Magazine article The CPA Journal

"Use of the Money" Principle Prevails

Magazine article The CPA Journal

"Use of the Money" Principle Prevails

Article excerpt

The Federal Claims Court ruled in The May Department Stores Co. US., No. 94-340T, 11/4/96 that the fundamental issue in assessing certain deficiency interest is governed by whether the government or the taxpayer had use of the money during the period in question. The IRS's arbitrary application of an overpayment to the next year's first and already fully paid estimated tax installment controlled the determination. It was concluded that the IRS had the use of the money for specific periods and therefore was precluded from assessing deficiency interest for those periods.

By way of background, The May Department Stores Co. ("May") filed Form 7004 in connection with its fiscal tax year ended January 28, 1984 (" 1983 return"). At that time the liability was determined to be $111,000,000 and that amount was fully satisfied when the extension application was filed. Upon completing the Form 1120, it was discerned that the liability was $ 103,090,774. The overpayment of $7,909,226 was to be credited toward the succeeding year's tax liability, however, no statement was provided to indicate which installment of estimated tax should be credited.

Later, the IRS examined May's 1983 return and determined the actual liability to be $108,018,931. Hence, the overpayment was reduced to $2,981,069. Since the overpayment had been applied to the 1984 tax liability, a deficiency of $4,928,157 was created with respect to the 1983 tax year. The IRS accrued interest on the deficiency and calculated the interest from May 15, 1984. The IRS disallowed the claim.

The same fact pattern occurred for May in connection with its fiscal year ended February 2,1985 ("1984 return"). The IRS assessed deficiency interest from May 15, 1985, and again, May's claim for refund of this portion of the interest payment was denied.

The matter before the court in the instant case is a dispute regarding the IRS's assessment of interest on the deficiencies from the date May paid its flex installment of estimated tax for the following tax year. The IRS had automatically applied the overpayment credit to the first installment of the 1984 and 1985 tax years. However, it needs to be strongly emphasized that May had timely remitted and fully satisfied its first two installments for those years before the filing of the returns which disclosed the overpayments. Therefore, May asserts that during the periods from May 15 through October 15 of 1984 and 1985 there were no deficiencies and hence there should be no deficiency interest assessed. The application of the overpayment to the first installments of the two years was unnecessary and only created excessive credits.

May asserts that the IRS can assess interest only when there is an underpayment and when a taxpayer has use of funds that rightfully belong to the government. This position relies on Avon Products, Inc. 588 F2d 342 (CA 2 1978) and May argues that the government cannot charge deficiency interest under Section 6601(c) until October 15 of each year. This is the date when May created the deficiencies by applying the overpayments against its subsequent years' taxes. Only at this moment did May use funds which rightfully belonged to the government. Interest should begin running when a tax becomes both due and unpaid and thus, October 15 should be the beginning date for purposes of assessing deficiency interest. …

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