Estate Loses $144,000 Refund After Failing to Properly Designate Payment
as a Deposit. (Parker's Federal Tax Bulletin: August 14, 2013)

The difference between characterizing a remittance to the IRS as a deposit or a tax payment can have significant ramifications. It's generally preferable to have the remittance characterized as a deposit because there is no statute of limitations on when a deposit can be recovered. However, for a remittance to be characterized as a deposit, the taxpayer must include with the payment a written statement designating it as a deposit. In Syring v. U.S., 2013 PTC 236 (W. D. Wisc. 8/8/13), an estate neglected to do this when it made a payment with its estate tax extension request. When the return was finally filed, the estate had overpaid the tax by $144,000 and was due a refund. However, because the remittance with the extension request was not properly designated as a deposit, and the estate tax return was filed more than three years after the payment was made, the estate was not entitled to a refund of the $144,000 overpayment.

Facts

Marshall Syring died on October 14, 2005. Leone Syring, appointed as the estate's personal representative, hired Roger Peterson, CPA, to prepare the estate's tax return. Under Code Sec. 6075(a), the return was due on or before July 14, 2006. Peterson estimated that the total estate tax would be $600,000 but that the estate was eligible to pay the tax over a 10 year period because it qualified as a small business. Consistent with Peterson's advice, on July 14, 2006, the estate filed an application for extension and sent $170,000 to the IRS and $170,000 to Wyoming. In paying the IRS, the estate did not include a written statement designating the amount as a deposit as required by Rev. Proc. 2005-18.

Even with the extension to January 14, 2007, the estate missed the deadline to file a tax return. Instead, more than three years later, the estate filed it tax return on February 19, 2010, reporting no estate tax due. The IRS then conducted an audit and determined that the estate owed taxes in the amount of $25,526. The estate did not challenge the amount of the assessed estate tax, but requested the IRS return $144,474, comprising the original remittance less the assessed estate tax.

The IRS denied the estate's refund request on the grounds that the remittance was properly treated as a partial tax payment, rather than a deposit, in light of estate's failure to provide the IRS with a written statement designating the remittance as a deposit, as required by Rev. Proc. 2005-18. Because it was treated as a payment, the estate's claim fell outside the three-year tax recovery period under Code Sec. 6511(a) and (b)(2)(A).

Under Code Sec. 6511(a), a refund claim for an overpayment of tax must be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever of those periods expires later. Under Code Sec. 6511(b)(2)(A), if the refund claim was filed by the taxpayer during that three-year period, the amount of the credit or refund cannot exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to three years plus the period of any extension of time for filing the return.

The estate argued that the $170,000 payment was a deposit under Code Sec. 6603. Code Sec. 6603 provides that a taxpayer may make a cash deposit with the IRS which can be used to pay any tax which has not been assessed at the time of the deposit. To the extent the deposit is used by the IRS to pay tax, the tax is treated as paid when the deposit is made.

The procedures for designating a payment as a deposit, rather than a tax payment, are contained in Rev. Proc. 2005-18. Under Section 4 of that procedure, a taxpayer may make a deposit under Code Sec. 6603 by remitting to the IRS Center at which the taxpayer is required to file its return, or to the appropriate office at which the taxpayer's return is under exam, a check or a money order accompanied by a written statement designating the remittance as a deposit. The written statement also must include:

(1) the type(s) of tax;

(2) the tax year(s); and

(3) a statement described in Section 7.02 of Rev. Proc. 2005-18 identifying the amount of, and basis for, any disputable tax.

Undesignated remittances treated as tax payments are applied to the earliest tax year for which there is a liability, and is applied first to tax, then penalties and finally to interest. An undesignated remittance treated as a payment of tax is posted to the taxpayer's account as a payment upon receipt, or as soon as possible thereafter, and may be assessed, provided that assessment will not imperil a criminal investigation or prosecution. The amount of an undesignated remittance treated as a payment is taken into account by the IRS in determining the existence of a deficiency and whether a notice of deficiency is required to be issued.

District Court's Opinion

The district court had to determine whether the estate's remittance was a deposit or a tax payment. In making this determination, the court applied a fact-and-circumstances test, which considered the following three factors: (1) when the tax liability was defined, (2) the taxpayer's intent in remitting the money, and (3) how the IRS treated the remittance upon receipt. The court said that, ultimately, the determination of whether a remittance is a deposit or tax payment is a question of law for the court.

Timing of Determination of Tax Liability

With respect to the first factor of when the tax liability was defined, the court said this factor looks at whether the tax liability was defined at the time the remittance was made. A remittance made before the tax liability is defined tips the balance toward a finding of a deposit. According to the court, the undisputed facts established that there was neither a formal assessment nor a defined tax liability at the time the remittance was made. The IRS argued that this factor should weigh in favor of the finding of a tax payment because the estate had initially determined that it owed over $600,000 of estate tax and made the $170,000 remittance in response to that asserted tax liability.

The court noted that the IRS's approach would collapse this factor into the second factor, which focuses on the taxpayer's subjective perception of how much tax he or she owes. The better view, the court said, was for this first factor to focus on whether, objectively, the IRS had defined the taxpayer's tax obligation. This approach, the court noted, was consistent with other courts' treatment of this factor. The first factor therefore weighed in favor of categorizing the remittance as a deposit, the court concluded.

Taxpayer's Intent

Citing the Seventh Circuit's decision in Moran v. U.S., 63 F.3d 663 (7th Cir. 1993), the district court observed that the taxpayer's intent has an important place in the facts-and-circumstances test. According to the district court, courts may derive that intent only from reasonable interpretations of the taxpayer's actions, not from the taxpayer's after-the-fact claims and rationalizations. Here, the court concluded, Leone failed to put forth sufficient evidence from which the court could conclude that she intended to make a deposit when she signed the check to the IRS. Indeed, the court found the evidence was clearly to the contrary.

A written statement designating the remittance as a deposit, as required by Code Sec. 6603 and Rev. Proc. 2005-18, is prima facie evidence that a taxpayer intends to make a deposit in submitting the money. Not only was this evidence lacking, Leone failed to offer an affidavit, declaration, or other testimony describing her intent at the time she made the payment. As such, the court said, there was no direct evidence indicating her intent in making the remittance. Thus, the court could only derive intent from other indirect evidence. Since it was undisputed that Leone relied on the estate's accountant for advice and recommendations in making the remittance, the court looked to the accountant's advice and recommendations to determine Leone's intent.

The court also examined the accountant's actions to determine his intent in delivering his professional opinions to Leone. The court concluded that the accountant's actions, advice, and recommendations all demonstrated Leone's intent to make a partial tax payment in remitting the original $170,000. In coming to this conclusion, the court cited the accountant's advice that the estate was large enough to owe federal and state estate taxes. In connection with this debt, the court noted, the accountant advised that payments of $170,000 each to the federal and state government would be due before July 14, 2006. The court also cited the accountant's advice that the estimated federal estate tax would be more than $600,000 but that the full amount need not be paid immediately because the estate qualified to pay the tax over the next 10 years.

Having indisputably acted promptly on this advice, the court concluded, no reasonable person could find that Leone considered the remittance to be a deposit rather than a down payment on the estate's larger tax liability. The evidence was equally overwhelming that the accountant considered the remittance to be a partial tax payment when he recommended that the estate pay it. First, the court noted, the accountant calculated the estimated estate tax liability based on an assumption and valuation method he deemed appropriate at the time, rather than based purely on speculation. Leone had conceded, the court noted, that the accountant used fair market value to calculate the value of the gross estate. The estimated total federal estate tax of over $600,000 was made under the assumption that the estate qualified as a qualifying small business, which the accountant deemed appropriate at the time.

The court also noted that, after concluding that the estate owed federal estate tax and being provided with the opportunity to postpone the deadline of paying that tax, the estate's accountant filed Form 4768 with the IRS on behalf of the estate, requesting only an extension of time for filing the tax return. An extension of time for filing a return does not operate to extend the time for paying the tax. To apply for an extension of time to pay the tax, the court noted, the taxpayer must

(1) check the appropriate boxes on Form 4768, and

(2) provide the IRS with a written statement demonstrating either there are reasonable causes to delay payments or there are undue hardships to pay tax on time.

Despite these straightforward instructions being included in Part III of Form 4768, the accountant neither checked any of the boxes in Part III of the form, nor provided any written statements to the IRS explaining any difficulties the estate had in paying the estimated estate taxes. Instead, the accountant entered $170,000 in Part IV, line 1 of Form 4768, which the accountant represented was the amount of estate taxes estimated to be due then, as well as instructed Leone to submit that amount to the IRS. The court concluded that the way the accountant completed Form 4768, together with the fact that the accountant had informed Leone that the estate owed federal estate taxes but did not have to pay the full amount, strongly suggested to the court that the accountant intended the remittance to be a partial tax payment.

With respect to Leone's contention that the printed Form 4768 did not contain a column for deposits, meaning that a remittance made along with the form could still be a deposit, the court agreed that, in certain circumstances, a remittance made along with a printed Form 4768 might not be a tax payment. However, the court said that this fact did not support a finding that the estate intended to make a deposit in this situation, at least in the face of overwhelming, contemporaneous evidence to the contrary.

The court also disagreed with the estate's assertion that a remittance is a deposit if made to stop interest and penalties. While it is true that the intent to stop interest and penalties may support a finding that a taxpayer intends to make a deposit, the court said that an intent to stop interest and penalties does not exclude the possibility that the taxpayer intended to make a tax payment in remitting the money. In fact, the court said, making a large tax payment before a formal assessment has the same practical effect of mitigating or preventing any interest or penalties due to underpayment or untimeliness. Therefore, the taxpayer's intent of stopping interest and penalties is, at most, another fact to determine whether the taxpayer intended to make a deposit or a tax payment.

IRS's Treatment of Remittance

The final factor the court considered was the IRS's treatment of the remittance itself, which the court concluded also weighed in favor of the IRS. First, the court noted, the estate acknowledged not providing the IRS with any written statement designating the remittance as a deposit. Second, the parties agreed that the IRS recorded the remittance as a payment received upon receiving the remittance, rather than a deposit. Third, the IRS credited the amount directly to the estate's account, rather than put the remittance in a separate account for deposit. All of those actions strongly suggested that the IRS conformed to Rev. Proc. 2005-18 and treated the remittance as a tax payment. The court rejected the estate's contention that the IRS's failure to calculate interest accrued on the remittance contradicted the IRS's position that it treated the remittance as a tax payment. According to IRS testimony, the IRS's computer does not start calculating interest accrued on an estate's tax payment before the return is filed and the tax liability is determined.

Conclusion

Although the first factor in the facts-and-circumstances test used by the district court weighed in favor of the estate's position, its intent to make a down payment on its tax liability and the fact that IRS treated the remittance as a tax payment tipped the balance to a finding that the $170,000 was a tax payment. The district court noted that while this result may seem unfair because the government is allowed to keep a payment that it concedes was not due tax laws are not normally characterized by case-specific exceptions reflecting individualized equities. The court concluded that the estate was unable to meet its burden of demonstrating that the remittance was a deposit.

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