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refund action under section 7405. The Court of Appeals agreed
with cases holding that the payment of tax extinguishes the
assessment and that the assessment is not somehow revived when
the Commissioner mistakenly issues a refund. In Clayton v.
Commissioner, T.C. Memo. 1997-327, the Court observed that
whether the refund is a rebate or nonrebate refund depends on
what it represents: If the refund reflects a recalculation of
the taxpayers’ tax liability, it is a rebate refund; if the
refund is unrelated to a recalculation of tax liability, it is a
nonrebate refund.
In the case at hand, the tentative refunds were not issued
by accident, see O’Bryant v. United States, supra at 342, or
because of an error unrelated to the recalculation of tax
liability, see Clayton v. Commissioner, supra. The tentative
refunds were issued on the basis of petitioner’s recalculation of
the tax owed by the group for 1981 and 1984. In 1987, petitioner
decided that it had sustained a $29,286,968 CNOL, which could be
carried back to, and deducted from, the affiliated group’s 1984
tax year income, which in turn freed credits claimed in 1984 to
be carried back to 1981. See sec. 172; sec. 1.1502-21, Income
Tax Regs. To give effect to its calculations, petitioner applied
for and received a tentative carryback and refund adjustment
pursuant to section 6411. Thus, when petitioner filed the
application for tentative carryback adjustment, it substantively
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