rr-99-40.pdf

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Part I
Section 6601.--Interest on Underpayment, Nonpayment, or
Extensions of Time for Payment, of Tax
26 CFR 301.6601-1: Interest on Underpayments.
(Also §§ 6402, 7805(b); 301.6402-3, 301.7805-1.)
Rev. Rul. 99-40
ISSUE
If an overpayment claimed on a return is credited to the
succeeding year's estimated tax or refunded without interest,
from what date will interest be assessed on a subsequently
determined deficiency for the overpayment return year?
FACTS
Situation 1
. X Corporation files its federal income tax
returns on a calendar year basis. For 1995, X made timely
estimated tax payments of $100x. On March 15, 1996, X filed Form
7004, Application for Automatic Extension of Time to File
Corporation Income Tax Return, and received a 6-month extension
of time to file its income tax return. X paid $120x with the
request for extension. On September 15, 1996, X
filed Form 1120,
U.S. Corporation Income Tax Return, for 1995 showing a tax
liability of $210x and elected to have the overpayment of $10x
credited against its 1996 estimated tax. The $10x overpayment is
deemed to arise on March 15, 1996. X's required estimated tax
for 1996 was $100x. In order to avoid the addition to tax for
underpayment of estimated tax for 1996, X was required to make
payments of $25x each on April 15, 1996, June 15, 1996, September

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15, 1996, and December 15, 1996. X timely made the required $25x
payments in April and June. On September 15, X
made a payment of
$15x. In 1998, the Internal Revenue Service examined X’s 1995
return and determined that X’s correct 1995 tax was $215x,
resulting in a deficiency of $5x.
Situation 2. The facts are the same as in Situation 1
except that X paid $23x on April 15, 1996, and $14x on June 15,
1996, instead of the required payments of $25x on each of these
dates.
Situation 3
. A, an individual, files federal income tax
returns on a calendar year basis. In 1995, A made timely
estimated tax payments of $100x. On April 15, 1996, A filed Form
4868, Application for Automatic Extension of Time to File U.S.
Individual Income Tax Return, and received a 4-month extension of
time to file A’s income tax return. On August 15, 1996, A filed
Form 1040, U.S. Individual Income Tax Return, for 1995 showing
tax due of $80x, and requested a refund of the $20x overpayment.
The overpayment is deemed to arise on April 15, 1996. The refund
was made within 45 days of the date the timely return was filed,
by a check dated September 14, 1996. In 1998, the Service
examined A
’s 1995 return and determined that the correct tax was
$85x, resulting in a deficiency of $5x.
Situation 4. The facts are the same as in Situation 3,
except that A’s correct tax liability was $105x, resulting in a
deficiency of $25x.

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LAW AND ANALYSIS
Section 6601(a) of the Internal Revenue Code provides that
if any amount of tax is not paid on or before the last date
prescribed for payment, interest will be paid on the amount from
such last date to the date paid. Section 6151(a) provides, in
general, that the date prescribed for payment is the time fixed
for filing the return, determined without regard to any extension
of time for filing. Section 6601(b)(1) provides that for
determining interest on underpayments, the "last date prescribed
for payment" is determined without regard to any extension of
time for payment or filing.
Section 6402(b) states that the Secretary is authorized to
prescribe regulations providing for the crediting against the
estimated tax for any taxable year of the amount determined by
the taxpayer or the Secretary to be an overpayment of the income
tax for the preceding taxable year.
Section 301.6402-3(a)(5) of the Regulations on Procedure and
Administration provides that a taxpayer may elect to apply all or
part of the overpayment shown by its return to its estimated tax
for the succeeding tax year by so indicating on its return. No
interest is allowed on the portion of the overpayment credited
and the amount of the credit is applied as a payment on account
of the estimated income tax for the year or the installments
thereof. See
also § 301.6611-1(h)(2)(vii).
In Rev. Rul. 77-475, 1977-2 C.B. 476, revoked by Rev. Rul.

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83-111, 1983-2 C.B. 245, reinstated and modified by Rev. Rul. 84-
58, the Service held that if an overpayment of income tax for a
taxable year occurs on or before the due date of the first
installment of estimated tax for the succeeding taxable year, the
overpayment is available for credit against any installment of
estimated tax for such succeeding taxable year and will be
credited in accordance with the taxpayer’s election. If the
overpayment occurs after the due date of the first installment of
estimated tax for the succeeding taxable year, it may be credited
only against an installment of estimated tax due on or after the
date the overpayment was made. Under these circumstances,
§ 6655(b)(3) provides that a payment of estimated tax by a
corporation is credited against unpaid required installments in
the order in which the installments are required to be paid.
Section 6654(b)(3) provides the same rule for individuals.
The Tax Reform Act of 1984, § 413, 1984-3 (Vol. 1) C.B. 301,
provides that the application of the Code with respect to the
crediting of an overpayment against estimated tax shall be
determined without regard to Rev. Rul. 83-111 and with full
regard to the rules in effect prior to Rev. Rul. 83-111. The
legislative history provides that "[w]here the credit is made to
an estimated tax payment arising prior to the election [to credit
the overpayment], interest on the overpayment will not be
payable, and interest on the underpayment which arises because of
a deficiency in tax for the prior year will run from the date the

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credit is effective." H. R. Rep. No. 98-432, Pt. 2, 98th Cong.,
2d Sess. 1489-90 (1984).
Rev. Rul. 84-58, 1984-1 C.B. 254, holds that for returns
filed after December 31, 1983, when a taxpayer elects to have an
income tax overpayment credited against the succeeding year’s
estimated tax, the Service will apply overpayments arising on or
before the due date of the return against the first installment
payment of the succeeding year’s estimated tax, unless the
taxpayer requests that it be applied to a later installment.
Rev. Rul. 88-98, 1988-2 C.B. 356, holds that when a taxpayer
claims an overpayment on a return filed either on the original
due date or on extension, and the claimed overpayment is applied
in full against an installment of the succeeding year’s estimated
tax, interest on a subsequently determined deficiency for the
earlier year runs from the due date of that installment on the
part of the deficiency that is equal to or less than the claimed
overpayment and from the original due date of the return on the
remainder. Rev. Rul. 88-98 follows Avon Products, Inc. v. United
States, 588 F.2d 342 (2d Cir. 1978), in which the court
interpreted § 6601(a) to mean that interest on a deficiency can
only be charged when the tax is both due and unpaid. The date
the overpayment becomes a payment on account of the succeeding
year's estimated tax determines the date the prior year's tax
became unpaid for purposes of § 6601(a). Prior to that date the
government has the use of the funds with respect to the prior

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year’s tax, and no interest is payable on the overpayment that is
the subject of the taxpayer’s election. See
§ 301.6402-3(a)(5)
and § 301.6611-1(h)(2)(vii). In the case of a refund made
without interest under § 6611(e), the date on which the tax is
both due and unpaid is the date when the amount in question is
refunded, even when that date is subsequent to the date of the
claim for refund.
In Situation 2 of Rev. Rul. 88-98, the Service applied the
taxpayer's 1983 overpayment to the first installment of its 1984
taxes because the taxpayer did not indicate the installment to
which the overpayment was to be applied. Rev. Rul. 88-98 held in
Situation 2 that, because the overpayment was applied to the
first installment, interest ran from April 15, 1984, on a
subsequently determined deficiency for 1983 that was equal to or
less than the claimed overpayment. However, Situation 2 does not
indicate whether the taxpayer had actually made all or part of
the April 15th estimated tax payment. Thus, it is not clear
whether the taxpayer received any benefit of the overpayment as a
payment of the April 15th installment.
In May Department Stores Co. v. United States
, 36 Fed. Cl.
680 (1996), acq. AOD CC-1997-008 (Aug. 4, 1997), the taxpayer
elected to credit an overpayment shown on its 1983 tax return to
the succeeding year's estimated tax liability but did not attach
a statement to its return indicating the installment to which the
Service should credit the overpayment. Pursuant to Rev. Rul. 84-

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58, the Service applied the overpayment to the first installment.
A deficiency was determined for the taxpayer’s 1983 tax year and
interest was assessed by the Service on the deficiency from the
due date of the first installment in accordance with Situation 2
of Rev. Rul. 88-98. However, the taxpayer had made estimated tax
payments sufficient to avoid the addition to tax imposed by
§ 6655 for 1984 for the first and second installments of
estimated tax due for 1984. The court concluded that the
Service's application of the taxpayer's 1983 overpayment to the
first installment did not change the fact that the government had
the use of the taxpayer's overpayment from the due date of the
first installment (May 15) to the date the overpayment was
applied to the third installment (October 15) since the
overpayment was not needed to satisfy any installment of
estimated tax due during that period.
In light of the May Department Stores
decision, the Service
has reconsidered the manner in which interest on a subsequently
determined deficiency is computed under § 6601(a) when the
taxpayer makes an election to apply an overpayment to the
succeeding year's estimated taxes. When a taxpayer elects to
apply an overpayment to the succeeding year's estimated taxes,
the overpayment is applied to unpaid installments of estimated
tax due on or after the date(s) the overpayment arose, in the
order in which they are required to be paid to avoid an addition
to tax for failure to pay estimated income tax under §§ 6654 or

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6655 with respect to such year. The Service will assess interest
on a subsequently determined deficiency for the overpayment year
from the date(s) that the overpayment is applied to the
succeeding year’s estimated taxes.
Since the overpayment will be applied in the order necessary
to avoid the addition to tax for underpayment of estimated tax,
designation of all or part of the overpayment to a specific
estimated tax installment is not necessary. Accordingly, the
Service will not accept such designations after October 4, 1999.
In Situation 1
, interest on the $5x deficiency for 1995 runs
from September 15, 1996, the date on which the $10x overpayment
is applied to X’s third installment of 1996 estimated taxes. The
overpayment was not needed to satisfy an installment of estimated
tax prior to September 15, 1996.
In Situation 2, interest on the $5x deficiency for 1995 runs
from June 15, 1996, the date on which the overpayment is applied
to X’s 1996 estimated taxes. A portion ($2x) of the overpayment
is applied to the April 15th installment of 1996 estimated tax.
The remaining $8x of the overpayment is applied to X
’s June 15th
installment of 1996 estimated tax. Because the $8x portion of
the return overpayment exceeded the subsequently determined
deficiency of $5x, interest does not begin to run for 1995 before
the date that portion was applied to X’s 1996 estimated taxes.
In Situation 3, interest on the $5x deficiency runs from
September 14, 1996. Although A’s 1995 taxes were due on April

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15, 1996, A’s 1995 taxes were not underpaid until the $20x was
refunded without interest to A
on September 14, 1996.
In Situation 4, interest runs from September 14, 1996, on
$20x of the deficiency, and from April 15, 1996, on the remaining
$5x of the deficiency. Because A’s 1995 taxes of $105x were due
on April 15, 1996, and A had only paid $100x as of that date, A’s
1995 taxes were underpaid by $5x on April 15, 1996.
Nevertheless, A
was not underpaid with respect to the $20x until
that amount was refunded to A on September 14, 1996.
In all situations, the estimated tax rules in effect for the
tax year for which the election to credit a return overpayment is
effective are used to determine when the overpayment is applied
to that tax year’s estimated taxes, and, thus, for determining
when interest begins to run on the subsequently determined
deficiency.
HOLDING
When a taxpayer reports an overpayment on its income tax
return, interest will be assessed on that portion of a
subsequently determined deficiency for the overpayment return
year that is less than or equal to the overpayment as of: (1) the
date on which the Service refunds the overpayment without
interest; or (2) the date on which the overpayment is applied to
the succeeding year’s estimated taxes. Interest will be assessed
on any remaining portion of the deficiency from the original due
date of the tax for the overpayment return year.

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EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 88-98, Rev. Rul. 84-58, and Rev. Rul. 77-475 are
modified and, as modified, are superseded.
PROSPECTIVE APPLICATION
Pursuant to § 7805(b), this ruling will not be applied
adversely to a taxpayer that designated an overpayment to apply
to an installment of estimated tax in accordance with Rev. Rul.
84-58 prior to October 4, 1999.
DRAFTING INFORMATION
The principal author of this revenue ruling is John J.
McGreevy of the Office of Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue
ruling contact Mr. McGreevy at (202) 622-4910 (not a toll-free
call).