Use of money principle governs interest accrued on underpayments.

• Author: Peto, Loretta

In August 1997, the IRS acquiesced in the case of May Department Stores Company, 11/4/96, which stated that interest does not accrue during the time the Service has the full use of the money deposited. The IRS's previous position had been to accrue interest on underpayments of tax during the time when no underpayment actually existed.

May Department Stores' (May's) Jan. 31, 1984 corporate tax return was due on April 15,1984. May extended the time to file its return until Oct. 15, 1984. On Oct. 15, 1984, May filed the return and applied the overpayment to the estimated tax payment for the year ended Jan. 31, 1985. May did not specify the estimate to which the overpayment was being applied. The Service applied the overpayment to the first estimate due May 15, 1984. The first two estimated tax payments for the year ended Jan. 31, 1985 had already been paid in full by the time the Jan. 31,1984 return was filed.

May's 1984 tax return was adjusted on audit. The overpayment from 1984 that was applied to 1985 taxes was eliminated and additional taxes were due for 1984. The IRS assessed interest from May 15, 1984 (the date to which the...