Eleventh Circuit: Tax Court Has No Jurisdiction to Redetermine Interest on Deposit

(Parker Tax Publishing May 2023)

The Eleventh Circuit affirmed the Tax Court's dismissal of a taxpayer's motion to redetermine the amount of interest the IRS owed him after the taxpayer and the IRS settled a deficiency proceeding, stipulating that the taxpayer owed a gift tax deficiency in an amount less than the amount the taxpayer sent to the IRS as a deposit. The court rejected the taxpayer's argument that his deposit was an overpayment and therefore the interest rate for overpayments, rather than deposits, applied; the court found that under Code Sec. 6512(b) the Tax Court's jurisdiction to reopen the case depended on the taxpayer's having made an overpayment, and the court concluded that the payment was a deposit rather than an overpayment. Hill v. Comm'r, 2023 PTC 80 (11th Cir. 2023).

Background

In 2012, Albert Hill, III, sent $10,263,750 to the IRS as a "deposit" under Code Sec. 6603 toward his expected gift tax liability for that year. The IRS sent Hill a letter notifying him that it had credited $10,263,750 to his 2011 account and that, after he submitted his gift tax return, the IRS would "apply the credit to the tax he owed and refund any overpayment." Hill responded that he had delivered a $10,263,750 "deposit of tax" which should applied to 2012, rather than 2011.

Hill filed a 2012 gift tax return in 2014, reporting that he owed no gift tax. Over the next several years, he made multiple requests for the return of the funds, referring to the $10,263,750 as a "deposit." In 2015, the IRS began an examination of Hill's 2012 gift tax return. In 2017, the IRS issued a notice of deficiency which assessed a deficiency and penalties for 2010.

Hill challenged his gift tax liability in the Tax Court. Prior to trial, the parties reached a settlement, stipulating that Hill had no gift tax liability for 2010 but owed a gift tax deficiency of $6,790,000 for 2011. Appearing below the judge's signature were stipulations by the parties (i.e., below-the-line stipulations), stating that there was a "prepayment credit" for 2010 in the amount of $10,263,750, which would be applied to Hill's 2011 gift tax liability. Another stipulation stated that "interest will be credited or paid as provided by law on any overpayment in tax due" to Hill. The Tax Court's final decision adopted the parties' stipulations.

The IRS applied the $10,263,750 to Hill's 2011 deficiency and, in 2020, issued Hill a check for the balance of $3,473,750. It did not include interest. Hill filed a motion to redetermine interest in the Tax Court. He argued that the IRS owed him interest in the amount of $1,267,322, which he calculated using the interest rate for overpayments. The IRS responded that the Tax Court did not have jurisdiction to determine the interest owed to Hill and that, even if it did, Hill was owed only $218,121 in interest, using the interest rate for deposits. In a reply brief, Hill argued for the first time that his $10,263,750 remittance should be deemed a payment of tax, rather than a deposit. The Tax Court rejected that argument and, in Hill v. Comm'r, T.C. Memo. 2021-121, the Tax Court held that it did not have jurisdiction to reopen Hill's case.

The rules for the Tax Court's jurisdiction over interest determinations are provided in Code Sec. 7481(c). Under Code Sec. 7481(c)(2), there are only two categories of cases that may be reopened after a final Tax Court decision to determine the amount of interest: (1) cases where the IRS has made a tax assessment that includes interest (which does not apply to Hill's case), and (2) where the Tax Court finds under Code Sec. 6512(b) that the taxpayer has made an overpayment. Code Sec. 6512(b) provides that if the Tax Court finds that there is a deficiency, but that the taxpayer has made an overpayment of tax, the Tax Court has jurisdiction to determine the amount of the overpayment.

Observation: When a taxpayer makes an undesignated remittance, the IRS generally treats it as a payment and applies it against any outstanding liability of the taxpayer. Rev. Proc. 2005-18 provides that an undesignated remittance made in the full amount of a proposed liability is treated as a payment, in which case a notice of deficiency is not issued, and the taxpayer does not have the right to petition the Tax Court for redetermination of the deficiency. By contrast, a taxpayer who makes a deposit can challenge an alleged deficiency in the Tax Court without accruing underpayment interest on the disputed tax, up to the amount of the deposit.

Hill appealed the Tax Court's ruling to the Eleventh Circuit. He argued that the only tenable conclusion from the Tax Court's stipulated findings and the parties' below-the line stipulations was that he (1) owed a $6,790,000 deficiency for 2011 and (2) made an overpayment of tax for 2011. To the extent the stipulated decision was ambiguous, Hill contended that his communications with the IRS were evidence of the parties' intent to treat the excess remittance as an overpayment. Hill emphasized that before the settlement, the IRS sent him an estimate of the interest he was owed and classified his remittance as an "Advance Payment of Determined Deficiency." The parties' joint stipulations, before the settlement, also referred to the remittance as an advance payment. In addition, Hill argued that the $10,263,750 remittance lost its character as a deposit because the IRS did not return it on demand. Finally, Hill argued that the Tax Court must have found an overpayment under Code Sec. 6512(b)(1) considering that he received a check for $3,473,750 in 2020, after his original $10,263,750 remittance was applied to the $6,790,000 deficiency.

Analysis

The Eleventh Circuit held that the Tax Court did not have jurisdiction to rule on Hill's motion to redetermine interest because Hill did not make an overpayment of tax as required under Code Sec. 6512(b)(1). The court rejected Hill's argument that the Tax Court implicitly found that he made an overpayment of tax. Rather, the court found that the Tax Court was at most silent on that issue, and the Tax Court's silence could not be a finding of an overpayment for Code Sec. 6512(b)(1) jurisdictional purposes.

The Eleventh Circuit concluded that the below-the-line stipulations reflected an agreement between the parties and were not judicial findings by the Tax Court. Moreover, the court found that these stipulations did not even state that Hill made an overpayment. In the court's view, the references in the below-the-line stipulations to a "payment" and a "prepayment" did not mean that Hill's $10,263,750 remittance was a payment toward his 2011 gift tax liability. The court found that, read properly, the stipulations stated that the $10,263,750 initially was credited to Hill's 2010 gift tax liability and now will be applied as a payment toward his 2011 gift tax liability. The court noted that the stipulations stated that "the deficiency for the taxable year 2011 is computed without considering the prepayment credit of $10,263,750" and reasoned that, had the parties agreed to treat the $10,263,750 as a payment of tax for 2011, it would not have been disregarded in the deficiency computation of $6,790,000.

The Eleventh Circuit also found no merit in Hill's argument that he and the IRS intended to treat the $3,473,750 remittance as an overpayment. The court explained that the intent of the parties has no bearing on the ultimate issue in this case - whether the Tax Court found that Hill made an overpayment of tax. Moreover, the court found that the evidence of the parties' intent was decidedly mixed. The court observed that a letter Hill sent to the IRS in 2013 referred to the remittance as a deposit and noted that the potential gift tax for 2012 was still undetermined. In addition, Hill referred to the remittance as a deposit in later communications with the IRS and even in his motion to redetermine interest. In the court's view, it was telling that Hill only began to refer to the remittance as an overpayment in his reply brief after the IRS pointed out that the Tax Court lacked jurisdiction to redetermine interest with respect to a deposit.

The court also found that the IRS's use of the term "advance payment" in reference to the remittance did not mean it was an overpayment. The court noted that the Internal Revenue Manual states that when the IRS processes a Code Sec. 6603 deposit, this deposit should be classified as an "Advance Payment of Determined Deficiency." Thus, the term "advance payment" could refer to a deposit, which is submitted to the IRS and then can be applied to pay a tax. The court said that in any event the parties' use of the term "advance payment" before the Tax Court's stipulated decision was entered did not show that the Tax Court found that Hill made an overpayment.

The fact that the IRS did not return Hill's remittance on demand did not, in the view of the Eleventh Circuit, change its character from a deposit to a payment of tax. The Eleventh Circuit found that the IRS never refused to return Hill's deposit. The court noted that in 2014, the IRS asked if the funds should be sent to the district court, rather than to Hill himself. Later, Hill did not provide information that the IRS requested to effectuate the return of his deposit. Additionally, the court noted that Hill cited no authority stating that a designated deposit becomes a payment merely because the IRS does not return it on demand. According to the court, nothing in Code Sec. 6603 imposes the on-demand time constraint Hill suggested. The court also rejected Hill's argument that the Tax Court must have found an overpayment given that he received a $3,473,750 check after his original remittance was applied to his deficiency. In the court's view, how the $10,263,750 was applied after the Tax Court's stipulated decision was entered had no bearing on whether the Tax Court found that Hill made an overpayment.

For a discussion of the Tax Court's jurisdiction over refund suits, see Parker Tax ¶261,190.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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