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Peacock v. Commissioner (T.C. Memo. 2020-63)

On May 19, 2020, the Tax Court issued a Memorandum Opinion in the case of Peacock v. Commissioner (T.C. Memo. 2020-63). The issue before the court in Peacock was whether a remittance that petitioners made to the IRS before the mailing of the notice of deficiency deprives the Tax Court of jurisdiction, which question turns on whether the remittance was in the nature of a payment or a deposit.

Background

The petitioners were issued a notice of deficiency regarding certain “fraud loss” deductions that were disallowed in full by the IRS. The day after the notice of deficiency was issued, petitioner-husband (PH) hand delivered a check payable to the U.S. Treasury. The memo line of the check contained two lines, one containing the PH’s Social Security number and the word “payment,” and the next contained the words “2013 Federal Income Tax.”

Critically, the Tax Court would find, the check was accompanied by a cover letter which stated, in pertinent part, that the taxpayer requested a follow-up meeting with the IRS, and “in the meantime” he was providing a check “in the amount reflected” on the notice of deficiency. PH’s letter noted (in bold, and underlined) “I do, however, respectfully disagree completely with your determination.” He wasn’t too fond of the cut of her jib, either, but he was being polite, after all. PH’s letter closed with the representation that he was in the process of completing IRS Form 12203 (Request for Appeals Review).

In a follow-up letter, PH stated that he had not heard from the IRS (6-months post remittance). He stated in the follow-up letter that “I made it crystal clear that this payment was made in protest, and that I completely disagreed with the IRS determination.” PH then requested a face-to-face meeting with Appeals. This meeting did not take place. Five months later (11 months since the remittance), Appeals issued the petitioners a notice of deficiency.

A Distinction with a Marked Difference

The petitioners timely filed a petition with the Tax Court, which the IRS moved to dismiss for lack of jurisdiction, arguing that the remittance extinguished the deficiency before the notice was issued. Ever so politely crying foul, the petitioners argued that the remittance was not a “payment” but rather a “deposit” that preserved the Tax Court’s jurisdiction citing Rev. Proc. 2005-18, § 4.02(b).

As a starting point, the Tax Court observes that if a taxpayer pays a deficiency in full before a notice of deficiency is (erroneously) issued, no deficiency exists, the notice is invalid, and the Tax Court lacks jurisdiction. See Bendheim v. Commissioner, 214 F.2d 26 (2d Cir. 1954); McConkey v. Commissioner, 199 F.2d 892 (4th Cir. 1952); Estate of Crawford v. Commissioner, 46 T.C. 262 (1966); Walsh v. Commissioner, 21 T.C. 1063 (1954); Anderson v. Commissioner, 11 T.C. 841 (1948). However, the Tax Court will have jurisdiction if the IRS (properly) treats a remittance as a deposit and does not assess additional tax equal to the amount of the remittance before issuing the notice of deficiency. See Hyde v. Commissioner, T.C. Memo. 2011-131, *9-*10; Baral v. United States, 528 U.S. 431, 439, n.2 (2000).

The Right to Deposit Funds with the IRS

The right to deposit is codified in IRC § 6603(a), which permits a taxpayer to make a cash deposit with the IRS, which deposit may be used to pay any tax income, gift, or estate tax that has not yet been assessed. Aside from preserving Tax Court jurisdiction, a deposit stops the running of interest on a deficiency. IRC § 6603(b).

The IRS issued guidance on the deposit procedures in 2005 with Rev. Proc. 2005-18, which requires a written statement to accompany the check designating the remittance as a deposit. Within the written statement, the taxpayer must include the type of tax, the tax year, and a statement identifying the amount of and basis for the disputable tax. Rev. Proc. 2005-18, § 4.02(1)-(2).

If the taxpayer still disagrees with the deficiency at the end of the examination, the IRS will issue a notice of deficiency, and the taxpayer may then petition the court. Id. The Tax Court found that PH’s written statement accompanying the remittance clearly indicated that he disagreed with the deficiency, and so the Tax Court’s jurisdiction hinged on whether the remittance was a payment (the IRS’s position) or a deposit (the petitioners’ position).

Mere Disagreement or Manifestation of Intent to Continue to Dispute Liability

The IRS’s remittance-qua-payment argument is thin. The IRS argued that the inclusion of the word “payment” on the face of the check shut the book on the matter. The Tax Court noted that it would be inclined to agree, if the check had not been accompanied by PH’s written statement, which the IRS’s argument conveniently ignores as mere surplusage or a “mere disagreement” with the deficiency.

A “mere disagreement,” the IRS argues, is not determinative of the payment-or-deposit question. That may be, the Tax Court countered, but the letter also sought a face-to-face meeting with Appeals, which indicated the petitioner’s desire to dispute the liability in “prepayment forums,” which was enough to properly designate the remittance as a deposit. The Tax Court notes in Footnote 14, however, that it is specifically not deciding the issue of whether a written expression of disagreement is sufficient to indicate that the remittance was a deposit under IRC § 6603.

(T.C. Memo. 2020-63) Peacock v. Commissioner

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