Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

IRS Can't Assess Underpayment Interest Where Overpayment Credits Exceed Deficiency

(Parker Tax Publishing October 2021)

The Fifth Circuit affirmed a district court's ruling that the statutory interest portion of proceeds awarded to a taxpayer in connection with the disposition of her stock in a corporation via a cash-out merger was properly classified as taxable interest income. However, on an issue of first impression, the Fifth Circuit reversed the district court and held that the IRS improperly assessed underpayment interest on the taxpayer's later-determined deficiency during a period where the IRS had use of enough credit-elect overpayment funds to satisfy that deficiency throughout the interest assessment period. Goldring v. U.S., 2021 PTC 319 (5th Cir. 2021).


In 1997, Jane Goldring held 120,000 shares of stock - roughly a 15 percent stake - in Sunbelt Beverage Corporation (Sunbelt), a privately held Delaware corporation. In August of 1997, Sunbelt engaged in a cash-out merger, which resulted in Goldring's Sunbelt shares being cancelled and converted into the right to receive $45.83 per share. Goldring sued Sunbelt and its directors in a Delaware court seeking a rescission of the merger and the restoration of her stake in Sunbelt or, in the alternative, the fair value of her Sunbelt shares as of the merger date plus interest and costs. In 2010, a Delaware court rejected Goldring's request for rescissory relief and instead awarded her the fair value of her shares as of the merger date, which the court determined to be $114.04 per share. The court also awarded Goldring court costs and expert fees. Finally, the Delaware court exercised its statutory discretion to award Goldring interest for the period between the merger date and the date the judgment was paid, calculated at the rate established under Delaware law.

On her 2010 tax return, Goldring reported the entire litigation award as income from the disposition of a capital asset - i.e., her Sunbelt shares - taxable as long-term capital gain. However, Goldring recognized that the IRS might subsequently determine that the interest portion of the award was ordinary income taxable at the higher ordinary income rate, which would render Goldring deficient on her 2010 taxes. In an attempt to avoid assessment of underpayment interest in the event of a later-determined deficiency, Goldring overpaid her reported 2010 tax liabilities by an amount sufficient to cover any later-determined deficiency for the 2010 tax year. She elected under Code Sec. 6402 and Reg. Sec. 301.6402-3(a)(5) to credit the overpayment forward to her estimated 2011 tax liabilities - an action known as a credit-elect overpayment. Goldring continued to make credit-elect overpayments on her tax returns through the 2016 tax year and consistently maintained overpayment balances with the IRS sufficient to cover any potential deficiency for the 2010 tax year.

In 2015, the IRS completed an audit of Goldring's 2010 tax return and determined that the interest award should have been reported as ordinary income. Based on this determination, the IRS concluded that Goldring had underpaid her 2010 taxes by $5,250,549 and issued a notice of deficiency. In August of 2017, the IRS assessed the following amounts against Goldring for the 2010 tax year: (1) the principal deficiency of $5,250,549 (2010 deficiency); and (2) underpayment interest of $603,335. The IRS retroactively satisfied the 2010 deficiency through application of Goldring's existing credit-elect overpayment balances and retroactively assessed underpayment interest. For the period April 15, 2011, through April 15, 2012, the IRS determined that Goldring's credit-elect overpayment for 2010 offset the 2010 deficiency and suspended the running of underpayment interest. However, the 2010 credit-elect overpayment was deemed by the IRS to be applied in payment of Goldring's 2011 tax liabilities on April 15, 2012, and was no longer available for offset against the 2010 deficiency moving forward. Therefore, the IRS determined that underpayment interest would run on the 2010 deficiency from April 16, 2012 until the deficiency was deemed satisfied, which occurred on April 15, 2017.

Goldring filed a refund claim with the IRS but the IRS took no action. Goldring then filed suit in a district court, seeking a refund of the underpayment interest amount and a declaration that the full amount of the litigation award, including the interest, was properly classified and taxed as a capital gain. The district court held that the interest award was properly classified as ordinary income and that the IRS properly assessed underpayment interest on Goldring's 2010 deficiency.

Goldring appealed to the Fifth Circuit. She argued that the interest award should be taxed as a capital gain because it was tied to the fair market value of her Sunbelt shares and that, under the origin-of-the-claim doctrine, the interest was part of a judgment intended to compensate her for the loss of a capital asset (the Sunbelt shares) and was therefore paid in lieu of her claim for restoration of those shares. Regarding the underpayment interest, Goldring based her argument on the use-of-money doctrine, which provides that a taxpayer is liable for interest only when the government does not have the use of the money it is lawfully due. According to Goldring, the IRS improperly assessed underpayment interest because it had continuous possession of her credit-elect overpayment funds sufficient to satisfy the 2010 deficiency.

The IRS acknowledged that it had continuous use of sufficient credit-elect overpayment funds to satisfy Goldring's 2010 deficiency from April 16, 2012, through April 15, 2017. However, the IRS argued that it was permitted under Code Sec. 6402(a) and (b), Code Sec. 6513(d), Reg. Sec. 301.6402-3(a)(5) and Reg. Sec. 301.6513-1(d), to assess underpayment interest during this period. The IRS further argued that the assessment of underpayment interest was proper under FleetBoston Fin. Corp. v. U.S., 483 F.3d 1345 (Fed. Circ. 2007). In FleetBoston, a corporate taxpayer overpaid its taxes for the 1984 and 1985 tax years and elected to credit each year's overpayment to the following year's tax liabilities. The IRS subsequently determined that the taxpayer's 1984 and 1985 tax returns were deficient. Although the taxpayer's overpayments exceeded the 1984 and 1985 deficiencies and were not needed to pay its taxes in subsequent years, the IRS nonetheless charged underpayment interest on the deficiencies. A majority of the Federal Circuit found that because the overpayments were designated as credit-elect overpayments, the funds could not be credited to any later-determined deficiency since under Code Sec. 6513(d) and Reg. Sec. 301.6402-3(a)(5), the IRS must apply credit-elect overpayments as payment of the taxpayer's estimated taxes for the following year. However, the FleetBoston dissent argued that under the use-of-money principle, underpayment interest does not accrue for any period the IRS possesses sufficient funds from the taxpayer to satisfy the later-determined deficiency. The dissent said the majority disregarded the fact that, throughout the period for which the IRS assessed underpayment interest, the IRS possessed funds belonging to the taxpayer in an amount exceeding the later-determined deficiency.


The Fifth Circuit affirmed the district court's ruling that Goldring's interest award was ordinary income but reversed the district court on the interest underpayment issue and ordered a refund of the underpayment interest to Goldring. In rejecting Goldring's assertion that the interest award was tied to the value of her shares and thus should not be considered ordinary income, the Fifth Circuit noted that the Delaware court calculated the interest portion of the award separately through the application of the Delaware statutory interest rate and that the Delaware court had statutory discretion to award interest and to select the rate at which interest was computed. Thus, the Fifth Circuit said, the interest was properly classified as ordinary income since under Delaware law the purpose of a statutory interest award is to fairly compensate the stockholder for her inability to use the fair value of her shares during a certain time period. The court also found that the origin-of-the-claim doctrine required that the interest be treated as ordinary income because it was awarded in lieu of what Goldring might have earned on the fair value of her shares for the period between the merger and the court's final judgment.

Turning to the interest underpayment issue, the Fifth Circuit noted that the application of the use-of-money principle to a scenario where, as here, the IRS assessed underpayment interest on a tax deficiency, even though it possessed credit-elect overpayment funds sufficient to satisfy that deficiency throughout the interest period, was an issue of first impression. The court observed, however, that in Avon Products, Inc. v . U.S., 588 F.2d 342 (2d Cir. 1978), the Second Circuit applied the use-of-money principle and concluded that interest may not run during any period the IRS possesses enough credit-elect overpayment funds to satisfy a later-determined deficiency. The Fifth Circuit also noted that several district courts have consistently applied the use-of-money principle to reach similar holdings. The Fifth Circuit also rejected the IRS's argument that it was authorized under the statute and regulations to assess underpayment interest against Golding. The court found that the provisions cited by the IRS did not address the IRS's ability to assess underpayment interest on a later-determined deficiency during periods where the IRS possesses credit-elect overpayment funds from the taxpayer sufficient to satisfy that deficiency. The court pointed out that in fact, the provisions relied upon by the IRS make no reference whatsoever to underpayment interest or Code Sec. 6601(a).

The Fifth Circuit agreed with the FleetBoston dissent. In the court's view, the government's argument - like the FleetBoston majority - fixated on the theoretical migration of credit-elect overpayment funds from one tax year to another, while ignoring the simple, undisputed fact that the IRS was never deprived of its use of the money Goldring owed it at any point during the assessment period. In the absence of clear statutory authority, the Fifth Circuit applied the established use-of-money principle and concluded that the IRS improperly assessed underpayment interest against Goldring.

For a discussion of the tax treatment of income from lawsuits, see Parker Tax ¶74,130. For a discussion of interest on underpayments of tax, see Parker Tax ¶261,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2021 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance