rr-07-51.pdf

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Part I

Section 6402.–Authority to Make Credits or Refunds
(Also: 6411)

26 CFR 301.6402-1: Authority to Make Credits or Refunds
(Also: 1.6411-3)

Rev. Rul. 2007-51

ISSUES
(1) Does section 6402(a) of the Code allow the Service to credit an overpayment
against unassessed internal revenue tax liabilities determined in a notice of deficiency?
(2) Does section 6411(b) of the Code allow the Service to credit a decrease in
tax resulting from a tentative carryback adjustment against unassessed internal revenue
tax liabilities determined in a notice of deficiency?
SCOPE
This revenue ruling only applies to internal revenue tax liabilities that are subject
to the deficiency procedures of Subchapter B of Chapter 63 of the Code. This revenue
ruling does not address the question of the Service’s crediting rights prior to issuing a

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notice of deficiency, in the context of a termination assessment under section 6851 or
otherwise. This revenue ruling also does not address the Service’s crediting rights
when a taxpayer is in bankruptcy (or other insolvency) proceedings. See Rev. Rul.
2007-52 for the Service’s crediting rights when a taxpayer is in bankruptcy.
FACTS
Situation 1. On March 15, 2005, a corporate taxpayer filed its income tax return
for the tax year ending December 31, 2004, claiming a refund of $500,000. On April 15,
2005, the Service sent a notice of deficiency to the taxpayer for tax year 2003 in the
amount of $1,000,000. As of April 15, 2005, the Service had not refunded the $500,000
overpayment for tax year 2004 or assessed the $1,000,000 deficiency for tax year 2003.
Situation 2
. On March 15, 2005, a corporate taxpayer filed a Form 1139,
Corporation Application for Tentative Refund, carrying back a net operating loss from
tax year 2004 to tax year 2002. The carryback generated a $250,000 decrease in tax
for tax year 2002. On April 15, 2005, the Service sent a notice of deficiency to the
taxpayer for tax year 2003 in the amount of $1,000,000. As of April 15, 2005, the
Service had not assessed the $1,000,000 deficiency for tax year 2003 or tentatively
refunded the $250,000 decrease in tax for tax year 2002.
LAW
Authority to Make Credits or Refunds
Section 6402(a) provides that within the applicable period of limitations the
Secretary may credit the amount of any overpayment, including interest allowed
thereon, against any liability in respect of an internal revenue tax on the part of the
person who made the overpayment. The Secretary shall refund any balance to the

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person who made the overpayment, subject to further credit against amounts specified
in sections 6402(c), (d), and (e). Regulations under section 6402(a) similarly provide
that credit may be made against “any outstanding liability.” See
section 301.6402-1 of
the Regulations on Procedure and Administration.
Tentative Carryback and Refund Adjustments
Section 6411(a) provides that a taxpayer may file an application for tentative
carryback adjustment of the tax for the prior taxable year affected by a net operating
loss carryback, a business credit carryback, or a capital loss carryback from any taxable
year. The application shall be made on Form 1139 or, in the case of taxpayers other
than corporations, on Form 1045, and shall set forth in detail the information required by
sections 6411(a)(1) through (a)(6) and by section 1.6411-1 of the Income Tax
Regulations.
Section 6411(b) provides, in general, that within a period of 90 days from the
date of filing the application for tentative carryback adjustment, the Secretary shall make
a limited examination of the application to discover omissions and errors of
computation, and shall determine the amount of the decrease in tax attributable to the
carryback. See
also section 1.6411-3(b) of the Income Tax Regulations.
Pursuant to section 6411(b) and section 1.6411-3(d), the decrease in tax
attributable to the carryback shall, in the following order:
1. be applied under section 1.6411-3(d)(1) against any unpaid amount of the
tax with respect to which such decrease was determined (i.e.
, unpaid tax
for the carryback year);

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2. be credited under section 1.6411-3(d)(2) against any unsatisfied amount
of any tax for the taxable year immediately preceding the taxable year of
the net operating loss carryback, business credit carryback, or capital loss
carryback, the time for payment of which was extended under section
6164; and
3. be credited under section 1.6411-3(d)(3) against any tax or installment
thereof “then due” from the taxpayer, and, if not so credited, be refunded
to the taxpayer.
ANALYSIS
Authority to Make Credits
Section 6402 permits the Service to credit overpayments against “any liability in
respect of an internal revenue tax on the part of the person who made the
overpayment.” Neither section 6402 nor the associated regulations specify when “any
liability” arises for purposes of determining when the Service may credit an
overpayment. It is, however, well-established that the Internal Revenue Code imposes
income tax liability based on an annual accounting period. Burnet v. Sanford & Brooks
Co., 282 U.S. 359, 363 (1931) (tax liability is based on the net result of all transactions
occurring during a fixed accounting period); Edelson v. Commissioner
, 829 F.2d 828,
834 (9th Cir.1987) (“[T]ax liabilities, though unassessed, are deemed obligations due
and owing at the close of the taxable year.”). Moreover, the accrual of an income tax
liability is not dependent on the Service sending a notice of deficiency. Nor is the
accrual of a tax liability dependent on the Service making an assessment. Goldston v.
United States, 104 F.3d 1198, 1199-1200 (10
th
Cir. 1997) (tax liability arises from

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statutory duty to pay tax, not assessment of liability); United States v. Latham
, 754 F.2d
747, 750 (7
th
Cir. 1985) (assessment is an administrative determination that is not a
prerequisite to tax liability.)
For purposes of the crediting provisions of section 6402(a), an internal revenue
tax liability for a tax year will arise no later than the date on which the Service sends a
notice of deficiency to the taxpayer pursuant to section 6212 that identifies the nature
and amount of the tax liability. Although there are circumstances in which an internal
revenue tax liability may be a “liability in respect of an internal revenue tax” within the
meaning of section 6402(a) prior to the issuance of a notice of deficiency they are
outside the scope of this revenue ruling.
Section 6411(b) permits, after application to other unpaid amounts, the decrease
in tax attributable to a carryback to be credited against “any tax . . . then due from the
taxpayer.” See
also section 1.6411-3(d)(3) of the Income Tax Regulations. Neither
section 6411(b) nor the regulations thereunder specify when a tax liability is “then due”
for purposes of determining when the Service can credit a carryback adjustment. Case
law analyzing the phrase “then due” in the context of predecessor statutes to section
6402, while consistent with this revenue ruling, does not aid in the interpretation of the
phrase because these cases involve inconsistent treatment of overpayment and
underpayment interest, and the statutory scheme relating to the accrual of interest has
since changed. See
McCarl v. United States, 42 F.2d 346 (D.C. Cir. 1930); Standard
Oil Co. v. United States, 5 F. Supp. 976, 988 (Ct. Cl. 1934).
Section 6151(a) prescribes the time for when a payment of tax is due. The
statute provides that a person required to file a return shall, without assessment or

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notice or demand from the Secretary, pay the tax at the time fixed for filing the return
(determined without regard to extensions). It follows that, in the context of a deficiency,
an internal revenue tax liability is “then due” for purposes of section 6411 no later than
the date on which the Service issues a notice of deficiency to the taxpayer identifying a
tax liability that is past due. Circumstances in which an internal revenue tax liability
may, in the context of a deficiency, be “then due” within the meaning of section 6411(b)
prior to issuance of a notice of deficiency are outside the scope of this revenue ruling.
Although sections 6402(a) and 6411(b) do not require a deficiency determination
or assessment as a prerequisite to the Service crediting an overpayment or a carryback
adjustment to a tax liability, the Service generally does not make such credits until the
tax liability is determined with specificity. When the Service issues a notice of
deficiency, it has determined the tax liability with specificity. Liabilities set forth in a
notice of deficiency generally are presumed to be correct at the time the notice of
deficiency is sent. See
Helvering v. Taylor, 293 U.S. 507, 515 (1935) (“Unquestionably
the burden of proof is on the taxpayer to show that the Commissioner's [deficiency]
determination is invalid.”); Merkel v. Commissioner
, 192 F.3d 844, 852 (9th Cir. 1999)
("Determinations made by the Commissioner in a notice of deficiency normally are
presumed to be correct, and the taxpayer bears the burden of proving that those
determinations are erroneous.").
Accordingly, section 6402(a) permits the Service to credit an overpayment
against an unassessed tax liability if the Service has determined the amount of the tax
liability in a notice of deficiency sent to the taxpayer pursuant to section 6212. Similarly,
section 6411(b) permits the Service to credit a decrease in tax against an unassessed

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tax liability if, within the 90-day period, the Service has determined the amount of the tax
liability in a notice of deficiency sent to the taxpayer pursuant to section 6212. See

section 1.6411-3(d)(3) of the Income Tax Regulations.
Clarification of Prior Guidance
In Rev. Rul. 54-378, 1954-2 C.B. 246, the Service announced a policy of making
partial allowances of refunds or credits under section 322(a)(1) of the 1939 Code, the
predecessor to section 6402(a). In Rev. Rul. 54-378, the Service was required to credit
any overpayment resulting from the allowance of partial overassessments against any
income or excess profits tax assessed and then due from the taxpayer, and to refund
the balance, if any, to the taxpayer. The facts in Rev. Rul. 54-378 focus on allowing
partial refunds or credits when the Service and the taxpayer agree on the amount of an
overassessment. Revenue Ruling 54-378 does not address the Service’s right to credit
an overpayment against a tax liability before the Service assesses the tax liability. This
revenue ruling clarifies that Rev. Rul. 54-378 does not limit the Service to crediting
overpayments only against assessed tax liabilities.
Crediting Rules Applied to Situations 1 and 2
Situation 1
. The $1,000,000 tax liability determined in the notice of deficiency is
an outstanding tax liability within the meaning of section 301.6402-1. Under section
6402(a), the Service may credit the $500,000 overpayment for tax year 2004 against
the $1,000,000 tax liability identified in the notice of deficiency for tax year 2003.
Situation 2
. The $1,000,000 tax liability determined in the notice of deficiency is
an amount “then due” for purposes of section 6411(b). The Service may credit the

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$250,000 decrease in tax that was generated from the net operating loss carryback
against the $1,000,000 tax liability for tax year 2003.
HOLDINGS
(1) Pursuant to section 6402(a), the Service may credit an overpayment against
unassessed internal revenue tax liabilities that have been determined in a notice of
deficiency sent to the taxpayer.
(2) Pursuant to section 6411(b), the Service may credit a decrease in tax
resulting from a tentative carryback adjustment against unassessed internal revenue tax
liabilities determined in a notice of deficiency sent to the taxpayer.
EFFECT ON OTHER REVENUE RULINGS
Revenue Ruling 54-378 is clarified. Pursuant to section 6402(a), the Service is
authorized to credit an overpayment not only against amounts of tax that are assessed,
but also against outstanding tax liabilities such as those identified in a notice of
deficiency sent to the taxpayer.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Joseph P. Dewald, formerly of the
Office of the Associate Chief Counsel (Procedure and Administration), and Cynthia A.
McGreevy of the Office of the Associate Chief Counsel (Procedure and Administration).
For further information regarding this revenue ruling, contact Cynthia A. McGreevy at
(202) 622-4910 (not a toll-free call).