Opinion ID: 174551
Heading Depth: 3
Heading Rank: 5

Heading: The Tax Court's Imposition of Liability for Interest on the Remaining Deficiencies

Text: Under I.R.C. § 6601, interest runs from the date a tax is due to be paid until the date the tax is paid. The Tax Court's determination that taxpayers' tax deficiencies should be reduced by a factor of 63.37 percent thus eliminated their liability for interest with respect to the portion of the tax liability that was eliminated. The Tax Court found, however, that taxpayers remained liable for underpayment of interest on the tax deficiencies for which they were liable after the application of the Thompson settlement terms. The Commissioner voluntarily agreed to suspend the running of interest on all Kersting taxpayers' deficiencies beginning in June 1992 and remaining suspended until 90 days after the Tax Court entered its judgment on remand. [12] Taxpayers argue, however, that interest should have stopped accruing on their tax deficiencies on December 31, 1986, the date Thompson stopped accruing interest on his tax deficiencies, in order to adhere to the Dixon mandate. The question on appeal is thus whether taxpayers remain liable for interest accrued from December 31, 1986 to June 1992, as well as for interest that has accrued to the present starting on September 13, 2007, the date that was 90 days after the Tax Court's decisions were entered in most of the consolidated group of cases that were before the Tax Court on remand, including all petitioners here. Pursuant to I.R.C. § 6601(a), [i]f any amount of tax imposed by this title . . . is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. Although in some circumstances a court may have discretion in determining whether prejudgment interest should be owed, in this context the statute indicates that interest shall be paid. See Grauvogel v. CIR, 768 F.2d 1087, 1090 (9th Cir. 1985) (The statute itself provides the means for a taxpayer to stop the interest provision from operating.). The Tax Court found that Thompson paid full interest on his tax deficiencies, as imposed by I.R.C. § 6601(a). While Thompson did stop accruing interest in 1986, this occurred because Thompson paid his interest liability in 1986, not because he received an adjustment to his interest due. It is true that Thompson did not pay the actual deficiencies themselves until six months after he paid his interest liability, but the Tax Court ruled under Perkins v. CIR, 92 T.C. 749, 760, 1989 WL 29293 (1989), that Thompson's payment of accrued interest was deductible in the year paid even though the underlying tax had not been paid. See I.R.C. § 163(a) (permitting deduction of interest without requiring that the underlying obligation be paid); I.R.C. § 461(f) (permitting deduction of interest in the year in which it is paid, even though taxpayer's liability for the underlying debt is contested). Taxpayers also point to a special feature of the Thompson settlement which allowed a replacement check Thompson paid in February 1987 to be credited as a payment on December 31, 1986. The Tax Court noted this in its opinion on remand, building into the reduced tax deficiency figure for taxpayers the tax benefit received by Thompson as a result of crediting the payment in 1986. The court did not address whether Thompson should have accrued an additional six weeks' worth of interest. Nonetheless, Thompson ultimately received refunds for overpayments made in 1986 and 1987, so it would be illogical to conclude that he had amounts still owing after December 31, 1986. It is true that taxpayers were not offered the benefit of the Thompson settlement terms in 1986. Taxpayers therefore did not have the option to pay their tax deficiencies in 1986 based on the terms offered to Thompson and thus stop interest from accruing on their deficiencies. Nonetheless, this Court's mandate in Dixon calling for a settlement that puts taxpayers in the same position as Thompson does not require taxpayers' interest be extinguished past 1986, because the Thompson settlement did not involve a cancellation or reduction in the interest owed by Thompson on his tax deficiencies. Indeed, some taxpayers involved in the Kersting tax shelter and related litigation did make prepayments on their deficiencies to stop interest accruing on their accounts just as Thompson did. The taxpayers who did not make prepayments continued to receive the economic benefits of their funds, while Thompson lost the use of his funds by paying all tax deficiencies and interest in 1986 and 1987. As the Tax Court noted, taxpayers therefore were granted the equivalent of an interest-free loan of the reduced deficiencies and interest they will now have to pay. Dixon, 91 T.C.M. (CCH) 1086, 2006 WL 1157520, at . Section 6601(a) is not a penalty for late payment but merely compensation for delayed payment in the nature of interest on a loan. Grauvogel, 768 F.2d at 1090; see also United States v. Childs, 266 U.S. 304, 309-10, 45 S.Ct. 110, 69 L.Ed. 299 (1924) (interest on income tax is clearly intended to compensate the delay in payment of the taxthe detriment of its non-payment, to be continued during the time of its nonpaymentcompensation, not punishment.). Cancelling taxpayers' interest payments beyond 1986 would accord taxpayers a benefit well beyond that received by Thompson.