IRS Headnote

Interest is allowable in accordance with the provisions of section 6611 of the Internal Revenue Code of 1954 on an overpayment of income tax where the tax was paid by a regulated investment company in respect of undistributed capital gains pursuant to section 852(b)(3) of the Code and the overpayment is refunded to a shareholder which is exempt from taxation. The date of overpayment, for purposes of computing the amount of interest allowable, is the last day an exempt shareholder would be required to file a return were it not exempt.

Reference:

Sec. 852 Sec. 6513 Sec. 6611

Full Text

Advice has been requested with respect to whether interest should be allowed on a refund to an exempt organization of income tax paid by a regulated investment company on capital gains under section 852(b)(3) of the Internal Revenue Code of 1954 and, if interest is allowable, the date of overpayment to be used for computing the amount of interest.

Section 852(b)(3)(A) of the Code imposes a tax of 25 percent on the undistributed capital gains of a regulated investment company. Section 852(b)(3)(D) of the Code, effective for taxable years beginning after December 31, 1956, provides that the regulated investment company may designate an amount of undistributed capital gains to each shareholder of the company.

Such section further provides that each shareholder must include in his gross income as a long-term capital gain the amount of undistributed capital gains designated to him and that he shall be deemed to have paid a tax equal to 25 percent of such amount. Section 1.852-4(b)(2)(ii) of the Income Tax Regulations provides that such shareholder is entitled to a credit or refund of the tax so deemed paid in accordance with the rules provided in section 1.852-9(c)(2) of the regulations. Thus, every shareholder is considered to be a taxpayer for purposes of section 852(b)(3) of the Code, and no distinction is made as to shareholders exempt from taxation under some other statutory provision.

Under section 852(b)(3)(D) of the Code every shareholder of a regulated investment company is deemed to have paid tax. As a shareholder an exempt organization is treated as having in fact paid tax, though by virtue of its exemption it owed no tax. Having thus been accorded the status of a taxpayer, an exempt organization must proceed in the manner of a taxpayer in order to obtain a refund of the resulting overpayment. The procedures for and limitations on its claiming a refund are the same as those applicable to claims for credit or refund of overpayments of income tax by other taxpayers. See section 1.852-9(c)(2)(ii) of the regulations, and section 301.6402-3 of the Regulations on Procedure and Administration.

Section 6611(a) of the Code provides that interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax at the rate of six percent per annum. Section 6611(b)(2) of the Code provides that such interest shall be allowed and paid, in the case of a refund, from the date of the overpayment to a date preceding the date of the refund check by not more than 30 days.

The amount of tax paid by a regulated investment company with respect to undistributed capital gains which is required by section 852(b)(3)(D) of the Code to be included in the shareholder's computation of long-term capital gains for the taxable year, constitutes an advance payment for purposes of section 6513(a) of the Code (section 1.852-9(c)(2) of the regulations). Section 301.6611-1(d) of the Regulations on Procedure and Administration provides, in part, that in the case of an advance payment of tax, the provisions of section 6513 of the Code, applicable in determining the date of payment of tax for purposes of the period of limitations on credit or refund, shall apply in determining the date of overpayment for purposes of computing interest thereon. Subsection (a) of section 6513 of the Code provides, in part, that payment of any portion of the tax made before the last day prescribed for the payment of the tax shall be considered made on such last day. Under section 6151 of the Code the date prescribed for payment is the date prescribed for the filing of a return.

Accordingly, interest is allowable in accordance with the provisions of section 6611 of the Code on an overpayment of income tax where the tax was paid by a regulated investment company pursuant to section 852(b)(3) of the Code in respect of undistributed capital gains and the overpayment is refunded to a shareholder which is exempt from taxation. The date of overpayment, for purposes of computing the amount of interest allowable, is the last day an exempt shareholder would be required to file a return were it not exempt.