No Overpayment For Tax Timely Assessed OR Collected (12/29/12)

In ILM 201252015, here, the IRS reached some interesting conclusions regarding the statute of limitations.  The ILM blazes no new legal trails, but is a helpful reminder of the rules that it applied.

I tried to develop a simplified set of facts that would illustrate the facts in the ILM but could not because there are some confusing dates which are identified by pseudonyms rather than actual dates.  If I had the actual dates it would likely not be confusing.  So, I will simply state the key legal propositions asserted in the ILM.

1. The normal statute of limitations is 3 years.  Section 6501(a).
2. The normal statute may be extended by agreement.  Section 6501(c)(4).  In this case it was by Form 872 Consent, which extends to a date stated.
3. In the case of an amended return filed within the 60 day window of the statute expiration date (whether the normal statute or the extended statute), the assessment date expires no later than 60 days after the amended returns.  Thus, for example, say that the year 01 return was timely filed on 4/15/02 and the normal statute date is 4/15/05.  If the taxpayer files an amended return on 4/1/05, the statute to assess the tax reported on the amended return does not expire before 5/31/05 (60 days after 4/1/05).
4. Tax actually collected by the IRS while the assessment statute is still open is not an overpayment even if the IRS does not assess the tax until after the statute expiration date.  Thus, in the above example,  assume that the same example, except that (i) the taxpayer sent a payment of $100,000 with the amended 01 return filed 4/1/05; (ii) the IRS posts the payment to the year 01 on 4/3/05; but (iii) the IRS does not assess until 9/1/05 (well after the period for assessment, even after the Section 6501(c)(7) 60 minimum extension).  There is still no overpayment because the IRS timely collected the tax.

With that background, the following legal analysis in the ILM is helpful.

No refund or credit may be made unless it has first been determined that a taxpayer has made an "overpayment" of tax for the taxable period. See Lewis v. Reynolds, 284 U.S. 281, 283 (1932) ("An overpayment must appear before refund is authorized."). The term "overpayment" is interpreted to mean any payment in excess of that which is properly due. See Jones v. Liberty Glass, 332 U.S. 524, 531 (1947). Moreover, payments made before the expiration of the period of limitations on assessment are not "statutory overpayments" under section 6401(a). Section 6401(a) provides that "the term "overpayment" includes that part of the amount of the payment of any internal revenue tax which is assessed or collected after the expiration of the period of limitation properly applicable thereto." Rev. Rul. 85-67, 1985-1 C.B. 364, states that an advance payment which cannot now be assessed of an agreed deficiency plus interest is not an overpayment under section 6401(a), such that the taxpayer is entitled to a refund under 6402(a). This ruling distinguishes Rev. Rul. 74-580, 1974-2 C.B. 400, which states that payments that are made after the expiration of the assessment statute are refundable. 

The Service's position expressed in Rev. Rul. 85-67 is based on the Supreme Court's decision in Lewis v. Reynolds, which held that the expiration of the period of limitations does not bar the Government from retaining payments already received when they do not exceed the amount which might have been properly assessed and demanded. Further, in Bull v. United States, 295 U.S. 247, 259 (1935) the Supreme Court held that the assessment does not create the liability but merely acts as a judgment for taxes found due. 

The Service's position has been accepted by the Eleventh Circuit Court of Appeals, which is the Circuit where the taxpayers reside. In Williams-Russell & Johnson Inc. v. United States, 371 F.3d 1350 (11th Cir. 2004), the court held that that the Service's untimely assessment does not create an overpayment when payment was made prior to the expiration of the assessment statute. See also Principal Life Ins. Co. & Subsidiaries v. United States, 95 Fed. Cl. 786 (Fed.Cl. 2010) (holding that a payment attributable to tax liabilities made within the assessment deadline had not been retroactively transformed into overpayment that had to be refunded simply because the Internal Revenue Service did not make a timely assessment); Williams-Russell & Johnson Inc. v. United States, 371 F.3d 1350 (11th Cir. 2004) (holding that the Service's untimely assessment does not create an overpayment); Ewing v. United States, 914 F.2d 499 (4th Cir. 1990) (holding that the statute requiring assessment to be made within three years and prohibiting court proceeding without assessment to collect tax after expiration of three years does not forbid the government from collecting and retaining taxes that were voluntarily paid without assessment and that did not constitute overpayment). 

In this case, there is no overpayment because the taxpayers did not pay more than what they owed, as shown on their amended returns. Further, the payments they made with their amended returns for Year 1 and Year 2 were not section 6401 statutory overpayments. These payments were credited to the taxpayers' accounts on Date 7. For Year 1, the assessment period of limitations was open on that date under section 6501(c)(7). For Year 2, the assessment period of limitations was open on that date under section 6501(a), because the original return was filed on Date 2, fewer than three years prior to the payment. On the other hand, the amounts of interest paid by credit transfer on Date 8 were in fact collected after the expiration of the assessment statute of limitations, and must be abated and refunded to the taxpayers.

Among the cases cited is Principal Life Insurance Company v. United States, 95 Fed. Cl. 786 (2010), here, where Judge Fran Allegra analyzes the overpayment provisions and other related procedural provisions with great learning and sensitivity to the interrelationship of these provisions.  I require my Tax Procedure students to read the case and spend a class discussing it as a good summary for the year.

One of these days I will devote a blog entry to the case if I feel up to trying to add anything to Judge Allegra's analysis.  Or perhaps the best I will be able to do is to summarize his analysis without doing too much damage to it in my summary.