T.C. Memo. 1999-221
UNITED STATES TAX COURT
ESTATE OF STELLA ADLER WILSON, DECEASED,
ELEANOR SHELDON, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 47120-86.
D made a voluntary payment on Dec. 31, 1986, part of
which satisfied the entire income tax deficiency as
reflected in the deficiency notice for her taxable year
1980. More than 5 years later, the IRS reallocated a
portion of the deficiency payment to other taxable years as
to which there were outstanding assessments. The balance of
D's Dec. 31, 1986, payment equaled accrued interest on the
1980 income tax deficiency. The IRS treated this amount on
its records as a "designated interest payment". On Mar. 9,
1998, P, D's executor, made a voluntary payment in the
amount of $30,000 which was designated to the taxable year
1980 and the 2 succeeding years. P contends that there is
an overpayment of Federal income tax for the taxable year
1980 in the amount of $30,000 due to unauthorized
reallocations of D's voluntary "designated" payment of tax
in 1986.
- 2 -
Held: R may not reallocate D's 1980 tax payment to
satisfy outstanding assessments for years other than 1980.
Howard Philip Newman, for petitioner.
Jeffrey Johnson, for respondent.
MEMORANDUM OPINION
NIMS, Judge: Respondent determined deficiencies and
additions to tax with respect to the Federal income tax of Stella
Adler Wilson (decedent) for the taxable years 1980, 1981, and
1982. Decedent, the original petitioner, died in 1992, and by
Order dated October 21, 1997, her estate was substituted as
petitioner.
This case initially involved a number of partnership-related
issues. However, these have all been resolved by stipulation.
When petitioner reviewed respondent's proposed computation
of tax due, a question emerged over the application of a payment
to a specific tax liability. By Order of the Court, petitioner
was permitted to amend her pleadings to claim an overpayment for
the taxable year 1980. There is no dispute that the claim was
timely.
Petitioner contends that there is an overpayment of Federal
income taxes for the taxable year 1980 in the amount of $30,000
due to the IRS's unauthorized reallocation of a voluntary
"designated" payment of tax, from decedent's taxable year 1980
- 3 -
account to other taxable years in which there were outstanding
and unpaid assessments. Respondent contends that there is an
underpayment of income tax for the taxable year 1980 in the
amount of $2,597 and that the reallocation of decedent's payment
was proper.
The sole issues for decision are whether decedent's
voluntary payment was a "designated" payment of her 1980 income
tax, and whether respondent's subsequent reallocation was proper.
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code in effect for the years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure. All dollar amounts are rounded to the
nearest dollar.
This case was submitted fully stipulated. The stipulation
of facts and the attached exhibits are incorporated herein by
this reference. At the time the petition was filed, decedent
resided in New York, New York.
Background
Decedent timely filed Federal income tax returns for the
taxable years 1980, 1981, and 1982. Respondent timely mailed
statutory notices of deficiency on October 14, 1986, determining
income tax deficiencies and additions to tax for decedent's 1980,
1981, and 1982 taxable years, as follows:
- 4 -
Additions to Tax
Year Deficiency Sec. 6659 Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2)
1980 $89,410 $26,768 $4,470 --- ---
1981 36,601 10,980 --- $1,830 50% of the
interest due on
$36,601
1982 4,602 1,381 230 50% of the
interest due on
$4,602
Respondent also determined that, pursuant to section 6621,
interest on substantial underpayments attributable to tax-
motivated transactions for the taxable years 1980, 1981, and 1982
would be 120 percent of the adjusted rate.
The petition was filed on December 15, 1986.
On December 31, 1986, decedent made a single voluntary
payment of $185,327. As of the same date, respondent credited
$89,410 to decedent's account for the taxable year 1980 as a
"Subsequent Payment". This amount equaled the 1980 income tax
deficiency determined by respondent. Under respondent's
procedures, a "Subsequent Payment" designation is used when a
taxpayer does not make a designation with respect to whether a
remittance constitutes a payment of tax or a deposit in the
nature of a cash bond.
Respondent credited the remaining $95,917 to decedent's
account for the taxable year 1980 as a "Designated Interest
Payment".
On July 13, 1992, respondent transferred the following
amounts out of decedent's account for the taxable year 1980 and
- 5 -
applied those amounts to satisfy liabilities for other taxable
years in which unpaid assessments were pending, as follows:
Amount Amount of Original Date of Original
Year Transferred Assessment Assessment
1978 $1,800 $7,408 05/14/79
1984 236 6,662 12/02/85
1989 30,561 23,130 02/03/92
The transfer in the amount of $30,561 from decedent's
account for the taxable year 1980 resulted in an overpayment for
the 1989 taxable year. Respondent issued a refund for the 1989
taxable year on April 19, 1993, in the amount of $12,376, of
which $1,163 was interest. The refund appears to have resulted
from abatement of interest and penalties made after the $30,561
reallocation from 1980 in 1992, plus certain other overpayment
credits transferred.
On March 9, 1998, petitioner made a payment in the amount of
$30,000. Petitioner designated this payment to be applied toward
the deficiency for the taxable year 1980. If any excess amount
remained, that amount was to be applied toward the deficiencies
for the 1981 and 1982 taxable years. The record contains no
explanation as to why petitioner made this payment, and in this
particular amount. Respondent credited $30,000 to petitioner's
account for the taxable year 1998.
Howard P. Newman (Newman), who represents petitioner in this
case, has been an attorney since January 1979. He worked for
- 6 -
District Counsel, IRS, for 4-1/2 years and then left to enter
private practice. He earned an LL.M. (tax) degree from New York
University in 1983.
In 1986, Newman was a practitioner working solely on Federal
income tax and related matters. In that year he wrote letters to
all of his clients who had pending tax matters, including
decedent, advising them that, due to changes in the law, if they
wished to deduct interest on tax liabilities, either "determined"
or contested, they had until December 31, 1986, to pay both the
tax and the interest thereon in full. Decedent apparently was
motivated by this letter to make her $185,327 payment on December
31, 1986, although in a recently filed status report Newman
states that he never heard from decedent in response to his
letter.
Discussion
Petitioner argues that decedent made a voluntary payment of
tax on December 31, 1986, in the amount of $89,410, the exact
amount of the deficiency for 1980, which, petitioner claims, was
"designated to the taxable year 1980". She urges that the
$89,410 was part of a total remittance of $185,327, the balance
of which, it is agreed, the IRS treated as a designated payment
of interest. Petitioner further argues that (1) since decedent's
voluntary payment was so designated, respondent was bound to
honor her designation; (2) respondent's 1992 reallocations of
- 7 -
$1,800, $236, and $30,561 to the taxable years 1978, 1984, and
1989, respectively, were improper; and (3) petitioner is
therefore entitled to add the reallocations back to the taxable
year 1980. Thus, petitioner contends that, since she made a
$30,000 voluntary tax payment on March 9, 1998, which was
"designated to the taxable year 1980" and the 2 subsequent years,
there was no deficiency for the 1980 taxable year, thereby
resulting in a $30,000 overpayment.
Respondent argues that the IRS's reallocations were proper
because decedent did not designate her voluntary payment in a
manner that supersedes the IRS's discretionary authority to
reallocate voluntary taxpayer remittances. According to
respondent, the IRS has discretion to reallocate voluntary
taxpayer remittances so long as the remittance is not designated
a deposit in the nature of a cash bond (deposit). In the absence
of evidence of such a designation, the IRS deems the remittance a
payment of tax and may therefore reallocate the payment of tax to
any taxable years in which assessments are outstanding. If
respondent's reallocations are proper, then respondent asserts
that petitioner has an underpayment of $2,597 for the taxable
year 1980, determined as follows (additions to tax under sections
6653(a) and 6659 were conceded by respondent):
- 8 -
Tax year ending: 12-31-80
_______________________________________________________
Date Amount
_______________________________________________________
REVISED LIABILITY xxxxxxxx $95,203.00
Assessment - tax per return xxxxxxxx 5,793.00
Additional assessment
Abatement
_______________________________________________________
TOTAL ASSESSMENT xxxxxxxx 5,793.00
INCREASE/(DECREASE) In ASSESSMENT xxxxxxxx 89,410.00
_______________________________________________________
Revised liability xxxxxxxx 95,203.00
Payments
Credit applied from 1979 year 04-15-80 3,609.10
Estimated tax payment 09-22-80 922.00
Estimated tax payment 01-21-81 2,000.00
Subsequent payment 12-31-86 89,410.00
Subsequent payment 03-09-98 30,000.00
Less refunds or credits:
Overpayment credit elect 04-15-81 (738.00)
Transferred to 1981
1
Credit transferred to 1989 12-31-86 (30,561.18)
1
Credit transferred to 1984 12-31-86 (236.14)
1
Credit transferred to 1978 12-31-86 (1,800.01)
_______________________________________________________
TOTAL PAYMENTS xxxxxxxx 92,605.77
BALANCE DUE/(OVERPAYMENT) xxxxxxxx 2,597.23
_______________________________________________________
1
These credits were actually transferred on July 13,
1992.
Thus, petitioner's entitlement to an overpayment for the
taxable year 1980 hinges upon whether the IRS had the authority
to reallocate petitioner's voluntary tax payment of $89,410,
which petitioner claims was designated for the taxable year 1980.
- 9 -
Respondent finds himself on the horns of a dilemma in this
case. On the one hand, he is constrained by Rosenman v. United
States, 323 U.S. 658 (1945), where the Supreme Court held that a
claim for refund for a remittance made as a "deposit" rather than
as a "payment" was not time barred by the predecessor to section
6511. See Ertman v. United States, 165 F.3d 204, 206 (2d Cir.
1999). Thus, if decedent's 1986 remittance was a deposit,
petitioner would, in general, be entitled to recover it without
interest, at any time before the IRS is entitled to assess the
tax. See Rev. Proc. 84-58, sec. 4.01, 1984-2 C.B. 501, 502.
On brief, respondent expends substantial effort to establish
that decedent's 1986 remittance was not a deposit. (For
simplicity, when referring to decedent's "remittance" we refer to
the $89,410 segment of her $185,327 remittance, except where
noted.) But respondent need not have made this effort, because
petitioner readily agrees that decedent's remittance was not a
deposit.
The alternative with which respondent must therefore deal is
how to categorize the remittance, and respondent appears to agree
that the remittance constitutes a payment of tax. As a matter of
fact, in his reply brief respondent cites Ertman v. United
States, supra, for the proposition that where a payment is
explicitly defined by the Code as a payment of tax, that payment
is a payment of tax rather than a deposit. (As respondent notes
- 10 -
in his reply brief, Ertman was decided by the U.S. Court of
Appeals for the Second Circuit, the court to which this case
would normally be appealed, after opening briefs were filed in
this case.) In Ertman, the Court of Appeals held that
remittances submitted with Forms 4868, Application for Automatic
Extension of Time to File U.S. Individual Income Tax Return,
constituted payments, not deposits, and therefore the taxpayers'
entitlement to refunds was limited by section 6511. See id.
Respondent goes on to point out that his own revenue
procedure, Rev. Proc. 84-58, supra section 4.03, 1984-2 C.B. at
502-503, explicitly says that any payment which is "specifically
designated as a deposit in the nature of a cash bond will be
treated as a payment of tax if it is made in response to a
proposed liability * * * and remittance in full of the proposed
liability is made." (Emphasis added.) Respondent nevertheless
argues that because decedent's remittance was "undesignated", the
IRS was authorized to reallocate it.
Where a taxpayer makes an involuntary payment, the IRS may
allocate or reallocate the payment as it sees fit, regardless of
taxpayer designation, if any. As we stated in Amos v.
Commissioner, 47 T.C. 65, 69 (1966): "An involuntary payment of
Federal taxes means a payment received by agents of the United
States as a result of distraint or levy or from a legal
- 11 -
proceeding in which the Government is seeking to collect its
delinquent taxes or file a claim therefor." Respondent does not
argue that decedent made an involuntary payment in this case.
In the same vein, if a taxpayer makes a voluntary payment
without directing application of funds, the IRS may make whatever
allocation it chooses. See Estate of Baumgardner v.
Commissioner, 85 T.C. 445, 459 (1985). However, where a taxpayer
makes voluntary payments to the IRS, he does have a right to
direct the application of payments to whatever type of liability
he chooses. See Muntwyler v. United States, 703 F.2d 1030, 1032
(7th Cir. 1983); Estate of Baumgardner v. Commissioner, supra at
459-460.
Having postulated the foregoing principles, we must now
decide whether decedent did, in fact, designate the December 31,
1986, remittance as a payment of her 1980 income tax--i.e., the
type of liability decedent chose--and if so, whether respondent
was free on July 13, 1992, to reallocate some of the 1986
payment, i.e., $32,597 thereof, to assessments for other years,
one of which--1989--was 3 years in the future at the time
decedent made her 1986 payment.
We are satisfied that decedent designated her entire
voluntary payment as a payment of income tax and interest for
1980. A transcript of decedent's IRS account for 1980 reflects,
under date of 12/31/86, as a "Subsequent Payment" the amount of
- 12 -
$89,410--the exact amount of the 1980 income tax deficiency
determined in the deficiency notice. Also, under the same date,
the same transcript reflects as a "Designated Interest Payment"
the amount of $95,916.67. Decedent's total payment, which
appears to have been motivated by Newman's letter to his tax
clients, was in conformity with the provisions of Rev. Proc. 84-
58, supra, which deals extensively with procedures for taxpayers
to make remittances to stop the running of interest on
deficiencies. Rev. Proc. 84-58, supra section 5.03, 1984-2 C.B.
at 503, states that "A taxpayer wishing to stop the running of
all interest must make a payment or deposit sufficient to cover
all accrued interest as of the date of remittance as well as the
entire amount of the underlying tax." This decedent did.
The record is silent as to why the IRS treated the tax
payment as a "subsequent payment" while at the same time treating
the interest payment as a "designated" interest payment.
Whatever may have been intended by the subsequent payment label
in the IRS records, this is merely an entry characterized by the
IRS, and the records to this extent are not dispositive of the
issue. See Estate of Baumgardner v. Commissioner, supra at 459.
Nevertheless, we are satisfied that decedent effectively
designated her total remittance as a payment of 1980 tax and the
interest thereon, notwithstanding the fact that neither party has
located any communication from decedent to the IRS making that
- 13 -
designation. It has to follow, moreover, that since the IRS
found the $95,916.67 to be a designated interest payment, the
$89,410 must have likewise been a designated tax payment. To
argue otherwise, as respondent does, is to fly in the face of his
own revenue procedure.
Section 6213(b)(4) provides an exception to the general rule
of section 6213(a), that no assessment may be made, among other
things, while a case is pending in the Tax Court. Under section
6213(b)(4), any amount paid as a tax or in respect of a tax may
be assessed upon the receipt of such payment notwithstanding the
provisions of section 6213(a).
Rev. Proc. 84-58, supra section 4.01, 1984-2 C.B. at 502,
provides that "a remittance made after the mailing of a notice of
deficiency in complete or partial satisfaction of the deficiency
will, absent any instructions from the taxpayer, be considered a
payment of tax and will be posted to the taxpayer's account as
such as soon as possible." While not expressly stated, the
manifest implication of this language is that a specific tax as
to type and year, i.e., the tax determined in the deficiency
notice, is what is paid, and not any tax that the IRS may choose.
We believe a remittance in full payment of the tax in response to
a deficiency notice fulfills this IRS administrative requirement,
and that decedent's 1986 remittance should have been treated as a
payment of tax for 1980. For the foregoing reasons, we hold that
- 14 -
decedent's 1986 remittance was a voluntary payment designated as
a payment in full of her 1980 tax, reflected in the deficiency
notice. Consequently, respondent was without authority to
reallocate the 1980 tax payment--over 5 years later--to
assessments for different years.
Since part of decedent's 1986 payment was reallocated from
1980 to 3 other years as to which there were outstanding
assessments as of July 13, 1992, when the reallocation was made,
($12,376, was refunded to petitioner on April 19, 1993),
respondent argues that petitioner is seeking an unwarranted
windfall to which she is not entitled. Petitioner correctly
points out, however, that the issue before the Court is whether
decedent's payment was designated to a specific year--1980.
Since we have found that decedent so designated her payment, the
consequences of the IRS's reallocation of the payment to other
years not before the Court are irrelevant, and in any event not
within our limited jurisdiction. See sec. 7442; Belloff v.
Commissioner, 996 F.2d 607, 611 (2d Cir. 1993), affg. T.C. Memo.
1991-350.
Respondent has not, in his pleadings or on brief, raised an
issue as to the applicability of section 6402(a), which provides
that the Secretary, within the applicable period of limitations,
may credit an overpayment, including any interest allowed
thereon, against any liability in respect of an internal revenue
- 15 -
tax on the part of the person who made the overpayment. That
issue is not, therefore, before the Court, and we express no
opinion with respect thereto.
Petitioner designated the $30,000 payment which she made on
March 9, 1998, to be applied toward the deficiency for 1980, with
any excess amount to be applied toward the deficiency for the
taxable year 1981, and if any excess amount remained, to be
applied toward the deficiency for 1982. To the extent there is
an overpayment, the overpayment will be determined pursuant to
section 6512 by a decision under Rule 155.
To properly account for the $30,000 payment, the settled
issues, and what we have held in this case, a recomputation will
be necessary, and
Decision will be entered
under Rule 155.