CCA 1138041: Separate excise-tax overpayment could not offset an expired unassessed liability

Plain-English summary

Chief Counsel Advice addressed whether an overpayment of one excise tax could be applied against an unassessed underpayment of a different excise tax for another period when the assessment period had expired. The advice stated that Lewis v. Reynolds concerns an overpayment of one type and period of tax, while separate taxes require an offset analysis under IRC § 6402(a). It concluded that IRC §§ 6401 and 6514(b) prohibited offsetting an overpayment of one excise tax against an unassessed liability for another excise tax after the assessment period had passed. The advice further stated that returned checks were not truly voluntary payments on the facts described, so the taxpayer was entitled to a refund if the refund statute remained open.

Ruling snapshot

• Question: Can an overpayment of one excise tax offset an unassessed liability for a different excise tax after the assessment period has expired?
• Outcome: advice given
• Key authorities: IRC §§ 6401, 6402(a), and 6514(b); Lewis v. Reynolds, 284 U.S. 281 (1932)

Full text (IRS public release)

ID: CCA_2011072713363547 Number: 201138041
Release Date: 9/23/2011
Office: --------------
UILC: 6401.01-00

From: ----------------------
Sent: Wednesday, July 27, 2011 1:36:43 PM
To: ---------------
Cc: -------------------
Subject: FW: Lewis v. Reynolds

--------my response is below. My review concurs. Let me know if you have further questions.

If the overpaid and underpaid taxes are completely separate taxes (though listed on the same return),
Lewis v. Reynolds would not apply. Lewis v. Reynolds, 284 U.S. 281 (1932), addresses what is an
"overpayment" of one type and period of tax. In L v. R, the Supreme Court held that the Service can
retain payments which do not exceed the correct amount of tax liability, even if that liability was never
assessed and the ASED has passed. The Service reduced the amount of the refund claimed by the
taxpayer on the return because the Service had determined the taxpayer owed additional tax for the
same year. The taxpayer is not entitled to a refund unless the tax is "overpaid", which means payment
exceeds the amount which might have been properly assessed and demanded for the tax year.

For separate taxes, the question is whether the overpayment and underpayment may be offset, under
section 6402(a). Section 6402(a) permits offset of an overpayment against a separate tax liability for
another period. Section 6401 provides that an "overpayment" includes amounts of payments of tax
assessed or collected after the ASED. And section 6514(b) provides that a credit against a liability in
respect of any taxable year shall be shall be void if any payment in respect of such liability would be
considered an overpayment under section 6401(a). Under this provision, we would be prohibited from
offsetting against an unassessed liability shown on a return where the assessment period has expired.
Thus, we cannot offset an overpayment of one type of excise tax against an unassessed excise tax of
another type, where the ASED for that tax has passed.

The Fisher case is distinguishable because it addresses offsetting a refund against unassessed interest.
The offset was allowed because the analysis was that deficiency interest is deemed an integral part of the
associated tax. In other words, in determining an overpayment of a particular tax liability, interest is just a
component of that tax liability (an L v. R "overpayment" analysis). Here, we have separate taxes (an
"offset" analysis).

You also mentioned Rev. Rul. 85-67 (1985-1 C.B. 364), which holds that an advance payment which
cannot now be assessed of an agreed deficiency plus interest is not an overpayment under section
6401(a), such that the taxpayer is entitled to a refund under 6402(a). Lewis v. Reynolds is discussed in
this rev. rul., as is Rev. Rul. 74-580, 1974-2 C.B. 400, which holds that payments of tax assessed and
paid after passing of the ASED are overpayments. Your question does not involve a payment of the
underpaid excise tax made within the assessment period so Rev. Rul. 85-67 is inapplicable.

Regarding the checks the taxpayer returned to the IRS, this was not truly a voluntary payment by the
taxpayer because it was premised upon the taxpayer's incorrect assumption that the taxpayer still owed
excise tax for the abstract where the ASED has run. The taxpayer would have no way of knowing the tax
was never assessed. Since sections 6401 and 6514(b) preclude us from applying the overpayment from
another abstract to the non-assessed abstract, the taxpayer is entitled to the refund (assuming the refund
statute is still open) and we should explain the situation to the taxpayer and return the refund check or
issue a new check. There are procedures in part 21.4.3 of the IRM which address handling returned
refund checks, including when the check is returned in error by the taxpayer. See IRM 21.4.3.4.4.

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