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TAX CLINIC

Inc., 588 F.2d 342 (2d Cir. 1978). In to be applied toward his anticipated gift seen in Hill, the Tax Court will not allow
that case, the Second Circuit held that tax liability for 2011. On July 19, 2019, taxpayers to recharacterize deposits as
the IRS could not assess underpayment the Tax Court entered a stipulated deci- payments based on hindsight.
interest for the period between when sion determining a 2011 gift liability
the taxpayer made an overpayment and of approximately $6.7 million and no Ahmed
when it used that overpayment to pay overpayment for any year. Afterward, the In December 2021, the Tax Court held
its next year’s tax liability. The Second IRS sent Hill a check for approximately that a taxpayer’s remittance was a pay-
Circuit held that underpayment interest $3.3 million — the amount of his excess ment even though the taxpayer labeled
may not run during any period the IRS deposit, but without any interest. the remittance as a deposit and stated
possessed enough credit-elect overpay- Hill filed a motion with the Tax he was submitting it pursuant to Rev.
ment funds to satisfy a later-determined Court for a redetermination of inter- Proc. 2005-18 (Ahmed, T.C. Memo.
tax deficiency. est. Hill asserted that he was entitled 2021-142).
The Fifth Circuit, citing Avon and to interest at the advance payment rate, Background: In 2018, Faisal
the “use-of-money” principle of Man- which is the federal short-term rate plus Ahmed petitioned the Tax Court to
ning v. Seeley Tube & Box Co., 338 U.S. 3 percentage points. The IRS conceded challenge the IRS’s collection activi-
561 (1950), held for the Goldings. that it owed Hill interest on the $3.3 ties (i.e., federal tax liens) with respect
Under the use-of-money principle, a million, but only at the deposit rate, to his income tax liabilities for several
taxpayer is liable for interest only when which is just the federal short-term rate. years and trust fund recovery penalties
the government does not have the use Thus, the issue before the Tax Court was (TFRPs) for several quarters. The Tax
of money it is lawfully due. The court whether the $10 million remittance was Court eventually dismissed the income
found that the IRS had continuous a deposit or an overpayment. tax liabilities because they were paid
possession of the Goldrings’ credit-elect Tax Court decision: The Tax Court in full so the only remaining issue was
overpayment funds sufficient to satisfy concluded the $10 million remittance the TFRP liabilities. The Tax Court
the 2010 deficiency; accordingly, the was a deposit, based on Hill’s repeated remanded the case to the IRS’s Appeals
Goldings did not owe any underpay- labeling of the payment as a deposit. Office for a supplemental hearing, which
ment interest. The Fifth Circuit said its When Hill sent the $10 million check was held in May 2020.
decision was consistent with the Second to the IRS, he designated it a deposit Around June 9, 2020, Ahmed sent
Circuit decision that had found “that and stated that he intended for “this the IRS a check for $625,000. In the
a tax is not considered ‘unpaid’ and deposit to satisfy the requirements of accompanying letter, Ahmed’s attorney
§ 6601(a) underpayment interest may section 6603(a).” In correspondence stated that the check was a “cash bond
not run during any period the IRS pos- with the IRS, Hill repeatedly called the deposit” being submitted under Sec.
sesses enough credit-elect overpayment $10 million remittance a deposit. In his 6603 and Rev. Proc. 2005-18. The letter
funds to satisfy a later-determined tax protest to the IRS’s 30-day letter, Hill explicitly stated that the remittance was
deficiency” (Goldring, slip op. at 13 (cit- again stated that the $10 million was a not a payment. The letter said the IRS
ing Avon)). deposit submitted pursuant to Rev. Proc. should not post the remittance as final
Taxpayers in jurisdictions other than 2005-18 for the purpose of making a payment until the Tax Court entered
the Fifth Circuit should be prepared deposit under Sec. 6603. a decision. Despite the “deposit” label,
for the IRS to take the position that Hill argued that the IRS unilaterally on June 29, 2020, the IRS posted the
credit-elect overpayments are not avail- converted his $10 million deposit into a $625,000 as payment toward Ahmed’s
able to stop underpayment interest “payment” of tax. The Tax Court sum- outstanding TFRP liabilities. The IRS
from accruing. marily rejected the taxpayer’s argument subsequently released the federal tax
because (1) it was aware of no authority liens with respect to those liabilities.
Hill that permits the IRS to unilaterally The IRS then moved to dismiss the
In another recent decision, Hill, T.C. overrule a taxpayer’s designation of a Tax Court case as moot. The IRS argued
Memo. 2021-121, the Tax Court reject- remittance as a deposit and (2) there was the case was moot because Ahmed had
ed a taxpayer’s attempt to recharacterize no evidence that the IRS actually over- paid in full his tax liability and there was
a deposit as an overpayment. ruled the taxpayer’s designation. no collection activity for the Tax Court
Background: In 2012, Albert G. The Hill case is a good reminder to review. Ahmed objected and asserted
Hill remitted a check for approximately to taxpayers to make informed deci- that the tax liability was not paid in full
$10 million to the IRS. The taxpayer sions when deciding whether to make a because the $625,000 was merely a de-
designated the remittance as a deposit deposit or advance payment because, as posit, not a payment.

14 March 2022 The Tax Adviser