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Part 20. Penalty and Interest

Chapter 2. Interest

Section 11. Miscellaneous Interest Provisions

20.2.11  Miscellaneous Interest Provisions

This chapter contains information on the following miscellaneous interest provisions:
• Windfall Profit Tax
• Personal Holding Company Tax
• Interest on Cooperatives and Patrons
• Renegotiation of Government Contracts
• Claim of Right-Adjustments to Income
• Bankruptcy Cases
• Stamp Taxes
• Transferee Assessments

20.2.11.1  (11-18-2008)
Windfall Profit Tax Repealed

  1. The Windfall Profit Tax (WPT) was an excise tax on the production of domestic crude oil for periods after February 29, 1980.

  2. The WPT on domestic crude oil was repealed for oil removed from the premises on or after August 23, 1988.

  3. Refer to the archived version of IRM 20.2.11, dated July 31, 2001, if instructions for computing interest on WPT are needed.

20.2.11.2  (11-18-2008)
Personal Holding Company Tax Overview

  1. If a liability for Personal Holding Company (PHC) tax is established for any taxable year under IRC section 541, taxpayers are allowed a deduction for the amount of deficiency dividends in order to determine PHC tax. Refer to IRC section 547(a)for the general rule for deductions for deficiency dividends.

20.2.11.2.1  (11-18-2008)
Determination of PHC Tax

  1. Determination of liability for PHC tax may be established by:

    • a decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction which has become final;

    • a closing agreement under IRC section 7121(Form 866, Agreement as to Final Determination of Tax Liability); or

    • an agreement (Form 2198, Determination of Liability for Personal Holding Company Tax).

20.2.11.2.2  (11-18-2008)
Criteria to Claim a Deficiency Dividend Deduction

  1. Form 976, Claim for Deficiency Dividends Deduction, Credit, or Refund, etc., is used to claim the deficiency dividend deduction.

  2. To qualify for the deduction the taxpayer must have:

    • filed a return on time;

    • committed no fraud;

    • distributed the dividend within 90 days after the determination; and

    • filed the claim (Form 976) after such distribution and within 120 days after the deficiency was established.

20.2.11.2.3  (11-18-2008)
Period for Making Assessment

  1. When filed, Form 976 suspends the running of the statute on assessment and collection for a period of two years after the date the deficiency was established.

20.2.11.2.4  (11-18-2008)
Decreases in PHC Tax

  1. Interest is not allowed if:

    • the deficiency dividend deduction results in an overpayment and

    • the original tax is assessed and paid prior to the determination of an overpayment.

  2. Input TC 770 –0– to restrict the allowance of credit interest.

20.2.11.2.5  (11-18-2008)
Debit Interest on PHC Tax Adjustments

  1. The taxpayer is liable for the interest due on the PHC tax that was eliminated by the dividend deduction. Interest is charged from the due date of the Form 1120, U.S. Corporation Income Tax Return, until the received date of the Form 976.

  2. The taxpayer may also be liable for interest on any underpayment that exceeds the dividend deduction, including:

    • tax underpayment in excess of the deduction;

    • penalties assessed or;

    • interest on tax, penalties and/or interest.

  3. When the established deficiency exceeds the amount attributable to the dividend deduction, the difference is assessed. Interest is computed on the excessive tax amount from the due date of the Form 1120 until the earlier of the full payment date, waiver plus 30 days, or 23C Date, whichever is applicable. Interest on the tax amount eliminated by the dividend deduction is computed under the rules of IRM 20.2.11.2.5:(1) above.

    Note:

    When more than one computation of interest is required under the above rules, the total interest due is combined and assessed with TC 340.

20.2.11.2.6  (11-18-2008)
Tax Court and Debit Interest on PHC Tax Adjustments

  1. If a claim is timely filed and the liability is established by a Tax Court decision or judgment; and the claim is filed on or before the 55th day after the decision became final:

    1. If the PHC deficiency is identical to the tax on the approved deficiency dividend deduction, assess and collect debit interest only, computed on the full deficiency from the due date of the tax to the date the claim was filed.

    2. If the PHC deficiency exceeds the tax on the approved deficiency dividend deduction, assess and collect the excess of the PHC tax, along with interest computed from the due date of the tax to the date of assessment or the date of the overpayment if satisfied by a credit.

  2. If the claim is not filed before the 55th day after the court decision became final, assess the full amount of the deficiency along with debit interest from the due date of the tax to the date of assessment.

  3. If a claim is filed between the 55th and 60th day after the decision became final, abate that part of the assessment that equals the tax on the approved PHC deficiency dividend deduction.

    1. Collect any excess tax along with the proportionate interest previously assessed.

    2. Compute and collect interest only on that part of the tax equal to the amount attributed to the approved deficiency dividend deduction, from the due date of the tax to the date the claim was filed.

20.2.11.3  (11-18-2008)
Interest on Cooperatives and Patrons

  1. This subsection covers Interest on Cooperatives and Patrons.

20.2.11.3.1  (11-18-2008)
Tax Treatment of Cooperatives and Patrons

  1. Farmers' cooperative organizations exempt from tax under IRC section 521 or corporations operating on a cooperative basis, are subject to IRC section 1381, 1382, and 1383, except those which:

    • are exempt from tax under Chapter 1, and

    • are subject to provisions relating to mutual savings banks or insurance companies, or

    • furnish electric energy or telephone service to rural areas.

  2. The method for determining taxable income of cooperatives is found in IRC section 1382.

  3. The rules for computation of tax are found in IRC section 1383.

20.2.11.3.2  (11-18-2008)
Special Rules for Credit Interest

  1. If the tax decrease ascertained under IRC section 1383 for the prior taxable year exceeds the tax for the current taxable year, the excess:

    • is considered a payment of tax on the due date of the return for the current taxable year, and

    • will be refunded or credited as if it were an overpayment for the current taxable year.

  2. Credit interest is allowed on the overpayment from the due date of the return for the current taxable year, rather than from the actual date of overpayment in the prior year.

  3. The amount of overpayment is shown on Line 9, Column (b) of Form 2285, Concurrent Determinations of Deficiencies and Overassessments.

20.2.11.4  (11-18-2008)
Renegotiation of Government Contracts

  1. This subsection covers Renegotiation of Government Contracts.

20.2.11.4.1  (11-18-2008)
Renegotiation of Government Contracts Overview

  1. If any contract between the United States Government and a taxpayer is renegotiated and excessive profits are eliminated, the taxpayer must pay or repay the excessive profits to the Government.

  2. The requirement was repealed effective November 5, 1990, except if:

    1. any transaction occurred before the date of repeal, or

    2. any property was acquired before the date of repeal, or

    3. any item of loss, deduction, or credit was taken into account before the date of repeal, and

    4. the treatment of such transaction affects the tax liability for periods ending after November 5, 1990.

20.2.11.4.2  (11-18-2008)
Tax Credit on Renegotiation of Government Contracts

  1. A credit is allowed by the contracting agency of the government against the repayment of excessive profits reported as income on a prior year tax return (See IRC section 1481(b)).

  2. The amount of the credit allowable is equal to the proposed tax reduction resulting from the reduction in income on the prior year return.

  3. Any part of the proposed tax decrease applied as a credit against the repayment to the contracting agency will not be scheduled for abatement or refund by the Service.

20.2.11.4.3  (11-18-2008)
Renegotiation Stamp on Returns

  1. After the excessive profits have been repaid to the contracting agency, the Renegotiation Board (or the agency) will inform the Campus Director with respect to the amount of taxes assessed or paid which have been allowed in the renegotiation settlement.

  2. Upon receipt of this information, the Examination Division will impress a stamp on the original return indicating:

    1. On the top line, the total amount of the credit deducted;

    2. On consecutive lines, the part of the credit applicable to income tax, PHC tax, declared value excessive profits tax, if any, and excessive profits tax.

    3. On the last line, the date of the letter containing the information.

  3. The date of the letter is considered to be the date the overpayment was allowed and is used in determining the dates of any subsequent overpayments.

  4. If actual dates are supplied by Examination or Appeals for payment, repayment, or offset, they are used to determine the date the overpayment was allowed.

20.2.11.4.4  (11-18-2008)
Interest Allowed When Not Deducted from Repayment

  1. Interest is allowed under IRC section 6611 if the amount allowable as a credit has NOT been deducted by the contracting agency or if an insufficient amount has been deducted (IRC section 1481(c) (repealed).

    If the repayment (or offsets) of excessive profits: Then compute credit interest from:
    was made to the contracting agency after the tax liability for the year involved was fully paid, the date of repayment.
    was made from tax payable in installments the date of payment of the last installment (if the last installment was less than the tax credit being allowed, use the next preceding installment payment dates to the extent necessary to absorb the credit).
    was made by offset against other amounts due the taxpayer from the contracting agency, the date of the schedule, or voucher, as the case may be, on which the offset was made by the contracting agency.
    was completed and then a part of the tax liability of the taxpayer was paid the date the tax was paid to the IRS on that portion of the tax liability.

  2. Allow credit interest to the refund schedule date.

20.2.11.4.5  (11-18-2008)
Subsequent Overassessments

  1. Credits under IRC section 1481(b) are considered as having been allowed from the most recent payments of tax made before the date the contracting agency notifies the Area Director that the credit has been allowed.

    1. If the tax paid prior to that date is not sufficient to absorb the full credit, the balance is considered allowed from payments immediately following the date of notification.

    2. Any refund or credit subsequently allowed must be made from payments of tax not previously allowed in the IRC section 1481(b) credit.

      Note:

      For statute of limitations purposes, it is important to determine the validity and timeliness of a claim, refunding only those amounts claimed prior to the original refund statute expiration date (RSED) or paid within two years of the filing date of the claim.

20.2.11.4.6  (11-18-2008)
Preparation of Allowance Documents

  1. Allowance documents prepared for any year for which the return bears a renegotiation stamp will indicate the credit as an addition to the tax liability rather than as a previous allowance.

    Example:      
             
      Assessed     Tax
             
      Taxpayer      
      Account No.      
      Total assessed     $100,000
      Less:     100,000
             
        IRC section 1481(b) credit 15,000  
        Correct Liability 50,000  
             
            65,000
    Overassessment     35,000

20.2.11.4.7  (11-18-2008)
Federal Tax Benefit

  1. If the Renegotiation Board determines that excessive profits repaid by a taxpayer should be restored to the taxpayer, the result is an increase in taxable income. The tax is not assessed as a deficiency by the Campus Director, but is deducted by the Board (or agency) from the rebate to the taxpayer in arriving at the net renegotiation rebate.

    1. The Board (or agency) will request the Campus Director to determine the tax attributable to the amount of the rebate.

    2. After the amount of tax has been determined and approved, the Examination Division prepares a letter to the Board informing it as to the amount of the federal tax benefit.

    3. The Board then notifies the Campus Director when the net renegotiation rebate has been certified for payment to the taxpayer.

    4. At that time, the Examination Division will place a stamp on the return and enter the amount of the federal tax benefit.

    5. Since a federal tax benefit is in the nature of an assessment, it must be shown as a deduction from the IRC section 1481(b) credit in any subsequent adjustment of the tax liability as follows:

      Example:      
               
        Assessed     Tax
               
        Taxpayer Acct.      
        No.      
        (Original).     $100,000
        Taxpayer Acct.      
        No.      
        (Additional)     25,000
        Total Assessed     125,000
               
        Less: IRC section 1481(b) credit 30,000  
          Federal Tax Benefit 10,000  
            20,000  
               
          Liability 65,000 85,000
               
        Overassessment     40,000

20.2.11.4.8  (11-18-2008)
Tax Credit Based on Assessment Rather Than Payment

  1. The tax credit is generally computed on all taxes assessed. In most instances, payment has been made in full before the allowance of the credit by the renegotiating agency.

    1. When the Service has knowledge of an unpaid amount of assessed tax, payment of which is in doubt, the computation is made on the basis of taxes paid. The credit allowed by the renegotiating agency is limited to the overpayment of tax.

    2. In some instances, the credit is computed on the basis of taxes assessed which have not been paid in full, and the credit has been allowed by the renegotiating agency.

    3. If the tax is not later paid, the amount of the credit allowed in excess of the amount allowable based on taxes paid will be assessed as a deficiency (Rev. Rul. 55-474, 1955-2 C.B. 673).

      Note:

      Compute debit interest from the date the excessive credit was allowed. The date will be furnished by the contracting agency.

20.2.11.4.9  (11-18-2008)
Concurrent Determination

  1. If an Examination determination using Form 2285 indicates a concurrent general adjustment deficiency and an overpayment of tax due to renegotiation when the credit was not deducted by the contracting agency, compute interest on the general adjustment deficiency from the due date of the tax to the date the excessive profits were repaid (to the contracting agency) and allow no interest on the overpayment. The right to the overpayment, which extinguished the deficiency, arose on the date the excessive profits were repaid.

  2. If the overpayment exceeds the deficiency, allow interest from the date of the repayment of the excessive profits, or the date of payment of the tax, whichever is later.

20.2.11.5  (11-18-2008)
Claim of Right—Adjustments to Income

  1. IRC section 1341(a) provides a method for recomputing the tax when a taxpayer has included an item in gross income in a prior taxable year because it appeared the taxpayer had an unrestricted right to it. In a subsequent taxable year, a deduction in excess of $3,000 is allowable because it was established that the taxpayer did not have an unrestricted right to the item.

20.2.11.5.1  (11-18-2008)
Computation of Tax

  1. When a taxpayer restores an amount under claim of right, the amount of tax owed for the deduction year is the lesser of:

    1. the tax computed with the deduction, or

    2. the tax computed without the deduction, minus the decrease in tax for the taxable year of inclusion after excluding the item.

20.2.11.5.2  (11-18-2008)
Computation of Interest

  1. An overpayment exists for the year only if the decrease in tax for the prior year of inclusion (after excluding the item) exceeds the tax computed for the year (without the deduction). See IRC section 1341(b). No interest is allowed on any refund or credit on this type of overpayment, before the due date of the year of the restoration return.

20.2.11.5.3  (11-18-2008)
Computation of Tax When Taxpayer Recovers Substantial Amount Held by Another Under Claim of Right

  1. IRC section 1342(a) provides a method for recomputing the tax; (i) when a taxpayer has deducted an item from gross income in a prior taxable year because it appeared that another person held an unrestricted right to the item as a result of a court decision in a patent infringement suit, and (ii) gross income is increased for the taxable year (in excess of $3000) because of a subsequent reversal of the court decision on the grounds that the decision was induced by fraud or undue influence.

  2. The tax for the taxable year shall be the lesser of:

    1. the tax computed with the gross income so increased: or

    2. an amount equal to the sum of:

    1. the tax computed without such increase in gross income; and

    2. the increase in tax (including interest) for the prior year which would result solely from elimination of such item.

  3. For purposes of the latter, deficiency interest shall be computed from the due date of the return for the prior year to the due date of the return for the taxable year (IRC section 1342(b)).

    Note:

    Repealed for tax years beginning after 1976.

20.2.11.6  (11-18-2008)
Bankruptcy Code Cases

  1. This subsection covers Bankruptcy Code cases.

20.2.11.6.1  (11-18-2008)
Interest to Date Petition Filed

  1. Pursuant to section 502(b)(2) of the Bankruptcy Code, claims for "unmatured interest" (interest accrued after the petition is filed) are generally not allowed against the debtor's bankruptcy estate for unsecured, pre-petition tax debts. Accordingly, when the Service files unsecured, pre-petition tax claims in bankruptcy cases, the interest shown on the Service's proof of claim should only reflect the interest accrued as of the date the petition was filed. This pre-petition interest should be reflected on the Service's proof of claim, whether or not the tax or the interest has been assessed prior to the petition date.

20.2.11.6.2  (11-18-2008)
Post-Petition Interest for Secured Tax Liabilities

  1. Pursuant to section 506(b) of the Bankruptcy Code, holders of oversecured pre-petition claims are entitled to receive post-petition interest payments from the debtor's bankruptcy estate.

    1. A federal tax claim is oversecured if a Notice of Federal Tax Lien (NFTL) was filed before the debtor's bankruptcy petition and the value of the collateral securing the claim is more than the amount of the claim.

    2. Pursuant to section 511 of the Bankruptcy Code, applicable to bankruptcy cases filed on or after October 17, 2005, the applicable post-petition interest rate for such post-petition interest is the rate prescribed by IRC section 6621.The interest rate paid pursuant to a confirmed plan is set as of the calendar month in which the plan is confirmed.

20.2.11.6.3  (11-18-2008)
Post-Petition Interest for Unsecured Pre-petition Taxes of Individuals

  1. Non-dischargeable Taxes: Section 523(a)(1) and 523(a)(7) of the Bankruptcy Code describe the pre-petition taxes (including pre-petition interest) and tax penalties, respectively, that are excepted from discharge if an individual debtor receives a discharge in a Chapter 7, 11, or 12 bankruptcy case, or if an individual debtor receives a "hardship" discharge in a Chapter 13 case under section 1328(b) of the Bankruptcy Code. The extent to which these exceptions apply in the case of a Chapter 13 debtor receiving a "superdischarge" under section 1328(a) of the Bankruptcy Code will vary depending on whether the Chapter 13 case was filed before or after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect on October 17, 2005.

    Note:

    Only individuals may file a Chapter 13 bankruptcy case.

  2. For Chapter 13 cases filed before October 17, 2005, there is no exception to the superdischarge for taxes and penalties.

  3. For Chapter 13 cases filed on or after October 17, 2005, the superdischarge no longer includes:

    • trust fund taxes (including the trust fund recovery penalty),

    • taxes for which a return was not filed or was late filed after two years before the bankruptcy case,

    • taxes for which the debtor filed a fraudulent return or attempted to evade or defeat the tax, or

    • any claim of any creditor that did not receive notice of the bankruptcy case in time to file a timely claim (unless the creditor had actual knowledge of the case).

  4. For unsecured pre-petition taxes and tax penalties that are excepted from discharge, the Service is entitled to receive post-petition interest from the taxpayer outside of bankruptcy, even though the post-petition interest on these debts cannot be claimed from the debtor's bankruptcy estate.

  5. For unsecured pre-petition taxes and tax penalties that are NOT excepted from discharge, the Service is not usually entitled to receive any post-petition interest from either the debtor's bankruptcy estate, or from the individual debtor outside of bankruptcy, unless the bankruptcy case is dismissed. A rare exception is a case that has sufficient assets to pay general unsecured claims with post-petition interest. See 11 U.S.C. section 726(a)(5).

20.2.11.6.4  (11-18-2008)
Post-Petition Interest for Unsecured Pre-petition Taxes Non-Individual

  1. For non-individual debtors, including corporations and partnerships, the exception to discharge provisions of section 523 of the Bankruptcy Code for taxes and tax penalties do not apply.

    1. For non-individual debtors in a Chapter 7 bankruptcy case, the Service's unsecured claims for pre-petition taxes are not entitled to receive any post-petition interest unless the case is dismissed. A rare exception is a case that has sufficient assets to pay general unsecured claims with post-petition interest. See 11 U.S.C. section 726(a)(5).

    2. For non-individual debtors in a Chapter 11 bankruptcy case, the Service's unsecured claims for pre-petition taxes are not entitled to receive any post-petition interest from the petition date through the plan effective date, unless the case is dismissed or unless the confirmed plan or the parties, by agreement, provide otherwise.

  2. Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, a Chapter 11 plan must provide for full payment of priority claims under section 507(a)(8) with post-confirmation interest on its secured claims, whether oversecured or not. See 11 U.S.C. section 1129(b)(2)(A).

    1. This interest begins to accrue upon the effective date of the plan at the rate described in IRC section 6621 unless the confirmed plan, the confirmation order, or an agreement of the parties provides another interest rate. For bankruptcy cases filed after October 17, 2005, the interest rate is determined as of the calendar month in which the plan is confirmed, per section 511 of the Bankruptcy Code.

    2. For unsecured pre-petition taxes NOT entitled to priority under section 507(a)(8) of the Bankruptcy Code, the Service is not entitled to any payment of interest that would accrue after the effective date of the plan unless the confirmed plan or the parties, by agreement, provide otherwise.

20.2.11.6.5  (11-18-2008)
Post-Petition Interest for Post-Petition Taxes

  1. For post-petition taxes and tax penalties incurred by a debtor and/or by the debtor's bankruptcy estate, the restrictions of section 502(b)(2) on the accrual of post-petition interest do not apply.

    1. Post-petition taxes incurred by an individual debtor in a Chapter 7 or 11 case do not represent a potential claim against the debtor's bankruptcy estate, but the post-petition taxes and post-petition interest thereon are collectible from the individual debtor outside of the bankruptcy.

    2. Post-petition taxes incurred by an individual debtor's bankruptcy estate in a Chapter 7 or 11 bankruptcy case, which is a separate taxable entity under IRC section 1398, are payable from the estate.

  2. The Service may elect to file a claim for post-petition taxes incurred by an individual debtor during a Chapter 13 case pursuant to section 1305(a)(1) of the Bankruptcy Code. If the Service chooses to file such a claim, it may be limited to claiming the tax only, depending on local practice. For this reason, the Service usually does not claim post-petition interest or penalties on section 1305(a)(1) claims. In some jurisdictions, however, the Service may be allowed to file a section 1305(a)(1) claim that includes accruals of post-petition interest and penalty as of the claim filing date.

    If Then
    the Service chooses to file a section 1305(a)(1) claim for post-petition taxes in a Chapter 13 case the Service usually will not claim post-petition interest unless such interest is allowed to be claimed based on local practice.
    the Service does not elect to file a section 1305(a)(1) claim for the post-petition taxes incurred by an individual debtor during a Chapter 13 case the post petition taxes and all the post-petition interest thereon are collectible from the individual debtor outside of bankruptcy.

  3. Post-petition interest on post-petition taxes and tax penalties incurred by a non-individual debtor's bankruptcy estate, including a corporation or a partnership in a Chapter 7 or 11 bankruptcy case, is payable through the non-individual debtor's bankruptcy case as an administrative expense claim.

    • In a Chapter 11 case, the Service may insist upon being paid the full amount of any post-petition taxes, penalties, and interest incurred by a non-individual debtor's bankruptcy estate by the plan effective date. For cases filed on or after October 17, 2005, the Service is not required to file an administrative claim to be paid from the bankruptcy estate. See section 503(b)(1)(D) of the Bankruptcy Code. However, in cases filed before October 17, 2005, if the Service fails to file its administrative period claims for post-petition tax, penalties, and interest by any applicable administrative claims bar date set in the Chapter 11 case of an individual debtor, the post-petition taxes incurred before the plan confirmation date may be discharged (sections 1141(d)(1) and 1129(a)(9)(A) of the Bankruptcy Code). A non-individual debtor does not receive a discharge under Chapter 7 of the Bankruptcy Code.

20.2.11.6.6  (11-18-2008)
Post-Petition Interest if a Case is Dismissed

  1. Pursuant to section 349(b) of the Bankruptcy Code, the dismissal of a bankruptcy case generally reinstates liens (and debts) and reverts property back to the taxpayer as if the bankruptcy petition had not been filed.

    If Then
    The debtor is not granted a discharge in a Chapter 7 case the Service should assert a right to uninterrupted statutory interest on any tax debts.
    A Chapter 13 case of an individual debtor is dismissed before the debtor receives a discharge pursuant to section 1328 of the Bankruptcy Code the Service should assert a right to uninterrupted statutory interest on any tax debts.
    A Chapter 11 case is dismissed after a plan has been confirmed the Service should review the terms of the plan and seek advice from Counsel.

20.2.11.6.7  (11-18-2008)
Post-Petition Interest owed by Non-debtors

  1. Pursuant to section 524(e) of the Bankruptcy Code, the discharge of a tax debt of the debtor does not generally affect the liability of any other entity or person for such tax debt.

    If Then
    The parent corporation or its subsidiaries are debtors in a bankruptcy case, but other members of the debtor's consolidated group for federal income tax purposes are not debtors in a bankruptcy case the several liability of the non-debtor members of the group for all statutory interest accruals upon the group's federal income tax debts continues and is unaffected by the bankruptcy cases of the debtor members of the group.

20.2.11.7  (11-18-2008)
Stamp Taxes

  1. The government levies and collects certain taxes by using stamps. See IRC section 6801.

20.2.11.7.1  (11-18-2008)
Treasury Department Responsibility

  1. The Department of the Treasury is responsible for the preparation and distribution of all stamps denoting the several stamp taxes. See IRC section 6801(b).

20.2.11.7.2  (11-18-2008)
Redemption of Stamps

  1. IRC section 6805 allows the Treasury to make allowance for or redeem any stamps:

    • that have been spoiled, destroyed or rendered useless or unfit for their intended purpose, or

    • for which the owner has no further use.

20.2.11.7.3  (11-18-2008)
Time for Filing Claims

  1. A claim for overpayment of any stamp tax must be filed within three years from the date of purchase of the stamps.

20.2.11.7.4  (11-18-2008)
Credit Interest on Overpayments of Stamp Taxes

  1. Credit interest is allowed on overpayments of stamp taxes, regardless of whether the tax was paid by purchase of stamps or due to an assessment.

    If Then allow credit interest:
    Paid by purchase of stamps FROM: the date the stamps were affixed and cancelled
    TO: refund schedule date
    Paid due to an assessment FROM: the date of payment
    TO: refund schedule date

  2. Do NOT allow interest on amounts paid in redemption of unused stamps.

20.2.11.8  (11-18-2008)
Transferee Interest and Assessments

  1. The Tax Court has jurisdiction of interest in transferee cases and may sometimes require computations of interest.

  2. Interest on a transferee liability is computed based on the state or federal law that governs the liability. State laws that may apply, for example, are wrongful transfer or fraudulent conveyance statutes. IRC section 6901 is strictly procedural as to the assertion of a transferee liability. O'Sullivan v. Comr, T.C. Memo. 1994-17 summarizes some of the principles.

20.2.11.8.1  (11-18-2008)
Unlimited Liability Interest

  1. In Unlimited Liability cases, the value of transferred assets exceed the transferor's total unpaid tax liabilities.

  2. The transferee is liable for normal interest under IRC section 6601 from the due date of the tax of the transferor. Lowy v. Comr., 35 T.C. 393 (1960) discusses this principle.

    1. See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 35.8.4.7.2.1, General Guidelines on Interest Issues, for further information.

20.2.11.8.2  (11-18-2008)
Limited Liability Interest

  1. (1) The amount of Interest on Limited Liability of the transferee's liability is limited by the value of the transferred assets, to the extent the state law that gives rise to the transferee liability allows interest. Estate of Stein v. Comr., 37 T.C. 945 (1962) discusses this principle.

    1. The state law that governs the transferee liability also controls interest from the date of transfer of assets to the date of the notice of transferee liability, which is the date the notice of liability is issued to the transferee (See Estate of Stein). However, after the date of the notice of transferee liability, the interest runs pursuant to IRC section 6601 (both the O'Sullivan and Estate of Stein court cases note this principle).

    2. In summary, in a limited liability situation, consider the state where the assets were transferred, the date the assets were transferred, and the date of the IRS notice of transferee liability. These two dates must be determined if computing interest in a limited liability situation.

    3. IF there is a state statute such as a wrongful or fraudulent transfer law on the books in the state the assets are transferred, consider the rate of that state statute and apply it to the limited liability from the date of transfer of assets to the date of the IRS notice of transferee liability. Stansbury v. Comr., 104 T.C. 486 (1995) discusses this principle. In a state where pre-judgement interest is permitted, the IRS is entitled to interest applied to the limited liability at the state rate from the date of the transfer of assets until the date of the IRS notice of transferee liability. (Merlino v. Comr., T.C. Memo 1995-208).

    4. Federal interest per IRC section 6601 starts on the limited liability from the date of the IRS notice of liability to the transferee.

    5. Seek Counsel advice as to the state interest rate (if applicable) and the effective dates of both State and Federal rates. See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 5.17.14.4.3, Fraudulent Transfers under Federal Law and State Law.

20.2.11.8.3  (11-18-2008)
Interest on Estate/Gift Tax Transferee Liability

  1. State law has no bearing on transferee liabilities (limited or unlimited) resulting from a transferor's estate/gift tax liability.

  2. IRC section 6324(a) specifically governs the transferee's estate/gift tax liability and together with IRC section 6901 provides that interest under IRC section 6601 will apply from the due date of the tax of the transferor. See IRM 8.7.4, Technical and Procedural Guidelines-Appeals Estate and Gift Tax Cases, for more information on estate and gift cases.

20.2.11.8.4  (11-18-2008)
Making Transferee Assessments

  1. Form 1296, Assessment Against Transferee or Fiduciary, is used to make Non-Master File (NMF) transferee assessments by allowing the user to specify the amount of tax and penalty to be assessed (if any), on cases involving an unpaid transferor liability assessed against a transferee(s).

  2. Transferee liability assessments are made on Non-Master File (NMF) using the transferor's tax year.

    1. For example, if the transferor is XYZ Corporation with a fiscal year ending 09/30/2006, and the transferee is Joe Smith with a tax year ending 12/31/2006, the assessment against Joe Smith would be made Non-Master File using a taxable period of 09/30/2006. Therefore, the transferee notice of liability would show the tax year for Joe Smith as 09/30/2006.

    2. In the reverse situation, if the transferor is John Doe for a tax year ending 12/31/2006, and the transferee is ZZZ Company with a fiscal year ending 08/31/2006, the transferee notice of liability for ZZZ Company would show the tax year as 12/31/2006.

  3. The transferee assessment is made using a "dummy" Taxpayer Identification Number (TIN) on NMF. The transferee's account is set up on NMF using the transferee's TIN with a "-D" (dummy) and "Transferee" after the name to indicate transferee status. See Paragraph (3) of IRM 4.11.52.6, Administration Procedures, for further information.

  4. Unlimited liability cases:

    1. In unlimited liability cases, prepare a separate Form 1296 for each taxable period and each kind of tax.

    2. Use the tax period of the transferor as the tax period of the transferee.

  5. Limited Liability cases:

    1. If the value of assets received by the transferee is less than the unpaid liability of the transferor and more than one year is involved, do not allocate the transferee's liability to the various years. Instead, show the liability as one amount on the Form 1296 of the earliest unpaid liability year of the transferor without identifying it with any particular year of the transferee.

    2. Prepare a single Form 1296. Show the total transferee liability on the right-hand side of Form 1296.

    3. Annotate the interest starting date and the interest rate on Form 1296 or the attachment to Form 1296.

    4. Itemize the liability of the transferor for each taxable year on an attachment, or in the remarks section of Form 1296, or on a separate Form 1296, depending upon the preference of the processing office.

  6. An example of a completed Form 1296 and the attachment are found in IRM Exhibit 8.7.5–3, Sample Form 1296, Assessment Against Transferee or Fiduciary. See IRM Exhibit 8.7.5–4, Attachment to Form 1296 - Transferee with Limited Liability – Multiple Years.

  7. ) In all cases, disregard previously assessed interest. On all "unlimited" asset cases, and on limited asset cases, if the distribution to the transferee was on or before the original due date of the tax:

    1. Compute interest (on the tax only) from the original due date to the date of assessment, or to the 30th day after the filing of an agreement, whichever is earlier.

    2. Compute interest to the availability date of the overpayment, if the tax is satisfied by crediting an overpayment.

20.2.11.9  (11-18-2008)
Jeopardy and Termination Assessments

  1. On a terminated tax year, if the tax is paid and the assessment later abated, interest is not allowed on any resulting refund for the period before the normal return due date. The payment is considered received as of the normal return due date.

  2. On a jeopardy assessment, if a portion of the assessment is later abated, normal credit interest rules apply to the overpayment.


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