OVERPAYMENT TEMPORARILY CREDITED TO ANOTHER YEAR WAS NOT 'UNPAID'.

                    UNITED STATES DISTRICT COURT

[1] In this tax refund action, plaintiff Sequa Corporation ("Sequa") moves for summary judgment, and defendant United States of America (the "Government") cross-moves for summary judgment. For the reasons given below, I grant in part and deny in part plaintiff's motion for summary judgment, and deny the Government's cross-motion for summary judgment.

I. BACKGROUND

[2] The parties have entered into a stipulation concerning many of the facts relevant to the resolution of these summary judgment motions. In relevant part, the stipulation reads as follows:

     1. For the tax years 1990 and 1991, plaintiff was a calendar

[3] Sequa commenced this action seeking a refund of the interest on its $1,676,263.00 of additional 1990 tax liability assessed and collected by the IRS. In an Opinion and Order dated April 19, 1996, with which familiarity is assumed, the Court denied the Government's motion to dismiss. See Sequa, 1996 WL 194323, at *1. The IRS has subsequently determined that it will refund to plaintiff the interest assessed and collected on plaintiff's $1,676,263.00 of additional 1990 tax liability between April 15, 1991 and September 15, 1991. (Letter to Court from Maya Wiley, 6/12/97, at 1).

II. DISCUSSION

[4] To prevail on a motion for summary judgment, the moving party therefore must show that there are no such genuine issues of material fact to be tried, and that he or she is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, (1986); Citizens' Bank v. Hunt, 927 F.2d 707, 710 (2d Cir. 1991). The party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion," which includes identifying the materials in the record that "it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp., 477 U.S. at 323.

[5] Because the IRS has determined that it will refund to plaintiff the interest assessed between April 15, 1991 and September 15, 1991 on plaintiff's $1,676,263.00 of additional 1990 tax liability, the Court denies as moot plaintiff's motion for summary judgment, and the Government's cross-motion for summary judgment as to plaintiff's claim for a refund of the interest assessed between April 15, 1991 and September 15, 1991. The remaining dispute concerns the interest the IRS assessed and collected on plaintiff's $1,676,263.00 of additional 1990 tax liability from September 15, 1991 to March 15, 1992. This period of time begins (on September 15, 1991) with plaintiff's election to credit its 1990 overpayment to its 1991 taxes, (Stip. paragraph 5), and ends (on March 15, 1992) when the IRS applied $1,676,263.00 of plaintiff's 1990 tax overpayment to satisfy Sequa's additional $1,676,263.00 of 1990 tax liability.

[6] Therefore the question before the Court is whether, when a taxpayer elects to credit its overpayment of tax in year one to its estimated tax liability in year two, see 26 U.S.C. section 6402(b); 26 C.F.R. section 301.6402-3(a)(5), but then seeks to reduce the amount of the overpayment credit to pay for additional tax liability in year one, the IRS properly assesses interest on the amount the overpayment credit is reduced for the period of time between the election to credit the overpayment to year two's estimated tax liability and the time when the IRS applies the overpayment to the year one's additional tax liability.

[7] It "is a clearly established principle that interest is not a penalty but is intended only to compensate the Government for delay in payment of a tax." Avon Prods., Inc. v. United States, 588 F.2d 342, 343 (2d Cir. 1978). Section 6601(a) of the I.R.C. provides the statutory basis for the imposition of interest: "If any amount of tax imposed by this title . . . is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid." 26 U.S.C. section 6601(a). Under section 6601(a), interest begins running only when a tax becomes "both due and unpaid." Avon, 588 F.2d at 344.

[8] Plaintiff's principal argument is that while it reduced the amount of its overpayment of 1990 tax to be credited to its 1991 estimated tax by $1,676,263.00, its 1990 tax was never both due and unpaid. Because, under I.R.C. section 6601(a), the IRS may impose interest only "when a tax becomes both due and unpaid," Avon, 588 F.2d at 344, plaintiff maintains that it is improper for the IRS to assess any interest on the $1,676,263.00 portion of its 1990 tax overpayment that it required to pay its 1990 tax. In response, the Government argues that once plaintiff elected to credit its overpayment of its 1990 taxes to its 1991 estimated tax liability, the IRS cannot credit a portion of plaintiff's overpayment of plaintiff's 1990 taxes to plaintiff's 1990 tax liability until plaintiff filed its 1991 return or the date or [sic] its 1991 taxes are due. Thus the Government contends that plaintiff's 1990 tax was unpaid by $1,676,263.00 until March 15, 1992 (giving plaintiff the benefit of the March 15, 1992 due date for its 1991 taxes as opposed to the September 15, 1992 actual filing date for its 1991 taxes).

[9] In the Opinion and Order, I rejected a similar argument from the Government. In particular, I noted that, under relevant authorities, "the Government is not considered to lose the use of an overpayment, nor is the taxpayer's overpayment deemed effective as a payment of the succeeding year's taxes, simply because, through an election, the taxpayer shifts the overpayment from its account for one year to its account for the succeeding year." Sequa, 1996 WL 194323, at *5. I maintain my view that the taxpayer's election to credit an overpayment of tax to the succeeding year's estimated tax liability does thereby constitute a payment of the succeeding year's taxes, and hereby incorporate the reasoning in the Opinion and Order. See id. at *3-5.

[10] In Avon, the Second Circuit Court of Appeals characterized an overpayment that a taxpayer elects to contribute to his tax for the succeeding year "as a voluntary anticipatory remittance." Avon, 588 F.2d at 342. Further, "a remittance which does not satisfy an asserted tax liability should not be treated as the 'payment' of a tax." Consolidated Edison Co. of New York, Inc. v. United States, 941 F. Supp. 398, 401 (S.D.N.Y. 1996) (quoting Lewyt Corp. v. Commissioner of IRS, 215 F.2d 518, 522-23 (2d Cir. 1954), aff'd in part and rev'd in part on other grounds, 349 U.S. 237 (1955)). Under these principles, plaintiff's election to credit its 1990 overpayment to its 1991 estimated tax liability did not constitute a "payment" of its 1991 tax. Rather, as the Federal Court of Claims commented in circumstances similar to those here:

     [T]he fact that [the taxpayer] used its purported overpayments

[11] The Government's reliance on Manning v. Seeley Tube & Box Co., 338 U.S. 561, 565 (1950), and Babcock & Wilcox Co. v. Pedrick, 212 F.2d 645 (2d Cir. 1954), is also misplaced. In Manning, the IRS assessed a tax deficiency and interest on the deficiency against the taxpayer. In the following year, the taxpayer had a net operating loss, which when carried back to the prior year eliminated the deficiency. Manning, 338 U.S. at 564. The IRS refused to refund the interest that had been assessed on the deficiency. Id. The Court held that "subsequent cancellation of the duty to pay this assessed deficiency does not cancel in like manner the duty to pay interest on that deficiency," because until the deficiency was abated, the taxpayer had use of funds that should have been in the possession of the United States. Id. at 565-66. In the instant case, however, the situation in Manning is "reversed." See May, 1996 U.S. Claims LEXIS 186, at *24. Here, the Government was never deprived of use of the funds to pay the taxpayer's 1990 tax liability. At all times plaintiff's 1990 tax liability was paid, indeed, overpaid. Thus, Manning does not support the Government's position.

[12] For similar reasons, Babcock also does not support the Government's position. In Babcock, the taxpayer had overpaid its income tax, but underpaid its excess profits tax; the taxpayer argued that interest should not be imposed on its excess tax underpayment to the extent that the underpayment could be offset by its income tax overpayment. Babcock, 212 F.2d at 645-47. In rejecting the taxpayer's argument, the Second Circuit Court of Appeals commented that "the issue comes down in essence to the question of whether the excess profits tax under the Code may properly be considered as part of the corporate income tax or whether it is a separate tax." Id. at 649. However, the instant case involves only one tax, a tax which the Court finds was never both due and unpaid. Cf. Avon, 588 F.2d at 344 (distinguishing Babcock on ground that instant case did not involve two separate taxes or deficiency in tax payments). Further, in Babcock, despite countervailing equitable considerations, the court deferred to a clear statutory mandate, a mandate that is not present in the instant case. Id. at 649. Accordingly, Babcock does not alter the Court's view that the IRS is not entitled to interest on the $1,676,263.00 that plaintiff's 1990 tax overpayment was reduced to pay its additional 1990 tax liability between September 15, 1991 and March 15, 1992. Therefore, plaintiff is entitled to summary judgment as to its claim for a refund of the interest the IRS imposed on its $1,676,263.00 between September 15, 1991 and March 15, 1992.

III. CONCLUSION

[13] For the reasons set forth above, the Court grants in part and denies in part plaintiff's motion for summary judgment [doc. no. 28], and denies the Government's cross-motion for summary judgment [doc. no. 29]. Specifically, the Court grants plaintiff summary judgment as to its claim for a refund of the interest the IRS assessed and collected on its $1,676,263.00 between September 15, 1991 and March 15, 1992. The Court denies as moot plaintiff's motion and the Government's cross-motion for summary judgment as to the interest the IRS assessed and collected on plaintiff's $1,676,263.00 1990 additional tax liability between April 15, 1991 and September 15, 1991.

[14] Any other pending motions are hereby moot. The Clerk of Court is directed to close this case.

[15] SO ORDERED.

Dated: New York, New York