588 F.2d 342 (2nd Cir. 1978), 112, Avon Products, Inc. v. United States

Docket Nº:112, Docket 78-6078.
Citation:588 F.2d 342
Party Name:AVON PRODUCTS, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
Case Date:November 20, 1978
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 342

588 F.2d 342 (2nd Cir. 1978)

AVON PRODUCTS, INC., Plaintiff-Appellant,


UNITED STATES of America, Defendant-Appellee.

No. 112, Docket 78-6078.

United States Court of Appeals, Second Circuit

November 20, 1978

Argued Oct. 30, 1978.

Page 343

Robert Feldgarden, Washington, D.C. (McClure & Trotter, Washington, D.C., of counsel), for plaintiff-appellant.

Frederick P. Schaffer, Asst. U. S. Atty., S.D. N. Y. (Robert B. Fiske, Jr., U. S. Atty., Peter C. Salerno, Asst. U. S. Atty., New York City, of counsel), for defendant-appellee.

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, 1 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. 2 The taxpayer elected to credit that amount against the installment of its estimated 1968 income tax due the same day. 3

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...

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