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By Theodore Peyser, Esq.
Roberts & Holland, LLP, Washington, D.C., and New York, N.Y.
When the Tax Court determines that the petitioner has made an overpayment of tax, it has been the practice of the IRS to take into account both assessed and unassessed underpayment interest in computing the amount of the overpayment for decision documents, stipulations, and Rule 155 computations. In a notice of March 26, 2010 (CC-2010-006), the Chief Counsel has eliminated this practice, barring the inclusion of assessed or unassessed interest computations in decision documents, stipulations, and Rule 155 computations. Instead, the Chief Counsel wants the decision documents to provide that "interest will be assessed and will accrue as provided by law." The IRS will offset unpaid underpayment interest against the overpayment under §6402(a) and if dissatisfied with this action, the petitioner has one year after the Tax Court decision becomes final to petition the Tax Court for a redetermination of interest under Tax Court Rules 260 and 261 and §7481(c).
This change of procedure implements the decision in favor of the IRS several years ago in Estate of Smith v. Comr., 429 F.3d 533 (5th Cir. 2005), reversing the Tax Court. In that case, after the Tax Court issued its opinion, the parties entered into a Rule 155 stipulation that there was an overpayment of estate tax in the amount of $238,847. Attached was a stipulation showing the recomputed estate tax, including a deduction for underpayment interest due the IRS. The court entered its judgment that the Estate had an overpayment of $238,847. Thereafter, the IRS reduced the overpayment by $64,996 in unpaid underpayment interest, but the Tax Court ordered the IRS to refund the full amount of the overpayment plus interest, less any amount previously refunded. The Fifth Circuit reversed, holding that, while the Tax Court could have decided the question of underpayment interest, it did not do so, and the Commissioner properly exercised his authority under §6402 to offset the unpaid interest against the overpayment of tax.
In Estate of Smith, interest computations in the stipulation were marked "For Information Only," but led the Tax Court to conclude that the overpayment judgment necessarily included both interest and tax due by the Estate. This sort of problem should not arise in the future since interest computations will no longer be included in decision documents, stipulations, or Rule 155 computations. In this way, it should be clear that an overpayment determination does not decide any question relating to underpayment interest.
For more information, in the Tax Management Portfolios, see Peyser, 627 T.M., Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation, and Levine, 630 T.M., Tax Court Litigation, and in Tax Practice Series, see ¶3840, Interest on Underpayments and Overpayments.
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