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).

Court Holds Defendant in FBAR Suit Alleging No Deficiency in Tax for Excessive Fines Argument Must Prove Deficiency Despite Tax Court No Deficiency Decision (4/1/22)

In United States v. Kerr, 2022 U.S. Dist. LEXIS 57004 (D. Az. 3/29/22), GS here and CL here, Government brought suit to collect an FBAR civil willful penalty. The Government conceded error in the calculation and submitted revised much lower calculations. The Court invoked the APA to remand the matter to the IRS for recalculation with a more robust explanation. Whether remand to the IRS can result in a valid FBAR assessment is yet to be determined.

I focus on Kerr’s claim that the FBAR civil willful penalty assessments violated the Eighth Amendment prohibition on Excessive Fines. This claim is often made in FBAR civil willful penalty cases, but it have never been made successfully so far as I am aware. Kerr also failed here.

I include the Court’s discussion in its entirety (Slip Op. 15-17, one footnote omitted) because it discusses the lack of preclusive effect for a stipulated no deficiency decision in the Tax Court without any judicial resolution of the issues behind the no deficiency stipulation.

c. Whether the Assessment Violates the Eighth Amendment

             Although the Court will only enter judgment on three of the penalties made in the Original Assessment, it will consider Mr. Kerr's argument that the FBAR penalties violate his rights under the Eighth Amendment. The Eighth Amendment provides that no “excessive fines” shall be imposed. U.S. Const. amend. VIII. A punitive forfeiture violation is excessive “if it is grossly disproportional to the gravity of a defendant's offense.” United States v. Bajakajian, 524 U.S. 321, 334 (1998). Although no court has expressly held that civil FBAR penalties constitute a fine under the Eighth Amendment, the Court will assume, without deciding, that they are. See United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017) (evaluating whether FBAR penalties are “grossly disproportional” to the gravity of the defense under the Eighth Amendment).

             Mr. Kerr bears the burden of showing that the civil penalties are grossly disproportional. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014). Courts show substantial deference to legislative bodies when reviewing statutorily established penalties. Bajakajian, 524 U.S. at 334; Solem v. Helm, 463 U.S. 277, 290 (1983). In Bajakajian, the Court considered several factors in determining whether a fine was excessive including the nature of the conduct, the resulting harm, and whether other penalties may be imposed. 524 U.S. at 336-38; see also United States v. Bussell, 2015 WL 9957826, at *7 (C.D. Cal. Dec. 8, 2015). The Ninth Circuit has noted that these Bajakajain [sic] factors are not “rigid” and so courts are not limited to these considerations. United States v. Mackby, 339 F.3d 1013, 1016 (9th Cir. 2003).

             Under these factors, Mr. Kerr argues that the penalty is grossly excessive because (1) the only crime he committed was willfully failing to report the accounts, (2) this failure was unconnected to other criminal activity, (3) that other criminal penalties already exist for this conduct, and (4) that “the government suffered no injury as it stipulated that [Mr.] Kerr did not underreport his tax liabilities.” (Doc. 47 at 25).

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.