Recaptured fuel credits create interest-bearing income tax underpayments

Plain-English summary

A taxpayer claimed refundable fuel credits on its income tax returns under IRC § 34(a)(3), using part of each credit to reduce income tax and receiving the rest as refunds. The IRS planned to recapture some or all of the credits. Chief Counsel advised that reducing the credits would leave the taxpayer underpaid on its income taxes. Under IRC § 6601, interest would accrue on each resulting underpayment from the applicable due date until payment.

Ruling snapshot

• Question: Does interest accrue when the IRS recaptures refundable fuel credits previously claimed against income tax?
• Outcome: Advice given that IRC § 6601 interest applies to the resulting income tax underpayment
• Key authorities: IRC §§ 34(a)(3), 6427(k), and 6601

Full text (IRS public release)

ID: CCA_2014101714474811 [Third Party Communication:

UILC: 6601.00-00, 6427.13-00 Date of Communication: Month DD, YYYY]

Number: 201447034
Release Date: 11/21/2014
From:
Sent: Friday, October 17, 2014 2:47:49 PM
To:
Cc:
Bcc:
Subject: RE: Underpayment interest on Excise Recapture

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Section 6427 permits certain taxpayers to receive a payment generally equal to the tax imposed on the purchase of certain fuels if such fuel is actually used for an exempt purpose. Alternatively, under section 6427(k) taxpayers can choose to claim a refundable income tax credit under section 34(a)(3) on the taxpayer’s income tax return. Section 34 claims are made on Form 4136 as an attachment to an income tax return.

In the situation -------- described to us, the taxpayer claimed refundable fuel credits under section 34(a)(3) of ---------------- and ---------------- for tax years -------and ------, respectively. In both years at issue, a portion of the credit was used to reduce the taxpayer’s income tax liability, and the remainder was refunded to the taxpayer. We understand that the Service intends to recapture some or all of these credits, and as a result the taxpayer will have an underpayment of income tax for tax years -------and -----
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Section 6601 provides that interest will accrue on an underpayment of tax from the due date to the date paid. Generally, when taken as a credit against income tax, a taxpayer receives a benefit to the extent of a reduction in the income tax it would otherwise have to pay. When the credit is reduced, the taxpayer becomes underpaid on its income taxes. Thus, an underpayment arises when the credit is reduced, and interest accrues on the underpayment under section 6601. In this case, Service intends to recapture some or all of the fuel credits the taxpayer previously claimed on its income tax return. As indicated above, this taxpayer will become underpaid and be liable for interest under section 6601 on any underpayment created by the recapture of these fuel credits.

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Kind regards,

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