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 of Federal Claims Rejects Defective § 6603 Strategy for Multiple Transferee Liabilities (11/21/22)

In Dillon Trust Company LLC v. United States, ___ Fed. Cl. ___, 2022 U.S. Claims LEXIS 2575 (11/10/22), FC here and GS here, the Government moved for partial dismissal for lack of jurisdiction and for partial summary judgment with respect to plaintiff’s interest-related claim. I focus here on the interest-related claim.

The background is an intermediary or Midco transaction by a family corporation with the assets stripped out of the corporation by direct or indirect transfer to shareholders without paying the large tax corporate liability generated by the corporation. In initially reporting the transaction, the corporation claims the benefit of a bullshit tax shelter to effectively zero out the gain and tax, but on audit and denial of bullshit tax shelter benefit, the gain is taxed to the corporation which has no assets (because the shareholders stripped them out directly or indirectly). So, the IRS has to chase the “transferees” – here the shareholders – to collect the payment through transferee liability under § 6901.  I cover these transactions in Federal Tax Procedure (2022 Practitioner Ed.), here, at pp. 745-746. In a footnote, I quote Alterman Trust v. Commissioner, T.C. Memo. 2015-231, at *2:

Courts, including this court, have been plagued by Midco cases. Rarely do these cases present themselves for a determination of the underlying liabilities. Instead, these cases are postured so that the courts are asked to determine whether someone other than the taxpayer should be on the hook for the taxpayer's liability. They are transferee liability cases, and so are these cases.

The corporate taxpayer involved was Humboldt Shelby Holding Corporation (“HSHC”) which was unable to pay the tax, the gross valuation misstatement penalty, and the interest on each. The corporate liabilities as of August 2014 were “a federal income tax deficiency of $25,617,887 and a gross valuation misstatement penalty of $10,247,155, plus interest, which remained unpaid.” The transferees the IRS targeted were certain Dillon family trusts (with the parties agreeing that the results would apply to all of the family trusts as direct or indirect transferees). 

Among other arguments in this refund suit, the trusts argue that they cannot be held for transferee liability for the gross valuation misstatement penalty “because they lacked knowledge of HSHC’s plan to carry out the tax shelter scheme that formed the basis of the I.R.C. § 6662 penalty.”  Good luck to them on that. 

But in this case, the  court only addressed interest issues. The interest issue arose from the trusts’ apparent desire to invoke § 6603 to prevent the running of interest during the period of the deposit. I cover § 6603 in Federal Tax Procedure (2022 Practitioner Ed.) pp. 268-272. The rules of § 6603 are not particularly complex, but the application of those rules in the Dillon Trust case was complex because of the machinations involved where the trusts, as putative persons liable for transferee liability, apparently thrusted about to achieve some purpose to avoid interest but did so in which appears to be a haphazard fashion. The result is that, although the IRS had the deposit money in a large amount and for a significant period, the taxpayer and the transferees achieved no interest benefit under § 6603 that might have been achieved had they structured the deposits/payments differently.

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.

Good Review of Points Previously Covered in Class (9/28/15)

Lua v. United States, 2015 U.S. Claims LEXIS 1235 (9/25/15), here, offers a good review of concepts we have studied in this case.

In Lua, upon completion of the audit, the unsophisticated taxpayers who did not have a representative signed a Form 4549 Income Tax Examination Changes.  This form has language "waiving their right to a notice of deficiency."  Section 6213(a), here, prohibits the IRS from assessing prior to issuing a notice of deficiency in income tax cases.  Section 6213(d) provides that a taxpayer may waive the right to receive a notice of deficiency, thus allowing an assessment without the notice of deficiency.  This waiver is often done on the Form 870, Waiver of Restrictions on Assessment, but also from the language quoted above, may be done on the Form 4549.  See Student Edition pp. 145-146 & 334-335.

Shortly after signing the waiver, the taxpayers engaged a tax professional.  The tax professional requested audit reconsideration in a telephone call to the agent and a day later confirmed the request in a letter to the group manager.

On November 26, 2007, the IRS assessed the deficiencies, but granted the request for audit reconsideration.  As a result of the audit reconsideration, the IRS ultimately reduced the amount of the deficiencies, but by that time the taxpayers had filed amended returns and, apparently protectively, payments substantially in excess of the amounts ultimately determined to be due.  It is a little fuzzy to me precisely what happened after the assessment, but it may not be critical for the points discussed below.  What appears to be in issue in this refund litigation is the amount paid up to the amount that was not abated in audit reconsideration -- in other words the amount determined due after audit reconsideration

1. Did the taxpayers waive the right to a notice of deficiency.

Yes.  The taxpayers did sign the Form 4549 which waives the notice of deficiency in clear language.  In this regard, the Court indicated in footnote 12 that the waiver had not been improperly induced.

2.  Did the taxpayers withdraw the waiver of the notice of deficiency.

No.  The taxpayers asked for audit reconsideration which is a separate procedure.  Audit reconsideration is addressed in the text.  See Student edition p. 452.

Ford Wants Overpayment Interest While Its Remittance Was Held as a Deposit (12/6/13)

In Ford Motor Co. v. United States, 571 U.S. ____ (2013), here, the Supreme Court entered the following order on Ford's petition for certiorari (caption omitted):

PER CURIAM. 

When a taxpayer overpays his taxes, he is generally entitled to interest from the Government for the period between the payment and the ultimate refund. See 26 U.S.C. § 6611(a). That interest begins to run "from the date of overpayment." §§ 6611(b)(1), (b)(2). But the Code does not define "the date of overpayment." 

In this case, after the Internal Revenue Service advised Ford Motor Company that it had underpaid its taxes from 1983 until 1989, Ford remitted a series of deposits to the IRS totaling $875 million. Those deposits stopped the accrual of interest that Ford would otherwise owe once the audits were completed and the amount of its underpayment was finally determined. See § 6601; Rev. Proc. 84-58, 1984-2 Cum. Bull. 501. Later, Ford requested that the IRS treat the deposits as advance payments of the additional tax that Ford owed. Eventually the parties determined that Ford had overpaid its taxes in the relevant years, thereby entitling Ford to a return of the overpayment as well as interest. But the parties disagreed about when the interest began to run under 26 U.S.C. § 6611(b)(1). Ford argued that "the date of overpayment" was the date that it first remitted the deposits to the IRS. Ibid. The Government countered that the date of overpayment was the date that Ford requested that the IRS treat the remittances as payments of tax. The difference between the parties' competing interpretations of § 6611(b) is worth some $445 million. 

Ford sued the Government in Federal District Court, asserting jurisdiction under 28 U.S.C. § 1346(a)(1). The Government did not contest the court's jurisdiction. See Brief in Opposition 3, n. 3. The District Court accepted the Government's construction of § 6611(b) and granted its motion for judgment on the pleadings. A panel of the Court of Appeals for the Sixth Circuit affirmed, concluding that § 6611 is a waiver of sovereign immunity that must be construed strictly in favor of the Government. 508 Fed. Appx. 506 (2012). 

Ford sought certiorari, arguing that the Sixth Circuit was wrong to give § 6611 a strict construction. In Ford's view, it is 28 U. S.C. § 1346 -- not § 6611 -- that waives the Government's immunity from this suit, and § 6611(b) is a substantive provision that should not be construed strictly. See Gómez-Pérez v. Potter, 553 U.S. 474, 491 (2008); United States v. White Mountain Apache Tribe, 537 U.S. 465, 472-473 (2003). In its response to Ford's petition for certiorari, however, the Government contended for the first time that § 1346(a)(1) does not apply at all to this suit; it argues that the only basis for jurisdiction, and "the only general waiver of sovereign immunity that encompasses [Ford's] claim," is the Tucker Act, 28 U.S.C. § 1491(a). Brief in Opposition 3, n. 3. Although the Government acquiesced in jurisdiction in the lower courts, if the Government is now correct that the Tucker Act applies to this suit, jurisdiction over this case was proper only in the United States Court of Federal Claims. See § 1491(a). 

This Court "is one of final review, 'not of first view.'" FCC v. Fox Television Stations, Inc., 556 U.S. 502, 529 (2009) (quoting Cutter v. Wilkinson, 544 U.S. 709, 718, n. 7 (2005)). The Sixth Circuit should have the first opportunity to consider the Government's new contention with respect to jurisdiction in this case. Depending on that court's answer, it may also consider what impact, if any, the jurisdictional determination has on the merits issues, especially whether or not § 6611 is a waiver of sovereign immunity that should be construed strictly. 

The petition for certiorari is granted, the judgment of the Sixth Circuit is vacated, and the case is remanded for further proceedings. 

It is so ordered.

Remittance to IRS -- Is it a Payment or a Deposit? (8/19/13)

Whether a remittance to the IRS is a payment of tax or a deposit can have significant consequences.  For example, if it is a payment of tax, there is a statute of limitations to obtain refund of the repayment; if it is a deposit, the refund statute of limitations does not apply.  Further, if it is a payment, the taxpayer can only get the remittance back by filing a claim for refund showing that he is entitled to the refund; if it is a deposit, the taxpayer can get it back simply by asking. There are complexities in this example, but in broad strokes that is the distinction.  The IRS has procedures whereby, in submitting a remittance, the taxpayer can designate whether the remittance is a payment or a deposit and the designation will (usually)  be honored by the IRS.

In Syring v. United States, 2013 U.S. Dist. LEXIS 111712 (D WI 8/15/13, amended order), here, a taxpayer, an estate, confronted this distinction.  The taxpayer had remitted tax of $170,000 to the IRS along with a timely request for extension of time to file the estate tax return.  The taxpayer did not designate the remittance as either payment of tax or deposit.  More than 3 years later (and just after the 3-year lookback limitations period for refunds), the taxpayer filed the estate tax return (then well over due), showing no tax due.  After audit the IRS determined that about $25,000 tax was due.  The taxpayer then requested return of the balance.  The IRS denied the request because, it determined, the original remittance was a payment and the return, effectively requesting the refund, was not filed within the required lookback period under Section 6511(b).

The court held that the original remittance was a payment rather than a deposit.

Despite having strong equities on its side, the court finds that the Estate has failed to meet its burden of putting forth sufficient evidence from which a reasonable trier of fact could find that the remittance was a deposit.  Plaintiff’s motion for summary judgment will, therefore, be denied and defendant’s motion for summary judgment will be granted.

The court looked at the facts and circumstances in making this test concluding:

Although the first factor articulated by the Seventh Circuit in Moran [there was no determination of tax due] weighs in favor of the plaintiff’s position, its intent to make a down payment on its tax liability and the fact that IRS treated the remittance as a tax payment tip the balance strongly to a finding of a tax payment. Based on this, the court finds that the Estate’s remittance does not constitute a deposit. This result may seem unfair -- after all the government is allowed to keep a payment that it concedes was not due -- but tax laws are “not normally characterized by case-specific exceptions reflecting individualized equities.” United States v. Brockamp, 519 U.S. 347, 352 (1997). Despite the equities, the court concludes that plaintiff is unable to meet its burden of demonstrating that the remittance was a deposit and, therefore, this court has no jurisdiction over its claim for refund. Dalm, 494 U.S. at 609

Ford Motor Company Loses Claim for Interest on Deposit (12/18/12)

In Ford Motor Co. v. United States, 2012 U.S. App. LEXIS 25725 (6th Cir. 2012) (unpublished), here, the Sixth Circuit denied the taxpayer a claim for refund for interest that the taxpayer alleged should have accrued in its favor while a remittance was on deposit with the IRS at the taxpayer's request.  These were deposits for years prior to Section 6603's effective date (October 22, 2004); readers will recall that Section 6603, here, now provides a statutory regime for deposits for what previously was a court created regime emanating from Rosenman v. United States, 323 U.S. 658 (1945).  Contrary to prior law (under Rosenman), Section 6603 does allow interest on the disputable amount of a deposit during the time of the deposit.  But, as noted, that was not the law prior to Section 6603.  At least that is what everyone except Ford Motor Co. and its counsel thought.

The Court sets out the gravamen of the two side's arguments as follows:

The government seizes upon the plain meaning of the word "payment," arguing that there can be no overpayment until there has actually been a payment—and there was no payment until Ford requested that its deposits be converted into tax payments. Prior to that point, Ford's remittances were, at its own request, treated as deposits in the nature of a cash bond and Ford could have requested their return at any time. As Revenue Procedure 84-58 § 2.03 clearly states, "[a] deposit in the nature of a cash bond is not a payment of tax." Accordingly, the government argues that it does not owe Ford interest from the date of the original remittances because they were indisputably made only as deposits, not as payments of any tax obligation.
But, wait, this taxpayer argued. 

Ford counters that the "most appropriate starting point" is not § 6611, but rather § 6601, the provision that governs underpayment interest. First, Ford contends that these two sections should be interpreted symmetrically because they both use very similar language, compare § 6601 ("date paid"), with § 6611 ("date of the overpayment"), and both deal with the accrual of interest on tax payments. Second, Ford notes that under § 6601(a), only a "payment" stops the accrual of underpayment interest against a taxpayer, and since a deposit in the form of a cash bond stops the accrual of interest from the date it is remitted, Rev. Proc. 84-58 § 5.01, that deposit must be considered a payment under § 6601(a). And because a deposit is treated as a payment for underpayment interest purposes under § 6601, it should also be considered a payment for overpayment interest purposes under § 6611. In other words, if a mere deposit stops the accrual of underpayment interest, then a mere deposit must also start the accrual of overpayment interest.