Document Number
02-166
Tax Type
Corporation Income Tax
Description
Amended returns, request for the abatement of the interest assessments
Topic
Accounting Periods and Methods
Computation of Tax
Date Issued
12-19-2002

December 19, 2002


Re: § 58.1-1821 Application: Corporation Income Tax


Dear *****:

This will reply to your letter of August 20, 2002, in which you contest the amount of interest assessed against ***** (the "Taxpayer") for the taxable years ended December 31, 1988 through 1995.
FACTS

The Taxpayer filed amended corporate income tax returns in October 2001 for the taxable years ended December 31, 1988 through 1995 pursuant to federal RAR adjustments. The amended returns reported underpayments for the 1988 through 1989 and the 1993 through 1995 taxable years and overpayments for the 1990 through 1992 taxable years. Interest was computed separately for each amended return through the processing date. The application of payments has left assessments for the taxable years ended 1989, 1993 and 1994.

The Taxpayer protests the department's computation of interest on the underpayments and overpayments related to the amended returns. Specifically, the Taxpayer asserts that the overpayments of tax should offset the underpayment of tax at the date the overpayment occurred (the due dates of the 1990 through 1992 taxable year returns) pursuant to Internal Revenue Code ("IRC") § 6621. In the alternative, the Taxpayer avers that Virginia law requires that interest should only accrue to the original due date of a return when overpayments are used to satisfy the underpayments in previous years, rather than interest accruing to October 2001, when the amended returns were filed. Finally, the Taxpayer contends that the department compounded interest in violation of Virginia law.
DETERMINATION

Under Virginia law, each amended return for a deficiency or refund is an entirely different transaction. Interest on each amended return is computed separately. Interest on a corporate income tax return with a deficiency is assessed pursuant to Code of Virginia § 58.1-455. Interest on refunds is paid pursuant to Code of Virginia § 58.1-1833.

For assessments of additional corporate income taxes, Code of Virginia § 58.1-455 provides in pertinent part:
      • Interest upon such tax or any unpaid balance of the tax ...shall be added at a rate determined in accordance with § 58.1-15, from the date the tax or any unpaid balance of the tax was originally due until paid.

For the assessment of additional tax, Code of Virginia § 58.1-1812 provides in pertinent part:
      • ... interest on the outstanding tax and penalty shall be charged at the rate established under § 58.1-15 for the period between the due date and the date of full payment.

For the refund of the overpayment of taxes, Code of Virginia § 58.1-1833 provides in pertinent part:
      • ... interest shall accrue from a date sixty days after payment of the tax, or sixty days after the last day prescribed by law for such payment, whichever is later, and shall end on a date determined by the department preceding the date of the refund check by not more than thirty days.

Code of Virginia § 58.1-15 sets the Virginia rates of interest for both the underpayment and overpayment of tax. It provides in pertinent part:
      • Unless otherwise specifically provided, interest on omitted taxes, assessments and refunds under this title shall be computed at the rates equal to the rates of interest established pursuant to § 6621 of the Internal Revenue Code. The rate of interest on omitted taxes and assessments under this title shall be the "Underpayment Rate" established pursuant to § 6621(a)(2) of the Internal Revenue Code plus two percent. The rate of interest on refunds under this title shall be the "Overpayment Rate" for noncorporate taxpayers established pursuant to § 6621(a)(1) of the Internal Revenue Code plus two percent. Separate computations shall be made by multiplying the deficiency or overpayment for each period by the rate of interest applicable to that period.

Conformity

The Taxpayer has made numerous arguments that the department is required to apply a zero rate of interest on overlapping underpayment and overpayment tax amounts in conformity to IRC § 6621 (d) pursuant to Code of Virginia § 58.1-15.

Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meanings as used in the IRC. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia.

Code of Virginia § 58.1-15 establishes Virginia interest rates for assessments and refunds. This statute incorporates the interest rates set by IRC § 6621. Conformity with the IRC is limited to these rates. Code of Virginia § 58.1-1833 is the statute that addresses interest on refunds. Conversely, Code of Virginia § 58.1-455 provides for interest when there is corporate income tax deficiency.

You argue that the department's adoption of the additional rate charged on corporate assessments in excess of $100,000 under IRC § 6621(c) supports your contention that Code of Virginia § 58.1-15 incorporates the offsetting of overpayments and underpayments computation under, and the 0% interest rate, included in IRC § 6621(d). However, the department interprets the Virginia statute, which sets Virginia's rate on omitted taxes and underpayments at the underpayment rate specified in IRC § 6621, to mean the underpayment rate as applied by federal law. Thus, the department applies the federal underpayment rate to large corporate underpayments with the substituted rate mandated by IRC § 6621.

This interpretation is consistent with the applicable federal and Virginia law. The language for IRC § 6621(c) is "Increase in underpayment rate for large corporate underpayments." It is not a new rate or a different rate. It establishes that the "underpayment rate" under IRC § 6621 will be applied one way for large corporate underpayments and another way for all other underpayments.

The language creating the "underpayment rate" in IRC § 6621(a)(2) reads:
    • The underpayment rate established under this section shall be the sum of
(A) the federal short term rate determined under subsection (b), plus
(B) 3 percentage points.

The underpayment rate cannot be determined from this language. The definition of "federal short term rate" in IRC § 6621 (b) must also be reviewed. Because this language refers to the underpayment rate "established under this section" rather than under this paragraph of subsection, any other language in IRC § 6621 that defines, amplifies, clarifies, or modifies, terms used in paragraph (2) of subsection (a) is also incorporated. Specifically, the definition of "underpayment rate" in IRC § 6621(a)(2) included the modified application set forth in subsection (c) of IRC § 6621.

Therefore, when Code of Virginia § 58.1-15 incorporates by reference the underpayment rate established by IRC § 6621(a)(2), it necessarily means the rate as it incorporates terms defined and modified elsewhere in IRC § 6621. See Chesapeake Hospital Authority v. Commonwealth, 262 Va. 551, 565 (2001).

IRC § 6621 (d) sets no underpayment or overpayment rate. As such, Code of Virginia § 58.1-15 does not incorporate the provisions under IRC § 6621(d).

Date of Payment

The Taxpayer further contends that even if the separate computations of interest are to be made for each period, interest should have only been calculated through the original due date of the return for subsequent taxable years in which overpayments were made and applied to prior year underpayments. The Taxpayer quotes the following from Public Document ("P.D.") 96-117 (6/3/96):
    • ... if any portion of a tax of an earlier year is satisfied by the overpayment of a later year, where the later year's return was filed timely or within the extension period, the interest is computed on the earlier year's return from the due date of the return until the original due date of the later year's return.

The Taxpayer also contends that because the department used the overpayment of tax to offset prior year underpayments, it should have calculated interest on those underpayments through the original due date of the return in which there was an overpayment.

The Taxpayer has misinterpreted P.D. 96-117. The passage that the Taxpayer quoted comes directly from Internal Revenue Service ("IRS") Revenue Ruling 88-97. P.D. 96-117 states unequivocally that Virginia does not follow Revenue Ruling 88-97. Rather, P.D. 96-117 held that when the balance due of an earlier year's return is paid by the overpayment of a later year's return, the interest is computed on the earlier year's tax return from the due date for the earlier year through the filing date of the later year's return when the overpayment was made with the later year's return.

The Taxpayer also contends that P.D. 86-235 (11/19/86) supports its position that interest should have only been calculated through the original due date of the return for subsequent taxable years in which overpayments were made and applied to prior year underpayments. The Taxpayer asserts that this determination classified an overpayment as a payment and interest would have been calculated on the tax underpayment to the date of this payment. However, P.D. 86-235 did not classify a payment as the equivalent to an underpayment. Rather it held that the original return and the amended return were entirely separate transactions and that interest on each return was to be computed separately using Code of Virginia § 58.1-1812 and Code of Virginia § 58.1-1833 as applicable.

In P.D. 86-235, a taxpayer could not file its estate tax by its due date. The taxpayer requested an extension and paid its tentative tax liability on the extension. The return, as filed, reflected an overpayment that was refunded by the department. A subsequent audit by the IRS resulted in an increase in federal, and ultimately, Virginia estate tax liability. An amended Virginia return was filed and the taxpayer computed additional interest on the difference between the refund on the original return and additional tax paid on the amended return for the period between the due date of the return and the date the refund check was issued and on the full amount of additional tax for the period subsequent to the refund check.

The Taxpayer has again used a statement from a public document out of context. In this case, the department stated "[i]f the overpayment shown on the original return had not been refunded, the interest on the additional tax would have been computed on the difference between the correct tax and the amount paid with the extension request." The Taxpayer attempts to argue that this statement contemplates that the unrefunded overpayment would, in fact, be considered a payment of tax offsetting an underpayment resulting from an amended return. To the contrary, the department is stating that if no refund had been issued, no overpayment would have occurred. This is consistent with the ruling that upheld separate interest computations for the original overpayment and subsequent underpayment resulting from an amended return.

The Taxpayer further believes that P.D. 84-88 (7/9/84) proposes that payments are the equivalent of overpayments, and interest may not accrue past the date of an unrefunded overpayment that is applied to an existing underpayment. P.D. 84-88 addressed the computation of interest when an overpayment of tax results from the carry back of a net operating loss. When a net operating loss deduction results in a refund, Code of Virginia § 58.1-1833 defines the date of overpayment to be the date the loss year return was filed or the last day prescribed by law for such filing, whichever is later. P.D. 84-88 does not apply to the Taxpayer's situation because the overpayments did not result from carrying back net operating losses. The department's position with regard to this issue was further clarified in P.D. 96-383 (12/20/96).

Finally, the Taxpayer contends that because it had use of the Commonwealth's money for the years that it underpaid its taxes and that the department had use of the Taxpayer's money during the years that the Taxpayer overpaid its taxes, interest for the years of overpayments and underpayments should be netted.

The Taxpayer cites a number of cases, Deputy v. Dupont, 308 U.S. 488 (1940), Manning v. Seely Tube & Box Co., 338 U.S. 561 (1950), and Shepard v. Capitol Foundry of Virginia, 554 S.E.2d 72 (Va. 2001), that support the principle that the compensation for the "use of money" is the primary rationale for charging interest. Virginia law acknowledges that it has the use of a taxpayer's money when a taxpayer overpays its tax. Code of Virginia § 58.1-1833 requires that the department pay interest on the overpayment of tax at the rates set by Code of Virginia § 58.1-15. Likewise, Virginia law acknowledges that when a taxpayer underpays its tax, the taxpayer has use of money that rightfully belongs to the Commonwealth. Code of Virginia §§ 58.1-455 and 58.1-1812 require taxpayers pay interest on money that they owe the Commonwealth. Therefore, the Virginia law recognizes and accounts for the "use of money".

Compounding of Interest

The Taxpayer contends that the department compounded interest in violation of Virginia law. Specifically, it contends that the department calculated interest on interest.

Code of Virginia § 58.1-1812 provides that after an assessment is issued, the department will send a bill requiring that any tax penalty and interest assessed must be paid within 30 days from the date of such bill. If the tax, penalty and interest are not paid within 30 days, then interest must accrue on the assessment from the date of such assessment to the date of payment.

The term "assessment" has a definite meaning in the law. It means the act of determining that a tax or penalty is due. As part of the assessment, the department must include any penalty prescribed by statue and interest at the rate established under Code of Virginia § 58.1-15 for the period between the due date and the date of payment. As such, the department may accrue interest on the original assessment of tax, penalty and interest that was not paid within 30 days of the assessment.

A review of the Taxpayer's account indicates that the original assessment of corporate income tax and interest was not paid within 30 days of the assessment. As such, subsequent bills accrued interest on the entire assessment.

Conclusion

Based on the foregoing, the Taxpayer's request for the abatement of the interest assessments for the taxable years ended December 31, 1988, 1989, 1993, 1994, and 1995 is denied. The current balance of the assessments for the taxable years at issue is shown on the enclosed schedule. Please remit payment to the Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218, Attention: *****. Payment must be made within 30 days from the date of this letter to avoid the accrual of additional interest.

Copies of the Code of Virginia sections, regulations, and public documents cited are available online in the Tax Policy library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact************ at *****.
                    • Sincerely,


                    • Kenneth W. Thorson
                      Tax Commissioner



AR/42465B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46