department of the treasury internal_revenue_service washington d c december number release date cc dom fs proc uilc internal_revenue_service national_office field_service_advice memorandum for assistant chief_counsel field service cc dom fs deborah a butler from subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend z representatives y year year year etc years date a petition filed in tax_court case issue sec_1 whether the tax_court has jurisdiction to determine a whether z overpaid underpayment interest on the portion of an underpayment_of_tax that was eliminated by use of a foreign_tax_credit for foreign taxes paid with respect to year in a later year and b whether the service owes z additional overpayment interest on overpayments that were refunded to z or credited to other tax_liabilities of z more than six years before the tax_court petition was filed whether z has presented a valid and timely claim for the payment of interest for the years at issue based upon each of the following audit adjustments a b c d e overpayment interest claimed on a refund alleged to have been made more than days after the original return claiming a refund for year was filed overpayment interest claimed on amounts credited from year and year to other tax_liabilities of z due to alleged errors in calculating the underpayment interest due from z overpayment interest claimed on the amounts credited pursuant to the election on z’s returns for year and year to its estimated_tax liabilities for respectively year and year reduction of underpayment interest_paid by z on the portion of an underpayment_of_tax for year that was eliminated by use of a foreign_tax_credit for foreign taxes paid with respect to year in a later year and netting under sec_6621 of underpayment interest_paid or payable by z and overpayment interest_paid or payable to z over overlapping interest periods for tax periods including year year and year conclusion sec_1 the tax_court has jurisdiction to determine the amount of deficiencies in tax and additions to the tax as well as the amount of any overpayments of tax interest and additions to the tax paid_by the taxpayer for the tax periods for which the taxpayer timely filed a petition from a notice_of_deficiency in addition under sec_7481 the court has jurisdiction to determine the amount of interest payable by or to the taxpayer on deficiencies or overpayments determined by the tax_court the court does not have unless otherwise indicated any reference to a specific section refers to the relevant section of the internal_revenue_code_of_1986 jurisdiction however to determine the amount of overpayment interest that should have been paid to the taxpayer on overpayments of tax such as those in situation sec_2 a b and c above that were not determined by the court in this proceeding with respect to the specific issues raised by the taxpayer a we are unable to determine from the facts developed and presented to date whether z’s return for year was processible when it was filed so that the service would be required to pay interest on the overpayment refunded to z more than days after the return was filed z however did not file a timely action for payment of interest b c d e facts z is not entitled to additional overpayment interest on overpayments that were credited in payment of outstanding tax_liabilities on excise_tax and employment_tax returns filed using the same employee identification_number for other tax periods and has not filed a timely action for such interest z is not entitled to overpayment interest on a tax overpayment that it elected to have credited to its estimated_tax liabilities for the succeeding tax_year and has not filed a timely action for such interest in accord with 111_tc_90 the service correctly computed underpayment interest on the portion of tax from year that was reduced by the carryback of foreign tax_credits from a later year through the due_date of the return for the year in which the foreign taxes were paid although the tax_court will likely have jurisdiction to determine reductions in z’s liability for interest that are attributable to the use of a zero tax_rate for overlapping periods of overpayment interest and underpayment interest z has yet not provided a statement of the overlapping periods z a consolidated_group of related corporations that files consolidated income_tax returns is the petitioner in a pending tax_court case filed on date a to contest the service’s determination of proposed deficiencies in income_tax for year year and year in that proceeding z claims that the service erred by not properly computing overpayment interest payable to z when the service processed various partial adjustments regarding income_tax liabilities during the return filing audit and administrative appeals process z also alleges that it is entitled to the refund of underpayment interest that it has paid for these years the theories underlying the claims for the refund or payment of interest based upon supplemental information provided by the taxpayer are separately presented herein a overpayment interest claimed on a refund alleged to have been made more than days after the year return claiming a refund was filed z timely under a six month extension mailed a return for year to the service on september year z declared a tax_liability of dollar_figurex reported prepayment_credits of dollar_figurex and claimed a refund of dollar_figurex the transcript of account for year shows the service’s designation of the return as non-processible five days later on september year the service’s processing of the return on november year and the issuance of a refund check for dollar_figurex without any interest on november year although the refund was made days after the filing_date it was made only days after the return was processed besides the information reported on the transcript neither the service nor z has found records showing what changes if any were made to the return between september year and november year z reports it has found no correspondence or other documents relating to the processing of the return or the refund refund check and did not question the service’s failure to pay overpayment interest with the refund before raising the issue in this litigation the petition in this case was filed more than six years after november year z accepted and cashed the b overpayment interest claimed on amounts credited from year and year to other tax_liabilities of z because the service allegedly erred in calculating the underpayment interest due from z on the other tax_liabilities on several occasions during the audit due to payments adjustments to the assessed tax and underpayment interest and z’s claims for various credits that were allowed by the service overpayments of tax were produced in the accounts for year and year the service in lieu of fully refunding these overpayments to z credited portions of the overpaid amounts to unpaid tax_liabilities for other tax periods of z on at least one occasion z consented to the crediting of such overpayments to the unpaid liability of a member of z’s consolidated_group that used a different taxpayer_identification_number in one example of these transactions the service on february year credited a dollar_figurex overpayment_of_tax from year to an excise_tax liability owed by z that was due on april year the year overpayments were first overpaid as of october year in applying sec_6611 the service properly allowed no overpayment interest on the year tax overpayments however z contends that the service erred by computing underpayment interest for the period from april year through february year on the dollar_figurex excise_tax liability that was paid_by application of the credit z has not yet offered computations to support its claim that the service’s computations were incorrect z has not filed a claim_for_refund of the allegedly overpaid underpayment interest the limitations_period for filing such a claim has expired and the excise_tax liability is not before the tax_court instead z argues that the service should pay interest on the year overpayment for the period from october year through february year because the alleged error in computing underpayment interest on the excise_tax liability prevented z from receiving the full benefit of the dollar_figurex overpayment of income_tax for year z first brought the alleged error to the attention of the service after the petition in this case was filed on date a more than six years after february year a second example involves amounts credited from the consolidated income_tax_liability of z a consolidated_group to the separate form_941 employment_tax liabilities of y the parent of z under whose taxpayer_identification_number tin z files its returns on january year the service credited an overpayment for z’s year return to y’s employment_tax liability the service allegedly assessed and collected underpayment interest on y’s employment_tax liability satisfied by the credit from the due_date of the return through january year but computed overpayment interest payable to z only through march year the first date on which y’s tax underpayment and z’s overpayment overlapped because the returns used the same tin the service identified them as belonging to the same taxpayer z now asserts that y’s employment_tax liability is separate and distinct from the consolidated income_tax_liability of z and that the service should treat y and z as separate taxpayers and compute interest on both y’s underpayment_of_tax and z’s tax overpayment through january year y has not filed a claim_for_refund of underpayment interest on the employment_tax liability you state that z has made similar allegations that the service erred in computing underpayment interest for taxes and tax periods that are not at issue in this suit when it credited overpayments from the tax periods at issue in this suit in payment of those taxes although we have not examined these other credited overpayments we will assume for purposes of providing this advice that they are similar in nature to those described above c overpayment interest claimed on the amounts credited pursuant to the elections on z’s returns for year and year to its estimated_tax liabilities for respectively year and year z timely filed its income_tax returns for year and year on september year and september year respectively under extensions of six months from the original filing due dates on those returns z elected to have the overpayments of tax credited to its estimated_tax liabilities for the next year ie year and year respectively since the tax_payments that made up the overpayments were deemed paid as of march year and march year the original due dates of the year and year returns z now claims that it is entitled to interest on the overpayments from march year to september year for year and from march year to september year for year based upon the opinion in 36_fedclaims_680 acq 1997_2_cb_1 d reduction of underpayment interest_paid by z on the portion of an underpayment_of_tax for year that was eliminated by use of a foreign_tax_credit in year z paid taxes to a foreign government with respect to income earned in year in agreeing to a partial settlement during the audit z claimed a foreign_tax_credit against u s income_tax for year under sec_901 in the amount of the foreign taxes that were paid in year to offset an agreed upon tax_deficiency for year in assessing the tax_deficiency the service allowed the credit but computed underpayment interest from march year the due_date of the u s income_tax return for year through march year the due_date for z’s u s income_tax return for year citing 35_fedclaims_284 z claims that no underpayment interest accrued because the foreign_tax_credit was effective as of march year z claims that the full amount of the assessed underpayment interest is subject_to refund e netting under sec_6621 of underpayment interest_paid or payable by z and overpayment interest_paid or payable to z over overlapping interest periods in its amendment to the petition z alleges that it made payments of income_tax and interest for year year and year and that it received credits and refunds of tax and interest together with overpayment interest for these same tax years but that the service did not use netting principles during periods when z had underpayments of tax and overpayments of tax over the same time periods for the years at issue z has not provided any statement of these concurrently existing overpayments and underpayments either within the year year and year accounts or between the year year and year accounts and other tax years and liabilities law and analysi sec_1 jurisdiction of tax_court to consider z’s claims in the pending case the jurisdiction of the tax_court is limited to that expressly permitted or prescribed by statute 112_tc_46 85_tc_527 sec_7442 gives the tax_court and its divisions such jurisdiction as is conferred on them by other code provisions the fundamental grant of jurisdiction to the tax_court in income_tax cases is found in sec_6214 which provides that the tax_court may redetermine the correct amount of the deficiency proposed by the service in a notice_of_deficiency even if the amount so determined is greater than the amount of the deficiency and may determine whether any additional_amount or addition to the tax shall be assessed as a prerequisite to the court’s exercise of such jurisdiction the service must issue a valid notice_of_deficiency and the taxpayer must file a timely petition with the tax_court 210_f2d_388 5th cir the tax court’s jurisdiction is limited to the determination of tax for those taxes and tax periods that are covered by both the notice_of_deficiency and the petition filed with the court 15_tc_253 acq 1950_2_cb_2 no jurisdiction over portion of year not covered by notice 102_tc_683 no jurisdiction over year for which the service issued notice disallowing deductions but not increasing the tax due 79_tc_521 no jurisdiction over gift_tax in income deficiency proceeding dick v commissioner tcmemo_1984_2 aff’d 760_f2d_264 4th cir no jurisdiction over year for which service proposed an overpayment although its jurisdiction over any_tax period or tax is conditioned upon a determination by the service that there is a deficiency the tax_court has jurisdiction under sec_6512 to determine that there is actually an overpayment_of_tax for any_tax periods for which a taxpayer has invoked its jurisdiction by filing a petition from a notice in which the service has proposed a deficiency thus if the tax_court determines there is an overpayment for the tax period for which the service proposed a deficiency whether there is or is not a deficiency the tax_court has jurisdiction to determine the overpayment and its amount further the service may refund_or_credit the amount of the overpayment once the decision becomes final if the tax_court as provided by sec_6512 has also determined that the payment was made after the notice_of_deficiency was issued or that a claim_for_refund of the overpayment would have been a timely claim_for_refund if it had been made on the date the notice_of_deficiency was issued further with respect to interest several code sections give the tax_court supplemental jurisdiction to consider the application of interest after the initial tax_court decision becomes final first once a tax_court decision determining an overpayment becomes final the tax_court has jurisdiction under sec_6512 to order the irs to refund the overpayment determined by the tax_court with overpayment interest if the irs has not made the refund days after the decision becomes final and the taxpayer files a motion likewise the tax_court has auxiliary jurisdiction under sec_7481 to determine whether the taxpayer has made an overpayment of interest or the service has underpaid interest based upon a deficiency or overpayment decision entered by the court for the court to exercise this jurisdiction the taxpayer must pay the tax and interest assessed by the service and file a motion for a redetermination of interest within one year after the decision is entered finally sec_6404 gives the tax_court jurisdiction to determine whether the service’s failure to abate interest due to unreasonable errors and delays by the service was an abuse_of_discretion but first the tax and interest must be assessed the taxpayer must administratively request the abatement and the service must make a final_determination not to abate the interest a jurisdiction over assessed underpayment interest the tax court’s jurisdiction over the determination of interest under these provisions depends upon the type of interest involved and the context in which it is raised the internal_revenue_code separately provides in sec_6601 and sec_6611 for the payment of underpayment interest interchangeably called deficiency_interest on amounts payable by taxpayers to the government on taxes that are not paid when due and for the payment of overpayment interest by the government when taxes that have been overpaid by the taxpayer are refunded or credited underpayment interest owed by a taxpayer generally accrues under sec_6601 from the date the tax is due until the date on which it is paid overpayment interest owed to a taxpayer by the service accrues from the date the overpayment arises until it is refunded or credited to the taxpayer in disputes involving underpayment interest the tax_court has no authority to decide whether underpayment interest is due or refundable on an unassessed and unpaid deficiency 107_tc_249 89_tc_352 95_tc_209 sec_6512 contains the specific requirements for the application of the sec_6511 limitations periods for claiming refunds in tax_court cases in clinton street corp the tax_court found that it did not have any authority to consider a requested abatement of underpayment interest in a deficiency proceeding because the service’s abatement authority in sec_6404 does not arise until an assessment has been made and the assessment cannot be made until the tax_court decision becomes final likewise in white the tax_court concluded that it had no jurisdiction over proposed assessment of interest under former sec_6621 because sec_6601 in providing for the imposition of underpayment interest specifically excludes such interest from being treated as a tax in deficiency proceedings in pen coal the court followed white to reach the same conclusion with respect to interest imposed under current sec_6621 on large corporate underpayments interest cannot be assessed on the tax_deficiency in a deficiency proceeding until such tax_deficiency is assessed and becomes an underpayment_of_tax the court does have jurisdiction to consider alleged overpayments of underpayment interest as part of its overpayment jurisdiction such excessive interest once assessed and paid becomes part of an overpayment ie a payment in excess of that which is properly due 332_us_524 baumgartner v commissioner 85_tc_445 at the time of the overpayment previous payments of tax and previous payments of interest merge to become the refundable amount of the overpayment regardless of their previous designation as tax or interest baumgartner pincite see also sec_6601 454_f2d_1379 deficiency_interest has been deemed an integral part of the tax 97_tc_548 tax_court has jurisdiction to consider overpayment of interest under former sec_6621 even though it does not have jurisdiction over a proposed determination of yet-to-be assessed and paid underpayment interest thus in 110_tc_291 the court held that it had jurisdiction to consider the effect of the service’s failure to honor the taxpayer’s request that the service_credit overpayments of tax from other tax years against the proposed liabilities before the court because such crediting would have reduced the amount of underpayment interest due from the taxpayer on the deficiencies critical to the court’s exercise of jurisdiction was the taxpayer’s payment of the tax plus the underpayment interest determined by the service before the taxpayer asked the court to determine an overpayment_of_tax including underpayment interest b jurisdiction over the payment of overpayment interest unlike a dispute over the sec_6601 interest_paid to the service on tax underpayments a dispute over the interest imposed by sec_6611 on tax overpayments is not within the tax court‘s jurisdiction baumgartner v commissioner 85_tc_445 in distinguishing a refund of the overpaid underpayment interest as at issue in that case from interest payable on an overpayment the court explained once an overpayment has been determined either by our court or one of the refund forums interest accrues in accord with sec_6611 until the time the overpayment is refunded to or reduced to judgment once reduced to judgment interest accrues on the judgment inclusive of the overpayment which may include overpaid interest and interest on the overpayment all in accord with u s c sec because our jurisdiction is not derived from title of the united_states_code we remain unable to enter a decision for interest upon an overpayment t c pincite the court’s analysis in baumgartner is consistent with the separation of claims for overpayment interest under the statutory and jurisdictional regimes for making and enforcing refund claims in district_court the handling of claims for refund of tax including claims for the refund of underpayment interest differ from those concerning the payment of overpayment interest the jurisdiction of district courts and the court of federal claims over claims for refund of underpayment interest under sec_7422 is predicated upon the taxpayer’s filing a timely administrative claim_for_refund while the jurisdiction of those courts over claims for overpayment interest falls within their general claims jurisdiction suits for refund of tax must be filed within years of the date on which a timely filed claim was denied while a claim for overpayment interest must be filed within six years of the date on which the refund was allowed without regard to interim administrative claims see 33_fedclaims_4 u s t c big_number the provisions giving the tax_court supplemental jurisdiction over interest on overpayments are limited by their terms to the overpayments determined by the tax_court and do not apply to overpayments made outside the tax_court proceeding if the service fails to refund an overpayment determined by the tax_court with overpayment interest within days after the decision ordering the refund has become final sec_6512 authorizes the tax_court to order the service to make the refund presumably this jurisdiction allows the court to determine the correct amount of overpayment interest due on the refund likewise sec_7481 authorizes the tax_court to reopen a case to determine whether the taxpayer has made an overpayment of interest or the secretary has made an underpayment of interest and the amount thereof again the auxiliary jurisdiction covers only the amount of interest involved in the case and does not extend to claims for overpayment interest on overpayments refunded or credited outside the scope of the tax_court case see tax_court rule 109_tc_1 the tax court’s lack of jurisdiction over claims for overpayment interest on refunds and credits made outside its jurisdiction does not deny aggrieved taxpayers a forum in which to seek a remedy under sec_6512 the tax court’s jurisdiction over the issues properly before it is exclusive if the secretary has mailed a valid notice_of_deficiency and if the taxpayer files a timely petition with the tax_court or a motion for statutory interest under c no credit or refund of income_tax for the same taxable_year in respect of which the secretary has determined the deficiency shall be allowed or made and no suit by the taxpayer for the recovery_of any part of the tax shall be instituted in any court except - as to overpayments determined by a decision of the tax_court which has become final and as to any amount collected in excess of an amount computed in accordance with the decision of the final tax_court decision and as to amounts collected after the sec_6502 period of limitation for collection has expired and as to overpayment attributable to partnership items and as to any amount collected during period between issuance of notice_of_deficiency and final tax_court decision and as to overpayments the service is authorized to refund_or_credit pending appeal by the express terms of sec_6512 and sec_7422 the tax court’s exclusive jurisdiction over cases before it extends only to credits or refunds or suits for the recovery_of tax because overpayment interest payable on taxes that have previously been refunded or credited is not itself an overpayment that might be refunded to the taxpayer it is not subject_to the restriction a taxpayer can file a suit for the payment of overpayment interest with respect to amounts of tax that have previously been refunded or credited even while a tax_court case involving the determination of further deficiencies and overpayments for the same tax period is pending such a suit if timely filed is the appropriate remedy for taxpayers having such claims another basis for finding that the tax_court does not have jurisdiction over z’s claim for additional overpayment interest particularly its claim that it is entitled to overpayment interest on amounts credited from year and year to other tax_liabilities is the limitation on the court’s jurisdiction in sec_6512 in defining the court’s jurisdiction to determine overpayments of tax sec_6512 provides the tax_court shall have no jurisdiction under this subsection to restrain or review any credit or reduction made by the secretary under sec_6402 applying this code section the tax_court determined in 112_tc_46 that it did not have jurisdiction to consider whether the service improperly determined the taxpayer’s liabilities particularly those for interest and penalties for the years before the court because the service had improperly applied a previously claimed overpayment_of_tax to assessed tax_liabilities for periods not before the court the court relied upon precedents in the second circuit that held before sec_6512 was enacted that a procedurally valid assessment for a period not before the tax_court generally provides a proper basis for the crediting of a tax overpayment and precludes the tax court’s jurisdiction to review the merits of the assessment t c pincite see 996_f2d_607 2d cir the taxpayer who correctly asserted that his liabilities for penalties and underpayment interest in the year before the court would be less if the overpaid taxes had not been credited to other liabilities was not allowed to question the validity of the taxes determined for the years not before the court or to have the amounts credited in payment of the assessed liabilities brought back as payments made in the year before the court finally we have considered the possibility that the tax_court might have jurisdiction over a claim that additional overpayment interest that is due to a taxpayer might be offset even if the refund_or_credit of such payment is barred under relevant limitations periods against deficiencies determined to be due from the taxpayer in the tax_court proceedings or the amount of tax and interest due form the taxpayer as a result of those proceedings in determining a tax_deficiency or a tax overpayment the service is authorized to consider a taxpayer’s entire liability for the subject tax period in 284_us_281 the supreme court held that deficiencies of tax that could not be assessed because the statutory assessment_period had expired could nevertheless be considered in determining whether an overpayment claimed by the taxpayer existed for the same tax period in practice the service may offset against a tax_refund claim any barred deficiencies of tax penalty or underpayment interest with respect to the tax period similar offsets may be made in determining a deficiency in determining the tax_deficiency for a given tax period under sec_6211 the tax_court must consider the entire tax_liability the amounts previously assessed plus the amount of any abatements credits refunds or other_payments although payments of underpayment interest are not considered in determining a deficiency they can be weighed in determining whether an overpayment exists the interest_paid to the taxpayer on previous overpayments however is not considered in determining the existence or amount of an overpayment and thus can not be offset against liabilities that are included in determining an overpayment thus we conclude that the tax_court would have jurisdiction to determine whether the payment of excessive underpayment interest gives rise to an overpayment_of_tax in the years before the court we have found no provisions however that give the tax_court jurisdiction either during a deficiency proceeding or in supplemental proceedings to determine whether the service properly paid the full amount of overpayment interest due a taxpayer on refunds and credits made to or on behalf of such taxpayer prior to the date on which the tax_court petition was filed without regard to the tax court’s jurisdiction z has not presented a valid and timely claim for the payment of interest for the years at issue based upon the audit adjustments a z has neither made a timely claim for additional overpayment interest on a refund alleged to have been made more than days after the original return claiming a refund for year was filed nor shown that the refund was not made within days of the date on which its return became processible sec_6611 provides the general_rule that interest is to be allowed and paid upon any overpayment in respect of any internal revenue tax in a widely applicable exception to the general_rule however sec_6611 provides that no interest shall be allowed on an overpayment if the overpayment is refunded within days from the last date prescribed for filing the return or if a return is filed after its due_date within days from the date the return is actually filed the day rule has applied to income_tax refunds made after date including those at issue in this case see interest equalization tax extension act of p l sec_1 93d cong 1st sess for purposes of sec_6611 and the day rule in e sec_6611 specifies that a return is not to be treated as filed for purposes of sec_6611 until it is in processible form this statutory requirement for processibility although formerly designated as sub sec_6611 and sec_6611 has not changed in substance since the enactment of former sec_6611 by the tax equity and fiscal responsibility act of tefra public law 97th cong 96_stat_325 effective for returns filed after date the tefra provision adopted the service’s existing administrative practice of not treating a return as filed until it was processible see gcm either the administrative or the statutory requirement was in effect for the return at issue sec_6611 explains that a return is not processible until it is filed on a permissible form it contains the taxpayer’s name address identifying number and required signature and it or required attachments contains sufficient information to permit the mathematical verification of tax_liability shown on the return see 70_f3d_1244 u s t c big_number fed cir aff’g 32_fedclaims_318 tentative claim_for_refund was processible when taxpayer followed irs directions and included all necessary information and signatures your efforts to locate records are ongoing in columbia gas before finding that the service was able to process the columbia gas returns as originally filed without submission of any additional data the federal_circuit explained mathematical verifiability requires sufficient information to permit irs to recalculate and corroborate the mathematics and data reported by the taxpayer thus under sec_6611 a taxpayer must submit in good_faith all the required forms with the required signatures and enough underlying data for irs to verify the tax_liability shown on the return the information must be sufficient to enable irs to calculate the tax_liability without undue burden the court also considered the ongoing relationship between the service and columbia gas with respect to the return at issue including the fact that the service repeatedly misplaced records concerning the return if z were entitled to overpayment interest based upon the service’s failure to make a refund within days of z’s filing of a processible return z’s claim for overpayment interest on the november year refund would nevertheless fail because z has not acted timely in making a claim for overpayment interest unlike suits for the refund of tax or the refund of underpayment interest suits brought in district_court or the court of federal claims for the payment of overpayment interest under sec_6611 are controlled by the general six-year statute_of_limitations under u s c and sec_2501 33_fedclaims_4 u s t c big_number 137_fsupp_716 the service can make payments of overpayment interest only within this six year period see rev ruls 1956_2_cb_959 1956_2_cb_959 and 1957_1_cb_452 the limitations_period begins to run when the overpayment is scheduled sec_6407 sec_301_6407-1 33_fedclaims_4 u s t c big_number in this situation the overpayment arose from the assessment of the tax reported on z’s year return because the previously recorded payments of tax exceed the recorded tax_liability to be assessed thus the overpayment was scheduled as of november year the 23c date when the assessment was scheduled and recorded because z did not file a suit for the payment of additional interest within six years of that date z can no longer recover overpayment interest under sec_6611 on the refunded amount b z has not made a timely claim for overpayment interest claimed on amounts credited from year year and year to other tax_liabilities of z nor shown that it is entitled to receive such overpayment interest the service is authorized to refund overpayments of tax to taxpayers under sec_6402 an overpayment_of_tax is the amount by which the tax_payments made by a taxpayer exceed the taxpayer’s liability for taxes interest and penalties for a given type of tax and tax period there is no overpayment until the entire amount of tax is satisfied an overpayment can result from the overpayment of estimated_taxes carrybacks of net operating losses or other adjustments made on an amended_return adjustments made as the result of an audit or by the payment of tax that is assessed or collected after the relevant limitations_period has expired irm sec_121 overpayments of tax can be refunded to a taxpayer at the request of the taxpayer in a formal or informal claim_for_refund or upon the service’s initiative sec_301_6402-2 in lieu of actually refunding such overpayments to a taxpayer sec_6402 also allows the service to credit an overpayment against existing liabilities when it provides in the case of any overpayment the secretary within the applicable_period of limitations may credit the amount of such overpayment including any interest thereon against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall subject_to subsections c or d refund any balance to such person no credit or refund of an overpayment can be made however after the expiration of the statute_of_limitations on refunds unless before the expiration of the statutory period the taxpayer files a claim_for_refund with the service sec_6511 at various times after z’s returns for year and year were filed the service had cause to abate the tax initially reported by z on those returns these abatements were caused by inter alia foreign tax_credits for taxes paid in later years and agreed partial settlements the reduction in z’s liability for tax and in some instances the underpayment interest that z had paid on the tax led to overpayments for year and year when these overpayments arose the service credited all or part of them against other tax_liabilities that were outstanding for other taxes and other periods either at the request of z or on its own initiative when an overpayment is credited against another tax_liability sec_6611 provides that interest is to be allowed and paid on the overpayment from the date of the overpayment to the due_date of the amount against which the credit is taken in the example you provided for year z’s excise_tax liability was due as of april year because that due_date preceded the date october year on which the overpayment for year arose there was no period on which overpayment interest was allowable in contrast sec_6611 allows interest on refunds from the date the overpayment arises until a date preceding the date of a refund check by no more than days z would have been entitled to overpayment interest if its year overpayment had been refunded to it rather than credited against the excise_tax liability on the other side of the credit transaction sec_6601 provides that interest on an underpayment_of_tax that is not paid on or before the last date prescribed for payment accrues from the prescribed payment_date until the date on which the tax is paid sec_6601 provides that the interest on any tax- shall be assessed collected and paid in the same manner as taxes any reference in this title except deficiency procedures to any_tax imposed by this title shall be deemed to refer to interest imposed by this section on such tax interest on a tax may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected sec_6601 under this provision the excise_tax liability would accrue interest from the date it was due until it was paid to parallel sec_6611 however sec_6601 provides that i f any portion of a tax is satisfied by credit of an overpayment then no interest shall be imposed under this section 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 such overpayment when the service credited the year overpayment against the excise_tax liability the underpayment interest on the excise_tax should have reflected the accrual_period from april year to october year no interest should have been assessed for any period after october year under sec_6601 since overpayment interest was not allowed after october year on the year overpayments accrual of underpayment interest on the excise_tax that was paid with the year overpayment should likewise have stopped as of october year although we have not reviewed the interest computations we assume for purposes of providing this advice that the service erred in assessing and collecting underpayment interest on the excise_tax for the period after october year the error if any was made in computing interest on the excise_tax liability it has been long established that the crediting of an overpayment_of_tax from one year against an underpayment of another tax_liability constitutes a payment of tax as effectively as a payment of the underpaid tax in cash 302_us_56 282_us_468 98_f2d_880 3d cir inasmuch as the amount of the credit is transferred from the overpaid account as a full or partial payment of the underpaid account the credited amount ceases to be a payment in the first account and can no longer be an overpayment in that account in your example the tax_liability for year was no longer overpaid once the service credited the overpayment in that accounts to the assessed underpayments for the excise_tax liability once an overpayment has been credited in payment of another tax_liability the proper remedy for contesting the validity and legality of the tax against which the overpayment has been credited lies in a timely claim_for_refund of the tax paid_by means of the credit sec_301_6402-2 see 33_fedclaims_600 as relevant herein the claim must be filed within two years from the date on which the tax was paid sec_6511 for purposes of claiming a refund the payment of a tax_deficiency for one year is made when the overpayment from another year is actually credited to the deficiency year see 613_f2d_518 ndollar_figure 5th cir 33_fedclaims_600 bazargani v united_states u s t c big_number e d pa revrul_56_506 1956_2_cb_959 it is undisputed that no one made a timely refund claim for interest on the excise_tax informal or otherwise within two years from february year when the credits from year to the excise_tax were authorized relying upon the sec_6601 prescription that references to tax also refer to underpayment interest on such tax the united_states court of federal claims has held that a taxpayer is required to follow the refund procedures for taxes with respect to claims for refund of underpayment interest before any suit can be filed to recover underpayment interest deficiency_interest has been so closely braided to principal that it has been deemed an integral part of the tax 454_f2d_1379 ct_cl the court expressly rejected the taxpayer’s argument that the refund procedures of the code do not apply to underpayment interest and that instead the general provisions governing suits against the government including the 6-year statute_of_limitations provided in u s c sec_2501 apply citing the acknowledged purposes of the refund claim requirement and the shorter limitations_period for tax_refund suits -- to prevent surprise to give adequate notice to the service of the nature of the claim and to allow the service to address the claim administratively prior to litigation -- the court observed all of these goals are advanced by adhering to the claim requirement as well as truncated limitations even where deficiency_interest alone is at stake f 2d pincite emphasis added z suggests that the service should correct any error in the application of the overpayment to the excise_tax liabilities by allowing the payment of additional overpayment interest on the overpayment for year z’s argument disregards the fact that the overpayment was properly credited to the tax_liabilities that had been assessed for another tax as of that application there was no longer any overpayment in the account for year that was subject_to refund or to the accrual of interest the only interest authorized by sec_6611 is that allowable under sec_6611 ie in this example none alternatively z argues that the service erred by applying the interest computation rules in sec_6611 and sec_6601 to the application of its overpayment to a tax_liability of its parent y the service in applying interest_netting as extensively as administratively possible uses its authority under sec_6402 to credit any overpayment together with interest thereon against any liability for any_tax then due from the person who made the overpayment see the interest provisions at irm sec_31 a because y is severally liable for the income_tax owed by consolidated_group z overpayment of z’s income_tax can be credited against outstanding liabilities of y for other taxes z now asserts for the first time that its liability is separate from y’s and that its overpayments should not have been credited under sec_6402 and that the interest_netting provisions should not have been applied the service will credit overpayments belonging to one taxpayer to liabilities of another taxpayer but because such crediting is not authorized under sec_6402 will first obtain the consent of the taxpayer whose overpayment is to be credited in these situations for interest purposes the service treats the overpayment as having been refunded to the taxpayer and a payment made by the other taxpayer on the date the credit is made thus interest on both the underpayment and the overpayment is computed through the date the credit is completed without using the interest computation rules in sec_6611 and sec_6601 because the underpayment rate has been higher than the overpayment rate since taxpayers usually prefer situations where related_taxpayers are treated as the same taxpayer further as discussed above if z were entitled to overpayment interest based upon the service’s crediting of more than the proper amount of the overpayments from year and year to other tax_liabilities or of crediting z overpayments to another taxpayer the service can no longer honor z’s claim for overpayment interest because more than six years has expired since the claim arose in these situations the overpayments arose from the abatements of tax due to various credits claimed by z during the audit as explained in 33_fedclaims_4 u s t c big_number the overpayments would have been scheduled for purposes of sec_6407 when the certificate and schedule of overassessment and overpayments scheduling the overassessment of tax was signed ie when the abatement creating the overassessment of tax was authorized because z did not file a suit for the payment of additional interest within six years of that date z can no longer recover overpayment interest under sec_6611 on the refunded amount c z has not filed a timely suit for overpayment interest claimed on the amounts credited pursuant to the election on z’s returns for year and year to its estimated_tax liabilities for respectively year and year nor shown that it is entitled to such interest in 36_fedclaims_680 acq 1997_2_cb_1 the court of federal claims held that when a taxpayer elected to have an overpayment reported on a return credited to the estimated_tax liability for the next tax period and later became liable for a deficiency in tax for the overpayment year the underpayment interest on the portion of the deficiency that became unpaid because of the overpayment credit did not start to accrue until the date as of which the overpayment was credited to the next year’s estimated_tax liability in light of may department stores the service reconsidered the manner in which interest on a subsequently determined deficiency is to be computed under sec_6601 and issued revrul_99_40 1999_40_irb_441 to announce a practice consistent with that decision when such an election is made the overpayment will be applied to unpaid installments of estimated_tax due on or after the date the overpayment arose in the order in which they are required to be paid to avoid an addition to the tax for failure to pay estimated income_tax under sec_6654 and sec_6655 the service will assess interest on a subsequently determined deficiency for the overpayment year from the date or dates that the overpayment is applied to the succeeding year’s estimated_tax obligations in all situations the estimated_tax rules in effect for the tax_year to which the overpayment is credited will be used to determine the amount of estimated_taxes due and thus the amount of the overpayment needed to satisfy the obligation for each installment of estimated_tax any remaining balance of the overpayment credit will be applied as of the due_date without extensions for filing the succeeding year’s income_tax return in its claims for overpayment interest on the overpayments of tax from year and year that it elected to credit to estimated_taxes for year and year z misinterprets the effect of may department stores the underlying premise in may department stores and similar cases is that a taxpayer who elects to have an overpayment_of_tax reported for one tax_year credited to the estimated_tax for the succeeding year relinquishes the right to obtain overpayment interest on the refund_or_credit of the overpayment when it makes the election later if the taxpayer became liable for a deficiency in tax because of that election to transfer money from one tax_year to the next year the courts have considered it inherently unfair to require a taxpayer to pay underpayment interest on the credited amount for the period of time before it was credited because the taxpayer by making the election had already given up the right to recover overpayment interest for that same period the tax that had been overpaid before the date as of which the credit was made did not become unpaid and subject_to underpayment interest until the credit was made nothing in the may department stores line of cases contradicts the statutory prescription in sec_6611 and sec_6513 that prohibit the payment of overpayment interest on estimated_tax for periods before the due_date of the return for the tax_year for which the estimated_tax payments are made for purposes of computing overpayment interest sec_6611 incorporates the provisions of sec_6513 establishing that estimated payments of income_tax for any taxable_year shall be deemed to have been paid on the last day for prescribed for filing the income_tax return for such taxable_year regardless of when the estimated_tax payments were submitted no overpayment interest is payable on payments of estimated_tax before the return_due_date the regulations issued under sec_6402 further explain the effect of the interest restriction when a taxpayer elects to credit an overpayment_of_tax from one year against the taxpayer’s estimated_tax for the succeeding year the regulations state in the middle of sec_301_6402-3 a return or amended_return shall constitute a claim_for_refund_or_credit if it contains a statement setting forth the amount determined as an overpayment and advising whether such amounts shall be refunded to the taxpayer or shall be applied as a credit against the taxpayer’s estimated income_tax for the taxable_year immediately succeeding the taxable_year for which such return or amended_return is filed if the taxpayer indicates in its return or amended_return that all or part of the overpayment shown by its return or amended_return is to be applied to its estimated income_tax for its succeeding taxable_year such indication shall constitute an election to so apply such overpayment and no interest shall be allowed on such portion of the overpayment credited and such amount shall be applied as a payment on account of the estimated income_tax for such year or the installments thereof emphasis added the no interest caveat is reiterated at sec_301 h vii the court of claims held that the regulations prohibiting interest were not unreasonable when it refused to allow interest on such an overpayment in owens corning fiberglas corp v united_states 462_f2d_1113 u s t c ct_cl in that case a corporate taxpayer included its sec_6402 election on a return timely filed under extension six months after the original due_date relying on the installment_payment plan for corporate taxpayers then in effect the taxpayer paid most of the tax in march made a payment of its underpaid estimated_tax liability in june and elected to credit an overpayment equal to the june payment to its next year’s quarterly estimated_tax liability due september when it filed its return in september the taxpayer then claimed a right to overpayment interest on that amount from june to september after reviewing the legislative_history of sec_6402 and the regulations issued by the service under that section the court of claims concluded that the treasury’s power to regulate the exercise of this privilege to treat an overpayment as a payment is broad enough that it may require a taxpayer who exercises it to forego benefits it would otherwise enjoy the court found that congress had implicitly approved the regulations thus while may department stores and its progeny may result in taxpayers being exempted from paying underpayment interest for periods over which they were not allowed overpayment interest on amounts credited under sec_6402 neither congress nor the courts have required the service to pay overpayment interest on the credited amounts see also 570_fsupp_176 u s t c n d ill when the taxpayers elected to have the overpaid taxes credited against the next year’s estimated_tax liability the overpayments by the taxpayers’ choice became tax_payments for that year which were not due until that next year’s return_due_date d z is not entitled to a reduction of underpayment interest_paid by z on the portion of a tax underpayment for year that was eliminated by use of a foreign_tax_credit carryback under sec_6601 underpayment interest accrues on a tax_liability from the last date prescribed for payment to the date on which the tax is paid the last date prescribed for the payment of income_tax is the date on which the return reporting such tax is due without regard to extensions in 35_fedclaims_284 the case relied upon by z the federal claims_court held that no underpayment interest accrued on the portion of a tax_deficiency that was eliminated by a foreign_tax_credit carryback because sec_904 in providing a credit for foreign taxes specifies that the foreign taxes in excess of the foreign_tax_credit ceiling for a tax_year may be carried back to the two prior years and that the excess credited taxes are deemed taxes paid_or_accrued in the tax_year to which they are carried back the federal claims_court decision in fluor however was reversed in by the court_of_appeals_for_the_federal_circuit in 126_f3d_1397 rev’g 35_fedclaims_284 the federal_circuit relying upon 338_us_561 and 348_us_254 reasoned that the retroactive adjustment to a taxpayer’s obligations to pay tax did not have the effect of releasing the taxpayer from the duty to pay interest on the original obligations until the time that they were reduced i e the year in which the foreign tax was paid_or_accrued the circuit_court did not accept however the service’s determination of when the interest stopped running while the service argued that the underpayment interest should accrue until the due_date of the return for the year in which the foreign tax was paid_or_accrued the circuit_court relied upon the statutes governing interest in when the foreign tax carryover provision was enacted to hold that the underpayment interest stopped running at the end of the tax_year in which the carryback was generated f 3d pincite these statutes provided that underpayment interest on deficiencies eliminated by a net_operating_loss_carryback and overpayment interest on foreign tax carrybacks and net_operating_loss carrybacks would respectively end and begin at the end of the taxable_year in which the carryback was generated sec_6601 and sec_6611 in the taxpayer_relief_act_of_1997 p l sec_1055 111_stat_944 congress codified the service position for tax years ending after date sec_6601 now provides if any credit is increased by reason of a carryback of tax paid_or_accrued to foreign countries or possessions of the united_states such increase shall not affect the computation of interest under sec_6601 for the period ending with the filing_date for the taxable_year in which such taxes were paid_or_accrued further for tax years ending before date the tax_court adopted the service’s argument in 111_tc_90 see also dresser industries u s t c big_number n d tex district_court followed intel not fluor and 111_tc_266 tax_court would not relinquish jurisdiction where taxpayer sought to avoid the intel precedent counsel’s litigating position on this issue is contained in lgm tl-104 date as it relates to this case t he service will not accept any settlement of either the deficiency_interest issue or the computation issue in cases docketed in the tax_court e netting under sec_6621 of underpayment interest_paid or payable by z and overpayment interest_paid or payable to z over overlapping interest periods neither the amendment to the answer filed by z nor the subsequent submissions we have seen clearly indicate the nature of z’s netting claims we are unable to consider them without further information to the extent z is trying to preserve a claim for global_netting for the years before the court and other tax years the service has set forth the application process and the deadlines for filing applications in revproc_99_19 issued date 1999_13_irb_10 and in revproc_99_43 issued date 1999_47_irb_579 case development hazards and other considerations please do not hesitate to contact us pincite-7940 concerning further development of these issues or other issues in this case deborah a butler assistant chief_counsel field service by george e bowden technical assistant assistant chief_counsel field service