1996 DECISION: MOTION TO DISMISS REFUND SUIT DENIED; TAXPAYER MAY BE DUE INTEREST REFUND.

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

For SEQUA CORPORATION, plaintiff: Michael I. Saltzman, [COR LD NTC], Baker & McKenzie, New York, NY.

For UNITED STATES OF AMERICA, defendant: Maya Wiley, [COR LD NTC], Assistant United States Attorney, New York, NY.

OPINION AND ORDER

WOOD, U.S.D.J.

[1] The United States, the defendant in this tax action, moves to dismiss. I deny the motion in its entirety, for the reasons given below.

I. The Allegations of the Complaint

[2] In relevant part, the allegations of the complaint filed by plaintiff Sequa Corporation ("Sequa") are as follows:

[3] On or about September 15, 1991, Sequa filed a 1990 tax return with the Internal Revenue Service ("IRS"), reporting tax due of about $11.1 million, a total payment of about $19.8 million, and hence an overpayment of about $8.7 million (the "1990 Tax Overpayment"). Compl. P 5. The overpayment resulted from tax payments Sequa had made earlier and from the use of an overpayment credit from a previous year. Id. In lieu of seeking a refund, Sequa elected to apply the $8.7 million overpayment to its 1991 tax liability. Id.; see also 26 U.S.C. section 6402(b) (allowing taxpayer to credit overpayment to successive year).

[4] On August 14, 1992, Sequa filed an amended 1990 tax return, belatedly declaring additional tax liability in the amount of about $1.7 million (the "Additional 1990 Tax Liability"), which brought Sequa's total 1990 tax due to about $12.8 million, and reduced Sequa's actual overpayment to $19.8 million minus $12.8 million, or about $7 million. Compl. P 6.

[5] On October 26, 1992, the IRS informed Sequa that the IRS would apply $1.7 million from funds representing Sequa's 1990 overpayment - - which had not been needed to satisfy Sequa's 1991 tax liability -- to satisfy Sequa's Additional 1990 Tax Liability. However, the IRS also informed Sequa that the IRS would collect interest on the $1.7 million from March 15, 1991, the date Sequa's 1990 tax was due, until March 15, 1992 -- the date Sequa's 1991 tax was due, and the date on which the 1990 Overpayment became available to satisfy the Additional 1990 Tax Liability. Compl. PP 7,9; see also Compl. Exh. A (IRS's letter to Sequa).

[6] The IRS subsequently collected that interest. Compl. P 11. Sequa sought a refund of the interest, and the IRS denied Sequa's refund claim on or about November 17, 1994. Compl. P 12.

II. The Motion to Dismiss The Claim for Refund of Interest Paid

[7] Based on the allegations above, Sequa seeks a refund of the interest collected by the IRS. The government moves to dismiss Sequa's complaint, contending that, based on the allegations of the complaint, the IRS was entitled, as a matter of law, to charge interest on the Additional 1990 Tax Liability of $1.7 million from March 15, 1991, when the Additional 1990 Tax Liability was originally due, until March 15, 1992, when the 1990 Tax Overpayment was applied to satisfy the Additional 1990 Tax Liability.

A. The Claim for Refund of Interest Paid For the Period From March 15 to September 15, 1991

[8] I first consider whether the IRS was entitled to charge Sequa interest from March 15, 1991, when its 1990 taxes were due, until September 15, 1991, when Sequa elected to apply its 1990 Tax Overpayment to its 1991 taxes. See 26 U.S.C. section 6601(a) (IRS may charge interest on overdue payments running from due date to date paid).

[9] I begin by noting that the facts underlying the Second Circuit's decision in Avon Products are very closely analogous to those alleged in Sequa's complaint in this action. See Avon Products v. United States, 588 F.2d 3432 (2d Cir. 1978). The parallels are as follows:

     (1) In Avon Products, the corporate taxpayer's 1967 taxes were

[11] Applying these principles, the Second Circuit held that, on the facts of Avon Products, the taxpayer's 1967 taxes were due but also paid, and therefore not subject to interest, during the period from June 15 to September 15, 1991 -- because "during [that period] Avon had unquestionably paid enough, indeed $17,000 more than enough to satisfy its [actual $44.483 million] 1967 tax liability." Id. at 343.

[12] Similarly, here, Sequa's complaint strongly suggests that Sequa's 1990 taxes were due but also paid, and therefore not subject to interest, from March 15 to September 15, 1991 -- because, during or before that period, Sequa made payments to the IRS that were enough, and indeed $7 million more than enough, to satisfy its actual $12.8 million 1990 tax liability.

[13] Whether and when Sequa in fact made such payments are fact questions that I cannot resolve in the context of this motion to dismiss. Accordingly, I deny the motion to dismiss Sequa's complaint, insofar as that complaint seeks a refund of interest charged by the IRS for the period from March 15 to September 15, 1991.

B. The Claim for Refund of Interest Paid For the Period From September 15, 1991, to March 15, 1992

[14] I now go on to consider the question whether, under the allegations of Sequa's complaint, the IRS was entitled, as a matter of law, to charge Sequa interest on the $1.7 million Additional 1990 Tax Liability from September 15, 1991, when Sequa elected to credit its 1990 Overpayment to its 1991 taxes, until March 15, 1992, when the IRS applied part of Sequa's 1990 Tax Overpayment to satisfy the Additional 1990 Tax Liability.

[15] The Second Circuit was not confronted with this question in Avon Products. There, when the taxpayer elected to credit its overpayment to its tax liability for the succeeding year, the credit based on the overpayment was immediately effective as a payment of estimated tax for the succeeding year that was "due the same day" the election was made; hence, the IRS lost the use of the funds representing the overpayment on the day the election was made. Avon Products, 588 F.2d at 343. ² Here, in contrast, Sequa claims that the credit it elected to receive, based on its 1990 overpayment, was never effective as a payment of either its estimated or its actual tax for the succeeding year, 1991, because both Sequa's estimated and actual 1991 taxes were ultimately paid from other sources.

[16] In its brief opposing the government's motion to dismiss, Sequa states that it paid $3 million in estimated taxes for 1991 on April 15, 1991. n3 See Pl's Br. at 3-4 (citing supporting declaration). However, Sequa also states that this $3 million estimated 1991 tax liability was paid not out of the 1990 Tax Overpayment, but rather out of other funds. Id. Sequa adds that Sequa's actual 1991 tax liability, in the amount of about $103,000, was paid not out of the 1990 Tax Overpayment, but out of other sources -- including the separate, $3 million estimated tax payment that Sequa had made earlier. Id. at 4.

[17] Thus, according to Sequa, the IRS possessed the funds representing the entire $8.7 million 1990 Tax Overpayment from September 15, 1991, or earlier, until March 15, 1992, when $1.7 million of the $8.7 million 1990 Tax Overpayment was applied to satisfy Sequa's Additional 1990 Tax Liability. Moreover, unlike in Avon Products, during this period, the IRS never actually applied the $1.7 million as a credit against either Sequa's estimated or its actual 1991 tax liabilities, each of which was satisfied from other funds.

[18] Thus, according to Sequa, during the period from September 15, 1991, until March 15, 1992, the IRS itself must have been receiving interest on the $1.7 million and the rest of the 1990 Tax Overpayment, from a third party. In addition, during that period, the parties agree that the IRS was not required to pay Sequa interest on the $1.7 million, or on the remainder of the $8.7 million 1990 Tax Overpayment, because Sequa had elected to apply that overpayment as a credit for the succeeding tax year, 1991. See 26 C.F.R. section 301.6611-1(h)(2)(vii); see also Avon Products, 588 F.2d at 345.

[19] If, as Sequa claims, the IRS charged Sequa interest on the $1.7 million Additional 1990 Tax Liability during a period when the IRS itself was receiving interest on that amount from a third party, then the interest worked a "penalty" upon Sequa. Avon Products, 588 F.2d at 343. In addition, if, as Sequa claims, the IRS indeed possessed, and received interest on, the $1.7 million, throughout the period from the date when it was due until the date when it was used by the IRS to pay Sequa's Additional 1990 Tax Liability, it seems to this court highly unrealistic for the government to justify the IRS's decision to charge interest by stating that there was an effective "delay in payment" of the funds representing the Additional 1990 Tax Liability, or a loss of the use of those funds. Id.

[20] Accordingly, if the factual representations in Sequa's complaint and its brief are correct, then under Avon Products the IRS was not entitled to charge Sequa interest on the 1990 Additional Tax Liability of $1.7 million for the period from September 15, 1991, to March 15, 1992 -- because (1) during that period, the 1990 Overpayment was never effective as a payment of Sequa's actual or estimated 1991 taxes, and (2) the IRS therefore never lost the use of any portion of the 1990 Overpayment, including the $1.7 million portion that was ultimately used to pay Sequa's 1990 Additional Tax Liability.

[21] Significantly, IRS sources support this result. n4 Initially, in a now-superseded 1983 Revenue Ruling, the IRS held that, in a situation similar to that in Avon Products:

     if a taxpayer has overpaid its liability as of the date

[22] However, that 1983 Revenue Ruling was explicitly superseded by a 1988 Revenue Ruling recognizing that, under the logic of Avon Products, "interest [may be] charged only for the loss of the use of money." See Rev. Rul. 88-98, 1988-2 C.B. 356, p.3 (Nov. 21, 1988). The 1988 Revenue Ruling therefore concluded that:

     if an amount that was originally paid with respect to [a

[23] Moreover, in the General Counsel Memorandum accompanying and interpreting the 1988 Revenue Ruling, the IRS's Counsel reasons similarly that, under Avon Products:

     the significant date for interest to start running . . . is the

     in the credit against estimated tax situation, considered in

[24] Based upon Sequa's complaint, and the representations in its brief, which are consistent with its complaint, I am not convinced that the IRS ever lost the use of the $1.7 million in question as a payment of Sequa's 1990 tax or, conversely, gained the use of that amount as a payment of Sequa's 1991 tax. Accordingly, I deny the government's motion to dismiss Sequa's claim for a refund of the interest it paid to the IRS for the period from September 15, 1991, to March 15, 1992.

[25] For all of these reasons, I deny the motion to dismiss in its entirety. I therefore direct the parties to enter into a new, joint scheduling order in this action within twenty-one days of the date of this order.

[26] SO ORDERED.

DATED: New York, New York

² Accordingly, in Avon Products, the taxpayer did not attempt to satisfy its additional liability out of its overpayment, which had presumably already gone to pay its estimated taxes for the succeeding year, but apparently paid that liability out of separate funds. Id. The taxpayer therefore sought a refund of only the interest that it had paid from June 15, when its taxes were ultimately due, until September 15, when it filed its return and elected to credit its overpayment to the succeeding year. Id..

³ Sequa's complaint does not specify whether or when Sequa paid estimated taxes for 1991 in advance of March 15, 1992, but its allegations are consistent with the representations Sequa makes in its brief.

⁴ IRS sources, such as Revenue Rulings, are entitled to considerable deference from the court as "the studied view of the agency whose duty it is to carry out the statute." See The Brook, Inc. v. Commissioner, 799 F.2d 833, 836 & n.4 (2d Cir. 1986).