[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1314(c)-1]

[Page 644-645]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1314(c)-1  Adjustment unaffected by other items.

    (a) The amount of any adjustment ascertained under Sec. 1.1314(a)-1 
or Sec. 1.1314(a)-2 shall not be diminished by any credit or set-off 
based upon any item other than the one that was the subject of the 
adjustment.
    (b) The application of this section may be illustrated by the 
following examples:

    Example 1. In the example set forth in paragraph (e) of Sec. 
1.1314(a)-1, if, after the amount of the adjustment had been 
ascertained, the taxpayer, filed a refund claim for the amount thereof, 
the Commissioner could not diminish the amount of that claim by 
offsetting against it the amount of tax which should have been paid with 
respect to the $6,000 interest item omitted from gross income for the 
year 1949; nor could the court, if suit were brought on such claim for 
refund, offset against the amount of the adjustment the amount of tax 
which should have been paid with respect to such interest. Similarly, 
the amount of the refund could not be increased by any amount 
attributable to the taxpayer's failure to deduct the $4,500 interest 
paid in the year 1949.
    Example 2. Assume that a taxpayer included in his gross income for 
the year 1953 an item which should have been included in his gross 
income for the year 1952. After the expiration of the period of 
limitations upon the assessment of a deficiency or the allowance of a 
refund for 1952, the taxpayer filed a claim for refund for the year 1953 
on the ground that such item was not properly includible in gross income 
for that year. The claim for refund was allowed by the Commissioner and 
as a result of such determination an adjustment was authorized under 
section 1311 with respect to the tax for 1952. If, in such case, the 
Commissioner issued a notice of deficiency for the amount of the 
adjustment and the taxpayer contested the deficiency before the Tax 
Court of the United States, the taxpayer could not in such proceeding 
claim an offset based upon his failure to take an allowable deduction 
for the year 1952; nor could the Tax Court in its decision offset 
against the amount of the adjustment any overpayment for the year 1952 
resulting from the failure to take such deduction.

    (c) If the Commissioner has refunded the amount of an adjustment 
under section 1311, the amount so refunded may not subsequently be 
recovered by the Commissioner in any suit for erroneous refund based 
upon any item other than the one that was the subject of the adjustment,

    Example: In the example set forth in paragraph (e) of Sec. 
1.1314(a)-1, if the Commissioner had refunded the amount of the 
adjustment, no part of the amount so refunded could subsequently be 
recovered by the Commissioner by a suit for erroneous refund based on 
the ground that there was no overpayment for 1949, as the taxpayer had 
failed to include in gross income the $6,000 item of interest received 
in that year.

    (d) If the Commissioner has assessed and collected the amount of an 
adjustment under section 1311, no part thereof may be recovered by the 
taxpayer in any suit for refund based upon any item other than the one 
that was the subject of the adjustment.

    Example: In example (2) of paragraph (b) of this section, if the 
taxpayer had paid the amount of the adjustment, he could not 
subsequently recover any part of such payment in a suit for refund based 
upon the failure to take an allowable deduction for the year 1952.

    (e) If the amount of the adjustment is considered an overpayment, it 
may be credited, under applicable law and regulations, together with any 
interest allowed thereon, against any liability in respect of an 
internal revenue tax on the part of the person who made such 
overpayment. Likewise, if the amount of the adjustment is considered as 
a deficiency, any overpayment by the taxpayer of any internal revenue 
tax may be credited against the amount of such adjustment in accordance 
with the applicable law and regulations thereunder. (See section 6402 
and the corresponding provisions of prior revenue

[[Page 645]]

laws.) Accordingly, it may be possible in one transaction between the 
Commissioner and the taxpayer to settle the taxpayer's tax liability for 
the year with respect to which the determination is made and to make the 
adjustment under section 1311 for the year with respect to which the 
error was made or for a year which is affected, or treated as affected, 
by a net operating loss deduction or a capital loss carryover from the 
year of the error.

[T.D. 6500, 25 FR 12040, Nov. 26, 1960]

       Involuntary Liquidation and Replacement of Lifo Inventories