Payment vs. Deposit under Refund SOL

A, executrix of her aunt’s estate (E), seeks to recover $140,000 remitted to the IRS as estimated estate taxes in 1996. The Service opposes the refund request as untimely, barred by the statute of limitations (SOL) applicable to refund claims.

Facts

A filed Form 4768, Application for Extension of Time to File a Return, for E and tendered two checks totaling $140,000 to the IRS. The Service accepted the checks and categorized them as payment of estimated taxes on the estate. It also approved a requested extension to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, but A failed to file it in the requisite time period. As a result, the IRS sent A two deficiency notices. E ultimately filed Form 706, reflecting no estate taxes due. The Service treated the Form 706 as a request for a refund of the amount A paid in 1996, but declined to issue the refund, because the request was made after the three-year SOL had run.

Analysis

The parties agree that if the remittance was a payment, then A is not entitled to a refund, due to the SOL, under Sec. 6511(a) and (b). To designate a remittance as a deposit, rather than as a payment, after the mailing of a notice of deficiency, the taxpayer must designate it as such in writing; see Rev. Proc. 84-58, 1984-2 CB 501, superceded by Rev. Proc. 2005-18, IRB 2005-13, 798. However, when the remittance is prior to a notice of deficiency, the Third Circuit has adopted a “facts and circumstances” analysis to determine the legal characterization of the remittance; see Fortugno, 353 F2d 429 (3d Cir. 1965); and Ertman, 165 F3d 204 (2d Cir. 1999). This approach mandates an inquiry into (1) the timing of the remittance; (2) the taxpayer’s intent in making it; and (3) how the IRS treated the remittance on receipt.

Here, although the IRS treated the remittance as a payment, the first two factors point toward designating it as a deposit. A did not consult with a tax attorney or accountant to estimate the taxes owed. Indeed, she testified that she had not seriously thought about the potential tax liability prior to actually writing the check. Further, she testified that her motivation in making the remittance was that no penalties be assessed against the estate due to untimeliness. This sentiment was confirmed by letters she subsequently sent the IRS. Thus, the facts and circumstances surrounding A’s remittance require a finding that it  was a deposit; see Risman, 100 TC 191 (1993) (finding remittance to be deposit when taxpayers made a wild guess at liability and the IRS initially coded remittance as deposit); Hill, 263 F2d 885 (3d Cir. 1959) (noting that when “a taxpayer gives the Government money in discharge of his tax debt or gives it money to stop interest and penalties while he and the Government contest what the debt is to be,” the remittance can be deemed a deposit).

In addition, Rev. Proc. 84-58, notes that “[a]ny undesignated remittance...made before the liability is proposed to the taxpayer in writing (e.g., before the issuance of a revenue agent’s or examiner’s report), will be treated by the Service as a deposit in the nature of a cash bond.” On one of the checks, A wrote “Federal Estate Tax for Helen Walbridge,” and on the other she made no notation. Thus, the remittance was “undesignated.” A’s remittance was a deposit, not a payment; thus, the refund claim is not barred by the SOL.