Payments v. Deposits and Below-the-Line Stipulations in a Stipulated Tax Court Decision Document (4/19/23)

In Hill v. Commissioner, ___ F.4^th ___ (11^th Cir. 4/10/23), CA11 Slip Op. here and GS here, the Court held that the taxpayer’s remittance of $10,263,750 to the IRS was a deposit that accrued interest at the lower interest rate for deposits rather than the higher overpayment rate.

Payments v. Deposits Background

In reaching its decision, the Court provided this background introduction (Slip Op. 18-20, cleaned up, particularly to eliminate parallel citations):

C. Payments and Deposits

As further background, it helps to understand why taxpayers, like Hill, will expressly designate a remittance as a "deposit," as opposed to a payment. Whether the taxpayer makes a deposit or a payment can affect whether the taxpayer can challenge the amount of a deficiency.

Generally, when a taxpayer makes an undesignated remittance, the IRS treats that remittance as a payment and applies it "against any outstanding liability for taxes, penalties[,] or interest." See Rev. Proc. 2005-18 § 4.01(2), 2005-13 I.R.B. 798, 799.n4 "If an undesignated remittance is made in the full amount of a proposed liability," it "will be treated as a payment of tax, a notice of deficiency will not be mailed[,] and the taxpayer will not have the right to petition the Tax Court for a redetermination of the deficiency." Id. § 4.03, 2005-13 I.R.B. at 800.

   n4 Throughout their briefs, both parties cited and relied upon Revenue Procedure 2005–18. No party raised a deference issue under Chevron, U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984), and thus we do not address Chevron.

By contrast, a taxpayer who makes a "deposit" can challenge an alleged deficiency in the Tax Court without accruing underpayment interest on the disputed tax, up to the amount of the deposit. See I.R.C. §§ 6601(a), 6603(a)-(b), 6213(a). The Supreme Court has recognized that "the taxpayer will often desire treatment of the remittance as a deposit—even if this means forfeiting the right to interest on an overpayment—in order to preserve jurisdiction in the Tax Court, which depends on the existence of a deficiency," which "would be wiped out" if the remittance were treated as a payment. Baral v. United States, 528 U.S. 431, 439 n.2 (2000).

Deposits are returnable on demand. If the taxpayer requests the return of his deposit in writing before the deposit is used to pay a tax, the IRS must return it to the taxpayer unless the IRS determines that the collection of tax is in jeopardy. I.R.C. § 6603(c).

 But once the deposit is applied to pay a tax, the taxpayer may submit "a claim for credit or refund as an overpayment." Rev. Proc. 2005-18 § 6.01, 2005-13 I.R.B. at 800 ("A deposit made pursuant to section 6603 is not subject to a claim for credit or refund as an overpayment until the deposit is applied by the [IRS] as payment of an assessed tax of the taxpayer.").

 Based on this background and more focused analysis, the Court determined, as did the Tax Court, that the remittance was a deposit rather than a payment, and thus accrued only the lower interest for deposits.

Below-the-line Stipulations on the Decision Document

Among the arguments that Hill made for the higher interest rate was that, in the stipulated decision document, immediately below the Judge’s signature line approving the deficiency, the following stipulation by the parties indicated that the Judge had found an overpayment (Slip Op. 10-11, italics supplied by the Court):

It is hereby stipulated that the Court may enter the foregoing decision in this case.

It is further stipulated that interest will accrue and be assessed as provided by law on the deficiency due from petitioner.

It is further stipulated that, effective upon the entry of this decision by the Court, petitioner waives the restrictions contained in I.R.C. § 6213(a) prohibiting assessment and collection of the deficiency (plus statutory interest) until the decision of the Tax Court becomes final.

It is further stipulated that there is a prepayment credit in the amount of $10,263,750.00 which payment was made on February 28, 2012 and was credited to petitioner's tax year 2010 gift tax liability. It is stipulated that the prepayment credit in the amount of $10,263,750.00 will be reversed for petitioner's tax year 2010 and applied to petitioner's tax year 2011 gift tax liability. It is further stipulated that the deficiency for the taxable year 2011 is computed without considering the prepayment credit of $10,263,750.00.

It is further stipulated that interest will be credited or paid as provided by law on any overpayment in tax due to petitioner.

The Court held that (Slip Op. 21-24) the below- the-line stipulation was not part of the decision entered by the Court, noting that the stipulation was that the “foregoing decision” [i.e., the portion of the decision document above the Judge’s signature] may be entered. Moreover, the references to prepayment and overpayment in the parties’ below-the-line stipulation were generic references not a stipulation between the parties that there was an actual overpayment.

My discussion of the Tax Court decision on these issues is Good Tax Court Opinion on Interest Consequences of Distinction between Deposits and Payments (Federal Tax Procdure Blog 11/2/21), here.