Comm'r of Internal Revenue

This case is not covered by Casetext's citator
United States Tax CourtApr 3, 1989
92 T.C. 749 (U.S.T.C. 1989)
92 T.C. 74992 T.C. No. 42

Docket No. 14968-87



Kevin O'Connell, for the petitioner. Marsha Keyes and Kathey I. Shaw, for the respondent.

R issued a notice of deficiency to P on December 19, 1983, for the taxable year 1980. On December 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 of sections 163(a) and 461(f). HELD FURTHER P's motion for summary judgment is granted and R's motion for summary judgment is denied. Kevin O'Connell, for the petitioner. Marsha Keyes and Kathey I. Shaw, for the respondent.



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 and Rule 180 et seq. of the Tax Court Rules of Practice and Procedure. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.



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 for the taxable year 1980, was deductible in 1983 as a payment of interest under section 163(a).


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 $7,362.00. 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 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 $7,362.00.

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 petitioner's deficiency for 1980 was decided to be $17,588.50, the exact amount determined in the notice of deficiency.


Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Shiosaki v. Commissioner, 61 T.C. 861, 862 (1974). Summary judgment is not a substitute for trial, in that disputes over factual issues are not to be resolved in such proceedings. Naftel v. Commissioner, 85 T.C. 527 (1985); Espinoza v. Commissioner, 78 T.C. 412, 416 (1982). Rule 121 provides that either party may move for a summary judgment in his favor upon all or any part of the legal issues in controversy. The Rule further provides that a decision shall be rendered if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law.

There 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:

(f) Contested Liabilities. — If

(1) the taxpayer contests an asserted liability,

(2) 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),

then the deduction shall be allowed for the taxable year of the transfer. * * *

Section 461(f) itself does not authorize a deduction, rather it relates only to the timing of a deduction otherwise allowable under the Code. It is section 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.‘

Respondent argues that there was no indebtedness within the meaning of section 163(a). Respondent further argues that petitioner does not qualify under section 461(f)(2) or under section 461(f)(4). In this regard, we note that the requirements of section 461(f)(4) provide that the deduction would be allowed but for the fact that the asserted liability is contested. Thus, respondent's argument under section 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 described under this section on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in 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). See Standard Oil Co. v. McMahon, 244 F.2d 11, 13 (2d Cir. 1957); LTV Corp. v. Commissioner, 64 T.C. 589, 597 (1975); Hudgins v. Commissioner, 55 T.C. 534, 538 (1970); Chapman v. Commissioner, 14 T.C. 943, 946-947 (1950), affd. per curiam 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, 772 (10th Cir. 1932); Big Diamond Mills Co. v. United States, 51 F.2d 721, 725 (8th Cir. 1931); see also United 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 The Explanation of Adjustments further stated as follows:



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 the time petitioner paid the amount because there had been no assessment.

In Arheit v. Commissioner, 31 T.C. 46 (1958), respondent examined the taxpayer's Federal income tax returns for the taxable years 1945 through 1950. As a result of the examination, agents of respondent proposed deficiencies. Since respondent was considering criminal tax charges against the taxpayer, respondent did not issue a 30-day or 90-day letter. In April 1952, the taxpayer sent a check to respondent in the amount of $66,639.70. The taxpayer directed that the remittance be applied to the proposed deficiencies and to interest as of the date of payment. Respondent deposited the funds in a suspense account pending the assessment of deficiencies and interest. In 1955, the taxpayer executed a Form 870, and deficiencies, additions to tax and interest were assessed for the taxable years 1945 through 1950. On his 1952 Federal income tax return, the taxpayer claimed a deduction for a portion of the amount paid, as a payment of interest. We held that the remittance in 1952 was not a payment of interest for which a deduction could be taken. We found that there was no formal determination made against the taxpayer in 1952. Relying on Rosenman v. United States, 323 U.S. 658 (1945) and Lewyt Corp. v. Commissioner, 215 F.2d 518 (2d Cir. 1954), affg. 18 T.C. 1245 (1952), modified on another point 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 had been made (no 30-day letter 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, the taxpayer made a remittance of $120,000 to the IRS in December 1934, prior to the filing of an estate tax return. The taxpayers designated the check as a payment on account of Federal estate tax. The IRS placed the funds in a suspense account. The estate tax return was filed 2 months later reflecting an estate tax liability of approximately $80,000. The following month, March 1935, the IRS applied $80,000 of the $120,000 payment in satisfaction of the amount of tax assessed on the return.

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 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 662.

In Lewyt Corp. v. Commissioner, supra, the taxpayer filed a petition in response to a notice of deficiency relating to income tax and excess profits tax deficiencies for 1943. After settlement negotiations, the taxpayer in September 1947 remitted approximately $190,000 to the IRS designating a portion for additional taxes and the balance for interest. The IRS deposited the check in its ‘Suspense Account.‘ A settlement stipulation was filed in February 1948.

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 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, held that the remittance did not constitute a payment. The court stated:

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 not SATISFY an asserted tax liability should not be treated as the ‘payment‘ of a tax. Satisfaction may, as in Rosenman, follow from payment 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), the taxpayer's 1948 return was in question. In 1955, respondent's agents made an informal recommendation with respect to a deficiency and addition to tax for 1948. In that same year, the taxpayer voluntarily tendered $20,000 to respondent attempting a payment of interest with respect to the 1948 deficiency. The taxpayer eventually executed a Form 870 in 1957, and the deficiency was then assessed. The 1955 remittance was credited to respondent's suspense account. We held in that case that the taxpayer was not entitled in 1955 to a deduction of interest citing Rosenman, supra; Lewyt, supra; and Arheit, supra.

RUWE, J. did not participate in the consideration of this opinion.