Rev. Rul. 84-98

1984-2 C.B. 304, 1984-27 I.R.B. 14.

                       Internal Revenue Service
                                 Revenue Ruling

   RAILROAD RETIREMENT;  REFUNDS AND CREDITS;  REDUCTION OF REFUND BY AMOUNT

                              OF BARRED DEFICIENCY

                            Published: July 2, 1984

Section 6402. - -Authority to Make Credits or Refunds, 26 CFR 301.6402-1:  Authority to make credits or refunds.

(Also Sections 3503, 6511;  31.3503-1, 301.6511(b)-1.)

  Railroad retirement;  refunds and credits;  reduction of refund by amount of barred deficiency.  The Service may reduce the amount of a RRTA refund by the amount of a barred FICA tax deficiency on the same wages if a determination is made that an employer is a FICA employer rather than a RRTA employer.

ISSUE

  May the Internal Revenue Service reduce the amount of a Railroad Retirement Tax Act (RRTA) refund by the amount of a barred Federal Insurance Contributions Act (FICA) deficiency for the same period(s) under the following circumstances?

FACTS

  X, a company owned and controlled by a railroad, treated its workers as employees under FICA (Chapter 21 of the Code).  X timely filed Form 941, Employer's Quarterly Federal Tax Return, for each quarter in 1977 and timely paid the tax due of 8x dollars for that year.  In 1980, the District Director examined the returns and determined that X was an employer as defined in section 3231(a) of the Code and thus was subject to the taxes imposed by RRTA (chapter 22 of the Code), rather than those imposed under Chapter 21.  On October 20, 1980, X agreed to the assessment and collection of the additional tax.  The Service assessed the gross amount of the tax under RRTA of 15x dollars on November 7, 1980, and mailed a notice and demand to X.  On November 17, 1980, X paid 7x dollars, the difference between the taxes due of 15x dollars and the taxes already paid under FICA of 8x dollars.  On December 3, 1980, the Service abated the taxes previously assessed under FICA and credited the 8x dollars paid with respect to those taxes to X's liability under RRTA.

  On September 11, 1981, X filed a claim for refund of the total amount of 15x dollars of taxes under RRTA paid for 1977, contending that it was not an employer under RRTA for that year.  The District Director reversed the position adopted in the first examination and agreed that X was not an employer under RRTA;  rather, X was an employer under FICA and was subject to taxes under FICA of 8x dollars.  X argued that the Service must refund the entire 15x dollars because assessment of the 8x dollars of FICA taxes is barred by the statute of limitations in section 6501(a) of the Code.

LAW AND ANALYSIS

  Section 6501(a) of the Code provides that the amount of any tax must be assessed within 3 years after the return is filed.

  Under section 6501(b)(2) of the Code, timely returns made under Chapter 21 of the Code are considered filed on April 15 of the following year for purposes of section 6501.  Thus, the period of limitation for assessment of X's FICA taxes expired April 15, 1981. The Service cannot now reassess the FICA taxes previously assessed.

  Section 3503 of the Code provides that any tax paid under chapter 21 or 22 by a taxpayer for any period for which the taxpayer is not liable under that chapter will be credited against the tax, if any, imposed by the other chapter, and the balance, if any, will be refunded.

  Under the doctrine of equitable recoupment, the Service may reduce a taxpayer's claim for refund by the amount of a barred deficiency so long as the refund claim and the deficiency arise from the same transaction.  Stone v. White, 301 U.S. 532 (1937), 1937-1 C.B. 224, Rothensies v. Electric Storage Battery Co., 329 U.S. 296 (1946), 1947-1 C.B. 109.

  To the extent that section 3503 of the Code does not override the limitation provisions in section 6501 under the facts described here, the doctrine of equitable recoupment would reduce the RRTA tax refund by the amount of the unassessable FICA tax.  The facts presented here meet the single transaction test enunciated in Electric Storage Battery Co.  The sole transaction was the payment of wages by X.  The only question is under what chapter of the Code the payments should be taxed.

HOLDING

  The Service may reduce a RRTA refund by the amount of a barred FICA tax deficiency.  Accordingly, the amount that may be refunded is 7x dollars.

Rev. Rul. 84-98, 1984-2 C.B. 304, 1984-27 I.R.B. 14.