The Court sets out the gravamen of the two side's arguments as follows:
The government seizes upon the plain meaning of the word "payment," arguing that there can be no overpayment until there has actually been a payment—and there was no payment until Ford requested that its deposits be converted into tax payments. Prior to that point, Ford's remittances were, at its own request, treated as deposits in the nature of a cash bond and Ford could have requested their return at any time. As Revenue Procedure 84-58 § 2.03 clearly states, "[a] deposit in the nature of a cash bond is not a payment of tax." Accordingly, the government argues that it does not owe Ford interest from the date of the original remittances because they were indisputably made only as deposits, not as payments of any tax obligation.
But, wait, this taxpayer argued.
Ford counters that the "most appropriate starting point" is not § 6611, but rather § 6601, the provision that governs underpayment interest. First, Ford contends that these two sections should be interpreted symmetrically because they both use very similar language, compare § 6601 ("date paid"), with § 6611 ("date of the overpayment"), and both deal with the accrual of interest on tax payments. Second, Ford notes that under § 6601(a), only a "payment" stops the accrual of underpayment interest against a taxpayer, and since a deposit in the form of a cash bond stops the accrual of interest from the date it is remitted, Rev. Proc. 84-58 § 5.01, that deposit must be considered a payment under § 6601(a). And because a deposit is treated as a payment for underpayment interest purposes under § 6601, it should also be considered a payment for overpayment interest purposes under § 6611. In other words, if a mere deposit stops the accrual of underpayment interest, then a mere deposit must also start the accrual of overpayment interest.For convenience, the links to §§ 6601 and 6611 are here and here.
The taxpayer's argument is textually clever. But the Court found the Government's argument more persuasive -- i.e., it said it found both arguments plausible, but it handed victory to the Government.
Some points the Court makes along the way are interesting.
1. The Court growls around about the Government's point that prior law, addressed in Rev. Proc. 84-58 "does not even contemplate" that a taxpayer can request to convert a deposit to a payment. The Government urged that the application of a deposit to a payment at the taxpayer's request is the equivalent of returning the deposit to the taxpayer and receiving the amount back as a payment, thus supporting the Government's position that interest accrues only from the date of payment rather than during the period the amount was on deposit. The Court called the Government's reading "strained" and taxpayer's reading superior, but still gives the Government the victory.
2. As to the effect of the Revenue Procedure, the Court says:
Ford relies heavily on Revenue Procedure 84-58, the only published guidance bearing on the meaning of "date of the overpayment" in § 6611(b)(1). Needless to say, relying upon a Revenue Procedure is quite different from relying upon a Supreme Court decision. A revenue procedure is at most an interpretive aid: it is "well-established that, as a general rule, 'the I.R.S.'s Revenue Procedures are directory not mandatory.'" Estate of Shapiro v. C.I.R., 111 F.3d 1010, 1017 (2d Cir. 1997) (quoting Estate of Jones v. C.I.R., 795 F.2d 566, 571 (6th Cir. 1986)). A revenue procedure does not enjoy the status of a law or regulation and does not bind courts. Xerox Corp. v. United States, 41 F.3d 647, 657-58 (Fed. Cir. 1994). Rather, it is a "mere internal procedural guide" that typically does not even bind the IRS itself. See Shapiro, 111 F.3d at 1017-18; see also Riley v. United States, 118 F.3d 1220, 1222 (8th Cir. 1997). Accordingly, "the 'failure to comply with [a] Revenue [Procedure] . . . is not dispositive . . . .'" Shapiro, 111 F.3d at 1017 (quoting Virginia Educ. Fund v. Comm'r, 799 F.2d 903, 904 (4th Cir. 1986)).I provide below my discussion of Section 6603 and its relation to prior law (footnotes omitted):
Under§ 6603, the bond / payment distinction is retained but the economic difference is mitigated somewhat. Section 6603 now codifies and modifies the bond procedure as follows:
(1) The taxpayer may make a cash deposit with respect to any tax that has not been assessed at the time of the deposit. This is a codification of practice under Rosenman.
(2) When and to the extent that the deposit is applied against a tax liability, the amount is deemed a payment at the time of the original deposit. Under the interest accrual rules discussed above, this will suspend the running of interest on the amount of the deposit just as if it had been designated a payment at the time. This is a codification of practice under Rosenman.
(3) To the extent not yet applied in payment of a tax, the IRS will return the amount of the deposit. This is a codification of practice under Rosenman.
(4) Any deposit returned under (3) will carry interest to the extent attributable to a “disputable tax” during the period of the deposit. The interest rate is the federal short term rate (i.e., 3% less than the overpayment / refund rate for individuals). This is a taxpayer favorable modification of practice under the Rosenman rule which did not allow interest on any portion of a deposit that is returned to the taxpayer (and correspondingly did not suspend the running of interest on any underlying tax). In effect, under the prior Rosenman practice, the Government had use of the taxpayer’s money for a period for which it did not pay rent via interest. Now, at least to the extent of a disputable tax, the taxpayer can get interest on return of the deposit. The taxpayer is allowed to make a reasonable estimate as to the maximum tax on disputable items. Disputable items, in turn, are defined as items as to which the taxpayer has both a reasonable basis and a reasonable belief that the IRS could have a reasonable basis to disallow the taxpayer’s position. The reasonable estimate is at least the amount the IRS has claimed in a 30-day letter.For super tax procedure enthusiasts, I strongly recommend Judge Allegra's opinion in Principal Life Insurance Company v. United States, 95 Fed. Cl. 786, 788 (2010), here. The case is not directly in point, but does deal with some of the payment or deposit issues and is masterfully reasoned and written.