Deposit May Not Transferred from One Person Potentially Subject to Transferree Liability to Another Person Ultimately Found Liable for the Same Tax

Under IRC §6603 a taxpayer who believes a tax may be imposed against him/her in the future, but for which has not yet been assessed, may make a cash deposit with the IRS which will serve to stop the running of any interest on that tax at the date of the deposit if that tax is later assessed.  One such way a taxpayer might wish to make a deposit would be in a case where the taxpayer believed he/she potentially could be subject to transferee liability.

In the case of transferee liability, an individual becomes liable for another taxpayer’s tax based on certain transfers that were made to that person.  In essence, the transferee received assets which the law views as depriving the taxpayer that owed the tax of the ability to pay that tax.  In some cases, there may be multiple potential “transferees” that could be found liable. 

In Field Attorney Advice 20171801F the issue was whether a person who made such a deposit could direct the IRS to apply some or all of that deposit against the liability of another person found liable for the same liability?  And, if the person can direct the transfer, can an attorney-in-fact (that, is, a representative named a Form 2848, Power of Attorney and Declaration of Representative) for that person make that direction?

The heavily redacted memorandum concludes the answer to both questions is no.  IRC §6603(a) specifically provides the IRS with the authority to prescribe the procedure for such deposits.  Rev. Proc. 2005-18 sets out the procedures for such deposits. 

The procedure does allow for a person to have any amounts deposited in excess of the tax determined to be due to be applied against another assessed or unassessed liability.[1]  But the example provided immediately after the sentence authorizing this transfer clearly contemplates another liability of that same individual:

For example, a taxpayer under examination for several different years may request that a deposit made for one type of tax in one year be applied to another type of tax in another year. The request must be in writing and must be directed to the same office where the original deposit was made.

Later the procedure explicitly discussed applying the payment only to the tax of the individual in question:

A deposit made pursuant to section 6603 is not subject to a claim for credit or refund as an overpayment until the deposit is applied by the Service as payment of an assessed tax of the taxpayer. A taxpayer may request the return of all or part of a deposit at any time before the Service has used the deposit for payment of a tax.[2]

After considering these provisions, the FAA goes on to provide the following justification for the conclusion the payment cannot be applied against the transferee liability of another person, even though it relates to the same tax of the same transferor:

The liability of a transferee is derivative of the transferor’s liability. Yet while multiple transferees may be severally liable for the same liability of a transferor, it does not follow that the liability of the several transferees is the same liability. While it arises from the same taxpayer that may have made transfers in fraud of its creditors, it does not necessarily follow that the liability of one transferee is interchangeable with the liability of another. The bases for the liability quite often arise from different transactions between the transferor and the transferees.

More concerning is that the guidance issued to date to administer this provision does not authorize one depositor designating its deposit to be applied to another taxpayer’s liability. The Revenue Procedure, at section 4.02(3), provides an example whereby one depositor can request that a deposit for one type of tax in one year be used to satisfy an underpayment of another type of tax for another year. Likewise, at section 6.01, it notes that the deposit is not subject to a claim for credit or refund until it is applied by the Service as payment of an assessed tax of the taxpayer.

But even a Court might reject the view of the IRS and allows for such an action, the FAA concludes that the standard language found on a Form 2848 (and found on the one being considered in the matter that lead to this FAA) does not authorize such actions.

The FAA continues:

We note our concern over the acceptance of the representations of an attorney-in-fact to transfer funds from one taxpayer to another. The Form 2848 executed by the potential transferees from which the transfers are sought identify the acts for which the representatives are authorized as those identified in ¶ 3 of that form, identifying the matter as “Income Tax (Transferee Liability)” arising from Tax Form 1120 for the Tax Period ended * * *. Paragraph 5.b of that form, Specific acts not authorized, states:

My representative(s) is (are) not authorized to endorse or otherwise negotiate any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the representative(s) or any firm or other entity with whom the representative(s) is (are) associated) issued by the government in respect of a federal tax liability.

No mention is made of the permission of the representative to transfer 6603 deposits made by the transferee as one of their powers conveyed by the Form 2848. In the absence of this specific power, we believe that there is not sufficient authority conveyed in the powers-of-attorney for the Service to follow the representative’s instructions to transfer a deposit to another’s liability.

Even if the application to another taxpayer was allowed, it appears a representative could only direct the IRS to take that action if the Form 2848 was modified explicitly to allow for such a transfer of the deposit.

The practical effect of this is that for all parties to stop the running of interest, each one would need to make a full deposit of what could reasonably be collected from them.  If, say, three persons could each be held liable for the entire amount of tax, then total deposits equal to three times the tax expected to be due would need to be made.

[1] Rev. Proc. 2005-18, Section 4.02(3)

[2] Rev. Proc. 2005-18, Section 6.01