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Hill v. Commissioner (T.C. Memo. 2021-121)

On October 25, 2021, the Tax Court issued a Memorandum Opinion in the case of Hill v. Commissioner (T.C. Memo. 2021-121). The primary issue presented in Hill was whether the petitioner’s remittance of $10.3 million to the IRS to be applied toward an anticipated gift tax liability for 2011, which remittance was designated as a “deposit” was a “deposit” or a “payment” for purposes of determining whether interest was due to the petitioner.

Hill v. CommissionerHeld:

Look, Albert, I’m going to level with you.

If you designate a check as a “deposit,” and you reference your “deposit” in numerous written communications with the IRS, don’t act so heartsick and offended when the IRS agrees with your designation that the check was a “deposit” and not a “payment” as you now argue…seeing as overpayments bear far more interest than deposits. Lesson learned.

Go buy an island where you can call your money whatever the heck you want.

A Gross Oversimplification of the Background of Hill v. Commissioner

More than a decade ago, the petitioner became embroiled in litigation with his father and other family members in the U.S. District Court for the Northern District of Texas. “Oversimplifying greatly, this litigation involved the division of wealth” from a Texas tea company…“oil, that is.”

The parties to the crude litigation (not sorry) settled, and the petitioner was ordered to assign a multi-million-dollar asset to trusts for the benefit of his children. This “asset” had an aggregate value over time of approximately $30,675,000. The petitioner made the assignment in 2011, and, understanding that the assignment could (and did) generate a gift tax liability, the petitioner wrote a check for $10.3 million to the IRS, which his representative hand delivered to the IRS in Atlanta in February 2012.

The Communiques with the IRS

The petitioner’s representative, a Mr. Burnett, followed up the delivery of the check with a letter dated less than a week after delivery, noting the litigation background and explaining that the check was being remitted “with respect to the potential [gift] tax…for [tax year] 2011.” Critically, Mr. Burnett, in his written letter to the IRS, designated the remittance as a “deposit.”

Not only that, Mr Burnett went one step further. He observed that the taxpayer intended “for this deposit to satisfy the requirements of IRC § 6603(a),” which is, itself, entitled “Deposits Made to Suspend Running of Interest on Potential Underpayments.”

Hill v. CommissionerThe IRS responded in August 2013, acknowledging receipt of the check but indicating that no corresponding tax return had yet been received. Pending receipt of a return, the IRS credited the $10.3 million to the petitioner’s “Form 709 account for [2011].”

The letter urged petitioner to submit a gift tax return as soon as possible, stating that the IRS would then “apply the credit to the tax you owe and refund any overpayment.” Mr. Burnett replied by letter four days later, again referring to the remittance as a “deposit” that “should be applied to 2012 rather than 2011.”

In March 2014, the petitioner submitted a 2012 Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). The return reported a gift tax liability of zero, taking the position that the gift (if any) was incomplete at year-end 2012 because entitlement to the funds was still being litigated, are held in the court registry, and are in dispute. In an accompanying cover letter Mr. Burnett reiterated that the “deposit,” which “was applied to 2012 from 2011, should be refunded to the taxpayer.”

Later letters demanding a return of the “deposit under IRC § 6603” was “authorized by IRC § 6603(a).” Finally, the petitioner’s attorneys stated that the petitioner was making this request under Rev. Proc. 2005-18, § 6, which section governs “request[s] for return of a deposit made pursuant to IRC § 6603.”[1]

The Gift Tax Examination

Hill GiftIn July 2015, the IRS commenced a gift tax examination, which centered on two questions: whether the petitioner’s assignment of the asset (an installment payment obligation) constituted a taxable gift, and, if so, whether the gift was made in 2010 (when the settlement was consummated), in 2011 (when petitioner executed the assignment), or in 2015 (when funds were actually transferred to the children’s trusts).

Bottom line, however, the $10.3 million would not be applied to the petitioner’s gift tax liability for 2012—as there was no gift tax liability for 2012 under any of the IRS’s hypotheticals. As such, the RA indicated that the petitioner “must request in writing that the funds be applied to a different tax year in accordance with Revenue Procedure 2005-18.”

The IRS issued petitioner a 30-day letter proposing alternative gift tax deficiencies for 2010, 2011, and 2015. The petitioner protested, and in such protest, he requested that, pursuant to Rev. Proc. 2005-18, the IRS apply “the deposit made under IRC § 6603” to any and all liabilities for 2010, 2011, and 2015.

A notice of deficiency was issued…litigation ensued…and the parties ultimately stipulated to the determination of a gift tax deficiency of $6.8 million for 2011 (with no other deficiencies or penalties). In the stipulated decision the parties agreed that “the prepayment credit in the amount of [$10.3 million] will be reversed for petitioner’s tax year 2010 and applied to petitioner’s tax year 2011 gift tax liability.”

In January 2020, the IRS issued the petitioner a check for $3.5 million, representing the difference between petitioner’s remittance ($10.3 million) and the deficiency the Tax Court determined ($6.8 million). The check included zero interest.

The Redetermination of Interest

Within one year of the date on which the Tax Court’s decision became final,[2] in August 2020, the petitioner filed a motion to redetermine interest pursuant to Tax Court Rule 261. In his motion, the petitioner contended that the IRS “erred in failing to refund the interest that accrued pursuant to IRC § 6603(d)(1).” The petitioner further alleged that the interest due on his excess deposit is $1.3 million, calculated using the interest rate payable on overpayments of tax. Under IRC § 6621(a)(1), the “overpayment rate” for non-corporate taxpayers is the Federal short-term rate plus three percentage points.

The IRS conceded that the petitioner was allowed interest; however, because the petitioner remitted a “deposit,” the IRS calculated the interest on the excess deposit using the Federal short-term rate—without a three-percentage-point “bump”—as specified in IRC § 6603(d)(4), which works out to just under $220,000, or $1.1 million less than the petitioners’ position.

An Interesting Jurisdictional Twist

The IRS also argued that the Tax Court lacked the jurisdiction to redetermine interest in the present matter. This is so, because IRC § 7481(c), grants the Tax Court jurisdiction to reopen the case to redetermine interest only where “the Tax Court finds under IRC § 6512(b) that the taxpayer has made an overpayment.”[3] As a consequence, the IRS argued that the petitioner made no “payment” of gift tax for any year, but only a deposit to stop the running of interest. Consequently, the Tax Court’s decision in the petitioner’s case did not determine, for any year, an “overpayment” of tax within the meaning of IRC § 6512(b).

More on this in a moment…

A Discussion on Deposits

Though we appreciate Judge Lauber’s thorough discussion of the history of tax deposits, your editors decided to skip to the present law…which actually is relevant.

IRC § 6603 was added to the Code in 2004.[4] IRC 6603(a) provides that a taxpayer “may make a cash deposit…which may be used…to pay any tax…which has not been assessed at the time of the deposit.” The IRS is required to “return to the taxpayer any amount of the deposit (to the extent not used for a payment of tax), which the taxpayer requests in writing.”[5]

Hill Deposit2For purposes of IRC § 6611 (interest on overpayments), a deposit returned to a taxpayer is treated as a payment of tax for any period to the extent (and only to the extent) attributable to a disputable tax for that period.[6] In turn, a “disputable tax” means “the amount of tax specified at the time of the deposit as the taxpayer’s reasonable estimate of the maximum amount of any tax attributable to disputable items.”[7] Critically, IRC § 6603(d)(4) specifies that the rate of interest for deposits is the Federal short-term rate determined under IRC § 6621(b), compounded daily.

The legislative history of IRC § 6603 observes that that “[a] deposit is not a payment of tax prior to the time the deposited amount is used to pay a tax.”[8] This observation is echoed by Rev. Proc. 2005-18, which states that a deposit made pursuant to IRC § 6603 is not subject to a claim for credit or refund as an overpayment until the deposit is applied by the IRS as payment of an assessed tax of the taxpayer.[9] If a deposit returned to the taxpayer is attributable to a disputable tax, such interest is determined using the Federal short-term rate provided under IRC § 6621(b).[10]

Motions to Redetermine Interest

Because the Tax Court is a court of limited jurisdiction, it may exercise jurisdiction only to the extent authorized by Congress,[11] and it is without authority to arrogate further jurisdiction.[12] Petitioner’s motion requires that we decide whether we have jurisdiction, at this stage of the proceedings, to redetermine interest.

The Tax Court generally lacks jurisdiction over a case once its decision has become final in such case, pursuant to IRC § 7481,[13] absent clerical error or fraud on the court.[14] However, there is a small jurisdictional exception to this “finality principle” contained in IRC § 7481(c) related to interest determinations.[15]

Hill Interesting

Notwithstanding IRC § 7481(a), if the taxpayer files a motion in the Tax Court for a redetermination of the amount of interest involved within one year after the decision of the Tax Court becomes final, then the Tax Court may reopen the case solely to determine whether the taxpayer has made an overpayment of such interest or the Secretary has made an underpayment of such interest and the amount thereof.[16]

This exception applies in two categories of cases: (1) where the IRS has made a tax assessment that includes interest; and (2) where the Tax Court finds that the taxpayer has made an overpayment under IRC § 6512(b).[17] The latter case is commenced by filing a motion to redetermine interest pursuant to Tax Court Rule 261(a)(1). Critically, in order for IRC § 7481(c)(2) to apply, the Tax Court must have determined that there has, indeed, been an overpayment pursuant to IRC § 6512(b).[18]

If the Tax Court finds that there is no deficiency and further finds either that the taxpayer has made an overpayment of tax or that there is a deficiency, but that the taxpayer has made an overpayment of such tax, the Tax Court has jurisdiction to determine the amount of such overpayment.[19] The Tax Court’s decision in Hill v. Commissioner, however, found only that “there is a deficiency in gift tax due from petitioner” for 2011 and that “there are no deficiencies in gift tax due from, nor overpayments due to, petitioner” for 2010 or 2015.

Because the Tax Court did not find that the petitioner had made an overpayment, it lacks jurisdiction over his motion. The petitioner’s contention that the decision “in substance determined an overpayment” is likewise not availing.

A Word on Stipulations “Below the Line”

A “below-the-line” stipulation is referred to as such, because it appears “below the Judge’s signature.”[20] As such, the Tax Court found that a below-the-line stipulation “evidences only an agreement between the parties” and not between the parties and the Tax Court. Stated differently, a below-the-line stipulation “does not constitute a finding by the Court.” What’s more, in Hill v. Commissioner, the parties themselves, in their below-the-line stipulations, do not refer to any “overpayment.” Rather, they stipulate that the deficiency for the taxable year 2011 is computed without considering the prepayment credit of $10.3 million.

Hill The Line
The line is a dot to the Tax Court, too.

Ultimately, the Tax Court held that the petitioner could not have determined that he made an “overpayment” for 2011, because he had not, actually, made a “payment” at the time the decision was entered. By designating the remittance as a “deposit” and constantly reaffirming that the petitioner intended “for this deposit to satisfy the requirements of IRC § 6603(a),” the petitioner and his representatives damned themselves to this result, because, as been stated above, “[a] deposit is not a payment of tax prior to the time the deposited amount is used to pay a tax.”[21]

This is further evidenced by the fact that when the remittance was made, no gift tax return had been filed. Consequently, and as admitted by the petitioner in its February 2012 letter, “the potential gift tax [wa]s undetermined” at that time. “That being so, it is difficult to see how the remittance could have been a tax ‘payment.’”

Indeed, it is difficult to see, Judge Lauber. Indeed, it is.

The Advantages (and Pitfalls) of Designating the Remittance as a Deposit

Designating this remittance as a “deposit” provided the petitioner with an important benefit. He could demand the immediate return of his deposit at any time.[22] If, on the other hand, the petitioner had made an “advance payment,” he could have secured return of the funds only by pursuing the IRS’s formal refund process (which can—and generally is—long, difficult, and expensive).[23]

The petitioner’s initial and continued insistence on the remittance being a “deposit” had two adverse consequences for petitioner: (1) this Court lacks jurisdiction to reopen the case and (2) interest on the excess deposit, while concededly due, must be computed at the Federal short-term rate, without the three-percentage-point “bump” applicable to interest on “overpayments.”[24] The Tax Court was not persuaded with the petitioner’s new tack that his deposit really was (or eventually became) a payment—on account of the IRS (“in all likelihood on receipt but in any event no later than August 2013”) unilaterally “converting” the deposit into a “payment” of tax.

The Tax Court found fault with this “eleventh hour change.” First and foremost, the petitioner does not actually cite any “authority” for the payment proposition. Further, Judge Lauber’s opinion observes that the Tax Court is otherwise unaware of any authority permitting the IRS to unilaterally overrule a taxpayer’s designation of a remittance as a “deposit.”

Hill BleepThe statute, which the petitioner and his representatives invoked—time and time again—specifically provides that a taxpayer “may make a cash deposit,” and it supplies no authorization for overruling a taxpayer’s designation.[25] IRC § 6603(a) further provides that “[s]uch a deposit shall be made in such manner as the [IRS] shall prescribe.”

The IRS prescribed “the manner” of making deposits in Rev. Proc. 2005-18. Nothing in that pronouncement remotely suggests that the IRS can unilaterally overrule a taxpayer’s designation of a remittance as a “deposit.”[26]

At the end of the day, the IRS never overruled the petitioner’s designation. In its August 2014 letter acknowledging the petitioner’s requests that the deposit be returned, the IRS stated that it needed more information, including “whether our repayment of this money will place in jeopardy the payment of any [F]ederal tax.” The Tax Court found that this statement plainly referred to IRC § 6603(c), which provides that a deposit shall be returned “[e]xcept in a case where the [IRS] determines that collection of tax is in jeopardy.”

Petitioner contends that the IRS converted the deposit into a payment by “refusing to return the deposit.” Vacillation, however, does not equal refusal. Although the IRS initially voiced uncertainty as to whether the deposit should be returned to petitioner or to the district court, when it asked for more information, the petitioner was not forthcoming.

Further, when the RA offered the petitioner the choice of designating the deposit to a year other than 2012 or having the deposit returned to the District Court, petitioner opted for the former. In his protest he explicitly requested, “pursuant to Rev. Proc. 2005-18, that the IRS apply the deposit…under IRC § 6603 to any potential gift tax liability for the 2010, 2011, and 2015 tax years.”

The petitioner likewise errs in relying on the parties’ below-the-line stipulation that “interest will be credited or paid…on any overpayment in tax due to petitioner.” The parties also stipulated that “interest will accrue and be assessed…on the deficiency due from petitioner.” Both statements, which appear among a litany of below-the-line stipulations, were “pure boilerplate,” according to Judge Lauber, as evidenced by the fact that no interest could possibly accrue on the deficiency (because the deficiency was smaller than the deposit).

A Cautionary Tale

Let Hill v. Commissioner serve as a warning to be careful what you wish (ask) for. The petitioner and his representatives clearly intended the remittance to be a deposit. They used the word “deposit” throughout the process until, realizing the windfall if it weren’t considered a deposit, they reversed course in the “eleventh hour.” Both payments and deposits accrue interest—with payments doing so at a more favorable rate. Nonetheless, there are significant drawbacks in making a “payment” versus a “deposit.” It’s critical to understand the end-game before designation, as the petitioner learned the hard way.

 

Hill It is

 

(T.C. Memo. 2021-121) Hill v. Commissioner

 


 

Footnotes:

  1. Rev. Proc. 2005-18, § 6.
  2. See IRC § 7481(a); Tax Court Rule 261(a)(2).
  3. IRC § 7481(c)(2)(B).
  4. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 842, 118 Stat. at 1598.
  5. IRC § 6603(c) (unless the IRS believes that the “collection of tax is in jeopardy”).
  6. IRC § 6603(d)(1).
  7. IRC § 6603(d)(2)(A).
  8. H.R. Rept. No. 108-755, at 649 (2004).
  9. Rev. Proc. 2005-18, § 6.01.
  10. Id., § 6.03.
  11. See IRC § 7442; Ruesch v. Commissioner, 154 T.C. 289, 294 (2020).
  12. Kasper v. Commissioner, 137 T.C. 37, 40 (2011).
  13. See Stewart v. Commissioner, 127 T.C. 109, 112 (2006); Abatti v. Commissioner, 86 T.C. 1319, 1323 (1986), aff’d, 859 F.2d 115 (9th Cir. 1988).
  14. See Stewart, 127 T.C. at 112, n.3.
  15. See Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 6246(a), 102 Stat. at 3751; Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1452(a), 111 Stat. at 1054.
  16. IRC § 7481(c)(1).
  17. IRC § 7481(c)(2)(A)-(B); see also Estate of Smith v. Commissioner, 429 F.3d 533, 538 (5th Cir. 2005), vacating 123 T.C. 15 (2004).
  18. Exxon Mobil Corp. & Affiliated Cos. v. Commissioner, 136 T.C. 99, 111 (2011), aff’d, 689 F.3d 191 (2d Cir. 2012).
  19. IRC § 6512(b)(1).
  20. See Smith v. Commissioner, T.C. Memo. 2009-33, (distinguishing a below-the-line stipulation from the decision line, which actually determines deficiencies, additions to tax, and penalties).
  21. H.R. Rept. No. 108-755, 649; Rev. Proc. 2005-18, § 6.01.
  22. See IRC § 6603(c).
  23. See Ford Motor Co. v. United States, 768 F.3d 580, 588 (6th Cir. 2014) (noting that taxpayers before enactment of IRC § 6603 faced the dilemma of “immediate access without interest, or interest without immediate access”).
  24. See IRC § 6621(a)(1).
  25. IRC § 6603(a).
  26. Rev. Proc. 2005-18, §§ 4.03, 4.04, and 4.05 (specifying circumstances in which an undesignated remittance will be treated as a payment of tax).
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