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Complications With Rolling Credit Elect Transfers – Part 1

Posted on Feb. 4, 2021

We welcome back guest blogger Bob Probasco. In Part One of this two part post, Bob dives into the history of “credit elect transfers” and their treatment for interest purposes. Part Two will analyze the Goldring case in more detail and discuss the arguments that are likely to be made on both sides as the case goes before the Fifth Circuit. Christine

A brief order was issued in September, concerning an issue related to interest on federal tax overpayments and underpayments. In Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020), the court granted the government’s motion for summary judgement, concluding that the IRS properly assessed $603,335 of underpayment interest. The court rejected the taxpayers’ arguments concerning the proper treatment of interest in situations with rolling credit elect transfers.

We’re all familiar with “credit transfers,” the terminology for IRS authority under Code section 6402(a) to apply an overpayment for one year against an outstanding tax liability for another year. IRS records show tax balances from the government perspective, of course, under which an overpayment by the taxpayer is a liability or, in accounting terminology, a credit. (These transfers show up on transcripts with transaction codes 826/706, labeled “credit transferred out”/“credit transferred in”.)

A “credit elect transfer” (CET) is one the taxpayer requests, on their tax return; I frequently make such an election and some of you may as well. The election, made on line 36 of the Form 1040 for 2020, is to apply part or all of the overpayment shown on the return to your estimated tax obligations for the next year. The overpayment that the taxpayer elects to transfer does not earn overpayment interest for the period before the transfer, even if the return is filed well after the due date of that return. This is not a statutory restriction; section 6402(b) just authorizes Treasury to prescribe regulations governing such CETs. It did, including § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii).

As for “rolling credit elect transfers,” those may be most easily illustrated by the facts of this case.  


I’m going to dispense with most of the details and just focus on the key facts regarding the specific issue at hand.

  • Mr. and Mrs. Goldring’s 2010 tax return showed an overpayment of $6,782,794, which was applied to their 2011 tax return at their request.
  • Their 2011 tax return showed an overpayment of $6,521,775, which was applied to their 2012 tax return at their request.
  • Their 2012 tax return showed an overpayment of $5,869,478, which was applied to their 2013 tax return at their request.
  • Etc., etc., etc.

Thus, “rolling” CETs – the Goldrings kept rolling over their overpayments to the next year instead of receiving refunds.

I’ve used CETs often, occasionally even rolling CETs, although the numbers were much smaller than for the Goldrings. I intended to use the CET against the estimated tax installment obligation due at the same time as my tax return. It was easier to make that portion of the obligation by CET rather than making a separate payment for year 2 and getting a refund (without interest) for year 1 several weeks later.

Mr. and Mrs. Goldring had something else in mind. They anticipated a possible audit deficiency for their 2010 tax return. Their accountants had suggested the rolling CETs as a way to keep funds with the IRS sufficient to cover the potential deficiency, thereby avoiding underpayment interest. Remitting a separate deposit in the nature of a cash bond would have been an option as well. Perhaps rolling CETs were seen as a low key way to accomplish the same thing, without waving a red flag to alert the IRS of the potential deficiency? If there had never been a deficiency for 2010, the rolling CETs wouldn’t have been an issue. Eventually the Goldrings would have asked for a refund instead of rolling the overpayments over. No interest would be allowed on the refund and that would have been an end of it.

But, as they feared, there was a deficiency for 2010.  The IRS began an audit on April 15, 2013 and issued a 30-day letter on August 11, 2015.  Appeals agreed with the audit determination and issued a notice of deficiency for $5,250,549 on March 30, 2017.  On June 20, 2017, rather than go to Tax Court, the taxpayers consented to immediate assessment.  The audit deficiency was eventually paid from overpayment balances for later returns, specifically, Mrs. Goldring’s 2014 separate tax return and Mr. Goldring’s 2016 separate tax return. A refund claim and this refund suit followed.

The validity of the 2010 deficiency itself had been resolved in this same case, by an order issued on April 13, 2020. That left the question of interest that had been assessed on the deficiency. The IRS assessed underpayment interest on the 2010 deficiency for the period from April 15, 2012, the due date for the 2011 tax return, until paid. The Goldrings argued that, because the IRS always had money in its possession sufficient to cover the audit deficiency, no underpayment interest should be accrued.       

The District Court’s Opinion

The court decided this issue in favor of the government.  Section 6601(a) provides for underpayment interest as follows:

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 . . . shall be paid for the period from such last date to the date paid.

The regulations sections cited above provide that the portion of an overpayment designation as a CET “shall be applied as a payment on account of the estimated tax for [the succeeding] year or the installments thereof.”  The 2010 CET was irrevocable and resulted in transferring $6,782,794 from the account for the taxpayers’ 2010 tax year to the account for their 2011 tax year.  That transfer from 2010 to 2011 was effective as of April 15, 2012, the due date of the 2011 tax return.  The original overpayment in 2010, transferred to 2011, would not earn overpayment interest.  But it could shield the taxpayers from underpayment interest from a subsequently determined deficiency, until the funds were deemed transferred to 2011.  Underpayment interest began accruing on April 15, 2012, the last date prescribed for payment for the year to which the overpayment was transferred, and continued until April 15, 2015 and April 15, 2017, when the deficiency was paid by section 6401(a) transfers from subsequent tax returns.  The plaintiffs were not entitled to a refund of underpayment interest and the government was entitled to summary judgement.

This sounds like a very straightforward application of clear law, doesn’t it? Particularly since the printed order was just barely over 4 pages and the “law and analysis” portion is only 2 pages, double-spaced. But I’m not sure that answer is necessarily the best interpretation of the law. Here’s why.

Treatment of CETs for interest purposes

Today, in most instances when you elect to apply some or all of an overpayment to estimated taxes for next year, interest issues don’t come up at all.  You’re not entitled to interest on the overpayment, by regulation.  When an interest issue does come up, it’s because the IRS audits the year with the overpayment and determines a deficiency.  With most CETs, the method of calculating underpayment interest on that subsequently determined deficiency is no longer contested.

But there was a great deal of uncertainty before the decision in Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978). By the last date prescribed for payments of its 1967 taxes, the unextended filing due date, the taxpayer had paid in $44,500,086.58. When it finally filed its tax return on September 15, 1968, it reported its tax liability as $44,384,460.26, resulting in an overpayment of $115,626.32, which it elected to apply to 1968’s tax liability. A subsequent audit determined that its correct liability was $44,483,062.42, resulting in a deficiency of $98,602.17.

Section 6601(a), by its literal terms, only charges interest on underpayments if the correct tax liability was not paid on or before the last date prescribed for payment. But the amount paid as of the last date prescribed for payment was $44,500,086.58, which was more than the adjusted tax liability of $44,483,062.42. Under the literal terms of the statute, the IRS could not assess any underpayment interest at all for that deficiency.

The interpretation didn’t seem right either, but the Second Circuit found an elegant solution.  It interpreted “last date prescribed for payment” in these situations to mean the moment at which the tax first became “due but unpaid.”  It was fully paid by March 15, 1968, the last date prescribed for payment.  But a CET was effectively a “negative payment,” just as a refund would have been.  It reduced the net amount paid by Avon from $44,500,086.58 (as of the date prescribed for payment) to $44,384,460.26 (after the CET).  At that point, the tax liability became “due but unpaid” and underpayment interest would begin accruing.

When the “negative payment” is a refund, we know when that happened and therefore when underpayment interest on a subsequently determined deficiency begins. But what is the effective date of a “negative payment” by CET? That wasn’t clear. The IRS argued for the due date of the return without regard to extensions, or March 15, 1968. Avon argued for September 15, 1968, the date of both (a) filing the 1967 return and making the election to apply the CET to 1968’s tax liability and (b) the due date of an estimated tax installment for Avon’s 1968’s tax liability. The Second Circuit agreed with Avon.

Avon Products, several subsequent cases – May Dep’t Stores Co. v. United States, 36 Fed. Cl. 680 (C.F.C. 1996); Kimberly-Clark Tissue Co. v. United States, 1997 U.S. Dist. LEXIS 3100 (E.D. Pa. 1997); Sequa Corp. v. United States, 1996 U.S. Dist. LEXIS 5288 (S.D.N.Y. Apr. 22, 1996); Sequa Corp. v. United States, 1998 U.S. Dist. LEXIS 8556 (S.D.N.Y. June 8, 1998) – and a series of revenue rulings eventually developed what is now the standard treatment for CETs.  “When a taxpayer elects to apply an overpayment to the succeeding year’s estimated taxes, the overpayment is applied to unpaid installments of estimated tax due on or after the date(s) the overpayment arose, in the order in which they are required to be paid to avoid an addition to tax for failure to pay estimated income tax under §§ 6654 or 6655 with respect to such year.”  Revenue Ruling 99-40.

The logic behind this solution was to avoid a double benefit, to either the taxpayer or the government. The CET amount would provide a potential benefit to the taxpayer in the year of the overpayment (1967 in the Avon Products case) for periods before the effective date of the transfer. Overpayment interest was not allowable, but the CET amount would reduce the subsequently determined deficiency that would be subject to underpayment interest. The CET amount would benefit the taxpayer in the succeeding year (1968 in the Avon Products case) for periods after the effective date of the transfer. It would either (a) avoid the addition to tax for failure to pay estimated taxes or (b) be refunded to the taxpayer for its use. There would be no period during which the taxpayer received a potential benefit for neither year or received a potential benefit for both years.

None of the cases or revenue rulings specifically dealt with situations in which the CET is not needed for an estimated tax installment. IRS practice has been to apply any remaining portion as of the due date of payment for the succeeding year’s tax liability. That makes perfect sense if there is no rolling CET, as the taxpayer will either need that amount to pay the liability or receive a refund. It makes less sense in situations with rolling CETs, as in the Goldring case. That had to wait for a new series of cases, and the results are mixed. I’ll turn to that in Part 2.

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