Allocation of Employment Taxes Between Trust Fund and NonTrust Fund Portions (6/28/13)

In Westerman v. United States, 718 F.3d 743 (8th Cir. 2013), here, the Eighth Circuit affirmed the district court's grant of summary judgment in a trust fund recovery penalty ("TFRP") case.  Although the decision blazes no new trails, it does offer a reasonable, if flowery, discussion of the importance of designating how payments of employment taxes are to be applied.  

The pattern was typical.  The corporate employer started experiencing cash flow problems and only sporadically forwarded checks for its accumulating employment taxes.  When forwarding the checks, the corporation did not designate how the IRS should apply the payments among the components of the employment taxes.  The components are the trust fund portion (consisting of the taxes withheld from the employees -- i.e., the employees' income tax withheld and the employees' share of FICA, and Medicare tax) and the nontrust fund portion (consisting of the employer's share of FICA and Medicare tax).  This division between the trust fund portion and the nontrust fund portion is important, because the responsible person(s) in the corporation can be assessed the TFRP for the unpaid trust fund portion.  As is typically the case, in the absence of designation, the IRS applied the payments to the nontrust fund portion for delinquent employment taxes.  The IRS assessed the unpaid trust fund tax liability against Mr. Westerman, the president and owner of the corporation.  He paid the amount in full, apparently $35,824.45.  In the litigation, He agreed that he was liable for $28,955.15 of that amount but urged that the IRS should have allocated the payments mentioned above to the trust fund tax liability so that he was not liable for the balance.

The Court opens the discussion with a discussion of his liability for the TFRP.  I find portions of that discussion confusing, so I forgo reviewing that discussion.  I understand it enough to know that there is nothing new or particularly elucidating in the discussion.  In broad strokes, a person is liable for the TFRP is that person had the practical authority and ability to insure the TFRP is paid and, in practical terms, caused other creditors to be paid when the TFRP  was not paid.  I do wonder why the Court felt it necessary to engage in the liability discussion since Mr. Westerman appears to have conceded his liability (he was, after all, the president and sole owner) and was only concerned about the IRS's allocation of the corporate payments of employment taxes.

So, I turn to that allocation issue, which involves only approximately $7,000.  The Court first confirms that, in the absence of the employer's designation of how to allocate the employment tax payments, the IRS may "apply the payment first toward the employer's non-trust fund liabilities for the quarter and, only once that obligation is fully satisfied, toward the quarter's trust fund liabilities."  Mr. Westerman argued that, even in the absence of a designation, the payment of employment taxes should be applied ratably to the various components of both the trust fund and nontrust fund portions of the employment taxes.  Here is the Court's discussion of that issue (footnotes omitted):

Tax Procedure Aspects of SEC Disgorgements For Taxes Underpaid (6/17/13)

Yesterday, I discussed on my Federal Tax Crimes Blog a case holding that the SEC can seek disgorgement of federal tax underpaid if it relates to securities fraud.  The case is  SEC v. Wyly, 2013 U.S. Dist. LEXIS 83897 (SD NY 6/13/13), here.  My blog on the case SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (6/16/13), here.

Today, I want to follow through on the tax procedure side if the court were ultimately to order disgorgement which, presumably, would be paid to the IRS.  What would the IRS do to the money.  Well, the IRS could apply it to the tax the Wylys underpaid (the basis for the disgorgement).  But, the IRS will first have to determine that it has an open statute of limitations to make the assessment.  Why, because Section 6401(a), here, treats as an overpayment any amount "assessed" after the statute of limitations.  Overpayments are refundable to the taxpayer.  So, unless the IRS has an open statute of limitations, any disgorgement attributable to the Wylys tax would have to be returned to them.  So, does the IRS have an open statute of limitations?  Only if the Wylys fraudulently underreported their taxes in question.  Perhaps that is the underlying theory of the SEC suit, although it is not clear from the case.  Indeed, the Court notes at the end that the parties could not make any definitive statement on that issue.  (Please refer to the case opinion and my Federal Tax Crimes blog discussion.)

Now, this does raise some collateral issues that the true afficionado of tax procedure would relish.  What if fraud were not involved so that the IRS could not assess but the IRS wanted to keep the money anyway?.  The clear import of Section 6401(a) seems to be that the IRS should not be able to retain any tax assessed or collected after the assessment statute of limitations.  Assuming the predicate (no fraud), this disgorgement treated as recovery of a tax when the IRS receives it would fall squarely within the scope of Section 6401(a).  What if the IRS does not assess and just holds on to the money, not wanting to return the money to the Wylys?  I am not sure what authority the IRS would have to do that, but as they say the golden rule may apply (he who has the gold makes the rules).  I suppose that the taxpayer would have to perhaps file a Tucker Act case in the Court of Federal Claims, perhaps combined with a refund suit (alternative pleadings, with the argument on the refund suit that the monies came from the SEC to the IRS as payment for -- or recompense for -- a tax and would have to be treated as a tax which would be refundable, even if the IRS did not book it as a tax collected).

Ninth Circuit Rejects Government Argument for a Federal Common Law for Nominee and Alter Ego Liens (6/15/13)

In Fourth Investments LP v. United States, ___ F.3d ___, 2013 U.S. App. LEXIS 11905 (9th Cir. 2013), here, the Ninth Circuit provides some helpful general discussion of the law regarding nominee liability, including a key holding that some Federal common law does not apply to the determination.  The issue arises in many contexts, but (as noted in a footnote), this is a variation of the typical context in which it arises (citing Teresa Dondlinger Trissel, A Uniform Standard for Alter Ego and Nominee Tax Litigation, 58 Fed. Law. 38, 38 (2011).):

Typical nominee . . . scenarios start with people falling behind on their taxes. Facing the loss of their homes or businesses to the federal government [for the taxes owed] some taxpayers take steps to try to separate themselves from their valuable assets. The taxpayer's house may be deeded to a friend, although the taxpayer continues to reside there. Or perhaps all the taxpayer's cash disappears, yet the taxpayer's personal bills are being paid by a closely-held and controlled corporation. The factual scenarios are as creative and varied as are taxpayers themselves. However, the tax collector's reaction is usually consistent: upon discovering that a third party is being used to thwart the IRS's collection efforts, the government will file a notice of a federal tax lien identifying the third-party target as the taxpayer's nominee or alter ego and will attempt to satisfy the tax liability from assets held by the third party.

Here are some key excerpts that I think are helpful students in understanding the nominee or alter ego concept:  These are quotes from the case, but I strip out the case citations except for the Supreme Court decision in Drye] and most of the quotation marks in order to provide a more readable narrative version:

A nominee is one who holds bare legal title to property for the benefit of another. Although the Supreme Court has clearly indicated that the IRS may impose nominee tax liens, it has provided only limited guidance concerning how such nominee determinations are to be made. However, the Court has explained that application of the federal tax lien statutes involves questions of both state and federal law. The federal tax lien statute itself creates no property rights but merely attaches consequences, federally defined, to rights created under state law. Consequently, in making nominee determinations in a tax lien context, we must look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach. After determining that the taxpayer has a property interest under state law, we then look to federal law to determine whether the taxpayer's state-delineated rights qualify as property or rights to property within the compass of the federal tax lien legislation. 

The Government contends that nominee doctrine should be governed by federal common law rather than state law. We reject this position, just as it has been uniformly rejected by our sister circuits and by nearly every federal court that has examined the issue.  [The cases are assembled and discussed in footnote 4 which I omit but which can be viewed at the link.] 

Statutes of Limitations on Refund Claims - Complexities (6/9/13)

The statutes of limitations on refunds are complex.  The key Code section is 6511, here.  The subsections implicated are (a) and (b)(2).  The rules are -- as I tried to simplify them in my Tax Procedure book -- as follows:

Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules.

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the time the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn.\ 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).

In my book, I use various examples to illustrate the application and interface of these limitations periods.  I won't go through all of them now, but will address some that relate to a recent IRS internal guidance, ECC 201321022 (5/2/13), here.  I provide the first four examples without the footnotes and then provide the fourth example with the footnote discussing ECC 201321022.

Example 1: The taxpayer files his Year 01 tax return on 4/15/02 and pays the indicated tax of $100.  In January of Year 05, the taxpayer discovers he overpaid the Year 01 tax by $50.  He may file a timely claim for refund any time on or prior to 4/15/05 and receive a full refund.  He satisfies both rules. 

Example 2: Assume the same facts, except for some reason, the taxpayer does not file the claim for refund until 6/01/05.  Both of the rules would prohibit the IRS from granting the claim.  First, he has not filed a claim for refund within the period provided in the first rule.  Second, the amount he seeks to have refunded was paid beyond the three year period before the filing of the claim, as provided in the second rule.