The Court of Federal Claims last year awarded the Coca-Cola Company (Coca-Cola) overpayment interest on an overpayment of tax (determined by the Tax Court) that previously had been (1) allowed as a tentative refund and then (2) recaptured and held for six years by the IRS. The Claims Court rejected the IRS position that overpayment interest was not due because the IRS had originally issued the tentative refund within 45 days of the date Coca-Cola filed its application (Form 1139, Corporation Application for Tentative Refund). The court’s decision suggests that corporations that have received refunds after the IRS has recaptured tentative refunds may be entitled to overpayment interest.
Tentative Refunds
Sec. 6411 allows a taxpayer to file an application for tentative refund based on the carryback of a net operating loss (NOL). The IRS must examine the application within 90 days for omissions and errors and, if it finds none, must either apply the decrease in tax liability against the taxpayer’s unpaid taxes or refund the balance. Even if a tentative refund is issued, the IRS retains the right to audit the taxpayer’s refund application and later recapture any amount it determines was refunded erroneously.
Although technically not a claim for credit or refund, an application for a tentative allowance under Sec. 6411 is treated as such a claim for purposes of determining whether the taxpayer is entitled to overpayment interest. Therefore, under Secs. 6611(f)(4)(B) and 6611(e), if a tentative allowance is issued within 45 days of the date of the taxpayer’s application, the IRS is not required to pay overpayment interest.
Background
In September 1985, Coca-Cola filed an application for a tentative refund in the amount of $18.7 million for its 1981 tax year, based on an NOL carryback from 1984. The IRS issued the tentative refund 12 days later, without interest. However, in 1991, the IRS concluded that the taxpayer’s claimed carryback from 1984 to 1981 was incorrect and recaptured $12.5 million of the tentative refund. Coca-Cola paid $9.8 million in additional tax and $3.8 million in deficiency interest and then filed a claim for refund of $13 million plus interest.
In 1997, the Tax Court held that there was an overpayment for 1981 that was attributable to an NOL carryback from 1984. The IRS then abated and refunded to Coca-Cola $12.4 million of tax and $5.5 million in deficiency interest. However, because the IRS did not post any overpayment interest to the company’s 1981 tax account, Coca-Cola filed a complaint in the Court of Federal Claims for interest in the amount of $2.7 million on the interim overpayment that existed for the 1981 tax year between March 15, 1985, and September 27, 1985.
The IRS argued that for purposes of determining whether Coca-Cola was entitled to overpayment interest, the court should focus on the 1985 tentative refund and not on the refund issued in 1997 based on the taxpayer’s 1991 claim. According to the IRS, because it issued the tentative refund within 12 days of the taxpayer’s application filed in September 1985, under Sec. 6611 no interest was now due.
Tax Court Decision
In Coca-Cola Co., 87 Fed. Cl. 253 (2009), the Court of Federal Claims characterized the IRS interpretation as “wooden” and “entirely unreasonable” and stated that it “would lead to absurd results.” The court emphasized that the IRS’s position focused solely on the timely issuance of the initial tentative refund and ignored the fact that the IRS had then recaptured and had use of the moneys at issue from January 23, 1991, to May 19, 1997.
The IRS relied heavily on the court’s prior decision in Soo Line R.R. Co., 44 Fed. Cl. 760 (1999), which also involved the issuance of a tentative allowance followed by the Tax Court’s determination of additional NOL carryback. However, the court distinguished Coca-Cola’s facts from those in Soo Line.
In Soo Line, the taxpayer received a tentative refund of $2.8 million for the tax year 1980 based on the carryback of an NOL from 1983. Because the IRS issued the tentative refund in 22 days, Soo Line was not entitled to overpayment interest. A stipulated decision of the Tax Court later determined that Soo Line had understated the amount of 1983 NOL that it could carry back to 1980. However, the Tax Court decision also determined general adjustments for 1980 that resulted in a tax increase that more than offset the additional NOL carryback. Accordingly, the taxpayer had overpaid its 1980 tax liability by only $2.4 million. Since the IRS had already issued Soo Line a tentative refund of $2.8 million, the Court of Federal Claims held that the taxpayer was not entitled to overpayment interest on the additional NOL carryback determined by the Tax Court’s decision.
In contrast, in Coca-Cola the IRS’s tentative refund, errant recapture, and subsequent abatement caused an overpayment in the taxpayer’s tax account—i.e., following the recapture the IRS permitted Coca-Cola to retain an amount less than that to which the company was entitled. Therefore, just as the court in Soo Line held that awarding overpayment interest would render Sec. 6611(e) a nullity, the court in Coca-Cola held that “failing to award interest in the present case would similarly castrate Sec. 6611(a).”
Observations
When the IRS issues within 45 days a tentative refund based on an NOL carryback, it properly suspends interest from the unextended due date of the loss year return to the date the tentative refund was issued. However, when some or all of the tentative refund is recaptured as the result of an IRS examination, the IRS’s practice—when it recomputes interest on the tax account at issue—has been not to reduce the amount on which overpayment interest was suspended as a result of the original carryback allowance. Accordingly, if some or all of the recaptured tentative refund is later allowed (as in Coca-Cola) or a general (i.e., current-year) tax decrease is determined for the carryback year (and overpayment interest normally would accrue through the interest suspension period that resulted from the original carryback), the taxpayer would not be paid the correct amount of overpayment interest. It will be interesting to see if the IRS changes its methodology as a result of the Coca-Cola decision.
Editor: Annette B. Smith, CPA
EditorNotes
Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington, DC.
For additional information about these items, contact Ms. Smith at (202) 414-1048 or annette.smith@us.pwc.com.
