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James W. Perkins, Petitioner v. Commissioner of Internal Revenue, RespondentPerkins v. CommissionerDocket No. 14968-87
United States Tax Court April 3, 1989. April 3, 1989, Filed*47
An order and decision for petitioner will be entered .R issued a notice of deficiency to P on Dec. 19, 1983, for the taxable year 1980. On Dec. 30, 1983, P forwarded a check to R with the designation that the remittance be credited to accrued interest on the 1980 deficiency. On his 1983 return, P deducted the amount paid as a payment of interest and R disallowed the deduction. In response to a notice of deficiency issued for the taxable year 1983, P filed a petition alleging entitlement to the interest deduction claimed on his 1983 return. The parties filed cross-motions for summary judgment on the issue of whether P was entitled to claim an interest deduction in 1983 for the remittance to respondent.
Held , that P's remittance in 1983 constitutes the payment of interest on indebtedness within the meaning ofsecs. 163(a) and461(f) ,I.R.C. 1954 .Held, further , P's motion for summary judgment is granted and R's motion for summary judgment is denied.Kevin O'Connell Marsha Keyes andKathey I. Shaw Gerber,Judge . Panuthos,Special Trial Judge . Nims, Chabot, Parker, Whitaker, Korner, Hamblen, Cohen, Swift, *48 Wright, Parr, Williams, Wells, Whalen, and Colvin,JJ ., agree with this opinion. Ruwe,J ., did not participate in the consideration of this opinion.GERBER; PANUTHOS*749 OPINION
This case was assigned to Special Trial Judge Peter J. Panuthos pursuant to the provisions of
section 7443A(b)(3) of the Internal Revenue Code of 1986 andRule 180 et seq. of the Tax Court Rules of Practice and Procedure. 1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.*750 OPINION OF THE SPECIAL TRIAL JUDGE
Panuthos,
Special Trial Judge : This case is before the Court on cross-motions for summary judgment. The question to be decided is whether an amount paid by petitioner in 1983 on a deficiency determined by respondent*49 for the taxable year 1980, was deductible in 1983 as a payment of interest undersection 163(a) .FACTUAL BACKGROUND
Respondent by notice of deficiency dated February 27, 1987, determined a deficiency in petitioner's Federal income tax for the taxable year 1983 in the amount of $ 3,694. The only adjustment to his 1983 taxable year contested by petitioner is the disallowance of an interest expense deduction in the amount of $ 7,362. 2 Pursuant to the notice of deficiency, petitioner filed a timely petition with this Court. At the time of filing the petition herein, petitioner resided at Lake Oswego, Oregon.
Petitioner is a cash basis taxpayer. On December 19, 1983, respondent issued a notice of deficiency to petitioner for the taxable year 1980 determining a deficiency in the amount of $ 17,588.50. On December 30, 1983, petitioner*50 calculated the interest accrued on the deficiency, as of that date, and mailed a check in the amount of $ 7,361.57 to respondent. In the letter accompanying the check, petitioner requested that the remittance be credited to his account as a payment of accrued interest. Upon receipt of petitioner's check, respondent credited the entire amount as an advance payment on the tax deficiency. Respondent did not notify petitioner that the amount had been credited as a payment of tax rather than as a payment of interest as petitioner had directed. Petitioner claimed an interest deduction on his 1983 Federal income tax return in the amount of $ 7,362.
Pursuant to the December 19, 1983, notice of deficiency, petitioner filed a petition with this Court to contest the deficiency for the taxable year 1980. The ensuing case was resolved on April 18, 1986, by a stipulated decision wherein *751 petitioner's deficiency for 1980 was decided to be $ 17,588.50, the exact amount determined in the notice of deficiency.
OPINION
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials.
Shiosaki v. Commissioner , 61 T.C. 861">61 T.C. 861Naftel v. Commissioner , 85 T.C. 527 (1985)Espinoza v. Commissioner , 78 T.C. 412">78 T.C. 412There is no dispute as to a material fact here. Further, there is no question but that petitioner actually paid the amount claimed in 1983. Thus, the only issue for decision is whether the payment is properly deductible in 1983 as a payment of interest.
Petitioner argues that he is entitled to claim the deduction in 1983 by virtue of
section 461(f) . That section provides as follows:SEC. 461(f) . Contested Liabilities. -- If --(1) the taxpayer contests an asserted liability,
(2) *52 the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability.
(3) the contest with respect to the asserted liability exists after the time of the transfer, and
(4) but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year),
Section 461(f) itself does not authorize a deduction, rather it relates only to the timing of a deduction otherwise *752 allowable under the Code. It issection 163(a) which provides for the deduction.Section 163(a) provides that: "There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness." 3*53 Respondent argues that there was no indebtedness within the meaning of
section 163(a) . Respondent further argues that petitioner does not qualify undersection 461(f)(2) or undersection 461(f)(4) . In this regard, we note that the requirements ofsection 461(f)(4) provide that the deduction would be allowed but for the fact that the asserted liability is contested. Thus, respondent's argument undersection 461(f)(4) is identical to his first argument, which is that there was no indebtedness.We will first address respondent's argument under
section 461(f)(2) . Respondent argues that the liability asserted was for additional tax, not interest, and petitioner did not designate any of the payment as a payment of tax.Section 6601(a) provides as follows:
If any amount of tax imposed by this title * * * is not paid on or before the last date prescribed for payment, interest on such amount at an annual rate established under section 6621 shall be paid for the period from such last date to the date paid.
Section 6601(e) provides in part as follows:
Interest prescribed under this section on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in*54 the same manner as taxes. * * *
Thus, under section 6601(a), interest is required to be paid on any underpayment of tax. Further, under section 6601(e), the interest is assessed and collected in the same manner as the tax. However, it is not required to be included in a notice of deficiency since as a general rule this Court has no jurisdiction with respect to interest under section 6601(a). 4 SeeStandard Oil Co. v. McMahon , 244 F.2d 11">244 F.2d 11LTV Corp. v. Commissioner , 64 T.C. 589">64 T.C. 589Hudgins v. Commissioner , 55 T.C. 534">55 T.C. 534Chapman v. Commissioner , 14 T.C. 943">14 T.C. 943191 F.2d 816">191 F.2d 816 (9th Cir. 1951). But, it is well settled that tax and interest thereon constitute a single liability, the interest being merely a part of the tax made so by statute.Colorado Milling & Elevator Co. v. Howbert , 57 F.2d 769">57 F.2d 769Big Diamond Mills Co. v. United States , 51 F.2d 721">51 F.2d 721United States v. Childs , 266 U.S. 304 (1924)In addition, we note that in the Explanation of Adjustments attached to the 30-day letter, respondent included a page which showed the total amount due from petitioner as $ 24,405.61. This amount was broken down as follows:
Total amount due as a result of the examination on 07/08/83 $ 24,405.61 Additional taxes: Balance due 17,588.50 Total additional taxes 17,588.50 Interest: 20% from 02/01/82 to 12/31/82 3,218.94 Plus 12% from 04/15/81 to 01/31/82 1,682.71 Total simple interest 4,901.65 Total additional taxes plus simple interest 22,490.15 Interest compounded after 12/31/82 1,915.46 Total additional taxes plus interest 24,405.61 Total additional taxes, interest, and penalties as of 07/08/83 24,405.61 *56 The Explanation of Adjustments further stated as follows:
ADDITIONAL INTEREST WILL ACCRUE AT THE CURRENT RATE OF 11% COMPOUNDED DAILY AND THE NEGLIGENCE PENALTY, IF APPLICABLE, WILL ALSO CONTINUE TO ACCRUE.
SINCE ADDITIONAL TAX IS DUE, YOU MAY WANT TO PAY IT NOW AND LIMIT THE INTEREST AND PENALTY CHARGES. PLEASE MAKE YOUR CHECK PAYABLE TO INTERNAL REVENUE SERVICE.
Based on the foregoing, we find that respondent's claim included both additional taxes and interest.
Respondent argues, however, that regardless of whether the amount claimed by him includes interest, there was no "asserted liability" within the meaning of
section 461(f) at *754 the time petitioner paid the amount because there had been no assessment.In
Arheit v. Commissioner , 31 T.C. 46">31 T.C. 46Rosenman v. United States , 323 U.S. 658">323 U.S. 658Lewyt Corp. v. Commissioner , 215 F.2d 518 (2d Cir. 1954)18 T.C. 1245">18 T.C. 1245 (1952), modified on another point349 U.S. 237">349 U.S. 237 (1955), we held that the remittance credited to the Internal Revenue Service (IRS) suspense account does not constitute a payment of tax. The Court relied on the fact that no formal determination*58 had been made (no 30- or 90-day letter had been issued) and thus respondent, by not making any definite determination in 1952, left open his procedures for revising the proposed deficiencies upward or downward.In
Rosenman v. United States, supra After an examination of the return, the IRS determined, approximately 3 years later, that the total tax due was approximately $ 129,000. When the taxpayer failed to file a petition with this Court, the deficiency of approximately $ 49,000 was assessed. The IRS applied the balance of the suspense account (approximately $ 40,000) to the assessed amount and in April 1938 the taxpayer paid the remainder *59 of the liability.
The IRS rejected the taxpayer's claim for refund filed in 1940 on the basis that the tax had been paid more than 3 years prior to the filing of the claim (except the payment made in April 1938). The IRS argued that the payment of taxes was made in December 1934 when the $ 120,000 check was remitted.
The Supreme Court held that the remittance in 1934 was in the nature of a deposit or cash bond and not a payment which would begin the running of the period of limitations. The Court held that "the taxpayer did not discharge what he deemed a liability nor pay one that was asserted. This was merely an interim arrangement to cover whatever contingencies the future might define."
Rosenman v. United States, supra at 662In
Lewyt Corp. v. Commissioner, supra Also, based upon an examination of the 1944 and 1945 tax years, the taxpayer forwarded approximately $ 179,000 to the IRS in September 1947. The taxpayer designated a part of the remittance for tax and part for interest. No notice of deficiency for 1944 and 1945 had been issued. The IRS deposited the funds to the suspense account.
The taxpayer argued that the portion of the remittances with respect to excess profits taxes and interest should be *756 allowed as a deduction in computing net operating losses for 1947. The issue thus was whether the excess profits taxes and interest could be considered as "paid" in that year.
The court of appeals, relying on
Rosenman v. United States, supra While we do not read
Rosenman to foreclose treating as a tax payment any remittance made prior to assessment, we do think that it supports the view that a remittance which does notsatisfy an asserted tax liability should not be treated as the "payment" of a tax. Satisfaction may, as inRosenman , follow from payment*61 of a tax assessed, for such a payment extinguishes the asserted liability, even though the taxpayer is left with an independent claim for refund which survives the discharge of the assessment. * * * In short, there can be no payment without satisfaction whether pursuant to or apart from an assessment. Here the taxpayer was tendering its check with one hand, and contesting its liability to pay with the other. Its Tax Court proceedings as to the 1943 deficiency still stood, and that avenue was still open to it as to 1944 and 1945 taxes. [Lewyt Corp. v. Commissioner , 215 F.2d at 522-523
Accordingly, the court held that the remittances did not constitute a payment.In
Shubert v. Commissioner , 41 T.C. 243 (1963)Rosenman, supra ; Lewyt, supra Arheit, supra .The aforementioned cases can be distinguished from this case. The tax years involved in
Rosenman v. United States, supra ; Lewyt Corp. v. Commissioner, supra Arheit v. Commissioner, supra section 461(f) . The taxable year 1955 was in issue inShubert and thussection 461(f) , which was enacted with the Internal Revenue Code of 1954, would have been effective. However, no mention or discussion is had with respect to *757 that section inShubert . Thus,section 461(f) does not play a role in any of the aforementioned cases. Furthermore,Rosenman, Arheit , andShubert , involved remittances made prior to the issuance of a notice of deficiency. 5*63 In
Lewyt Corp. v. Commissioner, supra satisfied since it was being contested by the taxpayer.Section 461(f) deals with the question of contested liabilities. Thus, at least to the extent that there was an asserted liability against the taxpayer inLewyt Corp ., it would appear that the result might be different hadsection 461(f) been in effect for the year in issue.In
Estate of Goodall v. Commissioner , T.C. Memo. 1965-154391 F.2d 775">391 F.2d 775 (8th Cir. 1968), we held, under facts similar to those inShubert andArheit , that a payment designated as an interest payment on a deficiency, which was made prior to issuance of a notice of deficiency and which was credited to a suspense account, was not a deductible*64 payment of interest. On appeal to the Court of Appeals for the Eighth Circuit, this issue was conceded by respondent. The Eighth Circuit stated that, "the Commissioner now concedes that 'the interest payment was received and acknowledged as such' by him and that the deduction was proper."391 F.2d at 781 .In
Charles Leich & Co. v. United States , 165 Ct. Cl. 127">165 Ct. Cl. 127section 461(f) , and thus the taxpayer was not entitled to claim a deduction for interest paid. The court found that the Senate Finance Committee report seemed to indicate that in order for there to be an asserted liability, the taxpayer "must be *758 put in a position where inaction on his part will cause him to have a legal obligation to pay the tax." 6*65Charles Leich & Co. v. Commissioner , 333 F.2d at 872. 7Here, were it not for the restrictions on assessment in section 6213, discussed
infra , petitioner would have had an immediate legal obligation to pay the tax. Under the circumstances of the case before us, we find that the issuance of the notice of deficiency constituted the assertion of a liability against petitioner. 8*66 Respondent in this case applied the remittance to the tax deficiency. The aforementioned cases applied the taxpayer's remittance as a cash bond to a suspense account. While we do not believe that respondent's application of the remittance should necessarily determine its characterization for tax purposes, we note that in this case respondent did not treat the remittance as a cash bond. Thus, to the extent that respondent relies upon his treatment of a remittance as a cash bond as determinative of its characterization for tax purposes, those cases are inapplicable. Here respondent treated the remittance as a payment. Under the circumstances of this case, we find that the payment made by petitioner, after issuance of the notice of deficiency, was a transfer of money to provide for the satisfaction of an asserted liability within the meaning of
section 461(f)(2) .Respondent also argues that petitioner fails to meet the requirement of
section 461(f)(4) that "but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier year)." In this regard respondent argues that even if the asserted liability were*67 not contested, petitioner would still not be entitled to an interest deduction undersection 163(a) ."Indebtedness" for the purpose of determining deductible interest means "an existing, unconditional and legally enforceable obligation for the payment of money."
First *759 , 289 F.2d 861">289 F.2d 861It appears that the only thing which prevented the deficiency from being an "existing, unconditional or legally enforceable obligation for the payment of money" is section 6213. Section 6213 allows petitioner to contest the asserted liability in the Tax Court and prevents respondent from immediately*68 assessing the asserted liability.
Petitioner made a clear and unambiguous designation to respondent that the payment should be applied to interest. Generally, a partial payment made by a taxpayer to respondent with specific instructions as to its application will be applied in accordance with those instructions. See
Keith v. Commissioner , 35 T.C. 1130 (1961)Specifically, respondent relies upon
Rev. Proc. 82-51, 2 C.B. 839">1982-2 C.B. 839 , which he interprets as requiring the payment to be a complete or partial satisfaction of the deficiency in tax. Respondent further citesRev. Proc. 84-58, 2 C.B. 501">1984-2 C.B. 501 , as clarifying his position on this question. That procedure permits the taxpayer to designate a payment of interest only if the taxpayer pays the underlying tax with respect to the amount designated as interest. Thus, respondent argues that petitioner's *69 designation of the entire payment as interest, constitutes a failure to comply with his revenue procedures. Respondent thus concludes that he was justified in not complying with petitioner's designation.Section 163(a) provides for a deduction of interest paid on indebtedness.Section 163(a) does not require that the debt *760 be paid prior to the payment of interest. Thus, respondent's requirement in his revenue procedure would appear to be an unwarranted restriction. We note that respondent's revenue procedure represents nothing more than "the contention of one of the parties to the litigation."Estate of Smead v. Commissioner , 78 T.C. 43">78 T.C. 43*70 We find that the payment by petitioner was a payment of interest for which a deduction could be claimed in 1983 but for the fact that respondent was forbidden by section 6213 from taking immediate action to assess or collect the tax. Accordingly, we hold that petitioner is entitled to a deduction in 1983, in the amount of $ 7,362, for interest paid on indebtedness. Petitioner's motion for summary judgment will be granted, and respondent's cross-motion for summary judgment will be denied.
An order and decision for petitioner will be entered .Footnotes
1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise noted.↩
2. The actual amount of interest petitioner claims to have paid to respondent is $ 7,361.57. However, petitioner apparently rounded to the nearest dollar all amounts shown on his 1983 return.↩
3.
Sec. 163 was amended by the Tax Reform Act of 1986 to disallow the deduction of personal interest.Sec. 163(h), I.R.C. 1986↩ . Personal interest generally includes interest on tax deficiencies. H. Rept. 99-841 (Cong.) (1986), 1986-3 C.B. (Vol. 4) 154. This amendment, however, does not affect the disposition of the issue before us.4. See, however, sec. 6246(a), Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3751, amended Code sec. 7481 by adding new subsec. (c). The amendment provides that the Tax Court may reopen a case to determine whether the taxpayer overpaid interest and the amount of such overpayment.↩
5.
Rosenman↩ involves a remittance prior to the filing of the return.6. S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 604-605.↩
7. On Jan. 17, 1989, after briefs in this case were submitted, respondent issued
Rev. Rul. 89-6, 3 I.R.B. 4">1989-3 I.R.B. 4 , wherein he acknowledged that as a result of a change in administrative procedures, he would not follow the conclusion inLeich that, in the absence of a tax assessment, an amount proposed in a revenue agent's or examiners' report is not an asserted liability within the meaning ofsec. 461(f)↩ .8. We note that the dissent in
Charles Leich & Co↩ . opined that even the lack of a formal notice of deficiency should not prevent a claim for additional tax and interest thereon as being considered an asserted liability.9. Respondent has not argued that the procedure constitutes a long-standing administrative position with congressional or judicial approval. See
Crow v. Commissioner , 85 T.C. 376 (1985)United States v. Correll , 389 U.S. 299 (1967)Commissioner v. Stidger , 386 U.S. 287">386 U.S. 287↩
Document Info
Docket Number： Docket No. 14968-87
Citation Numbers： 92 T.C. 749, 1989 U.S. Tax Ct. LEXIS 47, 92 T.C. No. 42
Judges： Gerber,Panuthos,Chabot,Whitaker,Korner,Hamblen,Cohen,Swift,Wright,Parr,Williams,Wells,Whalen,Colvin,Ruwe
Filed Date： 4/3/1989
Precedential Status： Precedential
Modified Date： 1/13/2023