Appeal by taxpayer from a judgment entered in the United States District Court for the Southern District of New York, Constance Baker Motley, J., in taxpayer's action for recovery of a portion of the interest it paid on a deficiency in its 1967 corporation income tax.
Before Kaufman, Chief Judge, and Timbers and Gurfein, Circuit Judges.
The Internal Revenue Code permits a corporate taxpayer that has paid more than its liability in one year to claim a credit for the excess against its taxes for the succeeding year, I.R.C. § 6402(b). Avon Products, Inc. followed this procedure, but a subsequent audit showed that it had taken a larger credit than that to which it was entitled. This case requires us to determine the extent of Avon's liability for interest on the deficiency thus created.
On March 15, 1968, Avon filed Form 7004, thereby automatically extending to June 15 the deadline for filing its 1967 corporation income tax return. Avon estimated its total 1967 tax liability at $44,500,000, and remitted half the unpaid balance of $18,600,000 on March 15, and the remainder on June 15. Avon completed payment of its 1967 taxes on June 15, as scheduled,*fn1 but it did not submit its return on that day. Instead, it requested and received a further three-month extension. When the return was finally filed on September 15, it showed a 1967 tax liability of $44,384,460.26, thus indicating that Avon had overpaid its taxes for that year by $115,626.32.*fn2 The taxpayer elected to credit that amount against the installment of its estimated 1968 income tax due the same day.*fn3
But Avon could not yet close its books for 1967. On a subsequent audit, the IRS determined that its correct liability was $44,483,062.43. Thus the Service conceded that Avon had originally overpaid its 1967 taxes by $17,024.15, but the excessive credit taken on September 15 had erased this surplus and created a deficiency of $98,602.17 instead. On February 1, 1971, Avon paid this sum plus interest from June 15, 1968. It did not challenge the deficiency assessment, nor did it contest the levy of interest from September 15. It asserted, however, that it was not liable for interest between June 15 and September 15, because the deficiency was not created until the excessive credit was claimed. It therefore sued to recover $1,479.03, the amount of interest assessed for that period. Both parties moved for summary judgment before Judge Motley. She granted the Government's motion, and Avon's appeal followed.
During the three-month period in dispute, Avon had unquestionably paid enough indeed, $17,000 more than enough to satisfy its 1967 tax liability. Moreover, 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. E. g., Vick v. Phinney, 414 F.2d 444, 448 (5th Cir. 1969); Time, Inc. v. United States, 226 F. Supp. 680, 686 (S.D.N.Y.), Aff'd on the basis of district court opinion, 337 F.2d 859 (2d Cir. 1964). Avon should not be required to pay interest for this period on a later-created deficiency, unless the Internal Revenue Code compels such an extraordinary result. We do not believe it does.
The IRS would have us charge Avon interest under I.R.C. § 6601(a).*fn4 That section provides: "If any amount of tax . . . 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." Manifestly, if we were to construe § 6601(a) literally, it would not even be apposite to this case. Avon's full tax was in fact paid "on or before the last date prescribed for payment," June 15, and so the premise of the provision is undercut.
Reading § 6601(a) more broadly, it provides that interest shall begin running when a tax becomes both due and unpaid. Avon's 1967 taxes became due on June 15, 1968, and they were paid in full from that date until a deficiency was created on September 15. It is the latter date from which interest should run.
This conclusion is supported by Central Fibre Products Co. v. United States, 115 F. Supp. 147 (N.D.Ill.1953). There the IRS granted the taxpayer a $65,000 refund in July 1947, but in February 1948 decided that it should have charged a $35,000 deficiency instead. The erroneous refund had thus created a gross deficiency of $100,000, and the Service, as in this case, attempted to collect interest on the full amount for the period before, as well as after, the improper refund was made. The court held, however, that for the period preceding the refund the taxpayer should pay interest only on the net deficit of $35,000 then actually existing; the remaining $65,000 was money which the taxpayer did not owe at that time, Id. at 150. The congruence of the case before us with Central Fibre is clear. Avon did not, during the period between June and September, 1968, owe the $98,000 on which it has been charged interest. Indeed, Avon's claim for a return of interest would seem to be an A fortiori application of Central Fibre. In that case, as the final audit established, the corporation originally underpaid its taxes, whereas Avon initially overpaid them by more than $17,000.
The cases on which the Government relies involved a situation much different from that of the later-created deficiency presented by Central Fibre and by the present case. In Babcock & Wilcox Co. v. Pedrick, 212 F.2d 645 (2d Cir. 1954), Cert. denied, 348 U.S. 936, 75 S. Ct. 355, 99 L. Ed. 733 (1955), the corporation's 1942 tax liability, composed of income and excess profits taxes, was limited by a ceiling of 80% of its income. The IRS found that the company had overpaid the excess profits levy because 10% of that component would be refunded after the war and caused a corresponding deficiency in its income tax. But the IRS did not rest content with the fact that at all times it had in its hands the 80% of Babcock & Wilcox's income to which it was entitled. Because interest did not begin to run as promptly on an overpayment as on a deficiency, the Service treated the taxes as separate and asserted that the company thus owed a net interest payment.
Stating that "the issue comes down in essence to the question whether (the taxes were separate)," Id. at 649, we upheld the IRS, and on that basis distinguished Central Fibre, where only one tax was involved, Id. at 650 n. 4. The same ground distinguishes Avon's case. Here, as in Central Fibre, there is only one tax involved, and there is no question whether an overpayment was so unrelated to a deficiency that the two could not be set off against each other before assessing interest. Before September ...