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United States: Appeals court denies interest on overpayment

21 October 2014   (0 Comments)
Posted by: Authors: Mel Schwarz and others
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Authors: Mel Schwarz, Dustin Stamper and Shamik Trivedi (Grant Thornton LLP)

In Ford Motor Co. v. United States, No. 10-1934 (6th Cir. 2014), the Sixth Circuit Court of Appeals ruled on Oct. 1, 2014, that the taxpayer wasn't entitled to approximately $445 million in additional interest from the government because its overpayment was in the nature of a deposit, not an advance payment of tax.

The IRS determined the taxpayer underpaid its taxes by nearly $2 billion in the 1980s, and in the 1990s, the taxpayer paid approximately $875 million to stop the accrual of underpayment interest. This remittance was made under Rev. Proc. 84-58 (the predecessor to Rev. Proc. 2005-18), specifically as a "deposit in the nature of a cash bond" to stop the running of underpayment interest. Subsequently, the taxpayer converted those remittances into advance tax payments.

Under the law in effect for the years in dispute, cash bond deposits and advance tax payments differed in that an advance tax payment would bear interest if the taxpayer has overpaid its taxes. Cash bond deposits didn't bear interest. The government eventually reversed its position and determined the taxpayer actually was owed a refund for the periods in issue. The government refunded the payments, but applied interest beginning only on the date the cash bond was converted to an advance tax payment.

The court's decision touched on several issues, including the jurisdiction of the courts and sovereign immunity waivers. But, importantly, the decision should remind taxpayers that the law has since changed. Now, under Section 6603, deposits made to the IRS can stop the running of interest on a disputed amount, and if the amounts aren't applied to pay tax, the amount returned to the taxpayer will bear interest. Rev. Proc. 2005-18 sets forth the procedures for taxpayers to make, withdraw or identify deposits to suspend the running of interest on potential underpayments.

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