AT&T Corp, may cost taxpayers years of overpayment interest.

• Author: Urban, Michael A.

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. C1. 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...