The Court of Appeals for the Fifth Circuit has denied an employer's refund claim, even though the employer had overpayments in certain quarters that were not applied to its withholding tax liability [Nicholas Acoustics & Specialty Company, Inc. v. U.S., CA5, 107 AFTR 2d 2011-2543, 6/15/11].
The facts. Between 1999 and 2003, Nicholas Acoustics & Specialty Company, Inc. (Nicholas) remitted payroll taxes to the IRS, but failed to file any tax returns. The funds remitted were not for the exact amount owed, but were instead an estimate of the amount due. The company occasionally paid taxes in excess of its liability. Nicholas erroneously assumed that the IRS could apply all of its overpayments to other quarters in which it had underpaid its tax liability.
In 2003, the IRS audited Nicholas due to its failure to file its tax returns. After the audit, Nicholas filed returns for the missing quarters, which allowed the IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. The IRS said that it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after the IRS made the adjustments. The IRS filed a lien against Nicholas, which Nicholas paid before seeking a refund. Nicholas contended that the shortfall wouldn't have occurred if the IRS had applied all of the company's overpayments to future or past quarters.
IRS methodology. The IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which the IRS simply holds, and a taxpayer may seek a refund of the deposit at any time (see Rosenman v. U.S., U.S. Sup. Ct., 33 AFTR 314, 1/29/45). But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for refund (see Miller v. U.S., Ct Fed Cl, 86 AFTR 2d 2000-7058, 11/09/00).
Previous court rulings. In Deaton v. Comm., CA5, 97 AFTR 2d 2006-984, 2/9/06, and Baral v. U.S., U.S. Sup. Ct., 85 AFTR 2d 2000-941, 2/22/00, federal courts determined that a remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under an Internal Revenue Code section for which the statute's plain language states that the remittance is to be “deemed paid.”
In Baral, the Supreme Court looked at an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. The Supreme Court held that the tax was paid when the money was remitted, not when the tax was assessed. The Supreme Court focused on Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2), which govern employee withholding taxes. It noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511. Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed by the taxpayer within two years from the time the tax was paid if no return was filed by the taxpayer.
The ruling. The Court of Appeals for the Fifth Circuit agreed with the IRS that the employment tax remittances constituted payments and that refunds of the payments were subject to the statute of limitations period in Code Sec. 6511. The Fifth Circuit looked at the plain language in Code Sec. 6513(c)(2) and said that it was a “deemed paid” provision subject to Code Sec. 6511 's limitations period for refunds. Similarly, Reg. §31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.