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Subsequently Determined Deficiency.

If an overpayment claimed on a return is credited to the succeeding year's estimated tax or refunded without interest, from what date will interest be assessed on a subsequently determined deficiency for the overpayment return year?

In Situation 1 of Rev. Rul. 99-40, X Corp. is a calendar-year taxpayer. For 1995, X made timely estimated tax payments of $100. On March 15,1996, X filed an extension request and paid $120. On Sept. 15, 1996, X filed a 1995 Form 1120, showing a tax liability of $210 and elected to have the $10 overpayment credited against its 1996 estimated tax. The $10 overpayment was deemed to arise on March 15, 1996. X's required estimated tax for 1996 was $100. To avoid the addition to tax, for underpayment of estimated tax for 1996, X was required to make payments of $25 each on April 15, 1996, June 15, 1996, Sept. 15, 1996, and Dec. 15, 1996. X timely made the required $25 payments in April and June. X made a $15 payment on September 15. In 1998, the Service determined that X's correct 1995 tax was $215, resulting in a $5 deficiency.

Rev. Rul. 99-40 concludes that interest on the $5 1995 deficiency runs from Sept. 15, 1996, the date on which the $10 overpayment was applied to X's third installment of 1996 estimated taxes. The overpayment was not needed to satisfy an installment of estimated tax before Sept. 15, 1996.

The facts are the same in Situation 2, except that X paid $23 on April 15, 1996 and $14 on June 15, 1996, instead of the required $25 payments on each of these dates.

Rev. Rul. 99-40 holds that interest on the $5 1995 deficiency runs from June 15, 1996, the date on which the overpayment is applied to X's 1996 estimated taxes; $2 of the overpayment is applied to the April 15 installment of 1996 estimated tax. The remaining $8 of the overpayment is applied to X's June 15 installment of 1996 estimated tax. Because the $8 portion of the overpayment exceeded the subsequently determined deficiency of $5, interest does not begin to run for 1995 before the date that portion was applied to X's 1996 estimated taxes.

In Situation 3, individual A is a calendar-year taxpayer. In 1995, A made timely estimated tax payments of $100. On April 15, 1996, A filed for an extension. On Aug. 15, 1996, A filed a 1995 Form 1040, showing tax due of $80, and requested a refund of the $20 overpayment. The overpayment was deemed to arise on April 15, 1996. The refund was made within 45 days of the date the timely return was fried, by check dated Sept. 14, 1996. In 1998, the Service determined that the correct tax was $85, resulting in a $5 deficiency.

According to Rev. Rul. 99-40, interest on the $5 deficiency runs from Sept. 14, 1996. Although A's 1995 taxes were due on April 15, 1996, they were not underpaid until the $20 was refunded without interest to A on Sept. 14, 1996.

The facts are the same in Situation 4, except that A's correct tax liability was $105, resulting in a $25 deficiency.

The ruling concludes that interest runs from Sept. 14, 1996, on $20 of the deficiency, and from April 15, 1996, on the remaining $5 of the deficiency. Because A's 1995 taxes of $105 were due on April 15, 1996, and A had only paid $100 as of that date, A's 1995 taxes were underpaid by $5 on April 15, 1996. However, A was not underpaid as to the $20 until that amount was refunded to A on Sept. 14, 1996.

In all four situations, the estimated tax rules in effect for the tax year for which the election to credit a return overpayment is effective are used to determine when the overpayment is applied to that tax year's estimated taxes and, thus, for determining when interest begins to run on the subsequently determined deficiency.

Rev. Rul. 99-40 concludes that, when a taxpayer reports an overpayment on its income tax return, interest will be assessed on that portion of a subsequently determined deficiency for the overpayment return year that is less than or equal to the overpayment as of(1) the date on which the Service refunds the overpayment without interest or (2) the date on which the overpayment is applied to the succeeding year's estimated taxes. Interest will be assessed on any remaining portion of the deficiency from the original due date of the tax for the overpayment return year.

Rev. Rul. 99-40 supersedes Rev. Ruls. 88-98, 84-58 and 77-475, but will not be applied adversely to a taxpayer that designated an overpayment to apply to an installment of estimated tax in accordance with Rev. Rul. 84-58 before Oct. 4, 1999.
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Author:Laffie, Lesli S.
Publication:The Tax Adviser
Date:Nov 1, 1999
Words:801
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