Sixth Circuit - Overpayment interest accrued when cash bond deposits were converted into advance payments  

December 17: The U.S. Court of Appeals for the Sixth Circuit today (in an unpublished opinion) affirmed that the taxpayer was not entitled to $445 million in overpayment interest because interest did not accrue on overpayments of corporate income tax until the point in time when “deposits in the nature of a cash bond” were converted into advance payments of tax. Ford Motor Co. v. United States, No. 10-1934 (6th Cir. December 17, 2012)

Read the decision: Ford Motor Co. [PDF 141 KB]

Summary

The taxpayer on several separate occasions—in September 1991, July 1992, and June 1994— remitted several hundred millions of dollars to the IRS, and specifically requested that the amounts be treated as deposits in the nature of a cash bond. The amounts were remitted after the IRS sent the taxpayer a 30-day letter of proposed tax deficiencies for tax years 1983–1989, 1992, and 1994.


Subsequently, the taxpayer requested that the IRS treat these remittances as advance payments—i.e., payments towards proposed (not yet assessed) tax deficiencies—rather than as deposits in the nature of a cash bond.


  • In December 1994, the taxpayer requested that part of a September 1991 deposit be treated as an advance payment.
  • In December 1995, the taxpayer requested that another portion of its September 1991 deposit and portions of other deposits made in September 1991 and in July 1992 and the entire June 1994 deposit also be treated as advance payments.

The IRS obliged, and the taxpayer effectively converted its deposits that were held in the nature of cash bonds into advance payments towards proposed past-due taxes.


It was later that the IRS determined that the taxpayer had actually overpaid its taxes for the years at issue, and refunded the overpayments. The refund amounts included overpayment interest—which the IRS calculated from the dates when the taxpayer had requested that its deposits be converted to advance payments.


The taxpayer, however, asserted that overpayment interest was due from earlier dates—that is, for the dates when the taxpayer remitted the deposits (in September 1991, July 1992, and June 1994). Thus, the taxpayer requested approximately $445 million in interest that had allegedly accrued on overpayments of its corporate income taxes for 1983–1989, 1992, and 1994.


The federal district court granted the government’s motion for judgment on the pleadings, concluding that there could be no overpayment of tax—and therefore no overpayment interest accrual—until the taxpayer actually converted its deposits to advance payments.


On appeal, the Sixth Circuit today affirmed. The Sixth Circuit explained that for the years at issue, a deposit in the nature of a cash bond stopped potential underpayment interest from accruing, but that interest was not to be paid for the time that the IRS held the deposit.


Thus, the appeals court answered that overpayment interest did not accrue from the date of the initial remittance, but from the date when the taxpayer requested that the remittance be treated as an advance tax payment.

KPMG observation

The case before the Sixth Circuit concerned tax years prior to the date of enactment of the American Jobs Creation Act of 2004, Pub. L. No. 108-357 (enacted October 22, 2004) which added new section 6603 to the Code to permit taxpayers to make a deposit with the IRS to suspend the running of interest under section 6601 on a potential underpayment of tax. Thus, a deposit may be made with respect to certain underpayments of tax that have not been assessed at the time of the deposit.


While the purpose of making payments in the nature of cash bonds or disputable tax deposits is to halt the running of underpayment interest, taxpayers need to consider their overall payment planning by reviewing the scope of overassessments and deficiencies that are likely to occur. This includes actions such as:


  • Determining on which years to make the deposits
  • How to handle payments and overpayments to achieve the best rate of possible overpayment interest

KPMG’s Complex Interest Services Group can review tax account transcripts to assist in developing a favorable payment plan and to identify other interest opportunities.


For more information, contact a member of KPMG’s Complex Interest Services team:


Darren Cossaart

(336) 433 7073


Rhonda Gibson

(336) 433 7122


Hazel Davis

(336) 433 7076


Liz Marchand

(336) 433 7141


Rhonda Mitchell

(336) 267 4674





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