SECTION 2. BACKGROUND

.01 Interest computations in general.

(1) Section 6601(a) provides, in general, that if any amount of tax imposed by the Code is not paid on or before the last date prescribed for payment, interest on such amount must be paid for the period from such last date to the date paid at the underpayment rate established under § 6621.

(2) Section 6611(a) provides that interest must be allowed and paid on any overpayment in respect of any internal revenue tax at the overpayment rate established under § 6621. Section 6611(b)(1) provides that, in the case of a credit, interest must be allowed and paid from the date of the overpayment to the due date of the amount against which the credit is taken.

Change in Accounting Method for Deferred Compensation

Notice 99–16

This notice provides procedures for implementing a change in method of accounting to comply with § 404(a)(11) of the Internal Revenue Code, regarding the payment of deferred compensation.

Section 404(a)(11) was added to the Code by § 7001 of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub. L. No. 105-206, 112 Stat. 685, 827 (July 22, 1998), effective for taxable years ending after July 22, 1998. Section 404(a)(11) provides that, for purposes of determining under § 404 whether compensation of an employee is deferred compensation and when deferred compensation is paid, no amount is treated as received by the employee, or paid, until it is actually received by the employee. Section 404(a)(11) overturns the decision in Schmidt Baking Co. v. Commissioner, 107 T.C. 271 (1996), in which the court held that a § 83(a) income inclusion event upon securitization of vacation and severance pay benefits with a letter of credit constitutes receipt of those benefits by employees for purposes of determining whether an employer’s deduction for the benefits is subject to § 404.

Section 7001(b) of the RRA provides that a taxpayer changing its method of accounting to comply with § 404(a)(11) for its first taxable year ending after July 22, 1998, will be treated as making a change initiated by the taxpayer with the consent of the Commissioner. It further provides that the change will be made with a § 481 adjustment that will be taken into account ratably over a 3-taxable-year period beginning with the first taxable year ending after July 22, 1998.

A taxpayer changing its method of accounting for its first taxable year ending after July 22, 1998, to comply with § 404(a)(11) must follow the automatic change in accounting method provisions of Rev. Proc. 98–60, 1998–51 I.R.B. 16, with the following modifications:

However, if the taxpayer is under examination, before an appeals office, or before a federal court with respect to any income tax issue, the taxpayer must provide a copy of the Form 3115, Application for Change in Accounting Method, to the examining agent(s), appeals officer, or counsel for the government, as appropriate, at the same time that it files the copy of the Form 3115 with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.

(2) The § 481(a) adjustment period generally is three taxable years (as opposed to four taxable years as specified in section 5.04(1) of Rev. Proc. 98–60).

(3) A taxpayer that, on or before May 28, 1999, files its original federal income tax return for its first taxable year ending after July 22, 1998, may comply with the filing requirement in section 6.02(2)(a) of Rev. Proc. 98–60 or with the following filing requirement. The taxpayer must complete and file a Form 3115 in duplicate. The original must be attached to the taxpayer’s amended federal income tax return for the taxpayer’s first taxable year ending after July 22, 1998. This amended return must be filed no later than July 27, 1999. A copy of the Form 3115 must be filed with the national office (at the address specified in section 6.02(6) of Rev. Proc. 98–60) no later than when the taxpayer’s amended return is filed.

(4) Section 7 of Rev. Proc. 98–60 does not apply; a taxpayer does not receive audit protection in connection with this change.

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 98–60 is modified and amplified to include this automatic accounting method change in the Appendix.

DRAFTING INFORMATION

The principal author of this notice is Robert Testoff of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Mr. Testoff at (202) 622-4800 (not a toll-free call).

(1) The scope limitations in section 4.02 of Rev. Proc. 98–60 do not apply.

March 29, 1999 10 1999–13 I.R.B.

Section 6611(b)(2) provides that, in the case of a refund, interest must be allowed and paid from the date of the overpayment to a date preceding the date of the refund check by not more than 30 days.

.02 Interest rates in general.

(1) For interest accruing before January 1, 1999, § 6621(a)(1) provides that the overpayment rate is the federal short-term rate (determined under § 6621(b)) plus 2 percentage points. To the extent that an overpayment of tax by a corporation exceeds $10,000, the overpayment rate is the federal short-term rate plus 0.5 percent.

(2) Section 6621(a)(2) provides that the underpayment rate is the federal shortterm rate (determined under § 6621(b)) plus 3 percentage points. Special rules in § 6621(c) increase the underpayment rate on large corporate underpayments.

.03 Interest for overlapping periods.

(1) Section 6621(d), as enacted by the RRA on July 22, 1998, provides that, to the extent that for any period interest is payable under subchapter A (§§ 6601 and 6602) and allowable under subchapter B (§ 6611) on equivalent underpayments and overpayments by the same taxpayer of tax imposed by the Code, the net rate of interest under § 6621 on such amounts is zero for such period.

(2) The Conference Report, H. R. Conf. Rep. No. 599, 105th Cong., 2d Sess. 257 (1998), accompanying the RRA provides that the net interest rate of zero is applied without regard to whether the overpayment or underpayment is currently outstanding. However, each overpayment or underpayment is considered only once in determining whether equivalent amounts of overpayment and underpayment overlap for a particular period. That report also provides that the net interest rate of zero applies even when special rules increase the rate of interest for large corporate underpayments under § 6621(c), or decrease the rate of interest for large corporate overpayments under § 6621(a).

(3) Section 6621(d) generally applies to interest for periods (calendar quarters) beginning after July 22, 1998 ( i.e., interest accruing on or after October 1, 1998). See H. R. Rep. No. 364 (Part 1), 105th Cong., 1st Sess. 64 (1998); S. Rep. No.

174, 105th Cong., 2d Sess. 62 (1998); H. R. Conf. Rep. No. 599, 105th Cong., 2d Sess. 257 (1998). However, § 3301(c)(2) of the RRA provides that § 6621(d) applies to interest for periods beginning before July 22, 1998 ( i.e., interest accruing before October 1, 1998), provided certain conditions are met. First, both periods of limitation applicable to the tax underpayment and to the tax overpayment (as described in section 2.04 of this revenue procedure) must have been open on July 22, 1998. Second, the taxpayer must: (a) reasonably identify and establish periods of tax overpayments and underpayments for which the net interest rate of zero applies, and

(b) not later than December 31, 1999, request the Secretary of the Treasury to apply § 6621(d) to such periods.

.04 Applicable periods of limitation. The applicable periods of limitation are as follows:

(1) Underpayment interest. A claim for credit or refund of interest paid on an underpayment pursuant to § 6601 or 6602 generally must be filed within 3 years from the time the tax return was filed or 2 years from the time the interest was paid, whichever period expires later, pursuant to § 6511.

(2) Overpayment interest. A claim for payment of additional interest allowable on an overpayment pursuant to § 6611 must be filed within the 6-year period in which a suit must be filed pursuant to 28 U.S.C. §§ 2401 and 2501. See Rev. Rul. 56–506, 1956–2 C.B. 959.