JAMES R. DIXON, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
SHARON C. DIXON, PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 9962–05L, 9965–05L. Filed September 3, 2013.
Ps were criminally prosecuted for failure to file individual
income tax returns for 1992–95. At the time, Ps were owners,
officers, and employees of Tryco Corp., which failed to file
employment tax returns and corporate income tax returns
during this period. As part of a plea agreement with the
Department of Justice, Ps agreed that their wrongdoing had
inflicted a ‘‘tax loss’’ on the IRS of $61,021 and acknowledged
that they could be required to make restitution of this
amount. On advice of their attorney they transferred funds to
Tryco with instructions that Tryco remit the funds to the IRS.
In December 1999 Tryco remitted $61,021 to the IRS with a
cover letter from Ps’ attorney designating the payment as
‘‘payment of [Form] 941 taxes of the corporation’’ that was ‘‘to
be applied to the withheld income taxes’’ of Ps for specified
calendar quarters of 1992–95. In early 2000 Ps’ accountants
determined that Ps actually owed $30,202 more in individual
income tax for 1992–95 than Tryco had remitted to the IRS
in December 1999. Accordingly, Ps transferred additional
173
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174 141 UNITED STATES TAX COURT REPORTS (173)
funds to Tryco, and in June 2000 Tryco remitted to the IRS
an additional check for $30,202. The cover letter from Ps’
attorney stated that the payment was ‘‘submitted as a pre-
assessment designated payment of [Form] 941 taxes of the
corporation’’ which ‘‘represents the withheld income taxes of
* * * [Ps]’’ for the fourth quarter of 1995. Ps argued for a
downward adjustment to their sentence and for a probated
sentence on the ground that they had remitted taxes to the
IRS in excess of the ‘‘tax loss’’ determined in the plea agree-
ments. They were sentenced to probation and a small fine.
Subsequently, R filed a notice of intent to levy on Ps’ assets
in satisfaction of their assertedly unpaid 1992–95 income tax
liabilities. Ps were granted a collection due process (CDP)
hearing in which they challenged the levy on the ground that
Tryco’s 1999–2000 remittances had discharged their 1992–95
income tax liabilities in full. The Appeals officer upheld the
levy, concluding that Tryco’s 1999–2000 payments ‘‘were not
withheld at the source and * * * cannot be designated to the
withholding of a specific employee.’’ Ps timely petitioned
under I.R.C. sec. 6330(d)(1) for review of this determination.
1. Held: Ps are not entitled to a credit under I.R.C. sec.
31(a) for the $91,223 Tryco remitted to the IRS in 1999–2000
because funds in that amount were not ‘‘actually * * * with-
held at the source’’ by Tryco from Ps’ wages during 1992–95.
See sec. 1.31–1(a), Income Tax Regs.
2. Held, further, this Court has subject matter jurisdiction
to determine whether R was obligated to honor Tryco’s des-
ignation of its 1999–2000 delinquent employment tax pay-
ments toward Ps’ income tax liabilities for 1992–95.
3. Held, further, there is no need to decide the applicable
standard of review in these CDP appeals because, under Ps’
alternative argument, R’s proposed collection action would be
impermissible either under an abuse of discretion standard or
under a de novo standard.
4. Held, further, R was required to honor Tryco’s designa-
tion of its 1999–2000 delinquent employment tax payments
towards Ps’ income tax liabilities for 1992–95. Because those
payments discharged Ps’ 1992–95 income tax liabilities in full,
R’s proposal to levy on their assets to collect this tax a second
time was an abuse of discretion.
Juan F. Vasquez, Jr., and Renesha N. Fountain, for peti-
tioners.
W. Lance Stodghill and Derek B. Matta, for respondent.
LAUBER, Judge: This is a collection due process (CDP)
appeal pursuant to section 6330(d)(1). 1 Petitioners challenge
1 Statutory references are to the Internal Revenue Code (Code) in effect
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(173) DIXON v. COMMISSIONER 175
a decision by the Internal Revenue Service (IRS or
respondent) to levy on their assets for the purpose of col-
lecting their individual income tax liabilities for 1992–95.
Petitioners were owners, officers, and employees of Tryco
Corp. (Tryco). They challenge the proposed levy on the
ground that these liabilities were fully discharged by pay-
ments that Tryco made to the IRS in 1999 and 2000.
These cases were tried before Judge Holmes in November
2006, and the facts are detailed in a separate Memorandum
Opinion by Judge Holmes, Dixon v. Commissioner, T.C.
Memo. 2013–207, filed concurrently with this Opinion.
During 1999 and 2000 Tryco remitted to the IRS payments
aggregating $602,119 with respect to petitioners’ 1992–95
income tax liabilities. 2 Basing his findings in part on credi-
bility determinations, Judge Holmes concludes that pay-
ments totaling $510,896 that Tryco remitted in December
1999 represent tax actually withheld at the source within the
meaning of sections 3402 and 3403. He accordingly holds
that petitioners are entitled to a credit under section 31 for
these payments. Dixon v. Commissioner, at *17. In this
Opinion, we address the consequences for petitioners of the
$91,223 balance of Tryco’s payments.
FINDINGS OF FACT
Some facts have been stipulated, and the stipulation of
facts and its accompanying exhibits are incorporated by this
reference. On December 22, 1999, Tryco submitted 32 sepa-
rate checks to the IRS, in the aggregate amount of $571,917,
with respect to petitioners’ income tax liabilities for 1992
through 1995. These checks represented delinquent pay-
ments of employment tax for petitioners James Dixon and
Sharon Dixon, respectively, for the 16 calendar quarters in
those four tax years. Petitioners provided Tryco with the
funds to make these payments by executing a mortgage on
their home and contributing the mortgage proceeds to Tryco.
at the relevant times. Dollar amounts are rounded to the nearest dollar.
2 In referring to petitioners’ ‘‘income tax liabilities,’’ we generally mean
their income tax liabilities for 1992–95 exclusive of any interest, additions
to tax, and penalties. We address applicable interest and penalties infra
pp. 195–196 of this Opinion.
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176 141 UNITED STATES TAX COURT REPORTS (173)
Each check Tryco issued was accompanied by a substan-
tially identical cover letter signed by petitioners’ attorney,
informing the IRS that the check represented ‘‘payment of
[Form] 941 taxes of the corporation,’’ for a specified calendar
quarter in a specified amount, ‘‘to be applied to the withheld
income taxes of employee Sharon Dixon’’ or ‘‘to the withheld
income taxes of employee James R. Dixon,’’ as the case may
be. The ‘‘memo’’ line on each check was inscribed ‘‘Designated
Payment of 941 Taxes * * * for Sharon Dixon’’ or ‘‘Des-
ignated Payment of 941 Taxes * * * for James R. Dixon’’ for
the relevant calendar quarter.
Judge Holmes concludes that $510,896 of the total amount
Tryco remitted in December 1999 represents tax that Tryco
actually withheld at the source from petitioners’ wages
during 1992–95. The balance of the December 1999 remit-
tance, or $61,021, represented the ‘‘tax loss’’ that petitioners
and the Department of Justice agreed that the Federal
Government had suffered as a result of petitioners’ tax
crimes. 3 Of this ‘‘tax loss,’’ $30,799 was allocable to Sharon
Dixon and $30,222 was allocable to James Dixon. In their
plea agreements, executed February 7, 2000, petitioners
acknowledged that they ‘‘may be required to make full res-
titution for the losses sustained by the Internal Revenue
Service as a result of the offenses of conviction.’’ See gen-
erally U.S. Sentencing Guidelines Manual sec. 5E1.1 (2012)
(discussing restitution); John A. Townsend, et al., Tax
Crimes 305–306 (2008). Under the plea agreements the mag-
nitude of the ‘‘tax loss’’ would be taken into account for sen-
tencing purposes.
In early 2000 petitioners’ accountants determined that
petitioners actually owed $30,202 more in individual income
tax for 1992–95 than Tryco had remitted to the IRS in
December 1999. Accordingly, petitioners contributed addi-
tional funds to Tryco and, on June 1, 2000, Tryco remitted
3 Under
the Federal Sentencing Guidelines, the ‘‘tax loss’’ suffered by the
Government determines the ‘‘offense level,’’ which in turn affects the sen-
tence received by the defendant—the higher the offense level, the longer
the possible prison term. See generally John A. Townsend, et al., Tax
Crimes 321–322 (2008). A ‘‘tax loss’’ between $30,000 and $79,999 equates
to an ‘‘offense level’’ of 14 as compared with a maximum offense level of
36 for a ‘‘tax loss’’ exceeding $400 million. See U.S. Sentencing Guidelines
Manual sec. 2T4.1 (2012) (Tax Table).
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(173) DIXON v. COMMISSIONER 177
to the IRS an additional check for $30,202. The cover letter
accompanying this check, signed by petitioners’ attorney,
informed the IRS that the payment was ‘‘submitted as a pre-
assessment designated payment of [Form] 941 taxes of the
corporation [Tryco] for calendar quarter 9504, and which rep-
resents the withheld income taxes of employee James R.
Dixon and employee Sharon Dixon.’’
Before sentencing, petitioners argued for a downward
departure from the Federal Sentencing Guidelines and for a
probated sentence on the ground that they had remitted
taxes to the IRS substantially in excess of the ‘‘tax loss’’
determined in their plea agreements. On June 9, 2000, each
petitioner was sentenced by the U.S. District Court for the
Southern District of Texas to four years’ probation and a rel-
atively small fine.
The IRS accepted all of Tryco’s payments. According to IRS
transcripts of petitioners’ accounts, the IRS initially credited
these payments to petitioners’ 1992–95 income tax liabilities,
as designated by Tryco. If credited to petitioners’ account,
these payments would have fully discharged their 1992–95
income tax liabilities (excluding any applicable interest and
penalties). Subsequently, the IRS reversed itself and chose to
disregard Tryco’s designation. Instead, the IRS applied the
payments to Tryco’s general unpaid employment tax liabil-
ities, which then exceeded $23 million.
Respondent ultimately issued petitioners a notice of intent
to levy on their assets in satisfaction of their assertedly
unpaid 1992–95 income tax liabilities. Petitioners requested
and were granted a CDP hearing under section 6330(a). After
several exchanges, the Appeals officer upheld the levy, con-
cluding that Tryco’s 1999 and 2000 payments ‘‘were not with-
held at the source and * * * cannot be designated to the
withholding of a specific employee.’’ Petitioners timely peti-
tioned this Court under section 6330(d)(1) for review of the
Appeals officer’s determination. They resided in Texas when
they filed the petition.
OPINION
Petitioners advance two distinct arguments in support of
their position. First, they contend that they are entitled to a
withholding credit under section 31, not only for the
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178 141 UNITED STATES TAX COURT REPORTS (173)
$510,896 that Judge Holmes finds Tryco to have actually
withheld at the source, but also for the balance of the funds,
totaling $91,223, that Tryco remitted to the IRS in December
1999 and June 2000. Second, in the event we determine that
no credit is available under section 31, petitioners contend
that the IRS was obligated to honor Tryco’s designation of
this $91,223 toward payment of petitioners’ 1992–95 income
tax liabilities and that the IRS is therefore precluded from
levying on their assets to collect this tax a second time. We
discuss these arguments in turn.
I. Credit Under Section 31
Section 3402, captioned ‘‘Income Tax Collected at Source,’’
requires that an employer withhold from its employees’
wages, and remit directly to the IRS, the income tax that
employees are expected to owe for that year, on the basis of
exemptions the employees claim on their Forms W–4,
Employee’s Withholding Allowance Certificate. The employer
periodically remits and reports to the IRS on Forms 941 the
aggregate funds withheld from its employees. At the end of
the year, the employer determines the amounts withheld for
employees individually. These amounts are reported to the
IRS and employees on separate Forms W–2, Wage and Tax
Statement, and the combined information is reported to the
IRS on Form W–3, Transmittal of Wage and Tax Statements.
The employer is ‘‘required to collect the tax by deducting
and withholding the amount thereof from the employee’s
wages as and when paid, either actually or constructively.’’
Sec. 31.3402(a)–1(b), Employment Tax Regs. The adverb
‘‘constructively’’ refers, not to constructive withholding of the
tax at the source, but to constructive payment of wages. The
regulations explain that ‘‘[w]ages are constructively paid
when they are credited to the account of or set apart for an
employee so that they may be drawn upon by him at any
time.’’ Ibid.
If an employer actually withholds tax from an employee’s
wages, but withholds less than the correct amount of tax,
section 6205(a)(1) provides that ‘‘proper adjustments, with
respect to both the tax and the amount to be deducted, shall
be made, without interest, in such manner and at such times
as the Secretary may by regulations prescribe.’’ The regula-
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(173) DIXON v. COMMISSIONER 179
tions allow an employer to correct an underwithholding on a
supplemental return filed as late as ‘‘the last day on which
the return is required to be filed for the return period in
which the error was ascertained.’’ Sec. 31.6205–1(c)(2)(i),
Employment Tax Regs. 4 The employer must concurrently
notify the employee by furnishing a corrected Form W–2,
styled ‘‘Form W–2c.’’ When an employer timely corrects an
underwithholding in this manner, it is instructed to collect
the underwithheld income tax from the employee ‘‘on or
before the last day of such year by deducting such amount
from remuneration of the employee.’’ Sec. 31.6205–1(c)(4),
Employment Tax Regs.
The ‘‘proper adjustment’’ procedure outlined in section
6205 is beneficial to employers because it enables them to
correct an underwithholding of tax without paying interest or
penalties to the IRS. The regulations emphasize, however,
that there is a limited time during which an employer may
avail itself of this benefit. A subsequent reporting ‘‘con-
stitutes an adjustment within the meaning of this section
only if the return or supplemental return on which the
underpayment is reported’’ is filed within the prescribed time
period. Sec. 31.6205–1(c)(2)(i), Employment Tax Regs.; see
sec. 31.6205–1(c)(3)(ii), Employment Tax Regs. (amounts pay-
able under ‘‘proper adjustment’’ procedure ‘‘shall be paid to
the district director, without interest, at the time fixed for
reporting the adjustment’’).
Section 3403 provides that ‘‘[t]he employer shall be liable
for the payment of the tax required to be deducted and with-
held under this chapter.’’ The regulations confirm that an
employer who is required to deduct and withhold income tax
under section 3402 ‘‘is liable for the payment of such tax
whether or not it is collected from the employee by the
employer.’’ Sec. 31.3403–1, Employment Tax Regs. If an
employer fails to withhold and the tax in question is subse-
quently paid by the employee, section 3402(d) ensures
against double collection by relieving the employer of liability
4 Except as otherwise noted, the section 6205 regulations cited in this
Opinion were those in effect during the tax years at issue. Those regula-
tions were superseded by regulations finalized on July 2, 2008, T.D. 9405,
2008–2 C.B. 293, which apply to any error ascertained after January 1,
2009. The 2008 regulations do not differ substantially from the prior regu-
lations.
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180 141 UNITED STATES TAX COURT REPORTS (173)
for that same tax. But it makes clear that the employer is
not thereby relieved ‘‘from liability for any penalties or addi-
tions to the tax otherwise applicable in respect of such
failure to deduct and withhold.’’ Sec. 3402(d).
Section 31(a)(1) sets forth the consequences for the
employee of the employer’s withholding at the source. It pro-
vides that the amount withheld by the employer as tax from
an employee’s wages ‘‘shall be allowed to the recipient of the
income as a credit’’ against his or her income tax liability for
that year. This credit is available only ‘‘[i]f the tax has actu-
ally been withheld at the source.’’ Sec. 1.31–1(a), Income Tax
Regs.
The requirement of ‘‘actual withholding’’ at the source is
confirmed by section 3402(a)(1), which provides that an
employer making payment of wages shall deduct and with-
hold tax ‘‘upon such wages.’’ If an employer remits funds to
the IRS years after the wages were paid and the section 6205
window for making ‘‘proper adjustment’’ has closed, that pay-
ment cannot represent a withholding of tax ‘‘upon such
wages.’’ See sec. 6513(b)(1) (employee deemed to have paid
tax on April 15 following close of the tax year only when tax
has been ‘‘actually deducted and withheld at the source’’); see
also Begier v. IRS, 496 U.S. 53, 60–61 (1990) (‘‘Withholding
thus occurs at the time of payment to the employee of his net
wages.’’); Edwards v. Commissioner, 323 F.2d 751, 752 (9th
Cir. 1963) (section 31 affords the taxpayer a credit ‘‘for tax
actually withheld from his wages by his employer’’), aff ’g in
part, rev’g in part 39 T.C. 78 (1962). If the tax is actually
deducted and withheld at the source, ‘‘credit or refund shall
be made to the recipient of the income even though such tax
has not been paid over to the Government by the employer.’’
Sec. 1.31–1(a), Income Tax Regs.
This statutory scheme sets forth clearly the conditions
under which a taxpayer is entitled to a section 31 with-
holding credit. An employee’s entitlement to this credit
depends on whether the income tax in question ‘‘has actually
been withheld at the source’’ by the employer. Sec. 1.31–1(a),
Income Tax Regs. Tax is deemed to have been actually with-
held at the source only if the employer (a) contemporaneously
withholds tax in the correct amount, or (b) corrects an under-
withholding of the tax by making a ‘‘proper adjustment’’
within the period prescribed by section 6205(a)(1).
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(173) DIXON v. COMMISSIONER 181
Neither of these conditions was satisfied with respect to
the $91,223 of aggregate payments in issue here. Neither the
$61,021 attributable to the ‘‘tax loss’’ occasioned by peti-
tioners’ offenses nor the $30,202 attributable to errors discov-
ered by petitioners’ accountants in early 2000 represents
funds contemporaneously ‘‘withheld at the source’’ by Tryco
from petitioners’ wages. And these payments, submitted in
December 1999 and June 2000, respectively, were made well
outside the time period prescribed by section 6205(a)(1) for
making ‘‘proper adjustments’’ to an underwithholding for the
fourth quarter of 1995. Petitioners are accordingly foreclosed
from claiming a withholding credit under section 31 for these
sums.
In holding that a section 31 credit is unavailable in these
circumstances, we answer the question that we left open in
McLaine v. Commissioner, 138 T.C. 228 (2012). There, the
taxpayer advanced a ‘‘constructive withholding’’ theory in
support of his contention that he was entitled to a section 31
credit, against his individual income tax liability for 1999, for
a payment that his corporation allegedly made to the IRS in
2004 or 2005. See id. at 238–239. We found no need to decide
this question in McLaine, finding as a fact that no payment
had been made by the corporation in the later years. See id.
at 239, 242. Judge Halpern in his concurring opinion did
reach this question, concluding that, when an employer pays
in a later year the nonwithheld income tax of an employee
for an earlier year, the employee as a matter of law is not
entitled to a credit under section 31. See id. at 252–258
(Halpern, J., concurring). We express now our agreement
with Judge Halpern’s conclusion. 5
In finding it unnecessary to decide the section 31 issue in
McLaine, we noted that ‘‘[w]e may one day be presented with
a case in which the IRS proposes to collect a party’s liability
that has been paid by another person.’’ 138 T.C. at 242. That
day has arrived. Petitioners distinctly advance an alternative
5 In Whalen v. Commissioner, T.C. Memo. 2009–37, 97 T.C.M. (CCH)
1147, 1149, we suggested in dictum that a tax payment by an employer
in 2004 with respect to an employee’s tax liability for 2001 ‘‘could plausibly
be characterized as withholding tax under chapter 24 with a corresponding
section 31 credit being allowed to a proper recipient.’’ This Opinion clari-
fies the Court’s position and concludes that a section 31 withholding credit
would not be allowable to the taxpayer in such circumstances.
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182 141 UNITED STATES TAX COURT REPORTS (173)
argument, premised on Tryco’s specific designation of its
December 1999 and June 2000 payments, for a credit of
$91,223 against their 1992–95 income tax liabilities. We turn
now to this alternative argument.
II. Credit Through Specific Designation of Tax Payment
A. Jurisdiction
At the outset, the IRS argues that we lack subject matter
jurisdiction to decide whether it was obligated to honor
Tryco’s specific designation of the delinquent 1999–2000
employment tax payments. Respondent notes correctly that
this Court, for the tax years at issue, generally lacked juris-
diction concerning employment tax liabilities. From that
premise, respondent concludes that we have no jurisdiction
to decide whether an employer’s designated payments of
delinquent employment taxes should properly be credited to
the income tax liabilities of the named employees. We reject
this argument because respondent’s conclusion does not fol-
low from his premise.
Section 6330(d)(1) governs judicial review of CDP deter-
minations by the IRS. The statute in its current form states
that the taxpayer may appeal a CDP determination to the
Tax Court ‘‘and the Tax Court shall have jurisdiction with
respect to such matter.’’ Before 2006, however, the statute
provided two different avenues of appeal: to the Tax Court
or, ‘‘if the Tax Court does not have jurisdiction of the under-
lying tax liability, to a district court of the United States.’’
Sec. 6330(d)(1)(B) (2006) (before amendment by the Pension
Protection Act of 2006, Pub. L. No. 109–280, sec. 855(a), 120
Stat. at 1019). The ‘‘underlying tax liabilit[ies]’’ over which
this Court has jurisdiction consist of income tax imposed by
subtitle A, estate and gift taxes imposed by subtitle B, and
certain excise taxes imposed by chapters 42 through 45. See
sec. 6213(a). This Court generally lacks jurisdiction over
employment taxes, except to determine, under section
7436(a), ‘‘the proper amount of employment tax’’ consequent
upon a determination that a person should be classified as an
‘‘employee’’ as opposed to an ‘‘independent contractor.’’
The ‘‘underlying tax liabilit[ies]’’ that were the subject of
petitioners’ CDP hearing were their income tax liabilities for
1992–95. During the hearing petitioners contended that
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(173) DIXON v. COMMISSIONER 183
respondent should not levy to collect this tax because the tax,
by virtue of Tryco’s designated payments, had already been
paid. Section 6330(c)(2)(A) provides that a taxpayer may
raise at a CDP hearing ‘‘any relevant issue relating to the
unpaid tax or the proposed levy.’’ Petitioners’ contention that
the allegedly unpaid tax for 1992–95 had already been paid
was surely ‘‘relevant’’ to respondent’s proposal to levy on
their assets to collect this same tax.
The Appeals officer considered and rejected petitioners’
designation argument, concluding that Tryco’s 1999–2000
payments ‘‘cannot be designated to the withholding of a spe-
cific employee.’’ We have jurisdiction to review that conclu-
sion because it determines whether petitioners have unpaid
income tax liabilities that are a proper subject of IRS collec-
tion action. In determining whether the IRS may properly
take collection action, our jurisdiction ‘‘extends to facts and
issues in nondetermination years where they are relevant to
computing the unpaid tax.’’ Freije v. Commissioner, 125 T.C.
14, 26–27 & n.14 (2005). As we concluded in Freije, an issue
relevant to computing the unpaid tax ‘‘surely includes a
claim * * * that the ‘unpaid tax’ has in fact been satisfied
by a remittance that the Commissioner improperly applied
elsewhere.’’ Id. at 26.
In sum, because the question whether Tryco’s designated
payments should have been credited toward petitioners’
1992–95 income tax liabilities is relevant to computing the
unpaid tax, we have jurisdiction to decide this question. The
extent of our jurisdiction over employment tax liabilities is
immaterial because the underlying tax liabilities at issue on
this appeal are petitioners’ income tax liabilities for 1992–95.
B. Standard of Review
Section 6330(d)(1) does not prescribe the standard of
review that this Court shall apply in reviewing an IRS
administrative determination in a CDP case. The general
parameters for such review are marked out by our prece-
dents. We generally review the Appeals officer’s determina-
tion as to the propriety of particular collection action for
abuse of discretion. Wadleigh v. Commissioner, 134 T.C. 280,
288 (2010); Sego v. Commissioner, 114 T.C. 604, 610 (2000).
In some situations, the taxpayer may not have received a
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184 141 UNITED STATES TAX COURT REPORTS (173)
notice of deficiency or may not otherwise have had an oppor-
tunity to challenge the tax assessed against him. Where the
validity of the underlying tax liability is properly at issue,
the Court will review the matter de novo. See Wadleigh, 134
T.C. at 288; Sego, 114 T.C. at 610; Goza v. Commissioner,
114 T.C. 176, 181–182 (2000).
The IRS did not send petitioners a notice of deficiency for
the tax years at issue. In their posttrial brief, petitioners
accordingly urged a de novo standard of review. In its
posttrial brief, the IRS agreed that, ‘‘[s]ince the validity of
the underlying tax liability is at issue, the Court will deter-
mine the underlying tax liability de novo.’’
There is some uncertainty in our precedents as to whether
a de novo standard of review applies where (as here) the con-
troversy concerns the proper application, to the tax liability
at issue in the CDP hearing, of a credit, overpayment, or
remittance. 6 Petitioners contend that respondent’s refusal to
honor Tryco’s designation of the December 1999 and June
2000 payments was inconsistent with judicial precedent and
with the published IRS administrative position. If that is so,
respondent’s proposed collection action would be impermis-
sible under an abuse of discretion standard as well as under
a de novo standard. We accordingly do not need to decide
whether petitioners’ challenge involves a dispute concerning
their ‘‘underlying tax liability’’ as to which a de novo
standard of review would apply.
6 Compare
Landry v. Commissioner, 116 T.C. 60, 62 (2001) (applying de
novo standard where taxpayer challenged application of overpayment cred-
its, reasoning that ‘‘the validity of the underlying tax liability, i.e., the
amount unpaid after application of credits to which petitioner is entitled,
* * * [was] properly at issue’’), with Kovacevich v. Commissioner, T.C.
Memo. 2009–160, 98 T.C.M. (CCH) 1, 4 & n.10 (applying abuse of discre-
tion standard where taxpayer challenged application of tax payments, rea-
soning that ‘‘questions about whether a particular check was properly cred-
ited to a particular taxpayer’s account for a particular tax year are not
challenges to his underlying tax liability’’), and Orian v. Commissioner,
T.C. Memo. 2010–234, 100 T.C.M. (CCH) 356, 359 (same). See also Freije
v. Commissioner, 125 T.C. 14, 23, 26–27 (2005); Comfort Plus Health Care,
Inc. v. Commissioner, 2005–2 U.S. Tax Cas. (CCH) para. 50,494, at
89,175–89,176 (D. Minn. 2005) (applying abuse of discretion standard
where taxpayer in CDP case challenged IRS failure to credit overpay-
ments).
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(173) DIXON v. COMMISSIONER 185
C. Designated Payment
Respondent agrees that the law generally allows taxpayers
to designate how voluntary tax payments should be applied.
Respondent does not dispute that Tryco’s tax payments were
‘‘voluntary,’’ and he appears to agree that Tryco’s directions,
if followed, would result in applying the $91,223 as a credit
toward petitioners’ 1992–95 income tax liabilities. Respond-
ent’s position is that the IRS policy of honoring designations,
while well established, is limited. This policy is assertedly
confined to designations of tax payments to a particular tax
period or to a particular type of tax, e.g., to ‘‘trust fund’’ tax
liabilities as opposed to corporate income tax liabilities.
According to respondent, there is no legal basis for insisting
that the IRS honor the designation of a delinquent employ-
ment tax payment toward the income tax liability of a spe-
cific employee.
We can discover no such limitation on the IRS’ obligation
to honor the designation of voluntary tax payments, either in
published IRS administrative pronouncements or in the
judicial decisions that have cited and relied upon them for
the past 30 years. As explained more fully below, we accord-
ingly reject respondent’s argument and hold that petitioners
should have received a credit of $91,223 toward their 1992–
95 income tax liabilities by virtue of Tryco’s designated pay-
ments.
1. In Rev. Rul. 73–305, 1973–2 C.B. 43, the IRS announced
its position that voluntary partial payments of assessed tax,
penalties and interest are to be applied as the taxpayer des-
ignates. This rule was made applicable ‘‘to all taxes under
the Internal Revenue Code of 1954, except Alcohol, Tobacco,
and Firearms taxes, withheld employment taxes, and col-
lected excise taxes.’’ Id., 1973–2 C.B. at 44. The IRS revised
and expanded this position six years later in Rev. Rul. 79–
284, 1979–2 C.B. 83. It there held that the designation policy
announced in Rev. Rul. 73–305, supra, ‘‘applies to withheld
employment taxes and collected excise taxes where the tax-
payer provides specific written instructions for the applica-
tion of a voluntary partial payment.’’ Only where ‘‘no des-
ignation is made by the taxpayer’’ would the IRS apply the
payment ‘‘in a manner serving its best interest.’’
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186 141 UNITED STATES TAX COURT REPORTS (173)
Revenue Ruling 79–284, supra, was superseded, after the
tax payments in issue, by Rev. Proc. 2002–26, 2002–1 C.B.
746, which was published to ‘‘update and restate’’ the posi-
tion announced in the prior ruling. It similarly holds that,
when ‘‘the taxpayer provides specific written directions as to
the application of * * * [a voluntary partial] payment, the
Service will apply the payment in accordance with those
directions.’’ The Internal Revenue Manual (IRM) defines a
‘‘designated payment’’ as ‘‘a voluntary * * * [payment] that
the taxpayer has directed to be applied in a particular
manner, i.e., a specific period, kind of tax, tax portion,
interest, etc.’’ IRM pt. 5.1.2.4 (Jan. 22, 2001) (current version
at IRM pt. 5.1.2.8 (Aug. 15, 2008)).
The principle that the IRS must honor a taxpayer’s des-
ignation of a voluntary tax payment has been recognized
repeatedly by the courts. We have discovered no case
addressing the specific fact pattern involved here, where a
taxpayer designates a voluntary payment toward the income
tax liability of a named third party. However, the Commis-
sioner’s published position concerning designated payments
refers broadly to voluntary payments that a taxpayer ‘‘has
directed to be applied in a particular manner,’’ IRM pt.
5.1.2.4, and the courts have expressed their understanding of
the IRS policy in similarly unqualified terms.
The Supreme Court has stated: ‘‘IRS policy permits tax-
payers who ‘voluntarily’ submit payments to the IRS to des-
ignate the tax liability to which the payment will apply.’’
United States v. Energy Res. Co., 495 U.S. 545, 548 (1990);
see Slodov v. United States, 436 U.S. 238, 252 n.15 (1978)
(noting exception where payment ‘‘results from enforced
collection methods’’). These cases are appealable to the Court
of Appeals for the Fifth Circuit. See sec. 7482(b)(1)(A). The
Court of Appeals has stated: ‘‘[I]f a taxpayer directs that a
payment be applied in a certain manner, the IRS must abide
by the taxpayer’s direction.’’ Wood v. United States, 808 F.2d
411, 416 (5th Cir. 1987). The Courts of Appeals for the Third,
Sixth, Seventh, Ninth, and Tenth Circuits have recognized
the duty of the IRS to respect the taxpayer’s designation of
a voluntary payment. 7 This Court has consistently done the
7 See IRS v. Kaplan (In re Kaplan), 104 F.3d 589, 599 (3d Cir. 1997)
(‘‘[A]ny payment made on the corporate account involved is deemed to rep-
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(173) DIXON v. COMMISSIONER 187
same. See, e.g., Worthan v. Commissioner, T.C. Memo. 2012–
263, at *3 n.3 (‘‘[I]f the IRS has assessed additional taxes,
penalties, and interest ‘at the time the taxpayer voluntarily
tenders a partial payment that is accepted by the Service
and the taxpayer provides specific written directions as to
the application of the payment, the Service will apply the
payment in accordance with those directions.’ ’’ (quoting Rev.
Proc. 2002–26, sec. 3, 2002–1 C.B. at 746)); Cooley v.
Commissioner, T.C. Memo. 2012–164, 103 T.C.M. (CCH)
1875, 1876 n.1 (‘‘A taxpayer making a voluntary payment can
designate the liability she wants her payment to cover, and
the IRS will apply the payment as the taxpayer directs.’’). 8
Respondent notes correctly that many of these cases
involved ‘‘trust fund taxes,’’ where the dispute centered on
whether an employer’s tax payment should be applied to its
corporate income tax obligations or rather to employment tax
obligations for which its officers and employees would have
individual liability as ‘‘responsible persons.’’ 9 Respondent
resent payment of the employer portion of the liability * * * unless there
was some specific designation to the contrary by the taxpayer.’’); Davis v.
United States, 961 F.2d 867, 878 (9th Cir. 1992) (‘‘When a taxpayer sub-
mits a voluntary payment, she may designate to which liability the money
should be applied.’’); Lorenzini v. United States, 946 F.2d 895, 1991 WL
203086, at *4 (6th Cir. 1991) (‘‘Voluntary partial payments * * * will be
applied to withheld employment taxes * * * as designated by the tax-
payer.’’); Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983)
(‘‘When a taxpayer makes voluntary payments to the IRS, he has a right
to direct the application of payments to whatever type of liability he choos-
es.’’ (citing O’Dell v. United States, 326 F.2d 451, 456 (10th Cir. 1964))).
8 In all of these cases, the duty of the IRS to honor a taxpayer’s designa-
tion of a voluntary payment was common ground. The disputes focused on
whether the payment was ‘‘voluntary’’ and/or whether the taxpayer had
made a proper and unambiguous ‘‘designation.’’ See, e.g., Kaplan, 104 F.3d
at 599 (concluding that IRS can generally apply payment as it wishes ‘‘in
the absence of a written designation’’ by employer); IRS v. Energy Res. Co.
(In re Energy Res. Co.), 871 F.2d 223, 230 (1st Cir. 1989) (concluding that
payment made pursuant to bankruptcy court order was not ‘‘voluntary’’),
aff ’d on other grounds, 495 U.S. 545 (1990); Wood, 808 F.2d at 417 (con-
cluding that employer had made ‘‘no specific designation’’ of its payment).
9 Because section 7501(a) requires employers to hold taxes collected and
withheld from employees’ wages ‘‘in trust for the United States,’’ these
taxes are commonly referred to as trust fund taxes. See Slodov, 436 U.S.
at 242–243. Officers or employees who are responsible for collecting the tax
are commonly referred to as ‘‘responsible individuals’’ or ‘‘responsible per-
Continued
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188 141 UNITED STATES TAX COURT REPORTS (173)
acknowledges the IRS’ policy of honoring an employer’s des-
ignation of voluntary payments between these two types of
taxes. In his view, however, petitioners inappropriately ‘‘seek
to extend this policy beyond designating a payment for a spe-
cific type of tax and argue that an employer should be
allowed to designate a payment as the withholding of a par-
ticular employee.’’ According to respondent, designated
employment tax payments can be applied only to an
employer’s overall employment tax obligations. No authority
assertedly exists for allowing an employer ‘‘to designate pay-
ments as withholding for a specific employee,’’ so that
employees remain liable ‘‘for their separate and independent
income tax obligations’’ notwithstanding the employer’s des-
ignated payment thereof.
We find no such gloss on the IRS’ policy of honoring des-
ignated tax payments in its published administrative posi-
tion, which it is obligated to follow, Rauenhorst v. Commis-
sioner, 119 T.C. 157, 171–173 (2002), or in the judicial
decisions that have repeatedly recognized this obligation.
This supposed gloss, moreover, is at odds with established
practice in employment tax refund litigation and with
inferences logically drawn from section 6331.
Generally, a taxpayer must pay the entirety of an assessed
tax or proposed deficiency in order to support jurisdiction of
a refund suit under 28 U.S.C. sec. 1346 (2006). See Flora v.
United States, 362 U.S. 145, 177 (1960). However, under a
doctrine first enunciated in Steele v. United States, 280 F.2d
89, 91 (8th Cir. 1960), a well-established exception to this
full-payment rule exists with respect to ‘‘divisible taxes.’’ The
employment tax for which an employer is liable under sub-
title C is a ‘‘divisible tax’’ because each portion of the tax
relates to a specific employee and calendar quarter. An
employer is permitted to pay a divisible portion of its employ-
ment tax liability, file a refund claim for that amount, and
commence refund litigation under 28 U.S.C. sec. 1346(a)(1)
when the claim is denied. The United States then typically
counterclaims for the balance of the tax in dispute. See, e.g.,
Univ. of Chi. v. United States, 547 F.3d 773, 785 (7th Cir.
2008); Korobkin v. United States, 988 F.2d 975, 976 (9th
sons.’’ Energy Res. Co., 495 U.S. at 546–547; see infra p. 192.
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(173) DIXON v. COMMISSIONER 189
Cir. 1993); Boynton v. United States, 566 F.2d 50, 51–52 (5th
Cir. 1977); CCA 201315017 (Apr. 12, 2013).
This ‘‘divisible tax’’ litigation procedure is beneficial to
employers, enabling them to seek resolution of an employ-
ment tax dispute by means of a test case, without the neces-
sity of paying up front the entire amount at issue for
numerous workers. This procedure is commonly used to
establish the status of particular workers, or a particular
class of workers, as ‘‘employees’’ or ‘‘independent contrac-
tors.’’ See, e.g., Bruecher Found. Servs., Inc. v. United States,
383 Fed. Appx. 381 (5th Cir. 2010); Smoky Mountain Secrets,
Inc. v. United States, 910 F. Supp. 1316 (E.D. Tenn. 1995);
Theodore D. Peyser, Refund Litigation, 631–4th Tax Mgmt.
(BNA) A–5 (‘‘[T]o sue for a refund of employment tax, one
must first pay the tax or penalty assessed as to one employee
for a single quarter.’’).
Section 6331 governs levy and seizure of property to satisfy
Federal tax obligations. Section 6331(i)(1) provides that no
levy shall be made against an employer ‘‘with respect to any
unpaid divisible tax during the pendency of any proceeding’’
brought by the employer ‘‘for recovery of any portion of such
divisible tax.’’ A ‘‘divisible tax’’ for purposes of this section
includes employment taxes imposed by subtitle C. See sec.
6331(i)(2)(A). This bar against levies applies where the deci-
sion in the pending refund suit ‘‘would be res judicata with
respect to such unpaid tax’’ and where the employer ‘‘would
be collaterally estopped from contesting such unpaid tax by
reason of such proceeding.’’ Sec. 6331(i)(1)(A) and (B).
In order for this statutory scheme to function as Congress
intended, an employer will often find it necessary to des-
ignate employment tax payments toward the tax liabilities of
specific employees. A large company with complex operations
may have multiple locations with distinctive activities. It
may have multiple classes or categories of workers who
manifest varying indicia of ‘‘employee’’ and ‘‘independent con-
tractor’’ status or who receive different kinds of payments
that may or not be ‘‘wages.’’
Collateral estoppel applies only where the facts actually
litigated are the same as the facts in the collateral pro-
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190 141 UNITED STATES TAX COURT REPORTS (173)
ceeding. 10 Thus, in order to ensure that a decision in the
refund suit will have collateral estoppel effect with respect to
all affected workers, the employer must ensure that it has
paid employment taxes for at least one worker in each dis-
tinct employment class. If an employer fails to establish full
payment of employment taxes for at least one affected
worker for one calendar quarter, the case may be dismissed
for lack of jurisdiction. See, e.g., 47th Street Setting Corp. v.
United States, 84 A.F.T.R.2d (RIA) 99–6691 (S.D.N.Y. 1999)
(dismissing refund suit where employer had two classes of
workers and failed to pay full employment taxes for one cal-
endar quarter for any worker whom the IRS had reclassified
as an employee). 11
Where an employer has distinct employment classes, it is
hard to see how it can meet the threshold requirement to
prove it has paid taxes for at least one employee in each con-
tested class unless it can designate payments toward the tax
liabilities of specific employees—i.e., designate which
‘‘portion[s] of such divisible tax’’ are being remitted. Sec.
6331(i)(1). And it is hard to see how refund litigation could
be instituted on the terms Congress contemplated unless the
IRS is bound to honor the employer’s designation. The IRM
explicitly defines a ‘‘designated payment’’ to include a vol-
10 See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326–329 (1979) (dis-
cussing collateral estoppel); Alexander v. Commissioner, 224 F.2d 788,
791–793 (5th Cir. 1955) (same), aff ’g in part, rev’g in part 22 T.C. 318
(1954); Peck v. Commissioner, 90 T.C. 162, 166–167 (1988) (an important
factor when applying collateral estoppel is whether ‘‘[t]he issue in the sec-
ond suit * * * [is] identical in all respects with the one decided in the first
suit’’), aff ’d, 904 F.2d 525 (9th Cir. 1990).
11 Accord Gerald A. Kafka & Rita A. Cavanagh, Litigation of Federal
Civil Tax Controversies, para. 15.03[2], at 15–13 (2d ed. 2010), available
at 1999 WL 629587, at *4 (‘‘[T]he employee or transaction to which the tax
relates must be representative of all employees or transactions for which
the tax was assessed. * * * If the employee or the transaction is not rep-
resentative, the collateral estoppel effect of any judgment could be mini-
mized.’’); see also Spivak v. United States, 254 F. Supp. 517, 522–523
(S.D.N.Y. 1966) (finding that taxpayers failed to prove they had paid the
employment taxes for one employee for one quarter and dismissing com-
plaint), aff ’d, 370 F.2d 612 (2d Cir. 1967); Gerald A. Kafka, Refund Litiga-
tion in the U.S. District Court and U.S. Court of Federal Claims, ST009
ALI–ABA 325, 327 (‘‘Care must be taken to ensure that the payment does
in fact correspond to a single employee or event that is in issue.’’).
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(173) DIXON v. COMMISSIONER 191
untary payment that the taxpayer directs to be applied to ‘‘a
specific * * * tax portion.’’ IRM pt. 5.1.2.4.
2. Ensuring that the IRS honors taxpayer designations of
voluntary tax payments is essential to vindicate the policy
against double collection of the same tax. In the instant
cases, there is a single underlying tax liability—petitioners’
individual income tax liabilities for 1992–95. The Code pro-
vides two ways to collect this tax: from the employer as with-
holding tax under sections 3402 and 3403, and from the
employee when he files his annual Form 1040, U.S. Indi-
vidual Income Tax Return. As the Supreme Court stated in
Baral v. United States, 528 U.S. 431, 436 (2000): ‘‘With-
holding and estimated tax remittances are not taxes in their
own right, but methods for collecting the income tax.’’ The
principal liability for the income tax is borne by the tax-
payer-employee under section 1. The employer bears liability
for this tax under section 3403, but it is a derivative liability
arising from its status as a withholding agent. 12
Such derivative liability for withholding agents is common
in a multitude of Code settings. Section 3101(a) imposes a
share of the FICA tax on the employee; section 3102 provides
that this tax ‘‘shall be collected by the employer,’’ who thus
bears derivative liability for the employee’s share of the
FICA tax. Under section 3405, the payor of pensions and
annuities bears derivative liability for the distributee’s
income tax. Under section 3406, a financial institution
required to perform ‘‘backup withholding’’ on payments of
interest and dividends bears derivative liability for the inves-
tor’s income tax. In none of these contexts does the Code
explicitly provide that the employee, distributee, or investor
will receive, toward her principal liability, a credit for pay-
ments the payor makes toward its derivative liability. But
12 See
Whalen v. Commissioner, 97 T.C.M. (CCH) at 1149 (‘‘While we
agree with respondent that the tax liability of an employer under sections
3403 and 7501 is independent of the liability imposed on the employee
under section 1, we also agree with petitioner that these two liabilities are
for the same income tax.’’); H.R. Doc. No. 78–237, at 5 (1943) (employment
tax borne by employer is ‘‘not an additional tax—merely a collection de-
vice’’).
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192 141 UNITED STATES TAX COURT REPORTS (173)
the IRS allows such a credit, as it must, because failure to
do so would result in double collection of the same tax. 13
An analogous principle has been recognized in so-called
responsible person cases. Section 6672(a) provides that, if an
officer or employee responsible for withholding and collecting
employment taxes from employees willfully fails to do so, he
or she shall ‘‘be liable to a penalty equal to the total amount
of the tax evaded, or not collected, or not accounted for and
paid over.’’ This penalty is often called the ‘‘trust fund
recovery penalty,’’ because it provides a mechanism for col-
lecting, from an employer’s responsible persons, employment
taxes that should have been collected and held ‘‘in trust for
the United States.’’ Sec. 7501(a); see Weber v. Commissioner,
138 T.C. 348, 357–358 (2012). In this setting, the employer
bears principal liability under section 3403 for the trust fund
taxes that should have been withheld, and the ‘‘responsible
persons’’ bear derivative liability for those same taxes under
section 6672.
In a ‘‘responsible person’’ situation, numerous individuals
and/or entities may be liable for redundant penalties deriving
from the same unpaid tax. See Commonwealth Nat’l Bank of
Dallas v. United States, 665 F.2d 743, 758 (5th Cir. 1982).
There is no Code provision that explicitly grants a credit to
one person against his penalty assessment if the IRS later
collects the tax directly from the employer or collects the
13 Judge Holmes suggests in dissent that the Code does have an explicit
provision allowing credits for tax withheld from payments of pensions, an-
nuities, interest, and dividends. See Holmes op. p. 204. This provision, he
says, ‘‘is none other than the very same section 31’’ that we have discussed
previously. Section 31, however, is entitled ‘‘Tax Withheld on Wages’’; and
section 31(a) is entitled ‘‘Wage Withholding for Income Tax Purposes.’’ By
its terms, section 31 does not apply to pensions and annuities under sec-
tion 3405 or to interest and dividends under section 3406—except as it ap-
plies by analogy, which bolsters our point. Judge Holmes likewise points
to no Code section that explicitly provides a credit to the employee for the
employer’s payment of employee FICA tax. Rather, he infers that the em-
ployee must be entitled to a credit from section 31.3102–1(d), Employment
Tax Regs. (‘‘Until collected from * * * [the employer] the employee also is
liable for the employee tax with respect to all the wages received by him.’’).
But not even this regulation provides an explicit credit for the employee
when the employer pays the tax. Judge Holmes’ inference that a credit
must be available is reasonable precisely because the structure and logic
of the Code’s withholding provisions mandate such crediting to avoid dou-
ble collection of the same tax.
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(173) DIXON v. COMMISSIONER 193
penalty from others. But in practice such crediting does
occur, under a longstanding IRS policy which recognizes that
the section 6672 penalty is a method of collecting trust fund
taxes once, not twice. See IRM pt. 1.2.14.1.3(2) (June 9, 2003)
(‘‘The withheld income and employment taxes * * * will be
collected only once, whether from the business, or from one
or more of its responsible persons.’’); id. pt. 8.25.1.5.1(5) (Dec.
7, 2012) (‘‘Even though the Service may make assessments
against more than one responsible person for a particular
quarterly liability, it ultimately only collects the total
amount once.’’). The Supreme Court recognized this policy 35
years ago in United States v. Sotelo, 436 U.S. 268, 279 n.12
(1978): ‘‘[I]t is IRS policy that the amount of the tax will be
collected only once. After the tax liability is satisfied, no
collection action is taken on the remaining 100-percent pen-
alties.’’ 14
This well-established IRS policy against double collection
of trust fund taxes illuminates the proper disposition of the
question presented here. Just as there is no Code provision
explicitly mandating that an employer’s (late) payment of
employment tax must be credited toward a responsible per-
son’s liability for the section 6672 penalty, so too there is no
Code provision explicitly mandating that an employer’s (des-
ignated late) payment of employment tax be credited toward
the designated employee’s liability for income tax. But in
both cases, despite the Code’s silence as to the availability of
a credit, the payment of the one necessarily satisfies the
14 Accord,
e.g., USLIFE Tit. Ins. Co. of Dallas v. Harbison, 784 F.2d
1238, 1241 (5th Cir. 1986) (‘‘[A]s a matter of policy, * * * [the Govern-
ment] does not retain payments exceeding the underlying withholding tax
delinquency.’’); Kelly v. Lethert, 362 F.2d 629, 635 (8th Cir. 1966) (Govern-
ment is entitled to only one satisfaction of trust fund taxes); Weber v. Com-
missioner, 138 T.C. 348, 358 & n.6 (2012) (‘‘The IRS collects the trust fund
liability no more than once.’’); Gutherie v. United States, 359 F. Supp. 2d
693, 697 (E.D. Tenn. 2005) (‘‘Because the IRS is entitled to only one satis-
faction of the trust fund tax liability, once it has obtained that satisfaction
from the employer, it must abate all assessments against responsible indi-
viduals under section 6672.’’); Johnson v. United States, 203 F. Supp. 2d
416, 425 (D. Md. 2002) (‘‘[E]ven absent the internal IRS policy, the agency
* * * [is] not entitled to double recovery under section 6672.’’).
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194 141 UNITED STATES TAX COURT REPORTS (173)
other. The IRS must allow a credit in both situations to avoid
double collection of the same tax. 15
3. The outcome that we believe to be supported by judicial
precedent and sound tax policy is likewise supported by
common sense. Petitioners themselves supplied Tryco with
the $91,223 at issue. They contributed these funds to their
corporation, on the advice of their attorney, with explicit
instructions that the funds be remitted to the IRS and des-
ignated toward payment of their 1992–95 income tax liabil-
ities. These funds were paid to the IRS pursuant to peti-
tioners’ plea agreement with the Department of Justice,
which stated that they ‘‘may be required to make full restitu-
tion for the losses sustained by the Internal Revenue
Service’’ as a result of their tax offenses. Petitioners success-
fully argued for probated sentences on the ground that they
had remitted taxes to the IRS in excess of the ‘‘tax loss’’
determined in their plea agreements. Since these payments
were intended as ‘‘restitution’’ for petitioners’ tax offenses,
those payments should logically be credited toward peti-
tioners’ liability for the 1992–95 tax years that were the sub-
ject of the criminal tax case. It would be inequitable and
inconsistent with the premises of the plea agreement and
sentencing for the IRS to insist on collecting this same tax
again.
For these reasons, we hold that the IRS was obligated to
honor Tryco’s designation of its delinquent 1999–2000
15 JudgeHolmes contends that petitioners cannot ‘‘point to a single cred-
it under current law that would cause Tryco’s payment to erase their own
income-tax liability,’’ and that the Court has therefore ‘‘mint[ed] a new tax
credit nowhere to be found in the Code.’’ See Holmes op. pp. 202, 198. His
opinion proceeds from the erroneous premise that a ‘‘credit’’ to a taxpayer’s
account can arise only by virtue of a specific Code provision in ch. 1, subch.
A, pt. IV, captioned ‘‘Credits against Tax.’’ In fact, there is no section in
the Code providing that a payment of tax shall be credited against the li-
ability for that tax; but of course such payments must be so credited. If
a person remits $100,000 to the IRS and designates it toward payment of
his gift tax liability, the IRS would credit that payment toward his gift tax
liability. If a grandson remits $100,000 to the IRS and designates it toward
payment of his grandmother’s gift tax liability, the IRS would (we hope)
credit that payment toward his grandmother’s gift tax liability. In both
cases, the credit arises, not by virtue of a specific Code provision, but by
virtue of the IRS’ honoring the taxpayer’s designation and crediting the ac-
count of the relevant taxpayer for the relevant tax.
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(173) DIXON v. COMMISSIONER 195
employment tax payments to petitioners’ income tax liabil-
ities for 1992–95. Respondent’s failure to honor this designa-
tion was an abuse of discretion. The $91,223 payments at
issue, if properly credited to petitioners’ account, would have
fully discharged their 1992–95 income tax liabilities
(excluding any applicable interest and penalties). The IRS
therefore may not levy on their assets to collect this tax a
second time. 16
An important corollary of our holding concerns penalties
and interest. Section 6513(b)(1) provides that ‘‘[a]ny tax actu-
ally deducted and withheld at the source * * * shall, in
respect of the recipient of the income, be deemed to have
been paid by him on the 15th day of the fourth month fol-
lowing the close of his taxable year with respect to which
such tax is allowable as a credit under section 31.’’ The
$91,223 at issue here was not ‘‘actually deducted and with-
held at the source,’’ and no credit therefor is allowable to
petitioners under section 31. Tryco’s designated payments
thus result in a credit to petitioners’ account as of December
1999 and June 2000 respectively, not as of April 15, 1996.
Respondent accordingly may levy on petitioners’ assets to col-
16 Judge Buch in dissent errs in suggesting that our Opinion sanctions
‘‘double-dipping’’ by Tryco. See Buch op. p. 214. The $91,223 that Tryco re-
mitted to the IRS in 1999–2000 consisted of delinquent employment
taxes—specifically, income taxes that were not deducted and withheld from
its employees’ wages contemporaneously but were being remitted five
years late. Logically, these nonwithheld income taxes must be attributable
to some employee on Tryco’s payroll during the relevant tax years. In des-
ignating its payments, Tryco was simply identifying James and Sharon
Dixon, rather than John and Sally Doe, as the employees to whose ac-
counts these income tax payments should be credited. This is not ‘‘double-
dipping.’’ It is true that, by making these designated payments, Tryco was
simultaneously discharging the Dixons’ income tax liability under section
1 and its own withholding tax liability under section 3403. But this is
what happens in the normal situation when the employer withholds in-
come tax from its employees’ wages and remits that tax to the IRS. As ex-
plained in the text, see supra p. 191, there is a single underlying tax liabil-
ity involved in these cases—petitioners’ individual income tax liabilities for
1992–95. By remitting $91,223 to the IRS and designating it toward the
Dixons’ income tax liabilities, Tryco was simultaneously discharging the
Dixons’ principal liability and its own derivative liability for the same tax.
We assume that Judge Buch would not characterize this as ‘‘double-dip-
ping’’ if Tryco had remitted the tax timely, and we do not see why the
characterization should be different when Tryco remits the tax late.
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196 141 UNITED STATES TAX COURT REPORTS (173)
lect any applicable interest and penalties. Tryco likewise
remains liable for penalties and interest. See sec. 3402(d);
sec. 31.6205–1(c)(3)(ii), Employment Tax Regs. 17
Appropriate decisions will be entered.
Reviewed by the Court.
COLVIN, FOLEY, GALE, GOEKE, WHERRY, KROUPA, GUSTAF-
SON, PARIS, MORRISON, and KERRIGAN, JJ., agree with this
opinion of the Court.
VASQUEZ, J., did not participate in the consideration of this
opinion.
GOEKE, J., concurring: I agree with the opinion of the
Court and write simply to clarify that the credibility of peti-
tioners’ testimony played no role in the opinion of the Court
17 We
have no occasion in these cases to address the income tax con-
sequences of these designated payments for petitioners’ 1999 and 2000 tax
years. The regulations presuppose that, when nonwithheld taxes are paid
to the IRS, an employer will normally seek reimbursement from the em-
ployee ‘‘on or before the last day of such year by deducting such amount
from the remuneration of the employee, if any.’’ Sec. 31.6205–1(c)(4), Em-
ployment Tax Regs. That obviously did not happen here. Under these cir-
cumstances, Tryco’s designated payments of petitioners’ income tax liabil-
ities could conceivably be characterized as corporate distributions governed
by section 301(c) or as payment of additional wages (which might generate
additional withholding tax liability). See Old Colony Trust Co. v. Commis-
sioner, 279 U.S. 716, 730–731 (1929) (employer’s payment of employee’s in-
come tax obligation in consideration of employee’s services for employer
constitutes income to employee). We likewise have no occasion to address
the income tax consequences for Tryco of its 1999–2000 payments aggre-
gating $91,223 on petitioners’ behalf. Finally, we have no occasion to con-
sider the income tax consequences for an employer that, unlike Tryco,
makes a nondesignated payment of delinquent employment taxes under
section 3403. Compare L & L Marine Serv., Inc. v. Commissioner, T.C.
Memo. 1987–428 (employer’s payment of employees’ share of delinquent
employment taxes not deductible under section 162(a) either as compensa-
tion or as an ordinary and necessary business expense), with IRS Field
Service Advisory 200025002, (June 23, 2000) (employer’s payment of em-
ployees’ share of delinquent employment taxes deductible under section
162(a) as an ordinary and necessary business expense where payment
achieved a proximate business benefit for employer). The only issue before
us is whether the IRS may levy to collect petitioners’ income tax liabilities
for 1992–95.
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(173) DIXON v. COMMISSIONER 197
because the issues addressed are legal, not factual. Credi-
bility of their testimony was important only to the factual
findings Judge Holmes made as the trial Judge in the com-
panion Memorandum Opinion also released today.
The Court is obviously aware of petitioners’ 1999 plea
agreement with the U.S. attorney, which is discussed in both
the opinions issued today. The opinion of the Court only ref-
erenced the plea agreement as the source for the ‘‘tax loss’’
figure discussed in both opinions. There were no credibility
findings attached to that reference. In Judge Holmes’ Memo-
randum Opinion, the plea agreement was used in connection
with the best evidence rule to serve as ‘‘other evidence’’ that
reflects the content of Tryco’s missing payroll documents.
Judge Holmes also made a credibility finding with regard to
petitioners’ testimony.
The Court is also aware that James Dixon pleaded guilty
to Federal tax evasion for 2006, United States v. Dixon, No.
4:12CR00521–001 (S.D. Tex. Apr. 1, 2013), the same year
petitioners testified that they knew nothing about the non-
payment of withheld taxes for tax years 1992–95. Similarly,
Sharon Dixon was also later convicted for subsequent Fed-
eral tax crimes. United States v. Dixon, No. 4:12CR00522–
001 (S.D. Tex. Feb. 13, 2013).
WHERRY, KROUPA, MORRISON, and LAUBER, JJ., agree with
this concurring opinion.
HOLMES, J., dissenting: Imagine that a check arrives at the
IRS from John Green with a letter that says: ‘‘This check is
to be applied to my tax bill for 2013. Also, please credit my
friend Joe Black’s account for the same amount. He gave me
the money that let me write this check and I’d like him to
benefit as well.’’ If things work as they should at the Service,
Green’s account should be credited; and the suggestion that
the same check should be credited for Joe Black’s account
would cause some tittering, or maybe just a puzzled look on
the face of the IRS employee opening the envelope.
And that’s more or less what happened here. Tryco sent in
a few dozen checks together with letters saying to please pay
the company’s tax bill and designated them as well as pay-
ments of ‘‘withheld income taxes’’ for one or the other of the
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198 141 UNITED STATES TAX COURT REPORTS (173)
Dixons. The IRS credited Tryco’s giant unpaid employer-tax
liability, but did not reduce the Dixons’ large income-tax
liability.
The majority is quite right that the Dixons don’t get a
credit under section 31 for payments Tryco made that were
not ‘‘actually withheld at the source.’’ But what the majority
gets wrong is the way the crediting scheme works. Employers
get a credit under section 3402(d) for employee payments
whenever they’re made, but employees get a credit for
employer payments only when those payments are ‘‘actually
* * * withheld at the source.’’ Sec. 1.31–1(a), Income Tax
Regs. Here, we all agree that the payments were not actually
withheld at the source. That should be good enough to
answer the question before us, because the plain language of
the Code and regulations does not provide the Dixons with
a credit. Dissatisfied with this plain language, the majority
sets up its own forge and mints a new tax credit nowhere to
be found in the Code.
I must respectfully dissent, because this Court doesn’t
have the power to replace a clear and explicit crediting
scheme with one that we deem ‘‘fair’’.
I.
Had the Dixons sent the money in themselves and told the
Commissioner to apply the payments toward their own
income-tax liability, they’d have a credit for their payments
(but might still be on the hook for leftover penalties or
interest), and so would Tryco, under section 3402(d). But the
Dixons instead sent money to Tryco for Tryco to send to the
IRS. Tryco sent that money to the IRS voluntarily and told
the Commissioner to apply it towards Tryco’s own unpaid
employment taxes. It’s what the Dixons and Tryco told us
they intended to do, and it’s what they actually did. The
Commissioner then obeyed those instructions.
What colors these cases, and makes the Dixons look
sympathetic, is that the money Tryco paid is money that the
Dixons contributed to the corporation after they took out a
home-equity loan for almost a half-million dollars. It was this
money that they sent to Tryco, and had Tryco pay over to the
IRS in December 1999. The letters that accompanied the
payment told the IRS exactly where to put it: towards
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(173) DIXON v. COMMISSIONER 199
‘‘[Form] 941 taxes of the corporation * * * to be applied to
the withheld income taxes’’ of James R. Dixon or Sharon
Dixon for each quarter of the 1992 through 1995 tax years.
The ‘‘memo’’ lines on the checks themselves said ‘‘Designated
Payment of 941 Taxes’’ for each Dixon. The letter that Tryco
sent along with the June 2000 payment said something
similar: It was a ‘‘payment of [Form] 941 taxes of the cor-
poration for calendar quarter 9504, 1 and which represents
the withheld income taxes of employee James R. Dixon and
employee Sharon Dixon.’’ The Dixons couldn’t have been
much more clear—Form 941 is the Employer’s Quarterly
Federal Tax Return, and they told the IRS to pay the taxes
‘‘of the corporation,’’ the same entity that formally sent along
the payment. The Dixons did ask the IRS to apply the pay-
ments to the portion of Tryco’s employment-tax bill that was
attributable to Tryco’s failure to withhold taxes from James’s
and Sharon’s wages. But that isn’t the same thing as asking
the IRS to apply the payments directly towards the Dixons’
individual income-tax liabilities, because Tryco was asking
the IRS to apply the payments toward a specific part of
Tryco’s tax bill.
We even have testimony from Larry Campagna, the
Dixons’ tax attorney, saying that the Dixons knew that they
had a choice—pay their own taxes directly, or have Tryco pay
its own taxes, specifically those attributable to underwith-
holding for the Dixons. And he explained why the Dixons
decided to pay Tryco’s liability rather than their own.
Campagna stated that he was afraid that
had Mr. and Mrs. Dixon remitted the income taxes directly for their
account, then the 941 liability for Tryco would not have been reduced by
the payment, and the Government would have been asking for a double
collection of the same money on the income tax side and the employment
tax side. [2]
There was something else here: Had the Dixons simply
sent the money in and told the IRS to apply the payments
towards their own income-tax liabilities, they still would’ve
been on the hook for all of the interest and penalties that
1 In
IRS numerology, 9504 means the fourth quarter of tax year 1995.
2 That
statement implies a misunderstanding of section 3402(d), which,
by giving Tryco a credit for the Dixons’ payment of their own taxes, would
have prevented ‘‘double collection’’ of the remitted amount.
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200 141 UNITED STATES TAX COURT REPORTS (173)
had accrued between the due dates of the original returns—
April 1993, 1994, and 1995—and the dates that they finally
paid up in December 1999 and June 2000. See sec. 6622(a).
By instead contributing the money to Tryco—their
employer—and then having Tryco pay it as employment tax,
the Dixons hoped that the IRS would treat the payments as
the IRS treats normal withholding payments, which would
then erase many years of interest and penalties. 3 That’s why
they chose the indirect route. 4
We also have the Dixons’ briefs, which say that the Dixons
gave ‘‘detailed written instructions (on the checks and in the
cover letters),’’ that ‘‘unequivocally provided’’ for how the IRS
was to apply their payments, and also say ‘‘[t]he IRS did not
have to guess how Tryco wanted the payments applied.’’
They reiterate that those instructions said that the payments
were for ‘‘Form 941 taxes of the corporation for all quarters
during 1992–1995,’’ specifically those attributable to the
withheld income taxes of the Dixons.
So we know what the Dixons actually asked for in their
letters—for the IRS to apply the payments towards Tryco’s
employment taxes—and we know that’s exactly what they
meant to do, because their lawyer explained why, and their
briefs hammered it home. Nevertheless, the majority actually
appears to come to two conflicting conclusions about what
Tryco asked the IRS to do with the money. It argues both
that the Commissioner should have reduced the Dixons’
income-tax debt to the extent that Tryco paid its own
3 Section
31(a)(1) provides a credit to employees against their income tax
obligation with respect to their wages if that tax is ‘‘deducted and withheld
at the source,’’ even if their employer failed to remit it to the government.
Sec. 1.31–1(a), Income Tax Regs. That ‘‘amount so withheld during any cal-
endar year shall be allowed as a credit for the taxable year beginning in
such calendar year.’’ Sec. 31(a)(2). Thus, the effect of the Dixons’ position
would let Tryco’s late payment of the withholding tax not only satisfy their
income-tax debt, but also cancel the portion of that debt that consisted of
compounded interest.
4 Campagna testified that ‘‘I don’t think that I was concerned about the
interest.’’ As the trier of fact in these cases, I did not find this particular
part of his testimony credible. The IRS transcripts show that the IRS fi-
nally got around to crediting the Dixons’ accounts in April or May 2003.
By that point over $530,000 of interest had accrued—almost 90% of the
original tax reflected on the transcripts.
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(173) DIXON v. COMMISSIONER 201
employer-tax debt; and that Tryco’s payment of that debt
was also creditable to the Dixons as payment of restitution.
I’ll address each in turn.
II.
I agree with the starting point of the majority’s first argu-
ment—there is overwhelming authority for the proposition
that a taxpayer who submits a voluntary payment may direct
which of his taxes that payment should be credited to. I also
don’t doubt that one person can pay another person’s taxes.
But what I can’t agree to is the majority’s combination of
these two simple propositions to allow a taxpayer to des-
ignate that its payment should reduce both its own tax debt
and the debt of a third party. And remember as well that the
Dixons’ lawyer wrote the IRS, after these payments were
made, that he wanted them rejiggered to be for slightly dif-
ferent amounts and periods.
But the majority clearly errs in finding that the IRS did
not do exactly what Tryco asked it to. According to the IRS
transcripts in the record, the Commissioner applied the pay-
ments to Tryco’s employment-tax liability, and gave the
Dixons a section 31 credit for their income-tax liability. (The
transcripts are typically opaque about this—they don’t say
anything about section 31. But they do show that the
Commissioner abated interest that accrued between the
original due dates of the return and the dates of the later
payments, and a direct credit to the Dixons’ income taxes
wouldn’t have reduced their outstanding interest. 5) He
applied the payment exactly as Tryco asked—toward the out-
standing employment taxes of the corporation, specifically
those attributable to the Dixons. If he hadn’t, the Dixons
wouldn’t have ever gotten that mistaken section 31 credit.
The majority defends at length—and with copious cita-
tions—Tryco’s right to direct the IRS to apply its voluntary
payment towards a specific portion of its own tax liability.
There’s nothing wrong with this—a company’s employer tax
has long been seen by the courts and the Commissioner to
be the aggregation of numerous quarters of tax for numerous
employees. It’s convenient to pay it all in one lump sum
5 The Dixons’ transcripts also show that the Commissioner later realized
his mistake and took the credits and abatements away.
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202 141 UNITED STATES TAX COURT REPORTS (173)
every so often, but an employer’s total employer-tax liability
is very much the sum of a large number of smaller liabilities.
But assuming that Tryco’s payment was properly applied to
its own employment-tax bill, and specifically that portion
that should’ve been withheld from the Dixons, the Dixons
still can’t point to a single credit under current law that
would cause Tryco’s payment to erase their own income-tax
liability. 6
The reason is that employment taxes and income taxes are
welded together by detailed and specific language in the
Code and regulations. Section 3403 says ‘‘[t]he employer shall
be liable for the payment of the tax required to be deducted
and withheld under this chapter [chapter 24, sections 3401–
3406], and shall not be liable to any person for the amount
of any such payment.’’ Section 31.3403–1, Employment Tax
Regs., emphasizes that it is employers which are ‘‘required to
deduct and withhold the tax under section 3402’’ and which
are liable ‘‘for the payment of such tax whether or not it is
collected from the employee by the employer.’’ (Emphasis
added.)
The employer’s tax liability under section 3403 is, in other
words, independent of the employee’s liability under section
1 and section 61(a)(1) to pay tax on the same wages. But
what happens if the employee pays the tax? The answer is
that the employer is off the hook—section 3402(d) provides:
If the employer, in violation of the provisions of this chapter, fails to
deduct and withhold the tax under this chapter, and thereafter the tax
against which such tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected from the employer
* * * .[7]
6 The
Dixons need a credit under the Code because they want credit for
an amount paid toward another taxpayer’s—Tryco’s—tax bill. They
wouldn’t need a Code-based credit if they had sent in the payments toward
their own tax bill. This bit of confusion comes up because ‘‘credit’’ can
mean two different things in tax law. It can mean amounts subtracted
from the amount of tax otherwise owed (as is the case here), or it can
mean the reduction in unpaid liability that occurs when a taxpayer pays
his own tax and his account is ‘‘credited.’’ See Kovacevich v. Commissioner,
T.C. Memo. 2009–160, 2009 WL 1916351, at *5 n.9.
7 Section 3402(d) anticipates the concern about double collection of the
same tax that we expressed in Whalen v. Commissioner, T.C. Memo. 2009–
37, 2009 WL 383019, at *3, where we suggested (in what is probably dicta)
that an employer’s actual payment to the IRS of tax that the employer
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(173) DIXON v. COMMISSIONER 203
See also W. Mgmt., Inc. v. Commissioner, 176 Fed. Appx. 778,
782 (9th Cir. 2006) (remanding case for us to consider in the
first instance whether section 3402(d) provided employer
with any relief from collection of income taxes paid by
employee, and if so, to compute reduction in employer’s defi-
ciency), aff ’g in part, remanding in part T.C. Memo. 2003–
162.
The Code doesn’t have a section like 3402(d) that could
rescue employees. 8 Without one, an employee doesn’t get a
credit on his income-tax liability just by proving that the
employer later paid the tax it failed to withhold. 9 The Code
does have section 31, but it’s limited—an employee’s right to
a withholding credit depends on whether the tax has ‘‘actu-
ally been withheld at the source’’ by the employer. Sec. 1.31–
1(a), Income Tax Regs. We all agree that wasn’t done here.
Which should have meant that we all agree that the Dixons
don’t meet the requirements to get the only credit that the
Code provides in this situation.
Not to be discouraged by the lack of any actual credit in
the Code to which the Dixons are entitled, the majority
makes one up. As support for this new judge-made credit, the
majority gives three examples of other withholding obliga-
tions—sections 3102, 3405, and 3406—and says that ‘‘[i]n
should have withheld ‘‘could plausibly be characterized as withholding tax
under chapter 24 with a corresponding section 31 credit being allowed to
a proper recipient for an appropriate year.’’ Section 3402(d) tells us that,
to the contrary, the credit applies under the reverse circumstances, i.e., the
employer receives a credit for the employee’s actual payment of tax that the
employer should have withheld. But it nonetheless remains true that the
employer’s liability under sections 3402(a) and 3403 for withholding taxes
is separate and distinct from the employee’s liability for income taxes
under section 61.
8 Congress knows how to help employees when it wants to. Section
4999(c) requires an employer who pays the 20% excise tax on excess gold-
en-parachute payments to treat it as additional income-tax withholding.
That assures the employee of a credit under section 31(a) and, in effect,
keeps the Commissioner from collecting twice.
9 Section 3402(d) may, as a practical matter, discourage the Commis-
sioner in some cases from pursuing the employee for taxes he’s already col-
lected from the employer, but if it happens the Commissioner will abate
the employer’s taxes administratively. See Internal Revenue Manual pt.
4.23.8.4.2. (But, again, the Code makes this asymmetrical. There is no
similar provision that lets an employee recoup payments that he’s made
when his employer later makes payments toward the same liability.)
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204 141 UNITED STATES TAX COURT REPORTS (173)
none of these contexts does the Code explicitly provide that
* * * [a payee] will receive, toward her principal liability, a
credit for payments the payor makes toward its derivative
liability.’’ See op. Ct. p. 191.
If this were a gap in the Code, the majority might have a
point. But a closer look at the text shows that there are no
gaps: Let’s start with sections 3405 and 3406. The Code does
‘‘explicitly provide’’ credit for withholding under these sec-
tions, and it is in none other than the very same section 31
that’s at issue in these cases. Section 31(a)(1) creates a credit
for payees for amounts that payors ‘‘withheld as tax under
chapter 24.’’ Sections 3405 and 3406—just like section 3402—
are all a part of chapter 24, which means that section 3405
and 3406 payees are also subject to all of the same pesky sec-
tion 31 requirements. But there’s no gap in the Code here—
those payees should, like employees, get credits only when
portions of the payments or wages they receive are ‘‘actually
withheld at the source.’’
Section 3102, which involves the FICA (or Social Security)
tax and which the majority also cites, works a bit differently.
For most taxpayers, the primary obligation to collect and pay
this tax is on the employer. See sec. 3102(a) (tax collected
from employer); sec. 31.3102–1(d), Employment Tax Regs.
(employer ‘‘liable for the employee tax * * * whether or not
it is collected from the employee’’). The regulation makes
clear that the employee is also liable for the tax only ‘‘[u]ntil
collected from [the employer].’’ Sec. 31.3102–1(d), Employ-
ment Tax Regs. Thus, the majority is correct that the FICA
tax doesn’t work on a formal crediting system like the income
tax, but only because, instead of a credit, there is a reduction
in the amount of the liability itself. 10 As the employer pays,
the employee’s liability as defined by the Code and regula-
tions correspondingly shrinks.
10 Congress
did put something of a derivative liability for employers of
high-wage earners into the Code in enacting a higher tax rate to help fund
Obamacare. The Code now makes an employee liable for this higher FICA
tax ‘‘[t]o the extent that the amount of any tax imposed by section
3101(b)(2) is not collected by the employer.’’ Sec. 3102(f)(2) (added by the
Patient Protection and Affordable Care Act, Pub. L. No. 111–148, sec.
9015(a)(2), 124 Stat. at 871 (2010)). But once an employee pays the tax,
the Code expressly provides that ‘‘the tax * * * shall not be collected from
the employer.’’ Sec. 3102(f)(3).
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(173) DIXON v. COMMISSIONER 205
The majority’s last analogy is to the trust fund recovery
penalty imposed by section 6672. It claims this as yet
another situation where, even though the Code doesn’t
require it, the IRS doesn’t collect tax arising out of the same
event from more than one person. Several individuals may
become secondarily liable, under section 6672, for failure to
discharge the same section 3402 employer withholding tax
liability. Every circuit court—including the circuit court to
which these cases would likely be appealed—has concluded
that this penalty is one that creates a joint and several
liability among responsible parties. See Brown v. United
States, 591 F.2d 1136, 1142 (5th Cir. 1979). While it is true
that the IRS says it follows ‘‘a policy’’ of not collecting more
than the total sum due it from all those found to be respon-
sible parties, this ‘‘policy’’ simply restates a firm and deeply
rooted background priniciple of common law; i.e., that
against parties jointly and severally liable, ‘‘a partial satis-
faction of one judgment will not prevent obtaining or
enforcing another, although it is everywhere agreed that the
amount received must be credited pro tanto against the
amount to be collected.’’ William L. Prosser & W. Page
Keeton, Law of Torts 331 (5th ed. 1984); 2 Restatement,
Judgments 2d, sec. 50(2), cmt. c. (1982) (same); 1 Restate-
ment, Torts 3d, sec. 25(b) (2000) (same). Tax law may be the
most florid and convoluted example of the displacement of
the common law by statute and regulation, but even it can’t
completely overgrow the general legal principles that connect
all the cozy specialized gardens of the law. So, if the
Commissioner were ever to assert a right to collect a joint
and several debt more than once, he couldn’t do so without
a change in the Code or regulations. 11
But the Dixons’ cases do not feature an IRS ‘‘policy’’ and
are not about joint and several liability; they are about sepa-
rate and distinct employer (secondary) and employee (pri-
mary) liabilities: Tryco’s section 3402 employer tax liability
11 Courts certainly acknowledge that delays in collection, complex stat-
utes of limitation, and the possibility of taxpayers’ bringing a statutory re-
fund suit mean that the Commissioner isn’t trying to collect twice until
he’s actually established his right to retain the funds that he’s collected.
See USLIFE Title Ins. Co. v. United States, 784 F.2d 1238, 1244–45 (5th
Cir. 1986) (carefully explaining the need for a right to retain funds col-
lected).
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206 141 UNITED STATES TAX COURT REPORTS (173)
and the Dixons’ section 1 and section 61 income-tax liability.
Couples who file joint returns create joint and several
liability; they might be startled to learn that we today are
forcing them into such an intimate relationship with their
employers. And, absent joint and several liability, I know of
no Code section, regulation, or decided case that would pre-
clude the Commissioner from pursuing an employee for
unpaid income tax with respect to the same wages on which
an employer owes employer taxes.
This is just not an area where there is any room left for
judge-made law. The Code and regulations create an intri-
cate crediting scheme for employment and income taxes.
Employers get a credit for any employee payments, but
employees get a credit only when those payments have ‘‘actu-
ally been withheld at the source.’’ Sec. 1.31–1(a), Income Tax
Regs. Withholding credits are usually an excellent deal for
employees—not only do they reduce an employee’s net tax
bill, but the Code treats those taxes ‘‘as a credit for the tax-
able year beginning in’’ the calendar year when they were
withheld. Sec. 31(a)(2). If we were to hold that the Dixons
were entitled to a credit under section 31 on their 1992–95
taxes—that is, that those amounts were ‘‘actually * * * with-
held at the source’’—even though Tryco made the payments
only years later, we would be allowing them to eliminate
(because of the retroactive crediting of that payment) liability
for interest and additions to tax and penalties that the Code
computes on the basis of the time an employee’s tax has gone
unpaid—despite the fact that the tax did in fact go unpaid
for many years. The Dixons knew about that trick when they
chose to structure their payment through Tryco for Tryco’s
own taxes, see supra notes 3 and 4 and accompanying text,
and I certainly wouldn’t blame them or their lawyer for
trying—these are cases of first impression. And it sounds
kind of plausible because of all that caselaw and IRS guid-
ance from situations where a taxpayer is allowed to choose
which of his own liabilities his money pays down. But there’s
just nothing in the Code to support an extension of a general
rule that ‘‘taxpayers can designate liabilities’’ to situations
where the liability involved is both their own and another’s.
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III.
After defending at length Tryco’s right to designate the
payments toward its own employment-tax bill relating to a
specific employee, the majority puzzlingly also finds that the
Dixons actually provided ‘‘explicit instructions’’ that the
funds were for ‘‘payment of * * * [the Dixons’] 1992–95
income tax liabilities.’’ See op. Ct. p. 194.
The majority hangs its recharacterization of Tryco’s pay-
ments on the restitution language in the Dixons’ February 7,
2000 plea agreements. In those agreements, the Dixons
acknowledged that they ‘‘may be required to make full res-
titution for the losses sustained by the Internal Revenue
Service as a result of the offenses of conviction.’’ 12 But
remember that Tryco had sent in the bulk of the payments—
$571,917—back in December 1999 to reduce its employer-tax
debt. This language in the Dixons’ later plea agreement can
be nothing more than their acknowledgment that they might
have to pay their own tax bill after they had already made
Tryco pay down some of its own. Consider how odd this
makes this part of the majority’s holding—it’s holding that
the Commissioner abused his discretion by not ignoring the
clear instructions Tryco actually included with the payment,
because he should’ve known what Tryco actually wanted—if
only he could’ve peeked into the future at a document from
a third party (i.e., the Dixons) that was not yet in existence
when Tryco sent in the bulk of its payments. 13 It’s bad
12 This is almost certainly form language–‘‘the fact that the court may
order the defendant to pay restitution’’ should be ‘‘included in [the] para-
graph setting out [a] defendant’s awareness of possible punishment.’’ See
United States Attorneys’ Manual, Tax Resource Manual 19 n.2, available
at http://www.justice.gov/usao/eousa/foialreadinglroom/usam/title6/
tax00019.htm (last visited July 8, 2013). In the actual judgments entered
after the District Court accepted the plea deals, the boxes marked ‘‘restitu-
tion’’ are left unchecked.
13 The Dixons submitted their final $30,202 payment on June 1, 2000,
about four months after they signed the plea agreements. Nevertheless,
the Commissioner shouldn’t be expected to disregard a taxpayer’s specific
instructions in favor of ambiguous language in a document belonging to a
third party. The same point is true of the Dixons’ effort to get the Commis-
sioner to rejigger crediting of the payments after Tryco had sent them in.
The Dixons asked the Commissioner to reallocate money that they’d origi-
nally designated to apply to Tryco’s 1994 taxes—$17,850 to 1992; $9,116
Continued
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208 141 UNITED STATES TAX COURT REPORTS (173)
enough to require the Commissioner’s clerks to be mind
readers, but with this holding we’re requiring them to build
time machines too.
IV.
The majority glosses over some of the other tax con-
sequences of its decision today. The Dixons had to contribute
$602,119 to Tryco because Tryco wasn’t doing much business
anymore. The Dixons were controlling shareholders, and
their capital contributions would have increased their bases
in the Tryco stock. See secs. 351(a) (applies to controlling
shareholder), 358(a)(1), 1012; see also sec. 1016(a); Commis-
sioner v. Fink, 483 U.S. 89, 94 (1987) (same for noncontrol-
ling shareholders); Love v. Commissioner, T.C. Memo. 2012–
166, 2012 WL 2135598, at *9; sec. 1.1016–2(a), Income Tax
Regs. Tryco’s employment-tax burden is smaller to the extent
of the payments that it made, but it is still so large that the
company stock may still be worthless, manufacturing a tidy
loss for the Dixons. When the Dixons eventually abandon or
sell Tryco, they’ll get a bigger loss than they otherwise would
have because of their increased bases.
And we shouldn’t forget that Tryco was the Dixons’
employer. As the majority acknowledges, see op. Ct. note 17,
employers that pay their employees’ bills are treated as if
they were paying wages instead, see Old Colony Trust Co. v.
Commissioner, 279 U.S. 716, 729 (1929). But Tryco’s pay-
ments were in 1999 and 2000, meaning the Dixons have
untaxed income for 1999 and 2000, years for which assess-
ment is now barred by the statute of limitations (assuming
that the Dixons began filing their tax returns on time). We
also shouldn’t forget that paying wages—this time in the
form of paying tax bills—also comes with its own withholding
tax obligations for Tryco under section 3403, which it, once
again, won’t have fulfilled.
V.
If the Dixons wanted to pay their own tax liability, they
could have and should have sent the checks to the IRS
to 1993; and $22,981 to 1995. The majority seems to let this work, too,
even though there is no authority anyone has cited requiring the IRS to
allow a taxpayer to later change its designation once it’s made.
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(173) DIXON v. COMMISSIONER 209
directly, with a letter stating that the payments were for
their own income-tax liability. That should have created a
credit for Tryco under section 3402(d). Alternatively, the
Dixons could have used Tryco as a mere agent to pay their
own income-tax liability. What they could have gained from
sending the money through their corporation first is unclear,
but they’d still have their own tax bill wiped out, and Tryco’s
tax bill would be reduced an equal amount under section
3402(d). They’d just need to be clear about what debt they
were trying to pay, and the IRS would obey. The Dixons did
what they did because they were swinging for the fences—
they wanted to reduce Tryco’s employment-tax bill, reduce
their own income-tax liabilities, bump up their bases in prob-
ably worthless Tryco stock, and use section 31 to erase many
years of penalties and interest. I don’t blame them for
trying—the law was, and after today, will remain, unclear.
I do also acknowledge that in situations like this one, the
result I’m advocating may seem harsh. But Congress in its
wisdom created an asymmetric crediting scheme. If the
Dixons had paid their tax debt directly, they would have cre-
ated a credit for Tryco under section 3402(d) without quali-
fication. But the reverse isn’t true; even though Tryco paid
its tax debt with the Dixons’ capital contribution, it can’t
create a credit for the Dixons because its payment was late.
I do note that the money that the Dixons contributed to
Tryco, and that Tryco then paid over, does reduce the giant
employment and withholding tax debt that Tryco owes. (And
that, if the Dixons were ever held to be responsible parties
for the original nonpayment of Tryco’s taxes, would reduce
that part of their debt to the government.)
That may not be fair, or even logical, but it is unambig-
uously what the Dixons asked the IRS to do and what the
unambiguous language of the Code requires here. This Court
doesn’t have the power to rewrite it or the unbridled discre-
tion to do whatever we deem ‘‘fair’’. I must, respectfully, dis-
sent.
HALPERN and BUCH, JJ., agree with this dissent.
BUCH, J., dissenting: I join Judge Holmes’ dissent, wherein
he correctly observes that the relevant statutory scheme does
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210 141 UNITED STATES TAX COURT REPORTS (173)
not allow Tryco to designate a payment for its own benefit
and also for the benefit of the Dixons. I write separately to
address two other sources of authority that the majority
cites.
Administrative Authority
The majority cites a series of revenue rulings and a rev-
enue procedure for the proposition that ‘‘voluntary partial
payments of assessed tax, penalties and interest are to be
applied as the taxpayer designates.’’ See op. Ct. p. 185. This
statement, so far as it goes, is unremarkable. But the
majority stretches that guidance well beyond its terms, and
then, citing Rauenhorst v. Commissioner, 119 T.C. 157, 171–
173 (2002), attempts to hold respondent to a position that is
not taken in any of the cited guidance.
Where there is a linear progression of guidance, it is per-
haps best to start at the beginning, which, in this instance,
is an income tax ruling from 1947. At the time, interest was
deductible for individuals and businesses, and the IRS
addressed the question of whether a taxpayer who made a
lump-sum payment in compromise of tax, penalties, and
interest could deduct interest. Where that lump-sum pay-
ment was less than the principal deficiency, the IRS held
that no part of that lump-sumpayment could be deducted as
interest. I.T. 3852, 1947–1 C.B. 15. What is clear is that this
ruling dealt only with the question of interest deductions; it
appeared under the heading in the Cumulative Bulletin
‘‘SECTION 23(b).— DEDUCTIONS FROM GROSS INCOME:
INTEREST.’’
Rev. Rul. 58–239, 1958–1 C.B. 94, likewise dealt with the
issue of interest deductions. That ruling reaffirmed I.T. 3852,
supra. But it went on to explain that an undesignated partial
payment would be applied first to tax, then penalties, and
then interest. And where there are liabilities for multiple
years, the payment would be applied to the earliest year
first. What does this have to do with the designation of a
payment? It was this ruling that began the IRS’ practice of
allowing taxpayers to designate that their payments be
applied to specific liabilities. The rule was quite specific:
Where additional taxes, penalty and interest are assessed for one or
more years against a taxpayer whose income is reported on the cash
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(173) DIXON v. COMMISSIONER 211
method of accounting, a partial payment thereon tendered to and
accepted by the District Director of Internal Revenue with specific direc-
tions by the taxpayer as to its application, will be applied, as a general
rule, in accordance with such directions. The amount of interest satisfied
by such a partial payment will be deductible in computing taxable
income for the year in which the payment is made. [Rev. Rul. 58–239,
1958–1 C.B. at 95.]
This ruling addressed only the issue of the deductibility of
interest by a taxpayer making a partial payment. It had
absolutely nothing to do with the ability to designate a pay-
ment toward a third party’s liability. Again, if the plain lan-
guage of the ruling was not clear enough, the ruling appears
in the Cumulative Bulletin under a section headed ‘‘SEC-
TION 163.— INTEREST’’ with a subheading ‘‘(Also Section
6601: 301.6601.1)’’, which is a reference to the Code section
for underpayment interest. See Rev. Rul. 58–239, 1958–1
C.B. at 93–94.
Next came Rev. Rul. 73–305, 1973–2 C.B. 43, which super-
seded Rev. Rul. 58–239, supra. The issue in that ruling
relates to the application, by the Internal Revenue Service, of a partial
payment of tax, penalty, and interest, assessed for one or more taxable
periods, made by a taxpayer regularly employing the cash receipts and
disbursements method of accounting. The specific question is whether
the interest, if any, satisfied by such payment, is deductible for Federal
income tax purposes in the year in which it is paid. [Rev. Rul. 73–305,
1973–2 C.B. at 43.]
Again, the issue was interest deductions. And again, if the
issue was not clear enough from the ruling itself, it was fur-
ther emphasized by the major heading in the Cumulative
Bulletin under which the ruling was printed: ‘‘Section 163.—
Interest’’. Rev. Rul. 73–305, 1973–2 C.B. at 42. The sub-
heading again narrowed it to ‘‘26 C.F.R. 1.163–1: Interest
deduction in general.’’ Id., 1973–2 C.B. at 43. As the Court
notes, this ruling explicitly stated that it did not apply to
withheld employment taxes.
That limitation was lifted with Rev. Rul. 79–284, 1979–2
C.B. 83. At the risk of being redundant, this ruling also falls
under the heading ‘‘Section 163.—Interest’’ and the sub-
heading ‘‘26 C.F.R. 1.163–1: Interest deduction in general.’’
Which brings us to Rev. Proc. 2002–26, 2002–1 C.B. 746.
This is the last in the line of administrative guidance
addressing this issue, and it superseded those that came
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212 141 UNITED STATES TAX COURT REPORTS (173)
before it. Its text continues to address the issue of the
ordering of payments. The revenue procedure concludes:
If any part of a payment is applied to interest under the rules set forth
in this revenue procedure, the amount applied to interest is treated for
purposes of § 163 of the Code as interest paid in the year in which the
payment is made. Under § 163, interest paid or accrued in a taxable
year may be deducted in calculating taxable income for the year except
to the extent such interest is personal interest as defined in § 163(h) and
§ 1.163–9T(b)(2) of the Income Tax Regulations or is otherwise dis-
allowed under applicable provisions of the Internal Revenue Code and
Income Tax Regulations. [Id. sec. 3.04, 2002–1 C.B. at 746.]
What is clear throughout the history of these revenue
rulings and this final revenue procedure is that the IRS was
addressing one issue, and one issue only: the deductibility of
a partial payment of tax, penalties, and interest. There is no
statement in any of these revenue procedures that the IRS
agrees to accept the designation of a payment against both
the taxpayer’s liability and that of a third party.
Rauenhorst rightly holds that the Commissioner should be
held to positions taken in published guidance. But in that
case, ‘‘Respondent’s position * * * directly contradicted his
long-standing and clearly articulated administrative posi-
tion’’. Rauenhorst v. Commissioner, 119 T.C. at 171 (citing
Phillips v. Commissioner, 88 T.C. 529, 534 (1987), aff ’d, 851
F.2d 1492 (D.C. Cir. 1988)). Here, the majority forges a posi-
tion that is neither longstanding nor clearly articulated by
the Commissioner in any published guidance and then holds
the Commissioner to that position. Rauenhorst does not go
that far.
Judicial Authority
The majority’s citation of judicial sources of authority
starts with an unremarkable statement: ‘‘The principle that
the IRS must honor a taxpayer’s designation of a voluntary
tax payment has been recognized repeatedly by the courts.’’
See op. Ct. p. 186. And the Court then acknowledges: ‘‘We
have discovered no case addressing the specific fact pattern
involved here, where a taxpayer designates a voluntary pay-
ment toward the income tax liability of a named third party.’’
Id. Unfortunately, the majority then cites a litany of cases as
if they supported the Court’s position. They do not.
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(173) DIXON v. COMMISSIONER 213
The Court begins with United States v. Energy Res. Co.,
495 U.S. 545 (1990). In that case, the Supreme Court held
that a bankruptcy court has the authority to designate to
which among several liabilities a court-ordered payment
must be applied. Citing the same administrative guidance
discussed above, the Supreme Court merely observed what
IRS policy permits—the designation of a voluntary payment.
Id. at 548. The Supreme Court’s holding is unrelated to that
point; it held that the Bankruptcy Code gives bankruptcy
courts broad authority to modify creditor-debtor relation-
ships, including ordering the IRS to apply payments in a spe-
cific manner among the liabilities of the debtor. Id. at 549.
This is not even analogous to the facts before us.
The Fifth Circuit authority cited by the majority is no
more apt. In Wood v. United States, 808 F.2d 411 (5th Cir.
1987), the plaintiff argued that the IRS should have applied
certain payments to withholding taxes and not to the
employer’s share of the Federal Insurance Contributions Act
(FICA) taxes. The plaintiff lost on the facts; the court con-
cluded that the payments had not been unambiguously des-
ignated to withholding taxes. But throughout the opinion, the
Court of Appeals’ focus is the application of a payment
amongst the taxpayer’s liabilities, not the liabilities of a third
party. The paragraph discussing the application of voluntary
payments makes this clear.
It is well established that in the absence of a direction by the taxpayer
the IRS can apply a payment to any outstanding tax liability of the tax-
payer. The IRS has announced its intention to follow this practice in
applying employment tax deposits. This circuit has approved the applica-
tion of corporate funds to FICA employers’ tax liabilities before applying
the funds to withholding taxes in the absence of a direction by the tax-
payer. But if a taxpayer directs that a payment be applied in a certain
manner, the IRS must abide by the taxpayer’s direction. [Id. at 416;
emphasis added; internal citations omitted.]
Only by pulling this last quoted sentence out of context is the
majority able to cite Wood for support.
In fact, all of the cases cited by the majority stand for the
same unremarkable proposition: when a taxpayer makes a
partial payment, the taxpayer may designate that the pay-
ment be applied to specific liabilities amongst multiple out-
standing liabilities of the taxpayer. That is not the case
before us.
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214 141 UNITED STATES TAX COURT REPORTS (173)
Conclusion
Here, Tryco and the Dixons want to designate that a pay-
ment be applied simultaneously to two separate liabilities.
Judge Holmes’ dissent correctly observes that such a des-
ignation is not supported by the statutory scheme. It is also
not supported by either administrative or judicial authority.
By using Rauenhorst to hold the Commissioner to a position
he has never adopted, the Court goes too far. And the
caselaw provides no support for the double-dipping that the
opinion of the Court allows. As a result, I must dissent.
HALPERN and HOLMES, JJ., agree with this dissent.
f
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