AT&T Corp. May Cost Taxpayers Years of Overpayment Interest

When a tax overpayment is credited against an excessive Sec. 6411 tentative allowance, to what date should interest on the overpayment be paid?

Determining “Due Date”

Sec. 6611(b)(1) provides that when a tax overpayment is credited against another liability of the taxpayer, the IRS will pay overpayment interest from the date of the overpayment to the due date of the amount against which the credit is taken. Accordingly, when the Service recaptures all or a portion of a tentative allowance a taxpayer obtained by filing Form 1139, Corporation Application for Tentative Refund, and credits a separate overpayment otherwise owed the taxpayer against the tax deficiency resulting from the excessive allowance, the deficiency’s “due date” must be determined.

Regs. Sec. 301.6611-1(h)(2)(i) states that for Sec. 6611 purposes, “the term ‘due date’…means the last day fixed by law or regulations for the payment of the tax (determined without regard to any extension of time)….” Sec. 6151(a) provides that income tax is generally due on the return’s unextended return due date; for a calendar-year corporate taxpayer, this is March 15 of the following year.

AT&T Corp.

The Court of Federal Claims addressed the “due date” issue in AT&T Corp., 62 Fed. Cl. 490 (2004). It held that AT&T was not entitled to interest on a 1978 tax overpayment credited against an excessive tentative allowance for 1981, because the “due date” of the excessive allowance was March 15, 1982, which preceded the March 15, 1985 availability date of the 1978 overpayment (attributable to a carryback from 1984). This holding creates the possibility that taxpayers that have received excessive tentative allowances may be treated dramatically differently, depending on whether they have an overpayment that can be offset against the resulting deficiency. The decision appears to conflict with the “use-of-money” principle that generally applies to interest issues.

“Use-of-Money” Principle

In any inquiry as to interest on a tax underpayment or overpayment, it is critical to determine when the IRS or the taxpayer had the use of the other’s funds. This “use-of-money” principle was enunciated by the Second Circuit in Avon Products, Inc., 588 F2d 342 (2d Cir. 1978), the holding which the Service explicitly adopted; see Rev. Rul. 83-112.

TAM 8838001: In Letter Ruling (TAM) 8838001, which addresses when underpayment interest on an excessive tentative allowance begins to run, the Service was faced with the same conflict between the regulations and use-of-money principle posed in AT&T. In the TAM, it stated that the final version of Regs. Sec. 301.6601-1(e)(3) (still unissued) would eliminate the discrepancy between the proposed regulation and Avon Products, and provide that when a tentative allowance is refunded without interest and later determined to be excessive, underpayment interest on the resulting deficiency would begin to run only from the date the tentative allowance was issued.

TAM 9443007: The IRS again recognized the primacy of the use-of-money principle in Letter Ruling (TAM) 9443007, which determined that “in the case of an excessive refund, the date of the refund is the ‘due date’ when the taxpayer’s liability to the Government begins.” Accordingly, the Service concluded that interest on a tax overpayment credited against a later deficiency stemming from an excessive refund accrues up to the date of that refund. Although that conclusion cannot be reconciled easily—if at all—with AT&T’s holding, it is consistent with Avon Products.

Consequences

Taxpayers might be inclined to overlook the importance of AT&T and the threat it poses in light of its unusual facts. For example, only 10 days of overpayment interest (from March 15, 1985–March 25, 1985) was in dispute (albeit on an overpayment of over $21 million), because both the 1981 excessive tentative allowance and the 1978 overpayment were attributable to carrybacks from 1984. Accordingly, AT&T could assert that it was entitled to interest on the 1978 overpayment only from the date it arose (March 15, 1985, the unextended due date of the return for the 1984 source year) to the date the 1981 excessive tentative allowance was refunded (March 25, 1985).

However, in many other situations, AT&T would deny a taxpayer overpayment interest for several years.

Example: On Oct. 20, 2002, calendar-year X Corp. received a tentative allowance (without interest) for 1996 stemming from a 2001 net operating loss carryback. The IRS later determined that the 1996 tentative allowance was excessive and satisfied the resulting underpayment by applying a 1998 credit (overpayment).

Rather than receiving more than 312 years of interest (from March 15, 1999–Oct. 20, 2002) on its 1998 overpayment, under AT&T, the taxpayer would not be entitled to any overpayment interest; March 15, 1997 would be deemed the “due date” of the excessive allowance for 1996, while the 1998 overpayment did not arise until March 15, 1999. That would be true despite the fact that if X had not had a 1998 overpayment to be offset to 1996, and instead had to pay the underpayment stemming from the recapture of the 1996 tentative allowance out of its own pocket, interest would not begin to run on the underpayment until Oct. 20, 2002 (the date on which the tentative allowance was issued without interest).

Absent changes to Sec. 6611 or its regulations to address this concern, a taxpayer faced with the loss of several years of interest on a large overpayment due to AT&T might litigate the issue.

From Michael A. Urban, J.D., M.L.T., and Kevin Curran, J.D., LL.M., Washington, DC