When overpayment interest starts running on a foreign corporation's refund claim when it had no obligation to file a return

Plain-English summary

When the IRS refunds an overpayment, it usually owes the taxpayer interest running from the date of the overpayment, but a special rule (section 6611(b)(3)) cuts off interest for any period before a return is filed if the return is late. This Chief Counsel memo addresses a foreign corporation that had U.S. tax withheld at the source on interest income, then filed a Form 1120-F to claim a refund of that withholding after the return due date. The question was whether interest should run from the original June 15 due date or only from the later date the return arrived. The answer is "it depends," and it turns on one fact: whether the corporation knew, at the time the tax was withheld, that it would end up overpaid and seek a refund. If it knew, it had to file a timely return, and if it did not, interest runs only from when it filed a processible return. If it did not know, section 6611(b)(3) does not apply because a foreign corporation with no filing obligation cannot file a "late" return, so interest runs from the June 15 deemed-payment date under sections 6611(d) and 6513(b)(3). The memo relies on the OTI and MNOPF cases to reach this reading.

Ruling snapshot

• Question: Does overpayment interest on a foreign corporation's refund of withheld tax run from the return's original due date, or only from when the late return was filed?
• Outcome: Advice (it depends on whether the corporation knew at withholding that it would seek a refund)
• Key authorities: IRC § 6611(a), (b)(2), (b)(3), (d); § 6513(b)(3); Treas. Reg. § 1.6012-2(g); Overseas Thread Industries, 48 Fed. Cl. 221; MNOPF Trustees Ltd. v. United States, 123 F.3d 1460

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 202144027
       Release Date: 11/5/2021
       CC:PA:02:HHuang
       POSTN-111014-21

UILC: 6611.04-00

date: June 11, 2021

 to:   Kimberly Schoenbacher
       Director of Field Operations
       (Foreign Payments Practice & Automatic Exchange of Information)

from: Pamela W. Fuller
Senior Technician Reviewer
(Procedure & Administration)

subject: Computation of Overpayment Interest on an Overpayment Claimed by a Foreign
Corporation with no Filing Obligation

       This memorandum responds to your request for assistance. This advice may not be
       used or cited as precedent.

       LEGEND

        Corporation X    =   -------------------------------------------
        YR1              =   -------
        YR2              =   -------
        YR6              =   -------
        Date 1           =   ----------------

       ISSUE

       Whether overpayment interest accrues from the original due date of Corporation X’s
       return, June 15, YR2, for an overpayment claimed on the taxpayer’s YR1 Form 1120-F,
       U.S. Income Tax Return of a Foreign Corporation.

       CONCLUSIONS

       It depends.

       A. If Corporation X knew that its full withholding, at the time it occurred, would result in
       an overpayment for which it would seek a refund, Corporation X would be required to

POSTN-111014-21 2

file a timely income tax return. If Corporation X did so, overpayment interest accrues
from June 15, YR2. If Corporation X’s income tax return is not timely, overpayment
interest accrues from the date it filed a processible return.

B. If Corporation X did not know that its full withholding, at the time it occurred, would
result in an overpayment for which it would seek a refund, Corporation X’s overpayment
interest accrues from June 15, YR2, even though the return was filed after that date,
because the provisions of Internal Revenue Code section 6611(b)(3) relating to the
payment of interest on late returns would not apply.

FACTS

The facts you have provided are as follows:

Taxpayer, Corporation X, a foreign corporation, sought a refund on its YR1 Form 1120-
F for all of the withholding taxes (Chapter 3 withholding) on interest paid to Corporation
X by a related U.S. corporation during YR1. The last date prescribed for filing Form
1120-F was June 15, YR2, but the IRS did not receive the return until later that year.
Corporation X timely requested an extension, but it is not clear whether Corporation X
filed a processible return by the extended due date. It is also not clear when
Corporation X knew that its full withholding would result in an overpayment for which it
would seek a refund.

The Service issued the claimed refund, which posted on Date 1, YR6, as well as
overpayment interest that appears to run from the day after the return was received by
the IRS in YR2.

You have asked whether overpayment interest should have accrued from the June 15
due date.

LAW AND ANALYSIS

Generally, interest is paid on any overpayment of tax from the date of overpayment to a
date that precedes the refund date by not more than 30 days. I.R.C. § 6611(a), (b)(2).
Under section 6611(d), for income tax withholding, the provisions of section 6513
generally apply in determining the date of payment for purposes of section 6611(a).
Pursuant to section 6513(b)(3),

   Any tax withheld at the source under chapter 3 or 4 shall, in respect of the
   recipient of the income, be deemed to have been paid by such recipient on the
   last day prescribed for filing the return under section 6012 for the taxable year
   (determined without regard to any extension of time for filing) with respect to
   which such tax is allowable as a credit under section 1462 or 1474(b). For this
   purpose, any exemption granted under section 6012 from the requirement of
   filing a return shall be disregarded.

Here, the last day prescribed for filing the YR1 Form 1120-F is June 15, YR2, which is
also the deemed date of payment for purposes of section 6611.
POSTN-111014-21 3

On the other hand, the Service appears to have started computing interest from the
date it received the return because the return was treated as late under section
6611(b)(3), which provides an exception to the general rule that interest accrues from
the date of overpayment. Under section 6611(b)(3), if a tax return “is filed after the last
date prescribed for filing such return (determined with regard to extensions), no interest
shall be allowed or paid for any day before the date on which the return is filed.”
However, section 6611(b)(3) does not apply in this case if Corporation X does not have
a filing obligation under Treas. Reg. § 1.6012-2(g)(2)(i)(a), and Corporation X did not
know that it was owed a refund when the return was due.

In MNOPF Trustees Limited (Merchant Navy) v. United States,123 F.3d 1460, 1464
(Fed. Cir. 1997), the Federal Circuit found that a party that has no filing obligation could
not have filed a late return, and section 6611(b)(3) does not apply. Similarly, in
Overseas Thread Industries (OTI), 48 Fed. Cl. 221, 230 (2000), the Court of Federal
Claims held that section 6611(b)(3) does not govern the accrual date for interest on a
refund of overpayment that resulted from tax withheld at the source by a United States
subsidiary of the foreign corporate taxpayer. The court reasoned that if a foreign
corporation that meets the requirements of Treas. Reg. § 1.6012-2(g)(2)(i)(a) does not
file a tax return, “but later discovers the existence of an overpayment after the close of
the applicable income tax return filing period,” the foreign corporation is required to file a
return to claim the refund under Treas. Reg. § 301.6402-3(a)(1). Id. at 230. The return
is not considered late-filed because at the time the income tax return would have been
due, the corporation qualified for the filing exception. Id. The Court of Federal Claims
stated that it needed to harmonize the provisions into a coherent whole because the
government's interpretation of §1.6012-2(g) led to an odd result: a foreign corporation
that meets the requirements of the return-filing exception in § 1.6012-2(g)(2)(i)(a)
nevertheless must file a return under § 1.6012-2(g)(2)(i)(b) when claiming a refund,
thereby undermining the exception in § 1.6012-2(g)(2)(i)(a). Id. at 229-230. The court
reasoned that the proper interpretation of § 1.6012-2(g) is that the foreign corporation
must file a return when claiming a refund, but that the return will not be considered late
for purposes of section 6611(b)(3) if the foreign corporation did not know that it was
owed a refund when the return was due. See Id. at 230. Since the taxpayer was not
aware of its right to a refund when the return was due, the court held that the taxpayer's
return should be considered timely and that the interest on the overpayment began to
accrue from the date the return was due pursuant to section 6611(d), even though the
return was not timely filed. Id. The court stated that if a taxpayer “knows that its full
withholding, at the time it occurs, will result in an overpayment for which it will seek a
refund, then the taxpayer would be required to file a timely income tax return for that
taxable year. To find otherwise would nullify Treas. Reg. § 1.6012-2(g)(2)(i)(b)(2).” 1 48
Fed. Cl. at 230 n.8. The court also distinguished MNOPF, finding that section
6513(b)(3) applies to a taxable foreign entity, rather than a tax-exempt foreign entity like
MNOPF. Id. at 227-228. The Court pointed out that the language in section 6513(b)(3)
and related Treas. Reg. § 301.6513-1(b)(3) expressly recognizes the last date

1 We assume the phrase “at the time it occurs” refers to the date the tax withholding is deemed to be a

payment by the recipient under section 6513(b)(3). In this case, that date is June 15, YR 2.
POSTN-111014-21 4

prescribed for filing the return under section 6012 as the interest accrual date, even
when a filing exception applies. See Id. at 230. So, section 6611(d) and 6513(b)(3)
would set the interest accrual date, not section 6611(b)(3). Id.

Here, it is unclear when Corporation X knew that its full withholding would result in an
overpayment for which it would seek a refund. If Corporation X knew about it at the
time of the withholding, Corporation X was required to file a timely return. If it filed a
timely return, section 6611(b)(3) is not applicable. If it did not file a timely return,
overpayment interest runs from the date it filed a processible return. See I.R.C.
§6611(b)(3) and (g). If Corporation X discovered the overpayment after June 15 YR2,
the consequences are the same whether or not its return is filed after the due date for
filing. That is, if Corporation X claimed a refund on a valid and processible return filed
by the extended due date, the return is not late for purposes of section 6611(b)(3),
which takes extensions into consideration. If, on the other hand, the return was filed
after the extended due date, the return would not be late because the corporation has
no filing requirement. Sections 6611(d) and 6513(b)(3) apply so that “the last day
prescribed for filing the return under section 6012” (June 15, YR2, in this case) is the
date interest begins to run. In this scenario, overpayment interest runs from June 15,
YR2.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

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