general rule that taxes imposed by the Code shall be assessed within three years after the return is filed, and that no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period.

Section 6402(a) of the Code provides that in the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment, and shall refund any balance to such person.

Section 6401(a) of the Code provides that the term "overpayment" includes that part of the amount of the payment of any internal revenue tax that is assessed and collected after the expiration of the period of limitations.

In the present situation, A's payment of tax, plus interest, in satisfaction of an agreed deficiency was collected but not assessed before the running of the period of limitations on assessment under section 6501(a) of the Code. The purpose of an assessment, however, is only to place the taxes owed on the books of the Government. Cohen v. Mayer, 199 F. Supp. 331 (D. N.J. 1961), aff'd sub nom., Cohen v. Gross, 316 F.2d 521 (3rd Cir. 1963). The assessment does not create the liability but merely acts as a judgment for taxes found due. Bull v. United States, 295 U.S. 247, 259 (1935). A taxpayer may be liable for, and make a payment of, tax even though the tax has not been assessed. See section 6213(b)(4) of the Code and section 301.6213-1(b)(3) of the Regulations on Procedure and Administration.

Where taxes and interest legally due have been paid before the expiration of the period of limitations for assessment, as in the subject case, they cannot be recovered by the taxpayer merely because they have not been formally assessed. Crompton and Knowles Loom Works v. White, 65 F.2d 132 (1st Cir. 1933), cert. denied 290 U.S. 669 (1933). In Crompton, a deficiency was assessed against the taxpayer. Interest was added to the deficiency but by oversight was not assessed. The taxpayer paid the interest within the period of limitations. After the period of limitations expired, an assessment was made of the previously collected interest. The taxpayer argued that the unassessed interest was refundable. The court held that, notwithstanding the requirement that taxes be assessed, the amount the taxpayer sought was a sum legally owed to the Government and was not recoverable. The situation was different in Rev. Rul. 74-580, 1974-2 C.B. 400, which holds that payments of tax assessed and paid AFTER the expiration of the period of limitations for assessment are overpayments.

Nor is a taxpayer otherwise entitled to a refund unless the United States has money which belongs to him. Lewis v. Reynolds, 284 U.S. 281 (1932), X1-1 C.B. 130. In Lewis, the Commissioner offset a claimed overpayment with additional tax that would result from a disallowable deduction, after the period of limitations had expired. The taxpayer's suit for refund was rejected by the Supreme Court, which stated that while no new assessment can be made after expiration of the period of limitations, the taxpayer is not entitled to a refund unless the tax is overpaid. The expiration of the period of limitations does not bar the Government from retaining payments already received when they do not exceed the amount which might have been properly assessed and demanded.

HOLDINGS

1. The running of the period of limitations on assessment under section 6501(a) of the Code bars the Service from assessing the payment of the agreed deficiency, plus interest.

2. The advance payment of the agreed deficiency, plus interest, does not constitute an overpayment of tax under section 6401(a) of the Code, so as to entitle the taxpayer to a refund under section 6402(a).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 74-580 is distinguished.