TAXPAYER SCORES BIG AND BRILLIANT WIN ON PAYMENT/DEPOSIT ISSUE
In New York Life Insurance Co. v. United States, ___ F.3d ___ (Fed. Cir. 7/3/97), unofficially reported at 97 TNT 130-15 (7/8/97), pursuant to an audit for several years, the IRS proposed large adjustments. Before the IRS concluded the audit, the taxpayer remitted $31.9 MM to be applied to the year 1984, one of the years under audit. In remitting the payment, the taxpayer’s cover letter said that the remittance was ""'payment for income tax and accrued interest for 1984 based on a tentative settlement." Although the cover letter suggested a tentative settlement, subsequent developments suggested that the taxpayer did not agree with the additional tax liability. For some reason, the IRS never assessed the amount in issue and the statute of limitations on assessment, as extended, expired on 9/30/94. On 10/31/94, the taxpayer filed a complaint in the Court of Federal Claims under the Tucker Act and not under the Court’s refund jurisdiction. The Tucker Act confers jurisdiction to recover from the United States based on contract. The issue boiled down to whether the remittance described above was a "payment" or a "deposit." Tax practitioners know the difference between the two, of course, and the remittance cover letter smacked of "payment" rather than "deposit." Indeed, in a situation where the taxpayer does not believe that the taxes are really due, the standard practice is to make a "payment" because, upon refund, a "payment draws interest whereas return of a "deposit" does not. The Court held nevertheless that the remittance was a "deposit" and that a taxpayer (perhaps a misnomer in this case) could recover the deposit under the Tucker Act because it was simply a deposit and not a tax paid. Of course, if it were a tax paid, the taxpayer would be relegated to its refund remedies.
We hope that you have asked the question why the taxpayer would have desired to proceed under the deposit/Tucker Act theory. After all, if the IRS failed to assess, one would normally think that the taxpayer is entitled to a refund of the "payment" and would also be entitled to interest on the refund. Interest on $31.9 MM is no small beans. Why wouldn’t the taxpayer accept the IRS’s theory of the case that the remittance was a payment and go for the whole cahuna? Simple. In a refund suit, the IRS can assert additional tax otherwise barred by the statute of limitations as a "set-off." If the taxpayer, despite its protestations as to liability, really owes the tax now otherwise barred from assessment, a refund suit will offer no relief. By convincing the Court that the remittance was a deposit, the taxpayer can at least get the principal amount back. And principal on $31.9 MM is no small beans. Simply brilliant.