CCA 1125033: Time-barred delinquency penalty may offset an estate-tax overpayment

Plain-English summary

Chief Counsel agreed that an unassessed portion of a delinquency penalty may be considered before determining the amount of an estate-tax overpayment, even after the period for assessing the penalty has expired. The advice relies on the principle that the IRS may redetermine the entire tax liability for the year at issue when calculating an overpayment, rather than offsetting only like items. It discusses the application of that principle to interest and penalties under IRC §§ 6601(e)(1) and 6665(a)(1), and cites Federal Circuit, Tax Court, and other authorities.

Ruling snapshot

• Question: May an unassessed, time-barred delinquency penalty be considered when determining an estate-tax overpayment?
• Outcome: Advice given, the offset is permitted on the presented facts.
• Key authorities: IRC §§ 6402, 6601(e)(1), and 6665(a)(1); Fisher v. U.S., 80 F.3d 1576 (Fed. Cir. 1996); Lewis v. Reynolds, 284 U.S. 281 (1932); Brown v. U.S., 217 F.3d 858 (Fed. Cir. 1999).

Full text (IRS public release)

ID: CCA_2011052709313226 Number: 201125033
Release Date: 6/24/2011
Office: -------------
UILC: 6402.02-00

From: ------------------
Sent: Friday, May 27, 2011 9:32:09 AM
To: ------------------
Cc:
Subject: FW: abatement of unpaid 706 or 709 tax (setoff issue)

---------we agree with the RA’s that the unassessed portion of a delinquency penalty may be taken into
account before determining the amount of an estate tax overpayment even though the period of
limitations for assessment of the penalty has expired.

The RA cites to Fisher v. U.S., 80 F.3d 1576, 1581 (Fed. Cir. 1996), where the taxpayer claimed a refund
based on an income tax adjustment and the Service applied a time barred interest adjustment to
determine if the taxpayer had in fact overpaid income tax for the year at issue. The Federal Circuit held
for the government. The court noted that while it found no reported case allowing the government to
offset a tax liability with interest, the offset principal in Lewis v. Reynolds, 284 U.S. 281, 283 (1932) does
not simply offset like item against like item (i.e., tax against tax, penalty against penalty, and interest
against interest) but allows a redetermination of the entire tax liability for the year at issue. Fisher recites
a statement from Allen v. U.S., 51 F.3d 1012, 1015 (11th Cir. 1995) that “Lewis sweeps broadly to permit
redetermination of the entire tax liability by retaining any tax payment ‘which might have been properly
assessed and demanded.’ Lewis, 284 U.S. at 283.” And Fisher shows that tax liability includes
underpayment interest by referencing IRC 6601(e)(1) (“Interest prescribed under this section on any tax
shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as
taxes.”)

A case submitted by the ------ confirms the application of Fisher to a penalty case; one involving the
failure to timely pay an additional assessment. Brown v. U.S., 217 F.3d 858 ((Table) Fed.Cir. 1999)
aff’ing 43 Fed.Cl. 463 (Fed.Cl.,1999). The Federal Circuit reasoned that IRC 6601(e)(1) corresponds to
IRC 6665(a)(1) regarding penalties (“[T]he additions to the tax, additional amounts, and penalties
provided by this chapter shall be paid upon notice and demand and shall be assessed, collected, and
paid in the same manner as taxes.”). The Federal Circuit’s reliance on Fisher seems a bit lukewarm:
“Although Mr. Brown challenges Fisher as not well reasoned, it is binding on this court.” (And the lower
court is similarly lukewarm; 43 Fed.Cl. at 468.) But we have no doubts that Brown and Fisher are
correct. While there may not be many cases on the application of Lewis to interest and penalties, the
Service’s practice is longstanding. See Rev. Rul. 56-492 (Interest and penalties for the taxable year
barred by the statute from assessment should be taken into account in determining the amount of
overpayment allowable to a taxpayer on the basis of a timely filed claim for refund for the same taxable
year and the same type of tax.) See also Bachner v. Commissioner, 109 T.C. 125, 132 (1997), aff’d 172
F.3d 859 ((Table) 3rd Cir. 1998) (the taxpayer claim for a refund based on overwithholdings was
determined taking into account a time-barred negligence penalty) which references Allen, Fisher, and
Loftin & Woodard, Inc. v. U.S., 577 F.2d 1206 1245-47 (5th Cir.1978) (the taxpayer claimed a refund
based on a carryback loss and the court upheld the Service’s application of a time barred delinquency
penalty to determine the overpayment carryback year).