The Tax Court ruled that a taxpayer’s attempt to make a deposit rather than a payment of taxes failed when the tax had been assessed prior to the date the attempted deposit was made in the case of Ahmed v. Commissioner, TC Memo 2021-142.[1]

Deposit Rules

IRC §6603, enacted in 2004, allowed taxpayers to, in specific cases, make deposits with the IRS to stop the running of interest on an underpayment the IRS may assess in the future. IRC §6603(a) provides:

(a) Authority to make deposits other than as payment of tax

A taxpayer may make a cash deposit with the Secretary which may be used by the Secretary to pay any tax imposed under subtitle A or B or chapter 41, 42, 43, or 44 which has not been assessed at the time of the deposit. Such a deposit shall be made in such manner as the Secretary shall prescribe.

Under IRC §6603(b) any amount of the deposit actually used to pay tax will be treated as paid on the date the deposit was made.  As well, under IRC §6603(c) if the taxpayer requests in writing that a deposit be returned to the taxpayer while it remains a deposit, the IRS is to return such funds unless the IRS determines that collection of the tax is in jeopardy.

Attempt at Making a Deposit Under IRC §6603

In this case, the taxpayer was disputing the IRS’s position that he was liable for trust fund recovery penalties (TFRP) under IRC §6672 in a collection review case that had made its way before the Tax Court. The Tax Court describes the situation that resulted in the payment of $625,000 the taxpayer wished to have treated as a deposit:

On May 1, 2020, a supplemental Appeals conference was held by telephone. On or around June 9, 2020, petitioner sent to the IRS a check for $625,000 along with a letter, dated June 9, 2020, and signed by petitioner's counsel (June 9, 2020, letter). This letter stated that the $625,000 remittance “constitutes a cash bond deposit” for petitioner's TFRP liabilities for his tax periods ending March 31, June 30, and September 30, 2016, and indicated that the aggregate balance due for these liabilities was $617,039 (the sum of $80,737, $411,038 and $125,264 for the quarters ending March 31, June 30, and September 30, 2016, respectively).[2]

The letter that was sent along with the payment contained the following language, in part:

Under Internal Revenue Code § 6603 and under Rev. Proc. 2005-18, we designate this remittance as a deposit in the nature of a cash bond for the TFRP liabilities of Faisal Ahmed, for the tax periods stated in the above table [the tax periods ending March 31, June 30, and September 30, 2016].

This remittance is a deposit and not a payment of tax within the meaning of Rev. Proc. 2005-18 and should not be posted as a final payment to Taxpayer’s account until a decision in the United States Tax Court has been entered.

This cash bond is eligible for interest under IRC § 6603(d). * * *

* * * * * * *

To the extent the remittance is more than the amount owed, we designate the remaining funds to be applied to the Taxpayer’s 2017 income tax liability (Form 1040). This remittance is a deposit and not a payment of tax within the meaning of Rev. Proc. 2005-18 and should not be posted as a final payment to Taxpayer’s account until decision has been entered in the United States Tax Court.

If any excess remains after this remittance is posted as payment of assessed tax and/or interest for this taxable year in accordance with the subsequent designation, such excess should be immediately refunded to Faisal Ahmed * * * with interest under § 6603(d).[3]

Despite these statements in the letter, the IRS went ahead and applied the funds to the outstanding TFRP that had already been assessed prior to the payment of the funds (remember, we are in a collection matter at this point).

On June 29, 2020, the IRS posted petitioner’s $625,000 remittance as payment towards petitioner’s outstanding TFRP liabilities for the periods stated in the June 9, 2020, letter, resulting (in combination with some payments that petitioner had previously made) in the full payment of petitioner’s TFRP liabilities for the quarters ending March 31, June 30, September 30, and December 31, 2016.3 On September 25, 2020, respondent released the Federal tax lien with respect to the periods at issue. Appeals has not issued any supplemental notice of determination regarding the supplemental hearing held May 1, 2020.[4]

And the IRS argues this makes the collection matter moot, thus the taxpayer can no longer contest the matter in the Tax Court as the liabilities have been fully paid:

Respondent’s motion asserts that petitioner has fully paid his TFRP liabilities for the quarters ending March 31, June 30, September 30, and December 31, 2016. Accordingly, respondent asserts, he does not need or intend to take any further collection action with respect to those periods and has released the lien against petitioner. Consequently, respondent argues, there is no remaining case or controversy to sustain this Court’s jurisdiction with respect to petitioner’s TFRP liabilities and this case, being no longer justiciable, should be dismissed on grounds of mootness.[5]

Not surprisingly, the taxpayer disagrees with this view:

In his objection to respondent’s motion, petitioner argues that (1) the liabilities at issue should not be deemed fully paid because his $625,000 remittance should have been treated as a deposit rather than payment of tax and (2) this purported deposit does not extinguish petitioner’s challenges to the validity of respondent’s assessment, respondent’s calculation of interest, or the appropriateness of respondent’s releasing the lien as opposed to withdrawing the NFTL, and does not relieve respondent from his obligation to comply with the Court’s order dated March 5, 2020.[6]

Was the Taxpayer’s Collection Action Moot?

The Tax Court notes that there are limits on the cases it is allowed to hear.  With regard to collection matters, the opinion notes:

Section 6330(d)(1) provides that this Court has jurisdiction to review an Appeals determination. However, the Tax Court is a court of limited jurisdiction, sec. 7442, and we may exercise jurisdiction only to the extent expressly authorized by Congress, Naftel v. Commissioner, 85 T.C. 527, 529 (1985). In general, our jurisdiction under section 6330(d)(1) is limited to reviewing whether the Commissioner’s proposed collection activity is appropriate. Greene-Thapedi v. Commissioner, 126 T.C. 1, 7 (2006). Ordinarily, once the Commissioner concedes that there is no unpaid liability for a disputed year upon which a collection action could be based, a proceeding filed in this Court pursuant to section 6330 is moot. Id.; MacDonald v. Commissioner, T.C. Memo. 2009-240, 2009 Tax Ct. Memo LEXIS 242, at *7 (“[A] case filed pursuant to section 6330 is moot if the Federal income tax liability that the Commissioner is attempting to collect has been paid in full so that no collection action is appropriate.”). Section 6330 does not give the Court jurisdiction to determine an overpayment or order a refund or credit of taxes paid. Willson v. Commissioner, 805 F.3d 316 (D.C. Cir. 2015); Greene-Thapedi v. Commissioner, 126 T.C. at 7-8.[7]

Effectively, if there is no tax left to be collected, then the Tax Court has no matter upon which to rule in a post-assessment collection case.

The taxpayer argues that as the amount paid was labeled a deposit, it did not amount to having paid the tax and, thereby, did not moot any collection issue the Tax Court could rule upon:

Petitioner does not expressly dispute that full payment of his tax liabilities would moot this collection action. He contends, however, that his $625,000 remittance was not a payment but rather “a deposit to secure the discharge of the lien”. Accordingly, he suggests, the remittance did not moot this action.[8]

But the Tax Court did not accept the taxpayer’s view on this one.  The opinion first notes that even before this attempted deposit, the taxpayer had already paid off the TFRP for one quarter, so even if the Court were to find the deposit was not a payment of the tax, that quarter’s TRFP was no longer before the Tax Court.[9]

But the Court goes on to reject the taxpayers’ arguments for the remaining three quarters as well. First, the Court notes that the taxpayer had conceded the payments could not qualify as a deposit under IRC §6603.  In a footnote the Court pointed out two separate reasons why this payment could not be a deposit:

Sec. 6603(a), as enacted in 2004, provides that a taxpayer may make a cash deposit with respect to “any tax imposed under subtitle A or B or chapter 41, 42, 43, or 44 which has not been assessed at the time of the deposit.” Respondent asserts that petitioner’s $625,000 remittance failed to qualify as a deposit under sec. 6603(a) because petitioner’s TFRP liabilities had already been assessed at the time of the remittance. Seemingly on this basis petitioner concedes the nonapplicability of sec. 6603. Neither party has addressed what would seem to be a more fundamental impediment to treating the remittance as a deposit under sec. 6603(a), namely that TFRP liabilities are imposed under sec. 6672, which is in chapter 68 in subtitle F of the Code, rather than in any of the subtitles or chapters listed in sec. 6603(a).[10]

However, the taxpayer argues that there exists an older judicially created rule he can qualify under:

He argues, however, that it nevertheless constitutes a deposit under a judicially created “facts and circumstances approach” that predates the enactment of section 6603. In support of this proposition petitioner cites Rosenman v. United States, 323 U.S. 658 (1945), and Deaton v. Commissioner, T.C. Memo. 2005-1, aff’d, 440 F.3d 223 (5th Cir. 2006).[11]

The Tax Court found there was an important difference in those cases—in neither case had the tax been assessed before the funds were sent to the IRS.

These cases, however, are readily distinguishable from the case at hand. Each case involved remittances that — unlike petitioner’s $625,000 remittance — were made before the taxpayers’ tax liabilities had been assessed. Because petitioner’s TFRP liabilities had been assessed before he made his $625,000 remittance, it constituted payment of those liabilities. See Charles Leich & Co. v. United States, 329 F.2d 649, 652 (Ct. Cl. 1964) (“It seems clear that a remittance made by a taxpayer of an amount * * * given in response to an assessment of taxes by the Internal Revenue [*10] Service is a payment of tax.”). In any event, even if we were to agree with petitioner that his $625,000 remittance constituted a deposit in the first instance (which we do not), respondent’s application of the remittance as payment towards petitioner’s assessed and outstanding TFRP liabilities would have constituted payment of those liabilities. See Rosenman, 323 U.S. at 661 (holding that the Government’s application of a remittance after the taxpayer’s deficiency had been assessed constituted payment of the tax liability, triggering the limitations period for the taxpayer to claim a refund).[12]

The Court concludes that with no unpaid liability remaining, the Tax Court lacks jurisdiction:

In sum, no unpaid liability remains on petitioner's tax accounts for the periods with respect to which the NFTL was filed. Respondent has released the lien and there is no outstanding tax liability on which further collection action could be based. Petitioner has received all the relief that section 6330 authorizes the Tax Court to provide.[13]

The opinion concludes by noting that any further litigation would need to be in front of a different court:

If petitioner seeks a refund or overpayment credit or other relief, then any legal remedy would lie in a U.S. District Court or the U.S. Court of Federal Claims rather than in this Court.[14]

[1] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/individual%e2%80%99s-challenge-to-lien-is-moot%2c-tax-court-says/7cqzr (retrieved December 29, 2021)

[2] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[3] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[4] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[5] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[6] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[7] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[8] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[9] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[10] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[11] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[12] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[13] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021

[14] Ahmed v. Commissioner, TC Memo 2021-142, December 28, 2021