Remittances of employment taxes were tax payments subject to time limit on refunds

Nicholas Acoustics & Specialty Company, Inc. v. U.S., (CA 5 6/15/2011) 107 AFTR 2d ¶ 2011-950

The Court of Appeals for the Fifth Circuit, affirming the district court, has held that a corporation's remittances of employment withholding taxes were tax payments under Code Sec. 6513(c) , and not deposits. Since such payments were subject to the Code Sec. 6511 three-year statute of limitations, the Court denied the corporation's refund request as untimely.

Background. IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which IRS simply holds, and a taxpayer may seek a refund of the deposit at any time. (Rosenman v. U.S., (S Ct 1945) 33 AFTR 314 ) But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for a refund. (Miller v. U.S., (Fed Cl 11/9/2000) 86 AFTR 2d 2000-7058 )

A remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under a Code section for which the statute's plain language states that the remittance is to be “deemed paid.” (Deaton v. Comm., (CA 5 2006) 97 AFTR 2d 2006-984 , Baral v. U.S., (S Ct 2000) 85 AFTR 2d 2000-941 )

In Baral, the Supreme Court considered an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. While Baral's analysis specifically applied to Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2) , which govern employee withholding taxes, the Court noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511 . Under Code Sec. 6511(a) , a claim for credit or refund of an overpayment 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 period expires later.

Under Code Sec. 6513(c)(1) , if a return for any period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, the return is considered filed on April 15 of the succeeding calendar year. Under Code Sec. 6513(c)(2) , if a tax with respect to remuneration or other amount paid during any period ending with or within a calendar year is paid before April 15 of the succeeding calendar year, the tax is considered paid on April 15 of the succeeding calendar year. Further, Reg. § 31.6302-1(h)(9) provides that any money remitted to IRS in connection with Code Sec. 6513(c)(2) will be considered to be a payment of tax on the last day prescribed for filing the applicable return for the return period.

Facts. Between '99 and 2003, the construction firm Nicholas Acoustics & Specialty Company, Inc., (Nicholas) paid employment payroll taxes, but failed to file any tax returns. It didn't remit funds for the exact amount owed, but instead estimated the amount due, occasionally overpaying taxes. Nicholas erroneously assumed that IRS could apply the overpayment to other quarters in which it had underpaid its tax liability.

In 2003, IRS audited Nicholas due to its failure to file its returns. After the audit, Nicholas filed returns for the missing quarters, which allowed IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. IRS said it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after IRS made the adjustments. IRS filed a lien against Nicholas, which it paid before seeking a refund.

In seeking a refund, Nicholas contended that the shortfall wouldn't have occurred if IRS had applied all of its overpayments to future or past quarters rather than transferring the money into an excess collection account. IRS countered that when Nicholas actually filed the refund claims, certain overpayments couldn't be refunded due to the three-year statute of limitations under Code Sec. 6511 . Nicholas sought relief in the district court.

District court decision. The district court rejected Nicholas's contention that IRS should have classified the tax remittances as deposits rather than tax payments. As a deposit, the amount could be refunded at any time; but as a payment, the amount was subject to the statute of limitations. Relying on Baral, the district court found that the plain language of Code Sec. 6513(c)(2) made it a “deemed paid” provision and, accordingly, it concluded that tax deposits remitted under Code Sec. 6513(c) were payments. Nicholas's payments were subject to Code Sec. 6511 's statute of limitations as a matter of law. IRS was correct in not refunding Nicholas's late refund claims.

Taxpayer's position. Nicholas argued that the district court was wrong in concluding that its employment tax remittances were payments that couldn't be refunded due to the three-year statute of limitations. It argued that the district court erroneously concluded that Code Sec. 6513(c)(2) was a “deemed paid” provision under Baral.

Deemed paid. The Fifth Circuit concluded that the employment tax remittances constitute payments and that refunds of these payments were subject to the three-year statute of limitations under Code Sec. 6511 . The Court found that the district court correctly interpreted and applied Baral. The plain language of Code Sec. 6513(c)(2) indicates that it is a deemed paid provision, and so subject to Code Sec. 6511 's limitation period for refunds. Similarly, Reg. § 31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.

The Court also noted that the remittances at issue constituted payments under the then-applicable Rev Proc 84-58, 1984-2 CB 501 (this revenue procedure was superseded after Nicholas filed its tax returns). In Rev Proc 84-58 , IRS had set up a mechanism by which taxpayers could remit money (i.e., a “deposit in the nature of a cash bond”) to it and stop the accrual of underpayment interest. Rev Proc 84-58 stated that IRS would treat remittances as deposits if they were made before the mailing of a notice of deficiency and designated by the taxpayer in writing as a deposit in the nature of a cash bond. Nicholas's payments weren't made in response to a deficiency notice or a proposed liability. Additionally, at the time of payment, Nicholas didn't protest these payments in writing or request that the payments be treated as deposits.

 In 2005, IRS issued Rev Proc 2005-18, 2005-1 CB 798 , which provides procedures for taxpayers to make, withdraw, or identify deposits to suspend the running of interest on potential underpayments under Code Sec. 6603 , which was added by the American Jobs Creation Act of 2004. Under this provision, which liberalized prior rules, a cash deposit made in conformity with IRS rules may be used to pay income, gift, estate, or generation-skipping tax or certain excise taxes that have not yet been assessed at the time of the deposit. Rev Proc 2005-18 superseded Rev Proc 84-58 , effective for remittances made after Mar. 27, 2005. ( Rev Proc 2005-18, Sec. 9 ) .

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