Interest Computation Adjustments

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April 9, 2015

Purpose of bulletin

To inform staff that FTB is reviewing interest calculations in certain circumstances involving:

  1. May Department Stores v. United States (IRS Revenue Ruling 99-40), or
  2. Corporate Interest Netting (IRS Revenue Procedure 94-60)

Background

The May Department Stores interest calculation may impact a limited number of individuals or business entities that have all of the following:

  1. Taxpayer filed an amended return for additional tax OR received a deficiency assessment after the original return was filed for the same tax year, AND
  2. On the original return, taxpayer elected an overpayment transfer to the subsequent year’s estimate tax, AND
  3. On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the May Department Stores adjustment is one year of interest on the additional tax or deficiency amount.

May Department Store Examples

Example 1 In 2013, taxpayer timely filed their 2012 tax return and requested their $400,000 overpayment be transferred as an estimate payment for tax year 2013. In 2014, taxpayer received a notice proposing additional tax of $75,000 for tax year 2012.

  • Without the May Department Stores adjustment:If the entire $400,000 overpayment was applied to the 2013 first quarter estimate payment, taxpayer owes $1,910 interest on the $75,000 additional tax for the 2012 tax year.
  • With the May Department Stores adjustment: If the $400,000 overpayment was more than their required 2013 first quarter estimate payment, the taxpayer owes $383 interest, provided the minimum estimate payment needed was $120,000 (1st quarter). This is a potential net reduction of $1,527 interest ($1,910 - $383 = $1,527).

Example 2 Taxpayer received a notice revising his 2012 filing status with additional tax of $3,900. Since he requested an estimate payment transfer for tax year 2013, he may have a net reduction of $27 interest (with the May Department Stores adjustment) assuming an estimate transfer of $14,000 and 2013 tax liability of $39,000.

Corporation Interest Netting

Corporation Interest Netting adjustment may impact corporations with all of the following:

  1. Previous refund or payment transfer, AND
  2. Subsequent deficiency or amended return for additional tax with interest for the same tax year.

Corporation Interest Netting example:
In 2015, corporation filed an amended return for $60,000 in additional tax for tax year 2012.

  • Corporation Interest Netting does NOT apply: If the corporation did not receive a refund for the 2012 tax year, prior to filing the amended return for additional tax, then the corporation owes $60,000 tax plus $3,710 interest, as of 3/15/15.
  • Corporation Interest Netting does apply: If the corporation received a refund prior to filing the amended return for additional tax, (for example $70,000) for the same tax year, Interest Netting applies. The corporation owes $60,000 plus $2,363 interest, as of 3/15/15.This is a net reduction of $1,347 interest ($3,710 -$2,363 = $1,347).

These interest calculations are complex and must be manually performed. We will work with taxpayers to adjust interest calculations, as appropriate. We will be providing additional information on our FTB website and in upcoming Tax News articles.

Interest Adjustment Requests

Due to the potential statute of limitations expiring for tax year 2010, taxpayers (who may have been impacted by either of these scenarios) should submit the following information in a letter with the taxpayer’s signature:

  1. Taxpayer name or entity name as filed on return
  2. Taxpayer/Entity Identification Number
  3. Tax year(s)

For proper handling, please reference in red on the top of your correspondence "INTEREST ADJUSTMENT" and mail the letter by US Mail to:

INTEREST ADJUSTMENT
FRANCHISE TAX BOARD
PO BOX 1779
RANCHO CORDOVA CA 95741-1779

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