Rev. Rul. 84-38

1984-1 C.B. 250, 1984-11 I.R.B. 5.

                       Internal Revenue Service
                                 Revenue Ruling

                         OVERPAYMENTS;  TREASURY BONDS

                           Published: March 12, 1984

Section 6103. - -Confidentiality and Disclosure of Returns and Return Information

Section 6151. - -Time and Place for Paying Tax Shown on Returns, 26 CFR 20.6151- 1:  Time and place for paying tax shown on the return.

Section 6312. - -Payment by United States Notes and Certificates of Indebtedness, 26 CFR 301.6312-1:  Treasury certificates of indebtedness, Treasury notes, and Treasury bills acceptable in payment of internal revenue taxes or stamps.

(Also Sections 6151, 6402, 6611, 6621;  20.6151-1, 301.6402-1, 301.6611-1, 301.6621-1.)

  Overpayments;  treasury bonds.  When there is an overpayment of estate tax originally paid by the redemption of flower bonds, the Government may reinstate the flower bonds rather than make a cash refund.  In such a case, the Government will pay interest on the overpayments at the rate established by section 6621 of the Code and will calculate the interest on the fair market value of the bonds as of the date they were redeemed.

ISSUES

  1. When there is an overpayment of federal estate tax, may the Government reinstate "flower bonds" previously tendered at par in payment of the tax?

  2. If so, what rate of interest should be paid on the overpayment?

  3. On what amount should the interest be calculated?

FACTS

  D died on May 15, 1980.  On February 15, 1981, EX, executor of D's estate, filed a federal estate tax return reporting 800x dollars in tax.  To pay the tax, the estate redeemed "flower bonds" bearing interest at 3 1/2 percent, due February 15, 1990, with a par (face) value of 800x dollars and a fair market of 600x dollars. On February 15, 1982 the estate filed a claim for refund for 200x dollars.  The Internal Revenue Service determined that the claim should be allowed in full.

LAW AND ANALYSIS

  Section 6312 of the Internal Revenue Code authorizes the Secretary to receive certain U.S. government indebtedness issued on or before March 3, 1971, at par for payment of internal revenue taxes to the extent and under the conditions provided in the regulations.  Section 6312 was repealed by section 4(a)(2) of Pub.L. No. 92-5, 1971-1 C.B. 553, effective with respect to obligations issued after March 3, 1971.

  Under section 20.6151-1(c) of the Estate Tax Regulations, "flower bonds" may be used to pay estate tax.  Flower bonds are debt instruments of the United States that, although not otherwise redeemable at par before maturity, may be redeemed at par, plus accrued interest, to pay federal estate tax due from the deceased owner's estate.  The right of redemption applies only to those bonds which, by their offering circulars, provide for such redemption. See 31 CFR 306.28.  Thus, the right of redemption is contractual in nature.

  Section 6402(a) of the Code provides that the Secretary may credit the amount of any overpayment against any internal revenue tax liability of the person who made the overpayment and will refund any balance to that person.

  Section 6611(a) of the Code provides that interest will be allowed and paid upon any overpayment of any internal revenue tax at an annual rate established under section 6621.

  Section 6611(b)(2) of the Code provides that, in the case of a refund, interest will be paid from the date of the overpayment to a date preceding the date of the refund check by not more than 30 days.

  Section 6621 of the Code, as amended by the Tax Equity and Fiscal Responsibility Act of 1982, section 345(a), 1982-2 C.B. 462, 579, requires the Secretary to adjust interest rates semiannually according to the adjusted prime rate charged by banks.

  In Fryer v. United States, 440 F.Supp. 769 (S.D.Iowa, 1977), the question of the authority of the Government to reinstate bonds in lieu of a cash overpayment was not raised.  The court held that when the Government reinstates bonds, interest is payable at the contractual rate, not the statutory rate on overpayments established by section 6621 of the Code.

  In Girard Trust Bank v. United States, 602 F.2d 938 (Ct.Cl.1979), (Girard I) the court held that the Government was not limited, in refunding an overpayment, to making a cash refund or crediting the overpayment against another deficiency.  When the Government redeemed flower bonds to satisfy a liability that was found later not to be due, a premature redemption took place, contrary to the offering terms of the bonds.  Thus, the Government could refund the overpayment by reinstating a portion of the flower bonds previously surrendered.

  Girard I also considered the question of the interest on the overpayment.  The Government argued that interest should be paid at the contractual rate of 3 1/2 percent.  The court held, however, that because the estate had relinquished use of the funds as of the date the bonds were tendered for payment, an overpayment arose that should be governed by the statutory principles in sections 6611 and 6621 of the Code, rather than by the contractual language in the offering circular.  Thus, interest was payable under section 6611 at the rate established by section 6621.

  In Girard Trust Bank v. United States, 643 F.2d 725 (Ct.Cl., 1981) (Girard II), the court further considered the question of the amount of the overpayment on which the interest would be computed. The court applied the rationale in Girard I that interest is payable as compensation for the use of money.  The court reasoned that the amount of funds the estate lost the use of for the period after the tendering of the bonds was the fair market value of the bonds, not their par value.  Moreover, to allow interest on the par value would create a windfall for the estate beyond that intended by Congress. Thus, the court held that interest should be paid on the fair market value of the bonds.

  The Service will follow the decisions in both Girard I and Girard II and will not follow the decision in Fryer.  Accordingly, the Government may reinstate bonds with a face value of 200x dollars and pay interest at the applicable rate under section 6621 of the Code from February 15, 1981 to the date of reinstatement on 150x dollars.

(600x  X  200x)

800x

HOLDINGS

  1. The Government may reinstate flower bonds previously redeemed in settlement of an overpayment of federal estate tax.

  2. Interest on such overpayments will be paid at the applicable rate established under section 6621 of the Code.  The interest paid will be in lieu of the contractual rate.

  3. Interest will be calculated on the fair market value of the bonds at the time they are redeemed from the date of the overpayment to the date reinstatement is made.

Rev. Rul. 84-38, 1984-1 C.B. 250, 1984-11 I.R.B. 5.