Good Tax Court Opinion on Interest Consequences of Distinction between Deposits and Payments (11/2/21)

In Hill v. Commissioner, T.C. Memo. 2021-121, GS here, Judge Lauber held that a portion of a remittance labeled the taxpayer as a deposit will be treated under the interest rule for deposits under § 6603 rather the interest rule than for overpayments.  Judge Lauber states nicely the issue and holed in the opening paragraphs (footnote omitted):

            Currently before the Court is petitioner’s motion to redetermine interest under section 7481(c) and Rule 261.  In 2012 petitioner remitted [*2] to the Internal Revenue Service (IRS or respondent) a check for $10,263,750, designating the remittance as a “deposit” to be applied toward his anticipated gift tax liability for 2011. In a stipulated decision entered July 19, 2019, we determined a gift tax deficiency of $6,790,000 for 2011 and no overpayment for any year. After our decision became final, the IRS sent petitioner a check for $3,473,750, the amount of his excess deposit, but without any interest.

            Respondent concedes that petitioner is allowed interest on the excess deposit, and he computes the interest due as $218,122, calculated using the Federal short-term rate. See sec. 6603(d)(4) (cross-referring to section 6621(b)). But respondent contends that we lack jurisdiction to redetermine interest under section 7481(c), which permits reopening a case for this purpose only where “the Tax Court finds under section 6512(b) that the taxpayer has made an overpayment.” In respondent’s view, petitioner made a deposit, not a payment of tax, and our decision did not determine any “overpayment.”

            Disavowing his repeated designations of the remittance as a “deposit,” petitioner contends that the $10,263,750 check constituted a “payment” of gift tax. And he insists that our decision in effect determined an “overpayment,” because it  [*3] included the parties’ below-the-line stipulation that petitioner had a “prepayment credit” of $10,263,750 that would be “applied to * * * [his] tax year 2011 gift tax liability.” From these premises petitioner concludes, not only that we have jurisdiction to redetermine interest, but also that he is due interest of $1,267,323, the sum calculated using the Federal short-term rate plus three percentage points, the interest rate  specified for “overpayments.” See sec. 6621(a)(1). Concluding that respondent has the better argument, we will deny petitioner’s motion.

I recommend the full opinion for its great discussion of the history of the deposit/payment distinction and the operation of § 6603 designed to somewhat mitigate the difference in interest for deposits and payments.

In addition, the opinion has some nice discussion of parties’ stipulations in the Tax Court decision document (the decision document being analogous to a judgment in district courts).  Basically, there will sometimes be parties' stipulations below the line which is not part of the holding of the court– that is below the Tax Court Judges’ signature.  The Tax Court case to which this proceeding related was to determine the tax liability.  The tax liability was determined above the line.  The amount of the deposit was handled with a below the line stipulation.  This part of the opinion is (Slip Op. 18 ff.):

            Petitioner’s theory of the case is that we have jurisdiction because our decision in substance determined an overpayment. Relying on “below-the-line” stipulations by the parties in the decision document, petitioner contends that this Court in effect determined an overpayment for 2011. This argument is unpersuasive for at least two reasons. First, a below-the-line stipulation evidences only an agreement between the parties. It is called a “below-the-line” stipulation because it appears “below the Judge’s signature.” See Smith v. Commissioner, T.C. Memo. 2009-33, 97 T.C.M. (CCH) 1134, 1136 (distinguishing a below-the-line stipulation from the decision line, which “determin[es] deficiencies, additions to tax, and penalties”). Such a stipulation does not constitute a finding by the Court. See sec. 7481(c)(2)(B) (permitting reopening if “the Tax Court finds * * * that the taxpayer has made an overpayment” (emphasis added)). Second, the parties themselves, in their below-the-line stipulations, do not refer to any “overpayment.” Rather, they “stipulate[] that the deficiency for the taxable year 2011 is computed without considering the prepayment credit of $10,263,750.” (Emphasis added.)        

            This Court could not possibly have determined an “overpayment” for 2011 because petitioner had not made a payment of tax for any relevant year at the time [*19] our decision was entered. When remitting the $10,263,750 check to the IRS, petitioner’s representative explicitly designated it as a “deposit” and stated that “the taxpayers intend for this deposit to satisfy the requirements of [s]ection 6603(a).” “A deposit is not a payment of tax prior to the time the deposited amount is used to pay a tax.” H.R. Rept. No. 108-755, supra at 649; Rev. Proc. 2005-18, sec. 6.01 (same).

            Indeed, the February 2012 letter that accompanied the remittance informed the IRS that no gift tax return had yet been prepared or filed. As a result, “the potential gift tax [wa]s undetermined” at that time. That being so, it is difficult to see how the remittance could have been a tax “payment.” In subsequent references to the $10,263,750 check, petitioner’s representatives uniformly characterized that remittance as a “deposit.” When seeking return of the deposit in 2014, his lawyers represented that he had “designated the full $10,263,750 as a deposit under 26 U.S.C. § 6603” and demanded return of the deposit “as authorized by 26 U.S.C. § 6603(c).” They represented that they were making this request under “the procedures set out in * * * Revenue Procedure 2005-18,” which governs “request[s] for return of a deposit.” Rev. Proc. 2005-18, sec. 6.

As I have previously noted, when taxpayers characterize a remittance as a deposit they take the risk that the remittance will be higher than the tax liability and they will not be entitled to full overpayment interest had they designated the remittance as a payment rather than a deposit.