Recent guidance extends deficiency interest-free periods.

• Author: Zarzar, Robert

In late 1999, the IRS issued Rev. Rul. 99-40 and Chief Counsel Notice (35)000-165 (republished as Chief Counsel Notice (35)000-168), which adopted together the principle for deficiency-interest purposes that any return overpayment carried over (i.e., credit elected) to the following year nevertheless would be considered as remaining "paid" for the first year until the return overpayment actually was needed to pay an installment of estimated tax for the following year. Since deficiency interest accrues only when the tax liability is both due and unpaid, this principle establishes a "no deficiency interest" (NDI) period running from the due date of the first year (Yr1) until the time (and in the amounts) that the return overpayment is applied to the estimated tax installment obligations of the subsequent year (Yr2).

In the past year, the duration of the NDI period has been addressed in a series of case-specific Field Service Advices (FSAs). These FSAs extended the NDI period to the due date of the Yr2 return and, in one case, slightly beyond it. However, the rationale for ending the NDI period at that time seems unclear; an argument could be made to continue the NDI period as long as continuing credit-elects can be traced back to the deficiency year.

May Department Stores, Inc., 36 FedCl 680 (1996), acq., and Sequa Corp., DC NY, 6/8/98, which followed the principles of Avon Products, 588 F2d 342 (2d Cir. 1978), had established a gradually longer NDI period, first, in May, to the time the Yr1 credit-elect was applied to the Yr2 installment to avoid the estimated tax penalty, and then to the due date of the Yr2 return, in Sequa, when not needed for any Yr2 estimated tax purpose. May set the NDI period as the estimated tax installment due dates, and Sequa established that the NDI period could extend past the last installment date. However, Sequa did not establish the theoretical ending date, and the Service has not published formal guidance accepting that decision.

Recent Guidance

In FSA 200049001, the Office of Chief Counsel dealt squarely with the situation when the Yr1 overpayment was not needed to pay any installment of Yr2's estimated taxes. This FSA cited May and Sequa as holding that the credit-elect may not be considered a payment of estimated tax installments when those taxes are fully paid otherwise, without consideration of the credit-elect. However, recognizing that Rev. Rul. 99-40 did not address the situation beyond the last...