Not in Tax Court, Anyway

That’s the lesson Judge Gustafson teaches Hershal Weber in the eponymous case, 138 T.C. 18, filed 5/7/12.

Hersh overpaid his 2006 personal income tax and asked for the overpayment to be applied to what he’d owe for 2007. But IRS hit him with TFRPs for payroll taxes not withheld by an outfit called S&G, in which Hersh had some unspecified role, enough to make him a responsible person. And the Section 6672 TFRPs ate up his 2006 overpayment, so IRS held him for tax due for 2007, but that wasn’t much. Again Hersh asserted he had a previous overpayment to carry forward, so he wanted this applied to 2008. No, says IRS, nothing to apply, it’s all gone, and this time Hersh owes serious money.

IRS sends notice of levy for withholdings, and Hersh asks for a CDP. While waiting for Appeals, some other S&G types pay enough to satisfy the unpaid withholding taxes, and IRS says “no levy, withholding paid.” Hersh sues for a refund in US District Court, but no disposition of that case is brought to Judge Gustafson’s attention.

Meantime Hersh still owes personal income tax for years 2007 and 2008, so IRS sends Hersh a letter so stating, and a new notice of levy. Hersh asks for CDP hearing, alleges the TFRPs were paid and his payments should be applied as he requested, resulting in no tax due, but Appeals says “we have no jurisdiction for 2006 and 2007.” Hersh petitions Tax Court.

Judge Gustafson gives IRS summary judgment. Abuse of discretion is the standard. IRS can abuse its discretion in applying overpayments, but IRS has broad discretion per Section 6402(a): “The statute and case law are clear that the discretionary authority of the IRS supersedes any desires or wishes on the part of a taxpayer to have their overpayment credited to specific, preexisting, tax liabilities”). For purposes of the Commissioner’s motion for summary judgment, we assume that, in a collection due process case, we can review for an abuse of discretion the IRS’s decision under section 6402 to credit an overpayment to a nondetermination year rather than to the year at issue.” 138 T. C. 18, at p. 14, footnote 5 (Citations omitted).

While a taxpayer can ask that one year’s overpayment be applied to another year’s liability, Congress has given IRS regulatory authority to decide how to do this, but in any case, Reg. 301.6402-3(a)(6) makes it clear that IRS isn’t bound by what a taxpayer asks for.

Here TFRPs create a problem. While IRS can collect the penalty only once, there may be multiple payors, and in fact (as occurred here) the sum of the parts may be greater than the whole. So the IRS deems the TFRPs collected only after two years have gone by from last payment with no claim from the employer or any responsible person for a refund. In any case, Section 6672(d) allows responsible persons and the employer to sue one another for contribution if one of them paid more than their fair share.

Hersh’s overpayment, if there was one, applies to his Section 6672 TFRP payment, not his 2006 income tax withholding. Judge Gustafson: “…if the IRS holds Mr. Weber’s money wrongly, it holds it not as an overpaid 2006 income tax but as an overpaid section 6672 penalty. But there is no regulation that permits a taxpayer to elect to have an overpayment of a section 6672 penalty to be applied to his income tax liability, and there is no line on the Federal income tax return form that permits the reporting of an overpaid section 6672 penalty as a credit to income tax. A credit elect overpayment can be an issue in a CDP case…, but Mr. Weber has no valid claim of a credit elect overpayment. After the 2006 income tax overpayment was credited against the section 6672 penalty, the 2006 income tax overpayment was no longer available for application to 2007 income tax. In the absence of that credit elect overpayment, Mr. Weber had no 2007 income tax overpayment that could be credited to his liability for 2008 income tax. The 2008 income tax liability could thus not be satisfied by cascading credit elect overpayments from 2006 and 2007.” 138 T.C. 18, at pp. 24-25.

While Tax Court can consider whether IRS abused its discretion in refusing to apply an available credit, there is no available credit here, because whatever credit Hersh has was applied to the TFRPs. Hersh wants Tax Court “not to consider a credit that is already ‘available’ (because it has already been determined) but rather to make ‘available’ a credit that is currently not available because the IRS has disallowed it. He contends that there is a positive balance in his penalty account and that we could decide this case in his favor as an almost arithmetical matter–but that is not the case: Whether the penalty has really been overcollected is a potentially complex question that may depend not only on the balance in his account (which in fact is still negative) but also on the pendency of refund claims by other responsible persons and on liabilities for interest and additions to tax. See supra pp. 17-19. Mr. Weber thus asks us not to allocate an uncontroversial credit but rather to adjudicate a disputed refund claim that is unrelated to the liability the IRS proposes to collect….” 138 T.C. 18, at pp. 35-36.

This would expand Tax Court’s jurisdiction in ways Congress never intended.

No dice, Hersh. Duke it out in District Court.