Tax Court Blesses a Taxpayer Designation of Payment (9/6/13)

I had intended to do a blog on the Tax Court decision in Dixon v. Commissioner, 141 T.C.; No. 3 (2013), here.  The background is that a taxpayer may generally designate how "voluntary" payments to the IRS gets applied among its various outstanding tax liabilities, but when not voluntary (I mean to be somewhat fuzzy here), the IRS may apply the payment in the best interest of the fisc.  There, in a reviewed opinion, the Tax Court held that, in a somewhat convoluted fact pattern, a corporation owing large amount of tax could receive money from its shareholders and pay it against its withholding obligations for the shareholders, thereby give the shareholder credit against their tax liabilities.  The shareholders, of course, could have paid their own tax liabilities directly, but they hoped to achieve collateral benefits by shuffling the payment through the corporation (one would be, they hoped, to have the income tax credit as of the date it should have been originally withheld and paid over, thereby avoiding the interim interest on their personal tax liability which they could not avoid with a direct payment).  But, the Stephen Olsen of the Procedurally Taxing Blog beat me to the punch and, actually, has done an excellent job, so I refer readers to that blog entry for a great discussion.  Tax Court Holds IRS Must Follow Corporation’s Designation on Tax Payment. (Procedurally Taxing Blog 9/6/13), here.

I do cut and paste below the Tax Court's Syllabus of the decision (which summarizes the majority decision, but refer readers also to Judge Holmes' dissent discussed in the Procedurally Taxing Blog:

Ps were criminally prosecuted for failure to file individual income tax returns for 1992-95. At the time, Ps were owners, officers, and employees of Tryco Corp., which failed to file employment tax returns and corporate income tax returns during this period. As part of a plea agreement with the Department of Justice, Ps agreed that their wrongdoing had inflicted a "tax loss" on the IRS of $61,021 and acknowledged that they could be required to make restitution of this amount. On advice of their attorney they transferred funds to Tryco with instructions that Tryco remit the funds to the IRS. In December 1999 Tryco remitted $61,021 to the IRS with a cover letter from Ps' attorney designating the payment as "payment of [Form] 941 taxes of the corporation" that was "to be applied to the withheld income taxes" of Ps for specified calendar quarters of 1992-95. In early 2000 Ps' accountants determined that Ps actually owed $30,202 more in individual income tax for 1992-95 than Tryco had remitted to the IRS in December 1999. Accordingly, Ps transferred additional funds to Tryco, and in June 2000 Tryco remitted to the IRS an additional check for $30,202. The cover letter from Ps' attorney stated that the payment was "submitted as a pre-assessment designated payment of [Form] 941 taxes of the corporation" which "represents the withheld income taxes of * * * [Ps]" for the fourth quarter of 1995. Ps argued for a downward adjustment to their sentence and for a probated sentence on the ground that they had remitted taxes to the IRS in excess of the "tax loss" determined in the plea agreements. They were sentenced to probation and a small fine. 

Subsequently, R filed a notice of intent to levy on Ps' assets in satisfaction of their assertedly unpaid 1992-95 income tax liabilities. Ps were granted a collection due process (CDP) hearing in which they challenged the levy on the ground that Tryco's 1999-2000 remittances had discharged their 1992-95 income tax liabilities in full. The Appeals officer upheld the levy, concluding that Tryco's 1999-2000 payments "were not withheld at the source and * * * cannot be designated to the withholding of a specific employee." Ps timely petitioned under I.R.C. sec. 6330(d)(1) for review of this determination. 

1. Held: Ps are not entitled to a credit under I.R.C. sec. 31(a) for the $91,223 Tryco remitted to the IRS in 1999-2000 because funds in that amount were not "actually * * * withheld at the source" by Tryco from Ps' wages during 1992-95. See sec. 1.31-1(a), Income Tax Regs. 

2. Held, further, this Court has subject matter jurisdiction to determine whether R was obligated to honor Tryco's designation of its 1999-2000 delinquent employment tax payments toward Ps' income tax liabilities for 1992-95. 

3. Held, further, there is no need to decide the applicable standard of review in these CDP appeals because, under Ps' alternative argument, R's proposed collection action would be impermissible either under an abuse of discretion standard or under a de novo standard. 

4. Held, further, R was required to honor Tryco's designation of its 1999-2000 delinquent employment tax payments towards Ps' income tax liabilities for 1992-95. Because those payments discharged Ps' 1992-95 income tax liabilities in full, R's proposal to levy on their assets to collect this tax a second time was an abuse of discretion.

I do want also to note that the majority cites our LEXIS-NEXIS Tax Crimes book published by LEXIS-NEXIS here:

In their plea agreements, executed February 7, 2000, petitioners acknowledged that they "may be required to make full restitution for the losses sustained by the Internal Revenue Service as a result of the offenses of conviction." See generally U.S. Sentencing Guidelines Manual sec. 5E1.1 (2012) (discussing restitution); John A. Townsend, et al., Tax Crimes 305-306 (2008). Under the plea agreements the magnitude of the "tax loss" would be taken into account for sentencing purposes.