Could a corporation retroactively use a 2002 overpayment credited to 2003 estimated tax to avoid interest on a later 2002 deficiency?

Subject

Interest after overpayment was credited to next year's estimates

Plain-English summary

Virginia denied the corporation's refund of interest on its amended 2002 income-tax liability. The corporation had originally overpaid 2002 tax and instructed Virginia to credit that amount to its 2003 estimated tax. When it later amended the 2002 return to report more tax due, it argued that the earlier overpayment had always left enough money with the Commonwealth to cover the deficiency.

The Commissioner ruled that the election changed the overpayment into a 2003 estimated payment. Estimated payments could be used only for their assigned taxable year until a return showed an overpayment. They could not be moved retroactively back to 2002. The 2002 deficiency remained unpaid until the corporation filed its 2003 return and that return produced an overpayment available for offset.

The IRS had reportedly refunded similar federal interest, but Virginia conformity did not require the Department to copy that result. Virginia conformity gives federal meaning to terms actually used in Virginia's income-tax statutes; it does not import federal concepts that conflict with Virginia statutes and regulations.

What this means for you

• Electing to credit an overpayment forward can make it unavailable to satisfy a later deficiency for the earlier year.
• Interest on an amended-return balance runs from the original due date until the balance is paid.
• A later year's overpayment becomes available only when that later return is filed and the overpayment is determined.
• Federal administrative treatment does not automatically control Virginia when Virginia has its own governing rule.

Common questions

Why could the 2002 overpayment not pay the amended 2002 balance?

At the taxpayer's request, it had already become a 2003 estimated payment.

When did the 2002 balance become paid?

When the 2003 return was filed and showed a sufficient overpayment to cover the 2002 assessment.

Did Virginia follow the IRS interest abatement?

No. The Commissioner said Virginia conformity does not extend to federal concepts that contradict Virginia law.

Was the requested interest refund granted?

No.

Citations and references

• Va. Code §§ 58.1-15, 58.1-301, 58.1-455, 58.1-1812, 58.1-1821, 58.1-1824, and 58.1-1833.
• 23 VAC 10-120-420 and 10-120-440.
• P.D. 99-99 (May 6, 1999); P.D. 02-166 (Dec. 19, 2002); P.D. 03-43 (Apr. 24, 2003); P.D. 96-117 (June 3, 1993, as printed in the ruling).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-195

Original ruling text

November 27, 2007

Re: § 58.1-1824 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek a refund of interest paid by * (the "Taxpayer") for the taxable year ended December 31, 2002.

FACTS

The Taxpayer timely filed its 2002 Virginia income tax return and requested that its overpayment be credited to its 2003 estimated tax. Pursuant to this request, the Department credited this overpayment to the Taxpayer's 2003 estimated tax. In October 2004, the Taxpayer filed an amended 2002 return and requested that the balance due be offset by a portion of the 2002 overpayment from its original return that was credited to 2003 estimated payments.

Around the same time, the Taxpayer filed its 2003 income tax return requesting that the overpayment be credited toward 2004 estimated tax. The Department processed the return and withheld a portion of the 2003 overpayment to satisfy the additional tax liability reported on the 2002 amended return. In addition, the Department assessed interest as a result of the increased 2002 tax liability and withheld a portion of the 2003 overpayment to offset the interest assessed.

The Taxpayer contests the assessment of interest for the 2002 taxable year contending that the Commonwealth had use of the 2002 overpayment and sufficient estimated tax was paid to cover the Taxpayer's 2003 liability. In addition, the Taxpayer contends that the Internal Revenue Service (I.R.S.) originally assessed additional interest and subsequently refunded the interest because the Taxpayer had sufficient funds on deposit to cover its additional federal liability. The Taxpayer, therefore, requests a refund of the interest.

DETERMINATION

Pursuant to the authority granted the Tax Commissioner by Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821.

Estimated Payments

This issue has previously been addressed in Public Document (P.D.) 03-43 (4/24/2003). Title 23 of the Virginia Administrative Code (VAC) 10-120-420 requires every corporation that expects its income tax to exceed $1,000 for a taxable year to file a declaration of estimated tax and to pay the tax in installments during the taxable year. Title 23 VAC 10-120-440, further provides:

All payments of estimated tax shall be applied toward the income tax liability of the taxpayer for the taxable year . . . [p]ayments of estimated tax may not be applied toward any other tax or taxable year unless and until an income tax return is filed showing a refund.

In P.D. 03-43, the Department articulated its policy that estimated taxes may be applied only toward the income taxes due for that taxable year. Once a return has been filed for that taxable year, any excess estimated payments may be returned to the taxpayer as a refund or applied to estimated payments toward the next tax year. Overpayments credited to a subsequent taxable year become estimated payments for that taxable year and may not be applied retroactively to a prior year's underpayment. See also P.D. 99-99 (5/6/1999).

In the instant case, once the Taxpayer's 2002 overpayment was credited to its 2003 estimated payment, it became a payment towards its 2003 tax liability and could not retroactively be used to offset the Taxpayer's additional 2002 liability. In essence, the Department used the Taxpayer's excess 2003 taxable year payments as reported on the Taxpayer's income tax return to satisfy the assessment for the 2002 taxable year. There was, in fact, no 2002 taxable year overpayment to offset the tax liability reported on the 2002 amended return.

Interest

The Taxpayer contends that interest should only be assessed if the Commonwealth was deprived of the use of money. It argues that because it had overpaid its estimated tax in an amount that exceeded the ultimate increased assessment that the Commonwealth was never deprived of the use of its money.

The Taxpayer cites a number of cases, Vick v. Phinney , 414 F.2d 444, 448 (5th Cir. 1969), citing Time, Inc. v. United States , 226 F. Supp 680, 686 (S.D.N.Y. 1964), affirmed 337 F.2d 859 (2nd cir.) And P. Lorillard Co. v. United States , 226 F. Supp. 694, 698 (S.D.N.Y. 1964), affirmed 338 F.2d 499, (2nd Cir.) that support the principle that the compensation for the "use of money" is the primary rationale for charging interest. Virginia law acknowledges that it has the use of a taxpayer's money when a taxpayer overpays its tax. Virginia Code § 58.1-1833 requires that the Department pay interest on the overpayment of tax at the rates set by Va. Code § 58.1-15. Likewise, Virginia law acknowledges that when a taxpayer underpays its tax, the taxpayer has use of money that rightfully belongs to the Commonwealth. Virginia Code §§ 58.1-455 and 58.1-1812 require taxpayers pay interest on money that they owe the Commonwealth. Therefore, the Virginia law recognizes and accounts for the "use of money". See P.D. 02-166 (12/19/2002).

In this case, the Department did not have the use of the Taxpayer's 2002 overpayment. Instead, at the Taxpayer's request, the Department converted the 2002 overpayment to a 2003 estimated payment, relieving the Taxpayer from making a portion of its estimated tax payments for the 2003 taxable year. As such, when the Taxpayer filed its 2002 amended income tax return, there were no payments in the Taxpayer's 2002 taxable year account to satisfy the outstanding liability.

Federal Conformity

The Taxpayer requests that Virginia refund the interest because the I.R.S. abated the interest assessment in this situation. Virginia's conformity to federal law is set forth in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meanings as used in the Internal Revenue Code. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Conformity does not extend to terms, concepts, or principles not specifically provided in Title 58.1 of the Code of Virginia . Therefore, the Department will not follow I.R.S. determinations that contradict Virginia's statutes and regulations.

Virginia Code § 58.1-455 is the statute that addresses interest on a corporate income tax return with a deficiency. This statute specifically provides in pertinent part:

Interest upon such tax or any unpaid balance of the tax . . . shall be added at a rate determined in accordance with § 58.1-15, from the date the tax or any unpaid balance of the tax was originally due until paid.

When a taxpayer files an amended return with a balance due, the interest accrues on that balance due from the date the tax was due until the day the balance due is paid. See P.D. 96-117 (6/3/1993). When the balance due for an earlier year's return is paid by the overpayment of a later year's return, the interest is computed on the earlier year's tax due from the original due date of that return to the filing date of the later year's return. It is on the filing date of the later year's return that the overpayment is determined and made available for payment of tax due. In the Taxpayer's case, the additional 2002 tax liability was not satisfied until the 2003 income tax return was filed showing a sufficient overpayment to cover the 2002 assessment.

Accordingly, the Taxpayer's request for refund of the interest paid is denied. The Code of Virginia sections, regulation and public documents cited, as well as other reference documents, are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1100799169B