Designation of payroll tax payment to employee’s delinquent income taxes
The Tax Court said a corporation’s designation of delinquent payroll tax payments for specific employees’ delinquent income taxes was binding on the IRS.
In the case of Dixon v. Commissioner of Internal Revenue, the U.S. Tax Court determined that the IRS was required to honor a closely held corporation’s designation of a voluntary payment of delinquent payroll taxes as a credit toward the income tax liabilities of specifically named employees who owned and controlled the corporation.
Background and procedural history
The taxpayers, husband and wife, were criminally prosecuted for tax evasion for failure to file individual income tax returns from 1992-1995. The taxpayers were the owners, officers and employees of a closely held corporation during that time. The corporation also failed to file payroll tax returns and corporate income tax returns during the same time period.
The taxpayers subsequently entered into a plea agreement which required them to make restitution for a tax loss of $61,021. Acting on the advice of counsel, the taxpayers transferred funds to the corporation with instructions for the corporation to remit the funds to the IRS.
In 1999, the corporation remitted $61,021 to the IRS with a cover letter from the taxpayers’ attorney designating the remittance as payment of payroll taxes of the corporation that were to be applied to the taxpayers’ income taxes for 1992-1995.
A second payment of $30,202 was remitted to the IRS in 2000 after the taxpayers’ accountants determined that this additional amount was due for 1992-1995 income taxes. The payment in 2000 likewise included a cover letter from the taxpayers’ counsel indicating that the payment was for payroll taxes of the corporation representing the withheld income taxes of the taxpayers for the fourth quarter of 1995.
The taxpayers’ were subsequently sentenced to probation and a small fine.
The IRS refused to accept the taxpayers’ designations and instead initiated proceedings to levy on the taxpayers’ assets for collection of individual income taxes allegedly owed by them for 1992-1995.
Following a collection due process hearing, an appeals officer upheld the levy.
The taxpayers filed an appeal of the appeals officer’s ruling in the U.S. Tax Court.
The Tax Court’s decision
The Tax Court determined that the IRS was required to honor the corporation’s designation of the delinquent payroll payments it made in 1999 and 2000 as a credit toward the taxpayers’ 1992-1995 individual income tax liabilities. Since the corporation’s payments totally discharged the taxpayers’ 1992-1995 income tax liabilities, the attempts by the IRS to collect the tax a second time were improper, the court said.
Federal tax laws generally permit taxpayers to designate how voluntary tax payments should be applied. Court precedent has repeatedly recognized the principle that the IRS must honor a taxpayer’s designation of a voluntary tax payment. Requiring the IRS to honor a taxpayer’s designation of a voluntary tax payment is necessary to uphold the policy against double collection of the same tax.
Furthermore, said the court, since the payments were submitted as “restitution” for the taxpayers’ tax offenses under the terms of their plea agreement, common sense dictates that the payments should logically be credited against their liability for the 1992-1995 tax years that were the subject of the tax evasion proceedings. It would be “inequitable,” said the court, and contrary to the terms of the plea agreement and the sentencing order for the IRS to collect this same tax a second time.
Contact an attorney
Individuals and business entities facing questions involving payroll tax liabilities and other federal income tax matters are urged to seek the advice of an attorney experienced in this field in order ensure that their legal rights are protected.
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