IRS may offset time-barred, unassessed interest against estate tax refund.

• Author: Ely, Mark

The Federal Circuit recently held that the IRS may offset previously unassessed interest against a refund of estate taxes when the statute of limitations (SOL) has barred assessment of the interest (Fisher, 4/10/96).

As representative of an estate, Gisele Fisher filed an estate tax return and paid the estate taxes in 1987. In 1990, the Service sent Fisher a notice of deficiency (largely based on an increase in the value of stock in a closely held corporation), which Fisher paid. In March 1991, the SOL for the assessment of tax expired without the IRS having assessed the tax or interest thereon. Fisher filed a refund claim for a portion of the taxes paid, which the Service denied in April 1991. She then filed suit in the Court of Federal Claims. In response, the IRS asserted that it was due interest on the deficiency, and claimed the right to offset the interest against any amount awarded to Fisher.

Early in the proceedings in the trial court, Fisher argued by motion that the Service could not offset interest against a refund of tax. The court noted that no interest offset was proper for interest on that portion of a deficiency ultimately refunded. However, the court left open the question of whether the IRS could offset interest on the valid portion of the deficiency against a partial refund of tax.

The Court of Federal Claims ultimately upheld Fisher's valuation of the stock and entered judgment for a refund of the amount of the deficiency related to the stock valuation. The Service sought to reduce Fisher's judgment by the interest on those items on which it had prevailed. The court found that the IRS was not entitled to offset the interest and entered judgment for Fisher, and the Service appealed.

The Federal Circuit determined that Lewis v. Reynold, 284 US 281 (1932), and Dysart, 340 F2d 624 (Ct. Cl. 1965), controlled, and that the IRS can offset a tax refund by any additional time-barred amounts the taxpayer owes for the year. In Lewis v. Reynold, the Supreme Court held that the Service could offset additional income tax owed against a refund of income tax for the same year even when the SOL barred assessment of the additional tax. Dysart applied Lewis to find that the IRS could offset a refund of a penalty by additional time-barred income tax determined to be owing for the same year.

The circuit court recognized that both Lewis and Dysart addressed offsets of additional income tax...