Unassessable interest may offset a refund after an NOL carryback

Plain-English summary

A net operating loss carryback reduced a taxpayer's liability for an earlier year, but section 6601(d)(1) preserved interest through the filing date for the loss year. Because the underlying tax had never been assessed, Chief Counsel concluded that the interest could no longer be assessed. The interest nevertheless remained lawfully due and could offset a claimed refund of withholding and the child tax credit. Under the refund cases cited in the advice, the controlling question was whether the taxpayer had actually overpaid after accounting for that interest.

Ruling snapshot

• Question: May interest that can no longer be assessed offset a refund after an NOL carryback eliminates the tax?
• Outcome: Advice given. The interest cannot be assessed but should offset the refund.
• Key authorities: IRC § 6601(d) and (e); Lewis v. Reynolds, 284 U.S. 281 (1932); Fisher v. United States, 80 F.3d 1576 (Fed. Cir. 1996)

Full text (IRS public release)

ID: CCA_2014081909342804 Third Party Communication: None

UILC: 6601.01-01 Date of Communication: Not Applicable

Number: 201438024
Release Date: 9/19/2014
From:
Sent: Tuesday, August 19, 2014 9:34:28 AM
To:
Cc:
Bcc:
Subject: RE: Counsel Advise Requested

Hi -----,

We agree with you that although the interest cannot be assessed, it can and should be used to offset any refund of withholding and the child tax credit.

Under section 6601(d)(1), if the amount of any tax is reduced by reason of a carryback of a net operating loss, such reduction in tax shall not affect the computation of interest for the period ending with the filing date for the taxable year of the loss. Because the tax was never assessed for ------, interest cannot now be assessed. However, when deciding whether the TP has an overpayment, as stated in Lewis v. Reynolds, “the ultimate question presented for decision, upon a claim for refund, is whether the taxpayer has overpaid his tax.” 284 U.S. 281, 283 (1932). Interest is treated in the same manner as tax under section 6601(e). Lewis v. Reynolds has been applied to offset a refund when the Service could not assess interest, Fisher v. United States, 80 F.3d 1576 (Fed. Cir. 1996). Here the taxpayer has not overpaid because interest was lawfully due for the time period prior to the loss. In addition, this situation appears almost identical to Situation 2 in Rev. Rul. 85-64, 1985-64 I.R.B. 35 (aside from the fact that in the revenue ruling, the taxpayer reported some tax for the year in question whereas the taxpayer in this case apparently did not).

If you have any questions or would like to discuss further, please let me know.

Thanks,
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