Rev. Rul. 85-64

1985-1 C.B. 365, 1985-64 I.R.B. 35.

NET OPERATING LOSS; RESTRICTED INTEREST; STATUTE OF LIMITATIONS

Published: May 20, 1985

Section 6601.-Interest on Underpayments, 26 CFR 301.6601-1: Interest on underpayments.

(Also Sections 172, 6501; 1.172-1, 301.6501(a)-1.)

  Net operating loss; restricted interest; statute of limitations. When an unassessed deficiency that is barred by the statute of limitations is offset by the carryback of a net operating loss, the interest on that deficiency may not be offset unless the taxpayer is actually due a refund. Rev. Ruls. 81-87 and 81-88 amplified.

ISSUE

  Can interest be collected by offset in either of the factual situations described below?

FACTS

  SITUATION 1. X files its income tax returns on a calendar year basis. In October 1982 the Internal Revenue Service examined X's income tax returns for 1978, 1979, 1980 and 1981. X filed timely returns and reported no income tax liability for each of these years. The Service determined that X's taxable income for 1978 was actually $15,000 and that for 1979 the taxable income was actually $8,000. The Service also determined that the taxpayer had a net operating loss in 1981. The NOL was larger than the combined taxable income of both 1978 and 1979. The Service made no change in X's 1980 return.

  SITUATION 2. The same as situation 1 except that X had reported taxable income of $6,000 on its 1978 return and paid tax of $3,000.

LAW AND ANALYSIS

  Section 172(a) of the Internal Revenue Code allows as a deduction for the taxable year the net operating loss (NOL) carryovers and carrybacks to that year.

  Section 172(b)(1) of the Code provides the general rule that an NOL for any taxable year is an NOL carryback to each of the three taxable years proceeding the taxable year of the loss.

  Section 172(b)(2) of the Code provides that the entire amount of the NOL for any taxable year must be carried to the earliest of the taxable years to which the loss may be carried. The portion of the loss that is carried to each of the other taxable years is the excess, if any, of the amount of the loss over the sum of the taxable income for each of the earlier taxable years to which the loss may be carried.

  'Taxable income' for purposes of section 172(b)(2) of the Code means correct taxable income. Rev. Rul. 81-88, 1981-1 C.B. 585.

  Section 6601(a) of the Code provides that interest must be paid at an annual rate established under section 6621.

  With respect to interest accruing prior to October 4, 1982, section 6601(d)(1) of the Code provided that if the amount of any income tax is reduced by reason of a net operating loss carryback, or a net capita loss, this reduction in tax will not affect the computation of interest under the section for the period ending with the last day of the taxable year in which the net operating loss or the net capital loss arises. Section 346(c)(2)(A) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 579, amended section 6601(d)(1) by striking out 'the last day of the taxable year' and inserting in lieu thereof 'the filing date for the taxable year'. This amendment applies to interest accruing after October 3, 1982.

  Section 6601(e) of the Code provides that interest must be paid upon notice and demand, and must be assessed, collected, and paid in the same manner as taxes. That section further provides that any reference to 'tax' in the Code is deemed to refer to interest as well.

  Section 6601(g) of the Code provides that interest on any tax may be assessed and collected at any time during the period within which the tax to which the interest relates may be collected.

  Section 6501(a) of the Code states, generally, that the amount of any tax imposed must be assessed within 3 years after the return was filed.

  A taxpayer is not entitled to a refund of tax for a particular taxable year unless the taxes are actually overpaid for that year. Lewis v. Reynolds, 284 U.S. 281 (1932), XI-1 C.B. 130; Rev. Rul. 81-87, 1981-1 C.B. 580.

  'Taxable income' in section 172(b)(2) of the Code means actual taxable income. X had taxable income of $15,000 in 1978. Thus, in situation 1, X may carryback to 1979 only the excess of the 1981 NOL over $15,000. No interest on the 1978 deficiency may be collected because more than three years has elapsed since the filing of X's 1978 return, and the deficiency was not assessed.

  In situation 2, as in situation 1, X may only carryback the 1981 NOL to 1979 to the extent that the NOL exceeds $15,000. However, X paid $3,000 in tax for 1978, and the 1981 NOL more than offsets the entire 1978 taxable income. If it were not for the fact that X underreported 1978 income by $9,000, X would be entitled to refund of $3,000. But X underpaid the tax for 1978 and owes interest on the underpayment. The statute of limitations on assessment and collection has expired with respect to the 1978 taxable year. However, under Lewis v. Reynolds, the taxpayer is not entitled to a refund unless that tax is overpaid. Under section 6601(d)(1) of the Code, any income tax reduced by reason of a net operating loss will not affect the computation of interest on the tax. The interest owed on the 1978 deficiency may be offset against the refund of tax due to the NOL.

HOLDING

  SITUATION 1. Interest on the 1978 deficiency may not be offset against the 1981 NOL.

  SITUATION 2. Interest on the 1978 deficiency may be offset against the refund due for 1978.

EFFECT ON OTHER DOCUMENTS

  Rev. Rul. 81-87 and Rev. Rul. 81-88 are amplified.

Rev. Rul. 85-64, 1985-1 C.B. 365, 1985-64 I.R.B. 35.