A district court held that an estate’s remittance to the IRS was a tax payment rather than a deposit. It denied the estate’s refund request because it occurred after the three-year recovery period had expired.
Generally, a taxpayer must request a refund of a tax overpayment within three years from the date the return was filed or two years from the date the tax was paid, whichever occurs later. Sec. 6603 permits a taxpayer to make a deposit (not considered a tax payment) with the IRS to suspend interest on a potential underpayment of tax. A taxpayer can request the return of all or part of a deposit at any time before the deposit has been used by the IRS as payment of a tax. To be considered a deposit, a remittance must be accompanied by the taxpayer’s written statement conforming to the requirements of Rev. Proc. 2005-18. In Moran, 63 F.3d 663 (7th Cir. 1995), when deciding whether a remittance was a deposit or a tax payment, the Seventh Circuit applied a facts-and-circumstances test by examining three factors: when the tax liability was determined, what the taxpayers intended, and how the IRS treated the remittance upon its receipt.
Marshall Syring, a resident of Superior, Wis., died on Oct. 14, 2005. The estate’s accountant estimated a $650,000 estate tax liability, which he believed could be paid over 10 years. On July 14, 2006, the estate, based on its accountant’s advice, remitted $170,000 to the IRS and requested an extension of its filing deadline to Jan. 14, 2007; however, no written statement conforming to Rev. Proc. 2005-18 was included with the remittance. The estate tax return, which reported no tax liability, was filed on Feb. 19, 2010. After an audit, the IRS determined an estate tax liability of $25,526, which the estate did not contest; however, it requested a refund of $144,474, the remainder of its remittance. The IRS denied the refund, arguing the remittance was a tax payment, not a deposit, and the estate’s request for the refund of the tax payment was not timely. The estate filed suit in the U.S. District Court for the Western District of Wisconsin.
The court held the remittance was a tax payment, using the three-factor test of Moran. The court found that under the first factor, the facts indicated the payment was a deposit, since there was no formal tax assessment or a defined tax liability at the date of remittance. However, the court found the other two factors—taxpayer intent and the IRS’s treatment of the remittance—indicated it was a tax payment. The estate would have had prima facie evidence that it intended to make a deposit if it had included a written statement outlined in Rev. Proc. 2005-18 with the remittance; however, the estate failed to do so.
The court looked at other factors to determine the estate’s intent and concluded that three circumstances indicated that the estate intended to make a partial estate tax payment: (1) the careful estimate of the estate tax liability and the amount of the remittance by the estate’s accountant; (2) the manner in which the accountant completed Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes; and (3) the prompt action by the estate following the accountant’s instructions.
Concerning the third Moran factor, the court found that the IRS treated the remittance as a payment since (1) Rev. Proc. 2005-18 states any remittance not accompanied by a written statement will be treated as a tax payment; (2) the IRS recorded the remittance as a “payment received”; and (3) it credited the payment to the estate’s account rather than a separate deposit account. In its conclusion, the court stated, “This result may seem unfair—after all the government is allowed to keep a payment that it concedes was not due—but tax laws are ‘not normally characterized by case-specific exemptions reflecting individualized equities’ ” (quoting Brockamp, 519 U.S. 347, 352 (1997)).
Syring, No. 12-cv-232-wmc (W.D. Wis. 8/15/13)
By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.