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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

  • Undeliverable and Returned Refund Checks

  • 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  (07-31-2001)
Windfall Profit Tax Overview

  1. The Windfall Profit Tax (WPT) was an excise tax on the production of domestic crude oil for periods after February 29, 1980. Generally, WPT was reported on versions of Form 720 as follows:

    • IRS Number 50—Quarterly Producers

    • IRS Number 52—Annual Filer

    • IRS Number 56—Withheld from Production

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 The WPT on domestic crude oil was repealed for oil removed from the premises on or after August 23, 1988.

20.2.11.1.1  (07-31-2001)
WPT Adjustments

  1. Adjustments to WPT can post to the Form 1120 or Form 720 tax modules.

  2. Adjustments are identified on the taxpayer's account as follows:

    RETURN TYPE INPUT AS: POSTS AS:
    Form 1120 REF 311 TC 766
    Form 720 REF 050 / 052 / 056 TC 291 / 301

    Exception:

    Annual WPT adjustments for REF 052 are rarely reported on Form 720.

  3. Claims for refund or credit are processed in the Adjustments/Correspondence Branch in the service centers.

20.2.11.1.2  (07-31-2001)
WPT Statute Awareness

  1. The latest deemed paid date for WPT was February 28, 1989.

    Caution:

    Consider the timeliness of a WPT claim before an adjustment is made.

20.2.11.1.3  (07-31-2001)
Master File WPT Adjustments

  1. WPT adjustments posted to Master File do not reflect the true account activity that must be manually recorded on spreadsheets.

  2. Master File is unable to recognize the relevant dates in the interest computations on cases involving WPT adjustments.

  3. These accounts have been restricted to bypass Master File interest computation.

    Caution:

    IT IS IMPERATIVE THAT THE INTEREST ON THESE ACCOUNTS REMAIN RESTRICTED.

  4. Obtain full supporting documentation before adjusting a Form 720 account with WPT activity. Spreadsheets attached to the return must indicate how interest was computed.

20.2.11.1.4  (07-31-2001)
Credit Interest on WPT Overpayments

  1. Consider the following when computing credit interest:

    • The IRS Number of the WPT overpayment.

    • The 45-Day Rule when credit interest applies.

    • GATT rates when credit interest is allowed.

    If WPT Overpayment is for: Then:
    IRS Number 50
    (Quarterly Form 720 Return)     		Compute interest:
    From: Return Due Date
    To: Refund Schedule Date

    Reminder:

    IRS Number 50 has the RDD of two months after the end of the quarter.
    IRS Number 52
    (Annual Form 1120)     		Compute interest:
    From: February 28 of the year following oil removal
    To: Refund Schedule Date

    Example:

    February 28, 1981, is the paid date for the period ending December 31, 1980.
    IRS Number 56
    (Quarterly Form 720)     		Do NOT allow credit interest.
       

  2. The Exception for credit interest:

    If Then
    the taxpayer files an annual claim or amended return before the deemed payment date of the WPT interest is not allowed on IRS Number 50
    the taxpayer files a quarterly claim or amended return before the due date of the quarterly return Interest is not allowed on IRS Item Adjustment Number 52
       

    Reminder:

    Credit interest is not allowed on lRS Item Adjustment Number 56 decreases. However, debit interest is charged on the IRS Number 56 increases. Prior to cycle 8403, IRS Item Adjustment Number 56 was not recorded on the Master File. IRS Item Adjustment Number 56 amounts were combined with IRS Item Adjustment Number 50 amounts. Credit interest paid on the manual refunds prior to cycle 8403 may have been computed on a combination of IRS Number 50 and 56 amounts, thereby reflecting a lower interest amount than would normally be associated with the tax decrease amount posted to Master File.

  3. WPT credit is applied before all other credits to satisfy an existing liability on an account.

    Example:

    On the following 8812 MFT 02, Form 1120, account:

    150 03151989 1,000.00  
    806 03151989 800.00–  
    766 03151989 300.00– REF 052
    770 05211990 14.25–  
    840 05211990 114.25  

  4. In the above example:

    1. First compute credit interest on the WPT credit of $300, FROM: February 28, 1989 TO: March 15, 1989. Credit interest is $1.24.

    2. Then apply the $300 WPT credit to the tax liability of $1,000.

    3. Next apply $700 of the $800 W/H credit to pay off the remaining tax liability.

    4. Compute credit interest on $101.24 ($100 overpayment from the W/H credit excess and the $ 1.24 credit interest accrual from the first step) FROM: March 15, 1989 TO: May 12, 1990. Total credit interest is $14.25.

    Reminder:

    For BMF accounts, the refund schedule date is the 23–C date minus 9 days. See Chapter 4.9.1.1.

  5. Note:

    For the rules regarding the 45-day rule, see Chapter 4.9.2. Prior to the repeal of the WPT a special rule applied to refunds of WPT under IRC section. 6611(h) (repealed).

    • No interest is paid if any overpayment of WPT is refunded within 45 days after the last date (determined without regard to extensions) prescribed for filing the WPT tax return for the taxable period of the overpayment, or if such return was filed after such date, then the date on which the return was filed.

    • If no WPT return was required, then the return used for purposes of determining the 45 day period is the income tax return for the taxable year of the producer in which the removal year (with respect to which the overpayment was made) ends.

20.2.11.1.5  (07-31-2001)
Debit Interest on WPT Underpayments

  1. Compute debit interest according to the type of IRS Number being adjusted.

    If the WPT is posted as: Then compute debit interest:
    IRS Number 052 on Form 720 (rarely reported) FROM: RDD of the first quarter
    TO: date full paid
    IRS Number 052 recaptured from Form 1120 FROM: refund date
    TO: date full paid
    IRS Number 050/056 on Form 720 (posted along with return) FROM: RDD of the quarter
    TO: date full paid
    IRS Number 050/056 recaptured from previously allowed claim on Form 720 FROM: refund date
    TO: date full paid
       

20.2.11.1.6  (07-31-2001)
WPT Claim From One Spouse of Joint Return

  1. A WPT refund or credit can be claimed by the spouse who is the producer of the oil.

  2. The WPT refund can be issued in the name of the spouse who filed the WPT claim even if that spouse filed a joint income tax return.

20.2.11.2  (07-31-2001)
Undeliverable and Returned Refund Checks

20.2.11.2.1  (07-31-2001)
Undeliverable Refund Checks

  1. To determine if additional interest is allowed on an undeliverable refund check:

    If check is undeliverable Then
    Through the fault of the government Additional interest is allowed to the new Refund Schedule Date.
    Through no fault of the government No additional interest is allowed for the period of the delay.

    Note:

    See Command Code CHK64 in IRM 3.25.78.26.

  2. Transaction Code 740 and Freeze Code "S–" post on IDRS and Master File. When the address is updated, the freeze is removed.

  3. Additional instructions are found in IRM 21.4, Refund Transactions.

20.2.11.2.2  (07-31-2001)
Returned Checks

  1. Transaction Code 841 and Freeze Code "P–" indicate a returned or intercepted refund check.

  2. When a refund check is returned to IRS:

    If Then
    Taxpayer returns check without cashing it Make adjustments to the account, if necessary, and issue correct refund
    Taxpayer returns check requesting that it be applied to a different module Post the check as a subsequent payment (TC 670) on the date the returned refund check is received.
    Taxpayer returns check because it was ‘non-negotiable, through no fault of the IRS Correct the Entity and reissue refund with no additional interest
    The IRS determines the amount of refund to be correct Reissue refund with no additional interest
    The original refund was for wrong amount Issue correct refund with interest to Refund Schedule Date

20.2.11.2.3  (07-31-2001)
Non Receipt of Refund Check

  1. When a taxpayer does not receive an original refund check due to fault of the IRS:

    1. interest is allowed to the Refund Schedule Date of the replacement check.

20.2.11.3  (07-31-2001)
Personal Holding Company Tax Overview

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

20.2.11.3.1  (07-31-2001)
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).

20.2.11.3.2  (07-31-2001)
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 on or within 90 days after the determination; and

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

20.2.11.3.3  (07-31-2001)
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.

20.2.11.3.4  (07-31-2001)
Decreases in PHC Tax

  1. Interest is not allowed on cases if:

    • the original tax is assessed and paid,

    • the deficiency dividend deduction results in an overpayment.

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

20.2.11.3.5  (07-31-2001)
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 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 deficiency established 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 104.8 13.6(1) above.

    Note:

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

20.2.11.3.6  (07-31-2001)
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 deficiency dividend deduction approved, assess and collect the excess of the PHC tax, together 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 together 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 PHC deficiency dividend deduction approved.

    1. Collect any excess tax together 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 deficiency dividend deduction approved, from the due date of the tax to the date the claim was filed.

20.2.11.4  (07-31-2001)
Interest on Cooperatives and Patrons

20.2.11.4.1  (07-31-2001)
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.

20.2.11.4.2  (07-31-2001)
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 taxable year, the excess:

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

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

  2. Credit interest is allowed on the overpayment from the due date of the taxable year return.

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

20.2.11.5  (07-31-2001)
Renegotiation of Government Contracts

20.2.11.5.1  (07-31-2001)
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.

20.2.11.5.2  (07-31-2001)
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.—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.

20.2.11.5.3  (07-31-2001)
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 District 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. This 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 the Examination or Appeals Division for payment, repayment, or offset, they are used to determine the date the overpayment was allowed.

20.2.11.5.4  (07-31-2001)
Interest Allowed When Not Deducted from Repayment

  1. Interest is allowed under 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.

20.2.11.5.5  (07-31-2001)
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 District 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 of a claim and consider only amounts paid within two years of filing.

20.2.11.5.6  (07-31-2001)
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
             
        Sec 1481(b) credit 15,000  
        Correct Liability 50,000  
             
            65,000
    Overassessment     35,000

20.2.11.5.7  (07-31-2001)
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 Service Center 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 District 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 District 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: Section 1481(b) credit 30,000  
        Federal Tax Benefit 10,000  
          20,000  
             
        Liability 65,000 85,000
             
      Overassessment     40,000

20.2.11.5.8  (07-31-2001)
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, 55–2 CB 673).

      Note:

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

20.2.11.5.9  (07-31-2001)
Concurrent Determination

  1. If an Examination determination (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.

20.2.11.6  (07-31-2001)
Claim of Right—Adjustments to Income

  1. If, during the taxable year, a taxpayer is entitled to a deduction of more than $3,000 because of the restoration to another of an item that was included in the taxpayer's gross income for a prior year under a claim of right, income tax on the amount is computed as provided by IRC section. 1341.

20.2.11.6.1  (07-31-2001)
Computation of Tax

  1. When 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.

20.2.11.6.2  (07-31-2001)
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 restoration return.

20.2.11.6.3  (07-31-2001)
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 ground that the decision was induced by fraud or undue influence.