FTC carryback eliminates interest on earlier underpayment of tax.

• Author: Renfroe, Diane L.
• Position: Foreign tax credits

In Fluor Corp., 5/24/96, the Court of Federal Claims held that if a foreign tax credit (FTC) from one year is carried back to an earlier year and eliminates an underpayment in that year, it also eliminates the interest on the underpayment. The carryback is treated as an actual payment of the tax in the prior year.

The IRS audited Fluor Corp.'s 1982-1984 tax returns and found an underpayment for 1982. However, an FTC carryback generated in 1984 eliminated the 1982 underpayment.

The Service assessed interest on the underpayment from Jan. 15, 1983 (due date of the 1982 return) until Jan. 15, 1985 (due date of the 1984 return). The IRS reasoned that had the taxpayer paid the proper tax in 1982, the government would have had use of the money until the carryback was generated two years later. The taxpayer argued that the carryback was retroactive, extinguishing the deficiency and eliminating the interest charge on the deficiency.

Interest - in General

Sec. 6601 (a) provides generally that interest is due on any tax deficiency not timely paid. Interest accrues between the date on which the tax should have been paid and the date of actual payment.

Sec. 6601(d) provides "restricted interest" when deficiencies are subsequently reduced by a net operating loss (NOL) carryback, a net capital loss carryback or a Sec. 39 business credit carryback. In these cases, interest accrues only until the filing date for the tax year giving rise to the carryback. FTC carrybacks are not mentioned.

Sec. 6611(a) provides generally that interest is paid on any tax overpayment not refunded within a certain time. Interest accrues between the date of the overpayment and the date the tax is credited or refunded (with a 30-day window for refund checks).

Sec. 661 (f) provides that if an overpayment results from the carryback of an NOL, net capital loss or business credit, interest is not paid for the period between the date of payment and the filing date for the tax year giving rise to the carryback. Sec. 6611(g) provides the same rule for overpayments resulting from FTC carrybacks.

Supreme Court Precedent

In Manning v. Seeley Tube & Box Co., 338 US 561 (1950), the Supreme Court held that when a deficiency is eliminated by an NOL carryback, interest on the deficiency accrues until the date the carryback arises, absent a clear expression of congressional intent to the contrary. The subsequent cancellation of the duty to pay the tax does not cancel the duty to pay interest:

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