Taxpayers who anticipate owing money to the Internal Revenue Service may file a “deposit” with the government. A deposit benefits a taxpayer by stopping the running of interest on an underpayment and penalties.25Unlike a payment, a deposit does not prevent a taxpayer from challenging a deficiency in Tax Court,26nor does it trigger the statute of limitations for filing a refund claim.27And if it is later determined that no tax is due to the government, the taxpayer can simply ask the government to 24A correspondent account is a bank account that one bank maintains for another bank. Typically, a foreign bank that does business in US dollars but does not have a US office will obtain a correspondent account in order to provide services to its US customers. 25 Principal Life v. United States, 95 Fed. Cl. 781, 796 (2010) 26Baral v. United States, 528 US 431, 439 n.2 (2000) 27 Rosenman v. United States, 323 US 658, 662-63 (1945) Taxpayers who desire to disclose to the Service a foreign account have a choice between the OVDP, the latest iteration of which is an open-ended program that began in January 2012 (modified in 2014), and the newer streamlined procedures. FOCUS ON TAX CONTROVERSY AND LITIGATION FEBRUARY 2016 15 return the money with neither the formality of filing a claim for refund nor the need to show that there had been an overpayment of tax. In addition, if the deposit is requested to be returned, the taxpayer is entitled to the payment of interest on the deposit at the applicable Federal short-term rate to the extent the deposit is attributable to a “disputed tax item”28 (meaning you can’t “deposit” funds with the IRS just to earn interest.) Historically, the genesis of a tax “deposit” has had a tortured path. The concept of a tax deposit was first recognized in the Supreme Court's decision in Rosenman v. United States, which found a basis for the concept in implications from the Internal Revenue Code.29Mr. Justice Frankfurter, writing for a unanimous court in Rosenman,30 first described a remittance that was not a “payment” of a tax, but rather “a deposit made in the nature of a cash bond for the payment of taxes thereafter found to be due.”31But, neither the term “deposit” nor Justice Frankfurter's concept of one “made in the nature of a cash bond for the payment of taxes thereafter found to be due” could be found in any of the income tax provisions in the 1939 Code.32The Federal Circuit later interpreted Rosenman in New York Life Ins. Co v. United States,33 concluding that a “circumstances” test controlled the question of whether a remittance was a deposit. Over time, the decisions in this area focused less on the tax attributes of deposits, and more on whether a particular remittance was a “deposit” versus a “payment.” The IRS eventually issued a series of revenue procedures, designed to provide taxpayers with guidance as to how “deposits” should be made and would be processed.34Rev. Proc. 84-58 and the patchwork of judicial decisions were later replaced by I.R.C. section 6603 (part of the American Jobs Creation Act of 2004),35 which was enacted to permit a taxpayer to make a deposit and suspend the running of interest under section 6601 on a potential underpayment of tax that was not been assessed at the time of the deposit. Today, this Code provision controls the question of whether a remittance is a “deposit” not New York Life. Section 6603 was enacted to permit taxpayers to make a deposit with the Service that may be used by the Secretary to pay any income, gift, estate, or generation-skipping taxes imposed under the Code, which has not been assessed at the time of the deposit. To the extent that such deposit is used by the Service to pay tax, for purposes of 28 See IRC section 6603. 29 See Rosenman v. United States, 323 US 658, 662-63 (1945) 30 Id. at 662-63. 31 Id. 32 See New York Life Ins. Co. v. United States, 118 F.3d 1553, 1556 (Fed. Cir. 1997), cert. denied, 523 US 1094 (1998) 33New York Life Ins. Co v. United States, 118 F.3d 1553, 1556 (Fed. Cir. 1997) 34 See Rev. Proc. 84-58, 1984-2 C.B. 501; Rev. Proc. 82-51, 1982-2 C.B. 839; Rev. Proc. 64-13, 1964-1 C.B. 674; Rev. Proc. 63-11, 1964-1 C.B. 497; see also Baral, 528 US at 439 n.2 (noting the existence of this guidance) 35Pub. L. No. 108-357, 118 Stat. 1418 “If the deposit is requested to be returned, the taxpayer is entitled to the payment of interest on the deposit at the applicable Federal short-term rate.” “A taxpayer may request the withdrawal of any amount of the deposit at any time. There is no limitations period for recovering a deposit with the IRS.” FOCUS ON TAX CONTROVERSY AND LITIGATION FEBRUARY 2016 16 section 6601 (relating to interest on underpayments), the tax shall be treated as paid when the deposit is made. Interest will not be charged on the portion of the underpayment that is deposited for the period that the amount is on deposit. Except in the case where the Service has determined that the collection of tax is in jeopardy, section 6603 provides that the Service shall return to the taxpayer any amount of the deposit the taxpayer requests in writing. A taxpayer may request the withdrawal of any amount of the deposit at any time. There is no limitations period for recovering a deposit with the IRS.36 Under section 6603, deposits will earn interest at the applicable Federal short-term rate to the extent they are attributable to a disputed tax item. A disputable item is any item for which the taxpayer (1) has a reasonable basis for the treatment of the item, and (2) reasonably believes that the Service also has a reasonable basis for disallowing the taxpayer’s treatment of such item.37All items included in a 30-day letter (letter of proposed deficiency subject to administrative review) to a taxpayer are deemed disputable for purposes of section 6603. A deposit shall be made in the manner prescribed by the Service. Section 6603(a) was explicated by Revenue Procedure 2005-18, which provides that a taxpayer may make a deposit by filing a “written statement designating the remittance as a deposit.”38 Rev. Proc. 2005-18 provides the procedures to make, withdraw or identify deposits to suspend the running of interest on potential underpayments. “[A] remittance that is not designated as a deposit (an “undesignated remittance”) will be treated as a payment and applied by the Service against any outstanding liability for taxes, penalties or interest.”39Rev. Proc. 2005-18 superseded Rev. Proc. 84-58. Under Rev. Proc. 2005-18 the procedures for making a deposit under section 6603 are as follows: 1. A taxpayer may make the deposit to the IRS Service Center at which the taxpayer is required to file its return or to the appropriate office at which the taxpayer’s return is under examination. 2. A check or money order must be accompanied by a written statement designating the remittance as a deposit. The written statement must also include the following: i. The type of tax; ii. The tax year(s), and iii. The statement described in section 7.02 (of Rev. Proc. 2005-18) identifying the amount of and basis for the disputable tax. 36Blatt v. United States, 34 F.3d 252, 254-55 (4th Cir. 1994) 37 See IRC Section 6603(d)(3) 38 Rev. Proc. 2005-18 § 4.01(1) 39 Rev. Proc. 2005-18 § 4.01(2) “Generally, the Circuit Courts have held that determining whether a remittance is a payment or a deposit involves consideration of the facts and circumstances of the case, with no one factor being conclusive.” FOCUS ON TAX CONTROVERSY AND LITIGATION FEBRUARY 2016 17 3. Section 7.02 requires that the taxpayer provide a written statement to include: i. The taxpayer’s calculation of the amount of disputed tax; ii. A description of the item of income, gain, loss, deduction or credit for which the taxpayer has a reasonable basis for the treatment of the item; iii. The basis for the taxpayer’s belief that it has a reasonable basis for the treatment of any item described in section 7.02 on its return. Remittances to the IRS may be a deposit in the nature of a cash bond, which the IRS holds until resolution of a case and may be refunded at any time, or the remittance may be a payment of tax which may only be refunded if a timely refund claim is filed.40Courts have noted that though Rev. Proc. 84-58 still provides important “guideposts” for distinguishing between deposits and payments, ultimately the courts must apply a facts and circumstances test.41 When making a deposit, it is important to designate in writing that the remittance is a “deposit” and not an “advanced payment.”42 In Bedrosian, Tax Court rejected taxpayers’ argument that they made an undesignated remittance while they were under examination, but before a liability was proposed in writing, and therefore the remittance was a deposit. Without such designation described in the Revenue Procedures discussed above, the failure “weighs against a finding that the remittance was a deposit.”43The purpose of such designation is to clearly indicate the intention of the taxpayer, a significant factor in the analysis.44The Fourth Circuit has held that the distinction between a payment and a deposit is based on “intent[,] which may be determined from the circumstances, such as when the tax liability was created, the taxpayer's purpose in remitting the money, and how the IRS treated the payment.”45 Generally, the Circuit Courts have held that determining whether a remittance is a payment or a deposit involves consideration of the facts and circumstances of the case, with no one factor being conclusive.46Relevant factors include: (1) whether the tax has been assessed by the IRS prior to the remittance; (2) whether the remittance is “disorderly,” i.e. made without careful consideration of the potential tax liability;47 (3) whether the taxpayer contests liability; (4) whether the taxpayer indicates to the 40 Rosenman v. United States, 323 US 658, 662-63 (1945) 41 See, e.g. Winford v. United States, 970 F. Supp. 2d 548 (W.D. La. 2013), aff’d, 587 Fed. App’x 207 (5th Cir. 2014) (adopting the lower court’s analysis in full) 42 See Bedrosian v. Commissioner, TC Memo 2007-376 (The written statement accompanying the check remitted by petitioners states that the check is for an “advance payment,” not a deposit) 43Winford v. United States, 970 F. Supp. 2d 548, 555, citing VanCanagan v. United States, 231 F.3d 1349, 1353 (Fed. Cir. 2000) 44 Ford Motor Co. v. United States, 768 F.3d 580, 589 (6th Cir. 2014). 45Blatt v. United States, 34 F.3d 252, 255 (4th Cir. 1994) (citing Rosenman v. United States, 323 US 658, 662 (1945)) 46 See e.g., VanCanagan, 231 F.3d at 1353 (Fed. Cir. 2000); New York Life Ins. Co. v. United States, 118 F.3d 1553, 1557 (Fed. Cir. 1997); Cohen v. United States, 995 F.2d 205, 208-09 (Fed. Cir. 1993) (citing Charles Leich & Co. v. United States, 329 F.2d 649 (Ct. Cl. 1964)) 47 See Northern Natural Gas Co. v. United States, 354 F.2d 310, 315 (Ct. Cl. 1965) FOCUS ON TAX CONTROVERSY AND LITIGATION FEBRUARY 2016 18 IRS that the remittance is a deposit;48 (5) whether the IRS viewed the remittance as a deposit; and (6) whether the remittance was made when payment was due and submitted with a request for an extension of time within which to file a return.49 In Deaton v. Commissioner,50 the court considered the following facts and circumstances to classify remittances made prior to assessment: (1) evidence that the taxpayer intended the remittance to be a deposit when remitted, (2) evidence that the taxpayer was disputing its tax liability, (3) and whether the taxpayer availed itself of the procedure available for making deposits.51Collectively, these factors indicate that the a taxpayer must appropriately avail itself of the procedures available in a manner that indicates clear intention. In Deaton, the remittance was made in conjunction with a request for an extension to file a return and the court determined that the remittance was a payment of tax under the facts and circumstances it reviewed.52A similar conclusion was recently reached in Bolt v. United States.53 In Bolt, the taxpayers remitted a payment to the Service with a signed copy of IRS Form 4549 “Income Tax Examination Changes,” which notified the Bolts of the amount of their tax liability. The Bolts did not submit any written statement with the remittance designating it as a deposit, pursuant to section 6603 or Rev. Proc. 2005-18. The IRS treated the remittance as an “advance payment of deficiency,” and not as a deposit. The court concluded that the Bolts intended the remittance to be a payment and not a deposit, and dismissed the Bolts’ claim for refund as time barred. Transmitting a deposit to the Service provides certain benefits to taxpayers. However, taxpayers must follow the prescribed requirements of Rev. Proc. 2005-18 and clearly articulate that the payment should be treated as a deposit and not as a payment of tax. Failure to do so may result in an undesirable outcome, as the taxpayers experienced in Bedrosian, Deaton and Bolt.