No, not the National Public Radio current-events quiz show. That’s Appeals’ answer to Edmond Harris, Esq., tax matterer for Valteau, Harris, Koenig and Mayer, which law firm’s nonpayment of withholding taxes is the subject of 2014 T. C. Memo. 144, filed 7/21/14, Judge Goeke providing some continuing education to Mr Harris and his firm.

Ed claims he became tax matterer after the firm canned its CPA, although Ed claims he “…was not qualified to handle petitioner’s tax liabilities even though he was designated as petitioner’s tax matters partner.” 2014 T. C. Memo. 144, at p. 6.

Howbeit, Ed also claims that all past due FICA, FUTA and income tax withholdings were eventually paid, but that IRS miscomputed one year’s worth (but Ed had no evidence of what the right numbers were, so that’s a non-starter) and IRS misapplied some payments, which, if properly applied, would have reduced the liabilities, interest and penalties.

For starters, Judge Goeke needs to consider standard of review, de novo or abuse-of-discretion. “There is some uncertainty in our precedents as to whether a de novo standard of review applies where (as here) the controversy concerns the proper application, to the tax liability at issue in the CDP hearing, of a credit, an overpayment, or a remittance. Petitioner contends that respondent’s refusal to honor its designation was inconsistent with a published IRS administrative position. If that is so, respondent’s proposed collection action would be impermissible under either standard. We accordingly do not need to decide whether petitioner’s challenge involves a dispute concerning its underlying tax liability as to which a de novo standard of review would apply.” 2104 T. C. Memo. 144, at p. 8. (Footnote omitted).

In any case, Ed is out of luck. If the deposit rules apply, Section 6656(e), which controls, doesn’t permit depositor to direct how deposit is to be applied until depositor has gotten a failure to deposit penalty notice, and Ed never did. And if payment rules apply, Ed put his directions on paper “…Forms 8109-B, Federal Tax Deposit Coupon (FTD coupon or coupon), and submitted them with the remittances to banks authorized to accept tax deposits. The FTD coupons indicated the period to which the remittances were to apply as did the memo line of each check. Petitioner designated many of the remittances to satisfy past due liabilities. Because the coupons and payments were submitted to banks rather than to respondent, respondent did not always receive petitioner’s designation instructions.” 2014 T. C. Memo. 144, at p. 4.

Since Ed never gave IRS directions how to apply the firm’s payments, but only gave them to the depository bank, IRS could do as it liked.

This was of course in the pre-electronic filing days. Nowadays the rules would be different. So beware of pouring new wine into old wineskins, as somebody remarked in a much more solemn context.

Finally, the real point: “Although it failed to timely pay its employment and unemployment taxes during the periods at issue, petitioner continued to operate as usual.  Petitioner never missed a payroll and continued to make bonus payments to its employees. Petitioner also organized yearend parties for its employees and took only minimal steps to reduce its expenses.” 2104 T. C. Memo. 144, at pp. 4-5.

Judge Goeke is not amused by such spendthrifty behavior. “Petitioner did not demonstrate a willingness to decrease its expenses, reduce salaries, or lay off personnel in an attempt to meet its tax obligations. Mr. Harris testified that petitioner did not have excess expenses to cut, because it paid only for necessities. However, during the periods at issue petitioner continued to pay for Christmas parties, provide yearend bonuses to its employees, and pay the partners all of their guaranteed payments. Petitioner’s preference for these expenses over its tax obligations does not demonstrate ordinary business care and prudence in providing for payment of tax liabilities. It is this type of spendthrift behavior section 301.6651-1(c)(1), Proced. & Admin. Regs., warns against.”2014 T. C. Memo. 144, at pp. 19-20. (Footnotes omitted).

Takeaway–Read the Code and Regs when deciding when and how to direct application of payments or deposits. And don’t party-on when you’re behind with your withholdings.