Dixon v. Commissioner

JAMES R. DIXON, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

SHARON C. DIXON, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 9962–05L, 9965–05L. Filed September 3, 2013.

Ps were criminally prosecuted for failure to file individual

income tax returns for 1992–95. At the time, Ps were owners,

officers, and employees of Tryco Corp., which failed to file

employment tax returns and corporate income tax returns

during this period. As part of a plea agreement with the

Department of Justice, Ps agreed that their wrongdoing had

inflicted a ‘‘tax loss’’ on the IRS of $61,021 and acknowledged

that they could be required to make restitution of this

amount. On advice of their attorney they transferred funds to

Tryco with instructions that Tryco remit the funds to the IRS.

In December 1999 Tryco remitted $61,021 to the IRS with a

cover letter from Ps’ attorney designating the payment as

‘‘payment of [Form] 941 taxes of the corporation’’ that was ‘‘to

be applied to the withheld income taxes’’ of Ps for specified

calendar quarters of 1992–95. In early 2000 Ps’ accountants

determined that Ps actually owed $30,202 more in individual

income tax for 1992–95 than Tryco had remitted to the IRS

in December 1999. Accordingly, Ps transferred additional

173

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174 141 UNITED STATES TAX COURT REPORTS (173)

funds to Tryco, and in June 2000 Tryco remitted to the IRS

an additional check for $30,202. The cover letter from Ps’

attorney stated that the payment was ‘‘submitted as a pre-

assessment designated payment of [Form] 941 taxes of the

corporation’’ which ‘‘represents the withheld income taxes of

* * * [Ps]’’ for the fourth quarter of 1995. Ps argued for a

downward adjustment to their sentence and for a probated

sentence on the ground that they had remitted taxes to the

IRS in excess of the ‘‘tax loss’’ determined in the plea agree-

ments. They were sentenced to probation and a small fine.

Subsequently, R filed a notice of intent to levy on Ps’ assets

in satisfaction of their assertedly unpaid 1992–95 income tax

liabilities. Ps were granted a collection due process (CDP)

hearing in which they challenged the levy on the ground that

Tryco’s 1999–2000 remittances had discharged their 1992–95

income tax liabilities in full. The Appeals officer upheld the

levy, concluding that Tryco’s 1999–2000 payments ‘‘were not

withheld at the source and * * * cannot be designated to the

withholding of a specific employee.’’ Ps timely petitioned

under I.R.C. sec. 6330(d)(1) for review of this determination.

1. Held: Ps are not entitled to a credit under I.R.C. sec.

31(a) for the $91,223 Tryco remitted to the IRS in 1999–2000

because funds in that amount were not ‘‘actually * * * with-

held at the source’’ by Tryco from Ps’ wages during 1992–95.

See sec. 1.31–1(a), Income Tax Regs.

2. Held, further, this Court has subject matter jurisdiction

to determine whether R was obligated to honor Tryco’s des-

ignation of its 1999–2000 delinquent employment tax pay-

ments toward Ps’ income tax liabilities for 1992–95.

3. Held, further, there is no need to decide the applicable

standard of review in these CDP appeals because, under Ps’

alternative argument, R’s proposed collection action would be

impermissible either under an abuse of discretion standard or

under a de novo standard.

4. Held, further, R was required to honor Tryco’s designa-

tion of its 1999–2000 delinquent employment tax payments

towards Ps’ income tax liabilities for 1992–95. Because those

payments discharged Ps’ 1992–95 income tax liabilities in full,

R’s proposal to levy on their assets to collect this tax a second

time was an abuse of discretion.

Juan F. Vasquez, Jr., and Renesha N. Fountain, for peti-

tioners.

W. Lance Stodghill and Derek B. Matta, for respondent.

LAUBER, Judge: This is a collection due process (CDP)

appeal pursuant to section 6330(d)(1). 1 Petitioners challenge

1 Statutory references are to the Internal Revenue Code (Code) in effect

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(173) DIXON v. COMMISSIONER 175

a decision by the Internal Revenue Service (IRS or

respondent) to levy on their assets for the purpose of col-

lecting their individual income tax liabilities for 1992–95.

Petitioners were owners, officers, and employees of Tryco

Corp. (Tryco). They challenge the proposed levy on the

ground that these liabilities were fully discharged by pay-

ments that Tryco made to the IRS in 1999 and 2000.

These cases were tried before Judge Holmes in November

2006, and the facts are detailed in a separate Memorandum

Opinion by Judge Holmes, Dixon v. Commissioner, T.C.

Memo. 2013–207, filed concurrently with this Opinion.

During 1999 and 2000 Tryco remitted to the IRS payments

aggregating $602,119 with respect to petitioners’ 1992–95

income tax liabilities. 2 Basing his findings in part on credi-

bility determinations, Judge Holmes concludes that pay-

ments totaling $510,896 that Tryco remitted in December

1999 represent tax actually withheld at the source within the

meaning of sections 3402 and 3403. He accordingly holds

that petitioners are entitled to a credit under section 31 for

these payments. Dixon v. Commissioner, at *17. In this

Opinion, we address the consequences for petitioners of the

$91,223 balance of Tryco’s payments.

FINDINGS OF FACT

Some facts have been stipulated, and the stipulation of

facts and its accompanying exhibits are incorporated by this

reference. On December 22, 1999, Tryco submitted 32 sepa-

rate checks to the IRS, in the aggregate amount of $571,917,

with respect to petitioners’ income tax liabilities for 1992

through 1995. These checks represented delinquent pay-

ments of employment tax for petitioners James Dixon and

Sharon Dixon, respectively, for the 16 calendar quarters in

those four tax years. Petitioners provided Tryco with the

funds to make these payments by executing a mortgage on

their home and contributing the mortgage proceeds to Tryco.

at the relevant times. Dollar amounts are rounded to the nearest dollar.

2 In referring to petitioners’ ‘‘income tax liabilities,’’ we generally mean

their income tax liabilities for 1992–95 exclusive of any interest, additions

to tax, and penalties. We address applicable interest and penalties infra

pp. 195–196 of this Opinion.

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176 141 UNITED STATES TAX COURT REPORTS (173)

Each check Tryco issued was accompanied by a substan-

tially identical cover letter signed by petitioners’ attorney,

informing the IRS that the check represented ‘‘payment of

[Form] 941 taxes of the corporation,’’ for a specified calendar

quarter in a specified amount, ‘‘to be applied to the withheld

income taxes of employee Sharon Dixon’’ or ‘‘to the withheld

income taxes of employee James R. Dixon,’’ as the case may

be. The ‘‘memo’’ line on each check was inscribed ‘‘Designated

Payment of 941 Taxes * * * for Sharon Dixon’’ or ‘‘Des-

ignated Payment of 941 Taxes * * * for James R. Dixon’’ for

the relevant calendar quarter.

Judge Holmes concludes that $510,896 of the total amount

Tryco remitted in December 1999 represents tax that Tryco

actually withheld at the source from petitioners’ wages

during 1992–95. The balance of the December 1999 remit-

tance, or $61,021, represented the ‘‘tax loss’’ that petitioners

and the Department of Justice agreed that the Federal

Government had suffered as a result of petitioners’ tax

crimes. 3 Of this ‘‘tax loss,’’ $30,799 was allocable to Sharon

Dixon and $30,222 was allocable to James Dixon. In their

plea agreements, executed February 7, 2000, petitioners

acknowledged that they ‘‘may be required to make full res-

titution for the losses sustained by the Internal Revenue

Service as a result of the offenses of conviction.’’ See gen-

erally U.S. Sentencing Guidelines Manual sec. 5E1.1 (2012)

(discussing restitution); John A. Townsend, et al., Tax

Crimes 305–306 (2008). Under the plea agreements the mag-

nitude of the ‘‘tax loss’’ would be taken into account for sen-

tencing purposes.

In early 2000 petitioners’ accountants determined that

petitioners actually owed $30,202 more in individual income

tax for 1992–95 than Tryco had remitted to the IRS in

December 1999. Accordingly, petitioners contributed addi-

tional funds to Tryco and, on June 1, 2000, Tryco remitted

3 Under

the Federal Sentencing Guidelines, the ‘‘tax loss’’ suffered by the

Government determines the ‘‘offense level,’’ which in turn affects the sen-

tence received by the defendant—the higher the offense level, the longer

the possible prison term. See generally John A. Townsend, et al., Tax

Crimes 321–322 (2008). A ‘‘tax loss’’ between $30,000 and $79,999 equates

to an ‘‘offense level’’ of 14 as compared with a maximum offense level of

36 for a ‘‘tax loss’’ exceeding $400 million. See U.S. Sentencing Guidelines

Manual sec. 2T4.1 (2012) (Tax Table).

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(173) DIXON v. COMMISSIONER 177

to the IRS an additional check for $30,202. The cover letter

accompanying this check, signed by petitioners’ attorney,

informed the IRS that the payment was ‘‘submitted as a pre-

assessment designated payment of [Form] 941 taxes of the

corporation [Tryco] for calendar quarter 9504, and which rep-

resents the withheld income taxes of employee James R.

Dixon and employee Sharon Dixon.’’

Before sentencing, petitioners argued for a downward

departure from the Federal Sentencing Guidelines and for a

probated sentence on the ground that they had remitted

taxes to the IRS substantially in excess of the ‘‘tax loss’’

determined in their plea agreements. On June 9, 2000, each

petitioner was sentenced by the U.S. District Court for the

Southern District of Texas to four years’ probation and a rel-

atively small fine.

The IRS accepted all of Tryco’s payments. According to IRS

transcripts of petitioners’ accounts, the IRS initially credited

these payments to petitioners’ 1992–95 income tax liabilities,

as designated by Tryco. If credited to petitioners’ account,

these payments would have fully discharged their 1992–95

income tax liabilities (excluding any applicable interest and

penalties). Subsequently, the IRS reversed itself and chose to

disregard Tryco’s designation. Instead, the IRS applied the

payments to Tryco’s general unpaid employment tax liabil-

ities, which then exceeded $23 million.

Respondent ultimately issued petitioners a notice of intent

to levy on their assets in satisfaction of their assertedly

unpaid 1992–95 income tax liabilities. Petitioners requested

and were granted a CDP hearing under section 6330(a). After

several exchanges, the Appeals officer upheld the levy, con-

cluding that Tryco’s 1999 and 2000 payments ‘‘were not with-

held at the source and * * * cannot be designated to the

withholding of a specific employee.’’ Petitioners timely peti-

tioned this Court under section 6330(d)(1) for review of the

Appeals officer’s determination. They resided in Texas when

they filed the petition.

OPINION

Petitioners advance two distinct arguments in support of

their position. First, they contend that they are entitled to a

withholding credit under section 31, not only for the

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178 141 UNITED STATES TAX COURT REPORTS (173)

$510,896 that Judge Holmes finds Tryco to have actually

withheld at the source, but also for the balance of the funds,

totaling $91,223, that Tryco remitted to the IRS in December

1999 and June 2000. Second, in the event we determine that

no credit is available under section 31, petitioners contend

that the IRS was obligated to honor Tryco’s designation of

this $91,223 toward payment of petitioners’ 1992–95 income

tax liabilities and that the IRS is therefore precluded from

levying on their assets to collect this tax a second time. We

discuss these arguments in turn.

I. Credit Under Section 31

Section 3402, captioned ‘‘Income Tax Collected at Source,’’

requires that an employer withhold from its employees’

wages, and remit directly to the IRS, the income tax that

employees are expected to owe for that year, on the basis of

exemptions the employees claim on their Forms W–4,

Employee’s Withholding Allowance Certificate. The employer

periodically remits and reports to the IRS on Forms 941 the

aggregate funds withheld from its employees. At the end of

the year, the employer determines the amounts withheld for

employees individually. These amounts are reported to the

IRS and employees on separate Forms W–2, Wage and Tax

Statement, and the combined information is reported to the

IRS on Form W–3, Transmittal of Wage and Tax Statements.

The employer is ‘‘required to collect the tax by deducting

and withholding the amount thereof from the employee’s

wages as and when paid, either actually or constructively.’’

Sec. 31.3402(a)–1(b), Employment Tax Regs. The adverb

‘‘constructively’’ refers, not to constructive withholding of the

tax at the source, but to constructive payment of wages. The

regulations explain that ‘‘[w]ages are constructively paid

when they are credited to the account of or set apart for an

employee so that they may be drawn upon by him at any

time.’’ Ibid.

If an employer actually withholds tax from an employee’s

wages, but withholds less than the correct amount of tax,

section 6205(a)(1) provides that ‘‘proper adjustments, with

respect to both the tax and the amount to be deducted, shall

be made, without interest, in such manner and at such times

as the Secretary may by regulations prescribe.’’ The regula-

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(173) DIXON v. COMMISSIONER 179

tions allow an employer to correct an underwithholding on a

supplemental return filed as late as ‘‘the last day on which

the return is required to be filed for the return period in

which the error was ascertained.’’ Sec. 31.6205–1(c)(2)(i),

Employment Tax Regs. 4 The employer must concurrently

notify the employee by furnishing a corrected Form W–2,

styled ‘‘Form W–2c.’’ When an employer timely corrects an

underwithholding in this manner, it is instructed to collect

the underwithheld income tax from the employee ‘‘on or

before the last day of such year by deducting such amount

from remuneration of the employee.’’ Sec. 31.6205–1(c)(4),

Employment Tax Regs.

The ‘‘proper adjustment’’ procedure outlined in section

6205 is beneficial to employers because it enables them to

correct an underwithholding of tax without paying interest or

penalties to the IRS. The regulations emphasize, however,

that there is a limited time during which an employer may

avail itself of this benefit. A subsequent reporting ‘‘con-

stitutes an adjustment within the meaning of this section

only if the return or supplemental return on which the

underpayment is reported’’ is filed within the prescribed time

period. Sec. 31.6205–1(c)(2)(i), Employment Tax Regs.; see

sec. 31.6205–1(c)(3)(ii), Employment Tax Regs. (amounts pay-

able under ‘‘proper adjustment’’ procedure ‘‘shall be paid to

the district director, without interest, at the time fixed for

reporting the adjustment’’).

Section 3403 provides that ‘‘[t]he employer shall be liable

for the payment of the tax required to be deducted and with-

held under this chapter.’’ The regulations confirm that an

employer who is required to deduct and withhold income tax

under section 3402 ‘‘is liable for the payment of such tax

whether or not it is collected from the employee by the

employer.’’ Sec. 31.3403–1, Employment Tax Regs. If an

employer fails to withhold and the tax in question is subse-

quently paid by the employee, section 3402(d) ensures

against double collection by relieving the employer of liability

4 Except as otherwise noted, the section 6205 regulations cited in this

Opinion were those in effect during the tax years at issue. Those regula-

tions were superseded by regulations finalized on July 2, 2008, T.D. 9405,

2008–2 C.B. 293, which apply to any error ascertained after January 1,

2009. The 2008 regulations do not differ substantially from the prior regu-

lations.

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180 141 UNITED STATES TAX COURT REPORTS (173)

for that same tax. But it makes clear that the employer is

not thereby relieved ‘‘from liability for any penalties or addi-

tions to the tax otherwise applicable in respect of such

failure to deduct and withhold.’’ Sec. 3402(d).

Section 31(a)(1) sets forth the consequences for the

employee of the employer’s withholding at the source. It pro-

vides that the amount withheld by the employer as tax from

an employee’s wages ‘‘shall be allowed to the recipient of the

income as a credit’’ against his or her income tax liability for

that year. This credit is available only ‘‘[i]f the tax has actu-

ally been withheld at the source.’’ Sec. 1.31–1(a), Income Tax

Regs.

The requirement of ‘‘actual withholding’’ at the source is

confirmed by section 3402(a)(1), which provides that an

employer making payment of wages shall deduct and with-

hold tax ‘‘upon such wages.’’ If an employer remits funds to

the IRS years after the wages were paid and the section 6205

window for making ‘‘proper adjustment’’ has closed, that pay-

ment cannot represent a withholding of tax ‘‘upon such

wages.’’ See sec. 6513(b)(1) (employee deemed to have paid

tax on April 15 following close of the tax year only when tax

has been ‘‘actually deducted and withheld at the source’’); see

also Begier v. IRS, 496 U.S. 53, 60–61 (1990) (‘‘Withholding

thus occurs at the time of payment to the employee of his net

wages.’’); Edwards v. Commissioner, 323 F.2d 751, 752 (9th

Cir. 1963) (section 31 affords the taxpayer a credit ‘‘for tax

actually withheld from his wages by his employer’’), aff ’g in

part, rev’g in part 39 T.C. 78 (1962). If the tax is actually

deducted and withheld at the source, ‘‘credit or refund shall

be made to the recipient of the income even though such tax

has not been paid over to the Government by the employer.’’

Sec. 1.31–1(a), Income Tax Regs.

This statutory scheme sets forth clearly the conditions

under which a taxpayer is entitled to a section 31 with-

holding credit. An employee’s entitlement to this credit

depends on whether the income tax in question ‘‘has actually

been withheld at the source’’ by the employer. Sec. 1.31–1(a),

Income Tax Regs. Tax is deemed to have been actually with-

held at the source only if the employer (a) contemporaneously

withholds tax in the correct amount, or (b) corrects an under-

withholding of the tax by making a ‘‘proper adjustment’’

within the period prescribed by section 6205(a)(1).

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(173) DIXON v. COMMISSIONER 181

Neither of these conditions was satisfied with respect to

the $91,223 of aggregate payments in issue here. Neither the

$61,021 attributable to the ‘‘tax loss’’ occasioned by peti-

tioners’ offenses nor the $30,202 attributable to errors discov-

ered by petitioners’ accountants in early 2000 represents

funds contemporaneously ‘‘withheld at the source’’ by Tryco

from petitioners’ wages. And these payments, submitted in

December 1999 and June 2000, respectively, were made well

outside the time period prescribed by section 6205(a)(1) for

making ‘‘proper adjustments’’ to an underwithholding for the

fourth quarter of 1995. Petitioners are accordingly foreclosed

from claiming a withholding credit under section 31 for these

sums.

In holding that a section 31 credit is unavailable in these

circumstances, we answer the question that we left open in

McLaine v. Commissioner, 138 T.C. 228 (2012). There, the

taxpayer advanced a ‘‘constructive withholding’’ theory in

support of his contention that he was entitled to a section 31

credit, against his individual income tax liability for 1999, for

a payment that his corporation allegedly made to the IRS in

2004 or 2005. See id. at 238–239. We found no need to decide

this question in McLaine, finding as a fact that no payment

had been made by the corporation in the later years. See id.

at 239, 242. Judge Halpern in his concurring opinion did

reach this question, concluding that, when an employer pays

in a later year the nonwithheld income tax of an employee

for an earlier year, the employee as a matter of law is not

entitled to a credit under section 31. See id. at 252–258

(Halpern, J., concurring). We express now our agreement

with Judge Halpern’s conclusion. 5

In finding it unnecessary to decide the section 31 issue in

McLaine, we noted that ‘‘[w]e may one day be presented with

a case in which the IRS proposes to collect a party’s liability

that has been paid by another person.’’ 138 T.C. at 242. That

day has arrived. Petitioners distinctly advance an alternative

5 In Whalen v. Commissioner, T.C. Memo. 2009–37, 97 T.C.M. (CCH)

1147, 1149, we suggested in dictum that a tax payment by an employer

in 2004 with respect to an employee’s tax liability for 2001 ‘‘could plausibly

be characterized as withholding tax under chapter 24 with a corresponding

section 31 credit being allowed to a proper recipient.’’ This Opinion clari-

fies the Court’s position and concludes that a section 31 withholding credit

would not be allowable to the taxpayer in such circumstances.

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182 141 UNITED STATES TAX COURT REPORTS (173)

argument, premised on Tryco’s specific designation of its

December 1999 and June 2000 payments, for a credit of

$91,223 against their 1992–95 income tax liabilities. We turn

now to this alternative argument.

II. Credit Through Specific Designation of Tax Payment

A. Jurisdiction

At the outset, the IRS argues that we lack subject matter

jurisdiction to decide whether it was obligated to honor

Tryco’s specific designation of the delinquent 1999–2000

employment tax payments. Respondent notes correctly that

this Court, for the tax years at issue, generally lacked juris-

diction concerning employment tax liabilities. From that

premise, respondent concludes that we have no jurisdiction

to decide whether an employer’s designated payments of

delinquent employment taxes should properly be credited to

the income tax liabilities of the named employees. We reject

this argument because respondent’s conclusion does not fol-

low from his premise.

Section 6330(d)(1) governs judicial review of CDP deter-

minations by the IRS. The statute in its current form states

that the taxpayer may appeal a CDP determination to the

Tax Court ‘‘and the Tax Court shall have jurisdiction with

respect to such matter.’’ Before 2006, however, the statute

provided two different avenues of appeal: to the Tax Court

or, ‘‘if the Tax Court does not have jurisdiction of the under-

lying tax liability, to a district court of the United States.’’

Sec. 6330(d)(1)(B) (2006) (before amendment by the Pension

Protection Act of 2006, Pub. L. No. 109–280, sec. 855(a), 120

Stat. at 1019). The ‘‘underlying tax liabilit[ies]’’ over which

this Court has jurisdiction consist of income tax imposed by

subtitle A, estate and gift taxes imposed by subtitle B, and

certain excise taxes imposed by chapters 42 through 45. See

sec. 6213(a). This Court generally lacks jurisdiction over

employment taxes, except to determine, under section

7436(a), ‘‘the proper amount of employment tax’’ consequent

upon a determination that a person should be classified as an

‘‘employee’’ as opposed to an ‘‘independent contractor.’’

The ‘‘underlying tax liabilit[ies]’’ that were the subject of

petitioners’ CDP hearing were their income tax liabilities for

1992–95. During the hearing petitioners contended that

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(173) DIXON v. COMMISSIONER 183

respondent should not levy to collect this tax because the tax,

by virtue of Tryco’s designated payments, had already been

paid. Section 6330(c)(2)(A) provides that a taxpayer may

raise at a CDP hearing ‘‘any relevant issue relating to the

unpaid tax or the proposed levy.’’ Petitioners’ contention that

the allegedly unpaid tax for 1992–95 had already been paid

was surely ‘‘relevant’’ to respondent’s proposal to levy on

their assets to collect this same tax.

The Appeals officer considered and rejected petitioners’

designation argument, concluding that Tryco’s 1999–2000

payments ‘‘cannot be designated to the withholding of a spe-

cific employee.’’ We have jurisdiction to review that conclu-

sion because it determines whether petitioners have unpaid

income tax liabilities that are a proper subject of IRS collec-

tion action. In determining whether the IRS may properly

take collection action, our jurisdiction ‘‘extends to facts and

issues in nondetermination years where they are relevant to

computing the unpaid tax.’’ Freije v. Commissioner, 125 T.C.

14, 26–27 & n.14 (2005). As we concluded in Freije, an issue

relevant to computing the unpaid tax ‘‘surely includes a

claim * * * that the ‘unpaid tax’ has in fact been satisfied

by a remittance that the Commissioner improperly applied

elsewhere.’’ Id. at 26.

In sum, because the question whether Tryco’s designated

payments should have been credited toward petitioners’

1992–95 income tax liabilities is relevant to computing the

unpaid tax, we have jurisdiction to decide this question. The

extent of our jurisdiction over employment tax liabilities is

immaterial because the underlying tax liabilities at issue on

this appeal are petitioners’ income tax liabilities for 1992–95.

B. Standard of Review

Section 6330(d)(1) does not prescribe the standard of

review that this Court shall apply in reviewing an IRS

administrative determination in a CDP case. The general

parameters for such review are marked out by our prece-

dents. We generally review the Appeals officer’s determina-

tion as to the propriety of particular collection action for

abuse of discretion. Wadleigh v. Commissioner, 134 T.C. 280,

288 (2010); Sego v. Commissioner, 114 T.C. 604, 610 (2000).

In some situations, the taxpayer may not have received a

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184 141 UNITED STATES TAX COURT REPORTS (173)

notice of deficiency or may not otherwise have had an oppor-

tunity to challenge the tax assessed against him. Where the

validity of the underlying tax liability is properly at issue,

the Court will review the matter de novo. See Wadleigh, 134

T.C. at 288; Sego, 114 T.C. at 610; Goza v. Commissioner,

114 T.C. 176, 181–182 (2000).

The IRS did not send petitioners a notice of deficiency for

the tax years at issue. In their posttrial brief, petitioners

accordingly urged a de novo standard of review. In its

posttrial brief, the IRS agreed that, ‘‘[s]ince the validity of

the underlying tax liability is at issue, the Court will deter-

mine the underlying tax liability de novo.’’

There is some uncertainty in our precedents as to whether

a de novo standard of review applies where (as here) the con-

troversy concerns the proper application, to the tax liability

at issue in the CDP hearing, of a credit, overpayment, or

remittance. 6 Petitioners contend that respondent’s refusal to

honor Tryco’s designation of the December 1999 and June

2000 payments was inconsistent with judicial precedent and

with the published IRS administrative position. If that is so,

respondent’s proposed collection action would be impermis-

sible under an abuse of discretion standard as well as under

a de novo standard. We accordingly do not need to decide

whether petitioners’ challenge involves a dispute concerning

their ‘‘underlying tax liability’’ as to which a de novo

standard of review would apply.

6 Compare

Landry v. Commissioner, 116 T.C. 60, 62 (2001) (applying de

novo standard where taxpayer challenged application of overpayment cred-

its, reasoning that ‘‘the validity of the underlying tax liability, i.e., the

amount unpaid after application of credits to which petitioner is entitled,

* * * [was] properly at issue’’), with Kovacevich v. Commissioner, T.C.

Memo. 2009–160, 98 T.C.M. (CCH) 1, 4 & n.10 (applying abuse of discre-

tion standard where taxpayer challenged application of tax payments, rea-

soning that ‘‘questions about whether a particular check was properly cred-

ited to a particular taxpayer’s account for a particular tax year are not

challenges to his underlying tax liability’’), and Orian v. Commissioner,

T.C. Memo. 2010–234, 100 T.C.M. (CCH) 356, 359 (same). See also Freije

v. Commissioner, 125 T.C. 14, 23, 26–27 (2005); Comfort Plus Health Care,

Inc. v. Commissioner, 2005–2 U.S. Tax Cas. (CCH) para. 50,494, at

89,175–89,176 (D. Minn. 2005) (applying abuse of discretion standard

where taxpayer in CDP case challenged IRS failure to credit overpay-

ments).

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(173) DIXON v. COMMISSIONER 185

C. Designated Payment

Respondent agrees that the law generally allows taxpayers

to designate how voluntary tax payments should be applied.

Respondent does not dispute that Tryco’s tax payments were

‘‘voluntary,’’ and he appears to agree that Tryco’s directions,

if followed, would result in applying the $91,223 as a credit

toward petitioners’ 1992–95 income tax liabilities. Respond-

ent’s position is that the IRS policy of honoring designations,

while well established, is limited. This policy is assertedly

confined to designations of tax payments to a particular tax

period or to a particular type of tax, e.g., to ‘‘trust fund’’ tax

liabilities as opposed to corporate income tax liabilities.

According to respondent, there is no legal basis for insisting

that the IRS honor the designation of a delinquent employ-

ment tax payment toward the income tax liability of a spe-

cific employee.

We can discover no such limitation on the IRS’ obligation

to honor the designation of voluntary tax payments, either in

published IRS administrative pronouncements or in the

judicial decisions that have cited and relied upon them for

the past 30 years. As explained more fully below, we accord-

ingly reject respondent’s argument and hold that petitioners

should have received a credit of $91,223 toward their 1992–

95 income tax liabilities by virtue of Tryco’s designated pay-

ments.

1. In Rev. Rul. 73–305, 1973–2 C.B. 43, the IRS announced

its position that voluntary partial payments of assessed tax,

penalties and interest are to be applied as the taxpayer des-

ignates. This rule was made applicable ‘‘to all taxes under

the Internal Revenue Code of 1954, except Alcohol, Tobacco,

and Firearms taxes, withheld employment taxes, and col-

lected excise taxes.’’ Id., 1973–2 C.B. at 44. The IRS revised

and expanded this position six years later in Rev. Rul. 79–

284, 1979–2 C.B. 83. It there held that the designation policy

announced in Rev. Rul. 73–305, supra, ‘‘applies to withheld

employment taxes and collected excise taxes where the tax-

payer provides specific written instructions for the applica-

tion of a voluntary partial payment.’’ Only where ‘‘no des-

ignation is made by the taxpayer’’ would the IRS apply the

payment ‘‘in a manner serving its best interest.’’

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186 141 UNITED STATES TAX COURT REPORTS (173)

Revenue Ruling 79–284, supra, was superseded, after the

tax payments in issue, by Rev. Proc. 2002–26, 2002–1 C.B.

746, which was published to ‘‘update and restate’’ the posi-

tion announced in the prior ruling. It similarly holds that,

when ‘‘the taxpayer provides specific written directions as to

the application of * * * [a voluntary partial] payment, the

Service will apply the payment in accordance with those

directions.’’ The Internal Revenue Manual (IRM) defines a

‘‘designated payment’’ as ‘‘a voluntary * * * [payment] that

the taxpayer has directed to be applied in a particular

manner, i.e., a specific period, kind of tax, tax portion,

interest, etc.’’ IRM pt. 5.1.2.4 (Jan. 22, 2001) (current version

at IRM pt. 5.1.2.8 (Aug. 15, 2008)).

The principle that the IRS must honor a taxpayer’s des-

ignation of a voluntary tax payment has been recognized

repeatedly by the courts. We have discovered no case

addressing the specific fact pattern involved here, where a

taxpayer designates a voluntary payment toward the income

tax liability of a named third party. However, the Commis-

sioner’s published position concerning designated payments

refers broadly to voluntary payments that a taxpayer ‘‘has

directed to be applied in a particular manner,’’ IRM pt.

5.1.2.4, and the courts have expressed their understanding of

the IRS policy in similarly unqualified terms.

The Supreme Court has stated: ‘‘IRS policy permits tax-

payers who ‘voluntarily’ submit payments to the IRS to des-

ignate the tax liability to which the payment will apply.’’

United States v. Energy Res. Co., 495 U.S. 545, 548 (1990);

see Slodov v. United States, 436 U.S. 238, 252 n.15 (1978)

(noting exception where payment ‘‘results from enforced

collection methods’’). These cases are appealable to the Court

of Appeals for the Fifth Circuit. See sec. 7482(b)(1)(A). The

Court of Appeals has stated: ‘‘[I]f a taxpayer directs that a

payment be applied in a certain manner, the IRS must abide

by the taxpayer’s direction.’’ Wood v. United States, 808 F.2d

411, 416 (5th Cir. 1987). The Courts of Appeals for the Third,

Sixth, Seventh, Ninth, and Tenth Circuits have recognized

the duty of the IRS to respect the taxpayer’s designation of

a voluntary payment. 7 This Court has consistently done the

7 See IRS v. Kaplan (In re Kaplan), 104 F.3d 589, 599 (3d Cir. 1997)

(‘‘[A]ny payment made on the corporate account involved is deemed to rep-

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(173) DIXON v. COMMISSIONER 187

same. See, e.g., Worthan v. Commissioner, T.C. Memo. 2012–

263, at *3 n.3 (‘‘[I]f the IRS has assessed additional taxes,

penalties, and interest ‘at the time the taxpayer voluntarily

tenders a partial payment that is accepted by the Service

and the taxpayer provides specific written directions as to

the application of the payment, the Service will apply the

payment in accordance with those directions.’ ’’ (quoting Rev.

Proc. 2002–26, sec. 3, 2002–1 C.B. at 746)); Cooley v.

Commissioner, T.C. Memo. 2012–164, 103 T.C.M. (CCH)

1875, 1876 n.1 (‘‘A taxpayer making a voluntary payment can

designate the liability she wants her payment to cover, and

the IRS will apply the payment as the taxpayer directs.’’). 8

Respondent notes correctly that many of these cases

involved ‘‘trust fund taxes,’’ where the dispute centered on

whether an employer’s tax payment should be applied to its

corporate income tax obligations or rather to employment tax

obligations for which its officers and employees would have

individual liability as ‘‘responsible persons.’’ 9 Respondent

resent payment of the employer portion of the liability * * * unless there

was some specific designation to the contrary by the taxpayer.’’); Davis v.

United States, 961 F.2d 867, 878 (9th Cir. 1992) (‘‘When a taxpayer sub-

mits a voluntary payment, she may designate to which liability the money

should be applied.’’); Lorenzini v. United States, 946 F.2d 895, 1991 WL

203086, at *4 (6th Cir. 1991) (‘‘Voluntary partial payments * * * will be

applied to withheld employment taxes * * * as designated by the tax-

payer.’’); Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983)

(‘‘When a taxpayer makes voluntary payments to the IRS, he has a right

to direct the application of payments to whatever type of liability he choos-

es.’’ (citing O’Dell v. United States, 326 F.2d 451, 456 (10th Cir. 1964))).

8 In all of these cases, the duty of the IRS to honor a taxpayer’s designa-

tion of a voluntary payment was common ground. The disputes focused on

whether the payment was ‘‘voluntary’’ and/or whether the taxpayer had

made a proper and unambiguous ‘‘designation.’’ See, e.g., Kaplan, 104 F.3d

at 599 (concluding that IRS can generally apply payment as it wishes ‘‘in

the absence of a written designation’’ by employer); IRS v. Energy Res. Co.

(In re Energy Res. Co.), 871 F.2d 223, 230 (1st Cir. 1989) (concluding that

payment made pursuant to bankruptcy court order was not ‘‘voluntary’’),

aff ’d on other grounds, 495 U.S. 545 (1990); Wood, 808 F.2d at 417 (con-

cluding that employer had made ‘‘no specific designation’’ of its payment).

9 Because section 7501(a) requires employers to hold taxes collected and

withheld from employees’ wages ‘‘in trust for the United States,’’ these

taxes are commonly referred to as trust fund taxes. See Slodov, 436 U.S.

at 242–243. Officers or employees who are responsible for collecting the tax

are commonly referred to as ‘‘responsible individuals’’ or ‘‘responsible per-

Continued

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188 141 UNITED STATES TAX COURT REPORTS (173)

acknowledges the IRS’ policy of honoring an employer’s des-

ignation of voluntary payments between these two types of

taxes. In his view, however, petitioners inappropriately ‘‘seek

to extend this policy beyond designating a payment for a spe-

cific type of tax and argue that an employer should be

allowed to designate a payment as the withholding of a par-

ticular employee.’’ According to respondent, designated

employment tax payments can be applied only to an

employer’s overall employment tax obligations. No authority

assertedly exists for allowing an employer ‘‘to designate pay-

ments as withholding for a specific employee,’’ so that

employees remain liable ‘‘for their separate and independent

income tax obligations’’ notwithstanding the employer’s des-

ignated payment thereof.

We find no such gloss on the IRS’ policy of honoring des-

ignated tax payments in its published administrative posi-

tion, which it is obligated to follow, Rauenhorst v. Commis-

sioner, 119 T.C. 157, 171–173 (2002), or in the judicial

decisions that have repeatedly recognized this obligation.

This supposed gloss, moreover, is at odds with established

practice in employment tax refund litigation and with

inferences logically drawn from section 6331.

Generally, a taxpayer must pay the entirety of an assessed

tax or proposed deficiency in order to support jurisdiction of

a refund suit under 28 U.S.C. sec. 1346 (2006). See Flora v.

United States, 362 U.S. 145, 177 (1960). However, under a

doctrine first enunciated in Steele v. United States, 280 F.2d

89, 91 (8th Cir. 1960), a well-established exception to this

full-payment rule exists with respect to ‘‘divisible taxes.’’ The

employment tax for which an employer is liable under sub-

title C is a ‘‘divisible tax’’ because each portion of the tax

relates to a specific employee and calendar quarter. An

employer is permitted to pay a divisible portion of its employ-

ment tax liability, file a refund claim for that amount, and

commence refund litigation under 28 U.S.C. sec. 1346(a)(1)

when the claim is denied. The United States then typically

counterclaims for the balance of the tax in dispute. See, e.g.,

Univ. of Chi. v. United States, 547 F.3d 773, 785 (7th Cir.

2008); Korobkin v. United States, 988 F.2d 975, 976 (9th

sons.’’ Energy Res. Co., 495 U.S. at 546–547; see infra p. 192.

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(173) DIXON v. COMMISSIONER 189

Cir. 1993); Boynton v. United States, 566 F.2d 50, 51–52 (5th

Cir. 1977); CCA 201315017 (Apr. 12, 2013).

This ‘‘divisible tax’’ litigation procedure is beneficial to

employers, enabling them to seek resolution of an employ-

ment tax dispute by means of a test case, without the neces-

sity of paying up front the entire amount at issue for

numerous workers. This procedure is commonly used to

establish the status of particular workers, or a particular

class of workers, as ‘‘employees’’ or ‘‘independent contrac-

tors.’’ See, e.g., Bruecher Found. Servs., Inc. v. United States,

383 Fed. Appx. 381 (5th Cir. 2010); Smoky Mountain Secrets,

Inc. v. United States, 910 F. Supp. 1316 (E.D. Tenn. 1995);

Theodore D. Peyser, Refund Litigation, 631–4th Tax Mgmt.

(BNA) A–5 (‘‘[T]o sue for a refund of employment tax, one

must first pay the tax or penalty assessed as to one employee

for a single quarter.’’).

Section 6331 governs levy and seizure of property to satisfy

Federal tax obligations. Section 6331(i)(1) provides that no

levy shall be made against an employer ‘‘with respect to any

unpaid divisible tax during the pendency of any proceeding’’

brought by the employer ‘‘for recovery of any portion of such

divisible tax.’’ A ‘‘divisible tax’’ for purposes of this section

includes employment taxes imposed by subtitle C. See sec.

6331(i)(2)(A). This bar against levies applies where the deci-

sion in the pending refund suit ‘‘would be res judicata with

respect to such unpaid tax’’ and where the employer ‘‘would

be collaterally estopped from contesting such unpaid tax by

reason of such proceeding.’’ Sec. 6331(i)(1)(A) and (B).

In order for this statutory scheme to function as Congress

intended, an employer will often find it necessary to des-

ignate employment tax payments toward the tax liabilities of

specific employees. A large company with complex operations

may have multiple locations with distinctive activities. It

may have multiple classes or categories of workers who

manifest varying indicia of ‘‘employee’’ and ‘‘independent con-

tractor’’ status or who receive different kinds of payments

that may or not be ‘‘wages.’’

Collateral estoppel applies only where the facts actually

litigated are the same as the facts in the collateral pro-

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190 141 UNITED STATES TAX COURT REPORTS (173)

ceeding. 10 Thus, in order to ensure that a decision in the

refund suit will have collateral estoppel effect with respect to

all affected workers, the employer must ensure that it has

paid employment taxes for at least one worker in each dis-

tinct employment class. If an employer fails to establish full

payment of employment taxes for at least one affected

worker for one calendar quarter, the case may be dismissed

for lack of jurisdiction. See, e.g., 47th Street Setting Corp. v.

United States, 84 A.F.T.R.2d (RIA) 99–6691 (S.D.N.Y. 1999)

(dismissing refund suit where employer had two classes of

workers and failed to pay full employment taxes for one cal-

endar quarter for any worker whom the IRS had reclassified

as an employee). 11

Where an employer has distinct employment classes, it is

hard to see how it can meet the threshold requirement to

prove it has paid taxes for at least one employee in each con-

tested class unless it can designate payments toward the tax

liabilities of specific employees—i.e., designate which

‘‘portion[s] of such divisible tax’’ are being remitted. Sec.

6331(i)(1). And it is hard to see how refund litigation could

be instituted on the terms Congress contemplated unless the

IRS is bound to honor the employer’s designation. The IRM

explicitly defines a ‘‘designated payment’’ to include a vol-

10 See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326–329 (1979) (dis-

cussing collateral estoppel); Alexander v. Commissioner, 224 F.2d 788,

791–793 (5th Cir. 1955) (same), aff ’g in part, rev’g in part 22 T.C. 318

(1954); Peck v. Commissioner, 90 T.C. 162, 166–167 (1988) (an important

factor when applying collateral estoppel is whether ‘‘[t]he issue in the sec-

ond suit * * * [is] identical in all respects with the one decided in the first

suit’’), aff ’d, 904 F.2d 525 (9th Cir. 1990).

11 Accord Gerald A. Kafka & Rita A. Cavanagh, Litigation of Federal

Civil Tax Controversies, para. 15.03[2], at 15–13 (2d ed. 2010), available

at 1999 WL 629587, at *4 (‘‘[T]he employee or transaction to which the tax

relates must be representative of all employees or transactions for which

the tax was assessed. * * * If the employee or the transaction is not rep-

resentative, the collateral estoppel effect of any judgment could be mini-

mized.’’); see also Spivak v. United States, 254 F. Supp. 517, 522–523

(S.D.N.Y. 1966) (finding that taxpayers failed to prove they had paid the

employment taxes for one employee for one quarter and dismissing com-

plaint), aff ’d, 370 F.2d 612 (2d Cir. 1967); Gerald A. Kafka, Refund Litiga-

tion in the U.S. District Court and U.S. Court of Federal Claims, ST009

ALI–ABA 325, 327 (‘‘Care must be taken to ensure that the payment does

in fact correspond to a single employee or event that is in issue.’’).

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(173) DIXON v. COMMISSIONER 191

untary payment that the taxpayer directs to be applied to ‘‘a

specific * * * tax portion.’’ IRM pt. 5.1.2.4.

2. Ensuring that the IRS honors taxpayer designations of

voluntary tax payments is essential to vindicate the policy

against double collection of the same tax. In the instant

cases, there is a single underlying tax liability—petitioners’

individual income tax liabilities for 1992–95. The Code pro-

vides two ways to collect this tax: from the employer as with-

holding tax under sections 3402 and 3403, and from the

employee when he files his annual Form 1040, U.S. Indi-

vidual Income Tax Return. As the Supreme Court stated in

Baral v. United States, 528 U.S. 431, 436 (2000): ‘‘With-

holding and estimated tax remittances are not taxes in their

own right, but methods for collecting the income tax.’’ The

principal liability for the income tax is borne by the tax-

payer-employee under section 1. The employer bears liability

for this tax under section 3403, but it is a derivative liability

arising from its status as a withholding agent. 12

Such derivative liability for withholding agents is common

in a multitude of Code settings. Section 3101(a) imposes a

share of the FICA tax on the employee; section 3102 provides

that this tax ‘‘shall be collected by the employer,’’ who thus

bears derivative liability for the employee’s share of the

FICA tax. Under section 3405, the payor of pensions and

annuities bears derivative liability for the distributee’s

income tax. Under section 3406, a financial institution

required to perform ‘‘backup withholding’’ on payments of

interest and dividends bears derivative liability for the inves-

tor’s income tax. In none of these contexts does the Code

explicitly provide that the employee, distributee, or investor

will receive, toward her principal liability, a credit for pay-

ments the payor makes toward its derivative liability. But

12 See

Whalen v. Commissioner, 97 T.C.M. (CCH) at 1149 (‘‘While we

agree with respondent that the tax liability of an employer under sections

3403 and 7501 is independent of the liability imposed on the employee

under section 1, we also agree with petitioner that these two liabilities are

for the same income tax.’’); H.R. Doc. No. 78–237, at 5 (1943) (employment

tax borne by employer is ‘‘not an additional tax—merely a collection de-

vice’’).

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192 141 UNITED STATES TAX COURT REPORTS (173)

the IRS allows such a credit, as it must, because failure to

do so would result in double collection of the same tax. 13

An analogous principle has been recognized in so-called

responsible person cases. Section 6672(a) provides that, if an

officer or employee responsible for withholding and collecting

employment taxes from employees willfully fails to do so, he

or she shall ‘‘be liable to a penalty equal to the total amount

of the tax evaded, or not collected, or not accounted for and

paid over.’’ This penalty is often called the ‘‘trust fund

recovery penalty,’’ because it provides a mechanism for col-

lecting, from an employer’s responsible persons, employment

taxes that should have been collected and held ‘‘in trust for

the United States.’’ Sec. 7501(a); see Weber v. Commissioner,

138 T.C. 348, 357–358 (2012). In this setting, the employer

bears principal liability under section 3403 for the trust fund

taxes that should have been withheld, and the ‘‘responsible

persons’’ bear derivative liability for those same taxes under

section 6672.

In a ‘‘responsible person’’ situation, numerous individuals

and/or entities may be liable for redundant penalties deriving

from the same unpaid tax. See Commonwealth Nat’l Bank of

Dallas v. United States, 665 F.2d 743, 758 (5th Cir. 1982).

There is no Code provision that explicitly grants a credit to

one person against his penalty assessment if the IRS later

collects the tax directly from the employer or collects the

13 Judge Holmes suggests in dissent that the Code does have an explicit

provision allowing credits for tax withheld from payments of pensions, an-

nuities, interest, and dividends. See Holmes op. p. 204. This provision, he

says, ‘‘is none other than the very same section 31’’ that we have discussed

previously. Section 31, however, is entitled ‘‘Tax Withheld on Wages’’; and

section 31(a) is entitled ‘‘Wage Withholding for Income Tax Purposes.’’ By

its terms, section 31 does not apply to pensions and annuities under sec-

tion 3405 or to interest and dividends under section 3406—except as it ap-

plies by analogy, which bolsters our point. Judge Holmes likewise points

to no Code section that explicitly provides a credit to the employee for the

employer’s payment of employee FICA tax. Rather, he infers that the em-

ployee must be entitled to a credit from section 31.3102–1(d), Employment

Tax Regs. (‘‘Until collected from * * * [the employer] the employee also is

liable for the employee tax with respect to all the wages received by him.’’).

But not even this regulation provides an explicit credit for the employee

when the employer pays the tax. Judge Holmes’ inference that a credit

must be available is reasonable precisely because the structure and logic

of the Code’s withholding provisions mandate such crediting to avoid dou-

ble collection of the same tax.

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(173) DIXON v. COMMISSIONER 193

penalty from others. But in practice such crediting does

occur, under a longstanding IRS policy which recognizes that

the section 6672 penalty is a method of collecting trust fund

taxes once, not twice. See IRM pt. 1.2.14.1.3(2) (June 9, 2003)

(‘‘The withheld income and employment taxes * * * will be

collected only once, whether from the business, or from one

or more of its responsible persons.’’); id. pt. 8.25.1.5.1(5) (Dec.

7, 2012) (‘‘Even though the Service may make assessments

against more than one responsible person for a particular

quarterly liability, it ultimately only collects the total

amount once.’’). The Supreme Court recognized this policy 35

years ago in United States v. Sotelo, 436 U.S. 268, 279 n.12

(1978): ‘‘[I]t is IRS policy that the amount of the tax will be

collected only once. After the tax liability is satisfied, no

collection action is taken on the remaining 100-percent pen-

alties.’’ 14

This well-established IRS policy against double collection

of trust fund taxes illuminates the proper disposition of the

question presented here. Just as there is no Code provision

explicitly mandating that an employer’s (late) payment of

employment tax must be credited toward a responsible per-

son’s liability for the section 6672 penalty, so too there is no

Code provision explicitly mandating that an employer’s (des-

ignated late) payment of employment tax be credited toward

the designated employee’s liability for income tax. But in

both cases, despite the Code’s silence as to the availability of

a credit, the payment of the one necessarily satisfies the

14 Accord,

e.g., USLIFE Tit. Ins. Co. of Dallas v. Harbison, 784 F.2d

1238, 1241 (5th Cir. 1986) (‘‘[A]s a matter of policy, * * * [the Govern-

ment] does not retain payments exceeding the underlying withholding tax

delinquency.’’); Kelly v. Lethert, 362 F.2d 629, 635 (8th Cir. 1966) (Govern-

ment is entitled to only one satisfaction of trust fund taxes); Weber v. Com-

missioner, 138 T.C. 348, 358 & n.6 (2012) (‘‘The IRS collects the trust fund

liability no more than once.’’); Gutherie v. United States, 359 F. Supp. 2d

693, 697 (E.D. Tenn. 2005) (‘‘Because the IRS is entitled to only one satis-

faction of the trust fund tax liability, once it has obtained that satisfaction

from the employer, it must abate all assessments against responsible indi-

viduals under section 6672.’’); Johnson v. United States, 203 F. Supp. 2d

416, 425 (D. Md. 2002) (‘‘[E]ven absent the internal IRS policy, the agency

* * * [is] not entitled to double recovery under section 6672.’’).

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194 141 UNITED STATES TAX COURT REPORTS (173)

other. The IRS must allow a credit in both situations to avoid

double collection of the same tax. 15

3. The outcome that we believe to be supported by judicial

precedent and sound tax policy is likewise supported by

common sense. Petitioners themselves supplied Tryco with

the $91,223 at issue. They contributed these funds to their

corporation, on the advice of their attorney, with explicit

instructions that the funds be remitted to the IRS and des-

ignated toward payment of their 1992–95 income tax liabil-

ities. These funds were paid to the IRS pursuant to peti-

tioners’ plea agreement with the Department of Justice,

which stated that they ‘‘may be required to make full restitu-

tion for the losses sustained by the Internal Revenue

Service’’ as a result of their tax offenses. Petitioners success-

fully argued for probated sentences on the ground that they

had remitted taxes to the IRS in excess of the ‘‘tax loss’’

determined in their plea agreements. Since these payments

were intended as ‘‘restitution’’ for petitioners’ tax offenses,

those payments should logically be credited toward peti-

tioners’ liability for the 1992–95 tax years that were the sub-

ject of the criminal tax case. It would be inequitable and

inconsistent with the premises of the plea agreement and

sentencing for the IRS to insist on collecting this same tax

again.

For these reasons, we hold that the IRS was obligated to

honor Tryco’s designation of its delinquent 1999–2000

15 JudgeHolmes contends that petitioners cannot ‘‘point to a single cred-

it under current law that would cause Tryco’s payment to erase their own

income-tax liability,’’ and that the Court has therefore ‘‘mint[ed] a new tax

credit nowhere to be found in the Code.’’ See Holmes op. pp. 202, 198. His

opinion proceeds from the erroneous premise that a ‘‘credit’’ to a taxpayer’s

account can arise only by virtue of a specific Code provision in ch. 1, subch.

A, pt. IV, captioned ‘‘Credits against Tax.’’ In fact, there is no section in

the Code providing that a payment of tax shall be credited against the li-

ability for that tax; but of course such payments must be so credited. If

a person remits $100,000 to the IRS and designates it toward payment of

his gift tax liability, the IRS would credit that payment toward his gift tax

liability. If a grandson remits $100,000 to the IRS and designates it toward

payment of his grandmother’s gift tax liability, the IRS would (we hope)

credit that payment toward his grandmother’s gift tax liability. In both

cases, the credit arises, not by virtue of a specific Code provision, but by

virtue of the IRS’ honoring the taxpayer’s designation and crediting the ac-

count of the relevant taxpayer for the relevant tax.

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(173) DIXON v. COMMISSIONER 195

employment tax payments to petitioners’ income tax liabil-

ities for 1992–95. Respondent’s failure to honor this designa-

tion was an abuse of discretion. The $91,223 payments at

issue, if properly credited to petitioners’ account, would have

fully discharged their 1992–95 income tax liabilities

(excluding any applicable interest and penalties). The IRS

therefore may not levy on their assets to collect this tax a

second time. 16

An important corollary of our holding concerns penalties

and interest. Section 6513(b)(1) provides that ‘‘[a]ny tax actu-

ally deducted and withheld at the source * * * shall, in

respect of the recipient of the income, be deemed to have

been paid by him on the 15th day of the fourth month fol-

lowing the close of his taxable year with respect to which

such tax is allowable as a credit under section 31.’’ The

$91,223 at issue here was not ‘‘actually deducted and with-

held at the source,’’ and no credit therefor is allowable to

petitioners under section 31. Tryco’s designated payments

thus result in a credit to petitioners’ account as of December

1999 and June 2000 respectively, not as of April 15, 1996.

Respondent accordingly may levy on petitioners’ assets to col-

16 Judge Buch in dissent errs in suggesting that our Opinion sanctions

‘‘double-dipping’’ by Tryco. See Buch op. p. 214. The $91,223 that Tryco re-

mitted to the IRS in 1999–2000 consisted of delinquent employment

taxes—specifically, income taxes that were not deducted and withheld from

its employees’ wages contemporaneously but were being remitted five

years late. Logically, these nonwithheld income taxes must be attributable

to some employee on Tryco’s payroll during the relevant tax years. In des-

ignating its payments, Tryco was simply identifying James and Sharon

Dixon, rather than John and Sally Doe, as the employees to whose ac-

counts these income tax payments should be credited. This is not ‘‘double-

dipping.’’ It is true that, by making these designated payments, Tryco was

simultaneously discharging the Dixons’ income tax liability under section

1 and its own withholding tax liability under section 3403. But this is

what happens in the normal situation when the employer withholds in-

come tax from its employees’ wages and remits that tax to the IRS. As ex-

plained in the text, see supra p. 191, there is a single underlying tax liabil-

ity involved in these cases—petitioners’ individual income tax liabilities for

1992–95. By remitting $91,223 to the IRS and designating it toward the

Dixons’ income tax liabilities, Tryco was simultaneously discharging the

Dixons’ principal liability and its own derivative liability for the same tax.

We assume that Judge Buch would not characterize this as ‘‘double-dip-

ping’’ if Tryco had remitted the tax timely, and we do not see why the

characterization should be different when Tryco remits the tax late.

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196 141 UNITED STATES TAX COURT REPORTS (173)

lect any applicable interest and penalties. Tryco likewise

remains liable for penalties and interest. See sec. 3402(d);

sec. 31.6205–1(c)(3)(ii), Employment Tax Regs. 17

Appropriate decisions will be entered.

Reviewed by the Court.

COLVIN, FOLEY, GALE, GOEKE, WHERRY, KROUPA, GUSTAF-

SON, PARIS, MORRISON, and KERRIGAN, JJ., agree with this

opinion of the Court.

VASQUEZ, J., did not participate in the consideration of this

opinion.

GOEKE, J., concurring: I agree with the opinion of the

Court and write simply to clarify that the credibility of peti-

tioners’ testimony played no role in the opinion of the Court

17 We

have no occasion in these cases to address the income tax con-

sequences of these designated payments for petitioners’ 1999 and 2000 tax

years. The regulations presuppose that, when nonwithheld taxes are paid

to the IRS, an employer will normally seek reimbursement from the em-

ployee ‘‘on or before the last day of such year by deducting such amount

from the remuneration of the employee, if any.’’ Sec. 31.6205–1(c)(4), Em-

ployment Tax Regs. That obviously did not happen here. Under these cir-

cumstances, Tryco’s designated payments of petitioners’ income tax liabil-

ities could conceivably be characterized as corporate distributions governed

by section 301(c) or as payment of additional wages (which might generate

additional withholding tax liability). See Old Colony Trust Co. v. Commis-

sioner, 279 U.S. 716, 730–731 (1929) (employer’s payment of employee’s in-

come tax obligation in consideration of employee’s services for employer

constitutes income to employee). We likewise have no occasion to address

the income tax consequences for Tryco of its 1999–2000 payments aggre-

gating $91,223 on petitioners’ behalf. Finally, we have no occasion to con-

sider the income tax consequences for an employer that, unlike Tryco,

makes a nondesignated payment of delinquent employment taxes under

section 3403. Compare L & L Marine Serv., Inc. v. Commissioner, T.C.

Memo. 1987–428 (employer’s payment of employees’ share of delinquent

employment taxes not deductible under section 162(a) either as compensa-

tion or as an ordinary and necessary business expense), with IRS Field

Service Advisory 200025002, (June 23, 2000) (employer’s payment of em-

ployees’ share of delinquent employment taxes deductible under section

162(a) as an ordinary and necessary business expense where payment

achieved a proximate business benefit for employer). The only issue before

us is whether the IRS may levy to collect petitioners’ income tax liabilities

for 1992–95.

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(173) DIXON v. COMMISSIONER 197

because the issues addressed are legal, not factual. Credi-

bility of their testimony was important only to the factual

findings Judge Holmes made as the trial Judge in the com-

panion Memorandum Opinion also released today.

The Court is obviously aware of petitioners’ 1999 plea

agreement with the U.S. attorney, which is discussed in both

the opinions issued today. The opinion of the Court only ref-

erenced the plea agreement as the source for the ‘‘tax loss’’

figure discussed in both opinions. There were no credibility

findings attached to that reference. In Judge Holmes’ Memo-

randum Opinion, the plea agreement was used in connection

with the best evidence rule to serve as ‘‘other evidence’’ that

reflects the content of Tryco’s missing payroll documents.

Judge Holmes also made a credibility finding with regard to

petitioners’ testimony.

The Court is also aware that James Dixon pleaded guilty

to Federal tax evasion for 2006, United States v. Dixon, No.

4:12CR00521–001 (S.D. Tex. Apr. 1, 2013), the same year

petitioners testified that they knew nothing about the non-

payment of withheld taxes for tax years 1992–95. Similarly,

Sharon Dixon was also later convicted for subsequent Fed-

eral tax crimes. United States v. Dixon, No. 4:12CR00522–

001 (S.D. Tex. Feb. 13, 2013).

WHERRY, KROUPA, MORRISON, and LAUBER, JJ., agree with

this concurring opinion.

HOLMES, J., dissenting: Imagine that a check arrives at the

IRS from John Green with a letter that says: ‘‘This check is

to be applied to my tax bill for 2013. Also, please credit my

friend Joe Black’s account for the same amount. He gave me

the money that let me write this check and I’d like him to

benefit as well.’’ If things work as they should at the Service,

Green’s account should be credited; and the suggestion that

the same check should be credited for Joe Black’s account

would cause some tittering, or maybe just a puzzled look on

the face of the IRS employee opening the envelope.

And that’s more or less what happened here. Tryco sent in

a few dozen checks together with letters saying to please pay

the company’s tax bill and designated them as well as pay-

ments of ‘‘withheld income taxes’’ for one or the other of the

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198 141 UNITED STATES TAX COURT REPORTS (173)

Dixons. The IRS credited Tryco’s giant unpaid employer-tax

liability, but did not reduce the Dixons’ large income-tax

liability.

The majority is quite right that the Dixons don’t get a

credit under section 31 for payments Tryco made that were

not ‘‘actually withheld at the source.’’ But what the majority

gets wrong is the way the crediting scheme works. Employers

get a credit under section 3402(d) for employee payments

whenever they’re made, but employees get a credit for

employer payments only when those payments are ‘‘actually

* * * withheld at the source.’’ Sec. 1.31–1(a), Income Tax

Regs. Here, we all agree that the payments were not actually

withheld at the source. That should be good enough to

answer the question before us, because the plain language of

the Code and regulations does not provide the Dixons with

a credit. Dissatisfied with this plain language, the majority

sets up its own forge and mints a new tax credit nowhere to

be found in the Code.

I must respectfully dissent, because this Court doesn’t

have the power to replace a clear and explicit crediting

scheme with one that we deem ‘‘fair’’.

I.

Had the Dixons sent the money in themselves and told the

Commissioner to apply the payments toward their own

income-tax liability, they’d have a credit for their payments

(but might still be on the hook for leftover penalties or

interest), and so would Tryco, under section 3402(d). But the

Dixons instead sent money to Tryco for Tryco to send to the

IRS. Tryco sent that money to the IRS voluntarily and told

the Commissioner to apply it towards Tryco’s own unpaid

employment taxes. It’s what the Dixons and Tryco told us

they intended to do, and it’s what they actually did. The

Commissioner then obeyed those instructions.

What colors these cases, and makes the Dixons look

sympathetic, is that the money Tryco paid is money that the

Dixons contributed to the corporation after they took out a

home-equity loan for almost a half-million dollars. It was this

money that they sent to Tryco, and had Tryco pay over to the

IRS in December 1999. The letters that accompanied the

payment told the IRS exactly where to put it: towards

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(173) DIXON v. COMMISSIONER 199

‘‘[Form] 941 taxes of the corporation * * * to be applied to

the withheld income taxes’’ of James R. Dixon or Sharon

Dixon for each quarter of the 1992 through 1995 tax years.

The ‘‘memo’’ lines on the checks themselves said ‘‘Designated

Payment of 941 Taxes’’ for each Dixon. The letter that Tryco

sent along with the June 2000 payment said something

similar: It was a ‘‘payment of [Form] 941 taxes of the cor-

poration for calendar quarter 9504, 1 and which represents

the withheld income taxes of employee James R. Dixon and

employee Sharon Dixon.’’ The Dixons couldn’t have been

much more clear—Form 941 is the Employer’s Quarterly

Federal Tax Return, and they told the IRS to pay the taxes

‘‘of the corporation,’’ the same entity that formally sent along

the payment. The Dixons did ask the IRS to apply the pay-

ments to the portion of Tryco’s employment-tax bill that was

attributable to Tryco’s failure to withhold taxes from James’s

and Sharon’s wages. But that isn’t the same thing as asking

the IRS to apply the payments directly towards the Dixons’

individual income-tax liabilities, because Tryco was asking

the IRS to apply the payments toward a specific part of

Tryco’s tax bill.

We even have testimony from Larry Campagna, the

Dixons’ tax attorney, saying that the Dixons knew that they

had a choice—pay their own taxes directly, or have Tryco pay

its own taxes, specifically those attributable to underwith-

holding for the Dixons. And he explained why the Dixons

decided to pay Tryco’s liability rather than their own.

Campagna stated that he was afraid that

had Mr. and Mrs. Dixon remitted the income taxes directly for their

account, then the 941 liability for Tryco would not have been reduced by

the payment, and the Government would have been asking for a double

collection of the same money on the income tax side and the employment

tax side. [2]

There was something else here: Had the Dixons simply

sent the money in and told the IRS to apply the payments

towards their own income-tax liabilities, they still would’ve

been on the hook for all of the interest and penalties that

1 In

IRS numerology, 9504 means the fourth quarter of tax year 1995.

2 That

statement implies a misunderstanding of section 3402(d), which,

by giving Tryco a credit for the Dixons’ payment of their own taxes, would

have prevented ‘‘double collection’’ of the remitted amount.

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200 141 UNITED STATES TAX COURT REPORTS (173)

had accrued between the due dates of the original returns—

April 1993, 1994, and 1995—and the dates that they finally

paid up in December 1999 and June 2000. See sec. 6622(a).

By instead contributing the money to Tryco—their

employer—and then having Tryco pay it as employment tax,

the Dixons hoped that the IRS would treat the payments as

the IRS treats normal withholding payments, which would

then erase many years of interest and penalties. 3 That’s why

they chose the indirect route. 4

We also have the Dixons’ briefs, which say that the Dixons

gave ‘‘detailed written instructions (on the checks and in the

cover letters),’’ that ‘‘unequivocally provided’’ for how the IRS

was to apply their payments, and also say ‘‘[t]he IRS did not

have to guess how Tryco wanted the payments applied.’’

They reiterate that those instructions said that the payments

were for ‘‘Form 941 taxes of the corporation for all quarters

during 1992–1995,’’ specifically those attributable to the

withheld income taxes of the Dixons.

So we know what the Dixons actually asked for in their

letters—for the IRS to apply the payments towards Tryco’s

employment taxes—and we know that’s exactly what they

meant to do, because their lawyer explained why, and their

briefs hammered it home. Nevertheless, the majority actually

appears to come to two conflicting conclusions about what

Tryco asked the IRS to do with the money. It argues both

that the Commissioner should have reduced the Dixons’

income-tax debt to the extent that Tryco paid its own

3 Section

31(a)(1) provides a credit to employees against their income tax

obligation with respect to their wages if that tax is ‘‘deducted and withheld

at the source,’’ even if their employer failed to remit it to the government.

Sec. 1.31–1(a), Income Tax Regs. That ‘‘amount so withheld during any cal-

endar year shall be allowed as a credit for the taxable year beginning in

such calendar year.’’ Sec. 31(a)(2). Thus, the effect of the Dixons’ position

would let Tryco’s late payment of the withholding tax not only satisfy their

income-tax debt, but also cancel the portion of that debt that consisted of

compounded interest.

4 Campagna testified that ‘‘I don’t think that I was concerned about the

interest.’’ As the trier of fact in these cases, I did not find this particular

part of his testimony credible. The IRS transcripts show that the IRS fi-

nally got around to crediting the Dixons’ accounts in April or May 2003.

By that point over $530,000 of interest had accrued—almost 90% of the

original tax reflected on the transcripts.

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(173) DIXON v. COMMISSIONER 201

employer-tax debt; and that Tryco’s payment of that debt

was also creditable to the Dixons as payment of restitution.

I’ll address each in turn.

II.

I agree with the starting point of the majority’s first argu-

ment—there is overwhelming authority for the proposition

that a taxpayer who submits a voluntary payment may direct

which of his taxes that payment should be credited to. I also

don’t doubt that one person can pay another person’s taxes.

But what I can’t agree to is the majority’s combination of

these two simple propositions to allow a taxpayer to des-

ignate that its payment should reduce both its own tax debt

and the debt of a third party. And remember as well that the

Dixons’ lawyer wrote the IRS, after these payments were

made, that he wanted them rejiggered to be for slightly dif-

ferent amounts and periods.

But the majority clearly errs in finding that the IRS did

not do exactly what Tryco asked it to. According to the IRS

transcripts in the record, the Commissioner applied the pay-

ments to Tryco’s employment-tax liability, and gave the

Dixons a section 31 credit for their income-tax liability. (The

transcripts are typically opaque about this—they don’t say

anything about section 31. But they do show that the

Commissioner abated interest that accrued between the

original due dates of the return and the dates of the later

payments, and a direct credit to the Dixons’ income taxes

wouldn’t have reduced their outstanding interest. 5) He

applied the payment exactly as Tryco asked—toward the out-

standing employment taxes of the corporation, specifically

those attributable to the Dixons. If he hadn’t, the Dixons

wouldn’t have ever gotten that mistaken section 31 credit.

The majority defends at length—and with copious cita-

tions—Tryco’s right to direct the IRS to apply its voluntary

payment towards a specific portion of its own tax liability.

There’s nothing wrong with this—a company’s employer tax

has long been seen by the courts and the Commissioner to

be the aggregation of numerous quarters of tax for numerous

employees. It’s convenient to pay it all in one lump sum

5 The Dixons’ transcripts also show that the Commissioner later realized

his mistake and took the credits and abatements away.

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202 141 UNITED STATES TAX COURT REPORTS (173)

every so often, but an employer’s total employer-tax liability

is very much the sum of a large number of smaller liabilities.

But assuming that Tryco’s payment was properly applied to

its own employment-tax bill, and specifically that portion

that should’ve been withheld from the Dixons, the Dixons

still can’t point to a single credit under current law that

would cause Tryco’s payment to erase their own income-tax

liability. 6

The reason is that employment taxes and income taxes are

welded together by detailed and specific language in the

Code and regulations. Section 3403 says ‘‘[t]he employer shall

be liable for the payment of the tax required to be deducted

and withheld under this chapter [chapter 24, sections 3401–

3406], and shall not be liable to any person for the amount

of any such payment.’’ Section 31.3403–1, Employment Tax

Regs., emphasizes that it is employers which are ‘‘required to

deduct and withhold the tax under section 3402’’ and which

are liable ‘‘for the payment of such tax whether or not it is

collected from the employee by the employer.’’ (Emphasis

added.)

The employer’s tax liability under section 3403 is, in other

words, independent of the employee’s liability under section

1 and section 61(a)(1) to pay tax on the same wages. But

what happens if the employee pays the tax? The answer is

that the employer is off the hook—section 3402(d) provides:

If the employer, in violation of the provisions of this chapter, fails to

deduct and withhold the tax under this chapter, and thereafter the tax

against which such tax may be credited is paid, the tax so required to

be deducted and withheld shall not be collected from the employer

* * * .[7]

6 The

Dixons need a credit under the Code because they want credit for

an amount paid toward another taxpayer’s—Tryco’s—tax bill. They

wouldn’t need a Code-based credit if they had sent in the payments toward

their own tax bill. This bit of confusion comes up because ‘‘credit’’ can

mean two different things in tax law. It can mean amounts subtracted

from the amount of tax otherwise owed (as is the case here), or it can

mean the reduction in unpaid liability that occurs when a taxpayer pays

his own tax and his account is ‘‘credited.’’ See Kovacevich v. Commissioner,

T.C. Memo. 2009–160, 2009 WL 1916351, at *5 n.9.

7 Section 3402(d) anticipates the concern about double collection of the

same tax that we expressed in Whalen v. Commissioner, T.C. Memo. 2009–

37, 2009 WL 383019, at *3, where we suggested (in what is probably dicta)

that an employer’s actual payment to the IRS of tax that the employer

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(173) DIXON v. COMMISSIONER 203

See also W. Mgmt., Inc. v. Commissioner, 176 Fed. Appx. 778,

782 (9th Cir. 2006) (remanding case for us to consider in the

first instance whether section 3402(d) provided employer

with any relief from collection of income taxes paid by

employee, and if so, to compute reduction in employer’s defi-

ciency), aff ’g in part, remanding in part T.C. Memo. 2003–

162.

The Code doesn’t have a section like 3402(d) that could

rescue employees. 8 Without one, an employee doesn’t get a

credit on his income-tax liability just by proving that the

employer later paid the tax it failed to withhold. 9 The Code

does have section 31, but it’s limited—an employee’s right to

a withholding credit depends on whether the tax has ‘‘actu-

ally been withheld at the source’’ by the employer. Sec. 1.31–

1(a), Income Tax Regs. We all agree that wasn’t done here.

Which should have meant that we all agree that the Dixons

don’t meet the requirements to get the only credit that the

Code provides in this situation.

Not to be discouraged by the lack of any actual credit in

the Code to which the Dixons are entitled, the majority

makes one up. As support for this new judge-made credit, the

majority gives three examples of other withholding obliga-

tions—sections 3102, 3405, and 3406—and says that ‘‘[i]n

should have withheld ‘‘could plausibly be characterized as withholding tax

under chapter 24 with a corresponding section 31 credit being allowed to

a proper recipient for an appropriate year.’’ Section 3402(d) tells us that,

to the contrary, the credit applies under the reverse circumstances, i.e., the

employer receives a credit for the employee’s actual payment of tax that the

employer should have withheld. But it nonetheless remains true that the

employer’s liability under sections 3402(a) and 3403 for withholding taxes

is separate and distinct from the employee’s liability for income taxes

under section 61.

8 Congress knows how to help employees when it wants to. Section

4999(c) requires an employer who pays the 20% excise tax on excess gold-

en-parachute payments to treat it as additional income-tax withholding.

That assures the employee of a credit under section 31(a) and, in effect,

keeps the Commissioner from collecting twice.

9 Section 3402(d) may, as a practical matter, discourage the Commis-

sioner in some cases from pursuing the employee for taxes he’s already col-

lected from the employer, but if it happens the Commissioner will abate

the employer’s taxes administratively. See Internal Revenue Manual pt.

4.23.8.4.2. (But, again, the Code makes this asymmetrical. There is no

similar provision that lets an employee recoup payments that he’s made

when his employer later makes payments toward the same liability.)

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204 141 UNITED STATES TAX COURT REPORTS (173)

none of these contexts does the Code explicitly provide that

* * * [a payee] will receive, toward her principal liability, a

credit for payments the payor makes toward its derivative

liability.’’ See op. Ct. p. 191.

If this were a gap in the Code, the majority might have a

point. But a closer look at the text shows that there are no

gaps: Let’s start with sections 3405 and 3406. The Code does

‘‘explicitly provide’’ credit for withholding under these sec-

tions, and it is in none other than the very same section 31

that’s at issue in these cases. Section 31(a)(1) creates a credit

for payees for amounts that payors ‘‘withheld as tax under

chapter 24.’’ Sections 3405 and 3406—just like section 3402—

are all a part of chapter 24, which means that section 3405

and 3406 payees are also subject to all of the same pesky sec-

tion 31 requirements. But there’s no gap in the Code here—

those payees should, like employees, get credits only when

portions of the payments or wages they receive are ‘‘actually

withheld at the source.’’

Section 3102, which involves the FICA (or Social Security)

tax and which the majority also cites, works a bit differently.

For most taxpayers, the primary obligation to collect and pay

this tax is on the employer. See sec. 3102(a) (tax collected

from employer); sec. 31.3102–1(d), Employment Tax Regs.

(employer ‘‘liable for the employee tax * * * whether or not

it is collected from the employee’’). The regulation makes

clear that the employee is also liable for the tax only ‘‘[u]ntil

collected from [the employer].’’ Sec. 31.3102–1(d), Employ-

ment Tax Regs. Thus, the majority is correct that the FICA

tax doesn’t work on a formal crediting system like the income

tax, but only because, instead of a credit, there is a reduction

in the amount of the liability itself. 10 As the employer pays,

the employee’s liability as defined by the Code and regula-

tions correspondingly shrinks.

10 Congress

did put something of a derivative liability for employers of

high-wage earners into the Code in enacting a higher tax rate to help fund

Obamacare. The Code now makes an employee liable for this higher FICA

tax ‘‘[t]o the extent that the amount of any tax imposed by section

3101(b)(2) is not collected by the employer.’’ Sec. 3102(f)(2) (added by the

Patient Protection and Affordable Care Act, Pub. L. No. 111–148, sec.

9015(a)(2), 124 Stat. at 871 (2010)). But once an employee pays the tax,

the Code expressly provides that ‘‘the tax * * * shall not be collected from

the employer.’’ Sec. 3102(f)(3).

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(173) DIXON v. COMMISSIONER 205

The majority’s last analogy is to the trust fund recovery

penalty imposed by section 6672. It claims this as yet

another situation where, even though the Code doesn’t

require it, the IRS doesn’t collect tax arising out of the same

event from more than one person. Several individuals may

become secondarily liable, under section 6672, for failure to

discharge the same section 3402 employer withholding tax

liability. Every circuit court—including the circuit court to

which these cases would likely be appealed—has concluded

that this penalty is one that creates a joint and several

liability among responsible parties. See Brown v. United

States, 591 F.2d 1136, 1142 (5th Cir. 1979). While it is true

that the IRS says it follows ‘‘a policy’’ of not collecting more

than the total sum due it from all those found to be respon-

sible parties, this ‘‘policy’’ simply restates a firm and deeply

rooted background priniciple of common law; i.e., that

against parties jointly and severally liable, ‘‘a partial satis-

faction of one judgment will not prevent obtaining or

enforcing another, although it is everywhere agreed that the

amount received must be credited pro tanto against the

amount to be collected.’’ William L. Prosser & W. Page

Keeton, Law of Torts 331 (5th ed. 1984); 2 Restatement,

Judgments 2d, sec. 50(2), cmt. c. (1982) (same); 1 Restate-

ment, Torts 3d, sec. 25(b) (2000) (same). Tax law may be the

most florid and convoluted example of the displacement of

the common law by statute and regulation, but even it can’t

completely overgrow the general legal principles that connect

all the cozy specialized gardens of the law. So, if the

Commissioner were ever to assert a right to collect a joint

and several debt more than once, he couldn’t do so without

a change in the Code or regulations. 11

But the Dixons’ cases do not feature an IRS ‘‘policy’’ and

are not about joint and several liability; they are about sepa-

rate and distinct employer (secondary) and employee (pri-

mary) liabilities: Tryco’s section 3402 employer tax liability

11 Courts certainly acknowledge that delays in collection, complex stat-

utes of limitation, and the possibility of taxpayers’ bringing a statutory re-

fund suit mean that the Commissioner isn’t trying to collect twice until

he’s actually established his right to retain the funds that he’s collected.

See USLIFE Title Ins. Co. v. United States, 784 F.2d 1238, 1244–45 (5th

Cir. 1986) (carefully explaining the need for a right to retain funds col-

lected).

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206 141 UNITED STATES TAX COURT REPORTS (173)

and the Dixons’ section 1 and section 61 income-tax liability.

Couples who file joint returns create joint and several

liability; they might be startled to learn that we today are

forcing them into such an intimate relationship with their

employers. And, absent joint and several liability, I know of

no Code section, regulation, or decided case that would pre-

clude the Commissioner from pursuing an employee for

unpaid income tax with respect to the same wages on which

an employer owes employer taxes.

This is just not an area where there is any room left for

judge-made law. The Code and regulations create an intri-

cate crediting scheme for employment and income taxes.

Employers get a credit for any employee payments, but

employees get a credit only when those payments have ‘‘actu-

ally been withheld at the source.’’ Sec. 1.31–1(a), Income Tax

Regs. Withholding credits are usually an excellent deal for

employees—not only do they reduce an employee’s net tax

bill, but the Code treats those taxes ‘‘as a credit for the tax-

able year beginning in’’ the calendar year when they were

withheld. Sec. 31(a)(2). If we were to hold that the Dixons

were entitled to a credit under section 31 on their 1992–95

taxes—that is, that those amounts were ‘‘actually * * * with-

held at the source’’—even though Tryco made the payments

only years later, we would be allowing them to eliminate

(because of the retroactive crediting of that payment) liability

for interest and additions to tax and penalties that the Code

computes on the basis of the time an employee’s tax has gone

unpaid—despite the fact that the tax did in fact go unpaid

for many years. The Dixons knew about that trick when they

chose to structure their payment through Tryco for Tryco’s

own taxes, see supra notes 3 and 4 and accompanying text,

and I certainly wouldn’t blame them or their lawyer for

trying—these are cases of first impression. And it sounds

kind of plausible because of all that caselaw and IRS guid-

ance from situations where a taxpayer is allowed to choose

which of his own liabilities his money pays down. But there’s

just nothing in the Code to support an extension of a general

rule that ‘‘taxpayers can designate liabilities’’ to situations

where the liability involved is both their own and another’s.

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(173) DIXON v. COMMISSIONER 207

III.

After defending at length Tryco’s right to designate the

payments toward its own employment-tax bill relating to a

specific employee, the majority puzzlingly also finds that the

Dixons actually provided ‘‘explicit instructions’’ that the

funds were for ‘‘payment of * * * [the Dixons’] 1992–95

income tax liabilities.’’ See op. Ct. p. 194.

The majority hangs its recharacterization of Tryco’s pay-

ments on the restitution language in the Dixons’ February 7,

2000 plea agreements. In those agreements, the Dixons

acknowledged that they ‘‘may be required to make full res-

titution for the losses sustained by the Internal Revenue

Service as a result of the offenses of conviction.’’ 12 But

remember that Tryco had sent in the bulk of the payments—

$571,917—back in December 1999 to reduce its employer-tax

debt. This language in the Dixons’ later plea agreement can

be nothing more than their acknowledgment that they might

have to pay their own tax bill after they had already made

Tryco pay down some of its own. Consider how odd this

makes this part of the majority’s holding—it’s holding that

the Commissioner abused his discretion by not ignoring the

clear instructions Tryco actually included with the payment,

because he should’ve known what Tryco actually wanted—if

only he could’ve peeked into the future at a document from

a third party (i.e., the Dixons) that was not yet in existence

when Tryco sent in the bulk of its payments. 13 It’s bad

12 This is almost certainly form language–‘‘the fact that the court may

order the defendant to pay restitution’’ should be ‘‘included in [the] para-

graph setting out [a] defendant’s awareness of possible punishment.’’ See

United States Attorneys’ Manual, Tax Resource Manual 19 n.2, available

at http://www.justice.gov/usao/eousa/foialreadinglroom/usam/title6/

tax00019.htm (last visited July 8, 2013). In the actual judgments entered

after the District Court accepted the plea deals, the boxes marked ‘‘restitu-

tion’’ are left unchecked.

13 The Dixons submitted their final $30,202 payment on June 1, 2000,

about four months after they signed the plea agreements. Nevertheless,

the Commissioner shouldn’t be expected to disregard a taxpayer’s specific

instructions in favor of ambiguous language in a document belonging to a

third party. The same point is true of the Dixons’ effort to get the Commis-

sioner to rejigger crediting of the payments after Tryco had sent them in.

The Dixons asked the Commissioner to reallocate money that they’d origi-

nally designated to apply to Tryco’s 1994 taxes—$17,850 to 1992; $9,116

Continued

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208 141 UNITED STATES TAX COURT REPORTS (173)

enough to require the Commissioner’s clerks to be mind

readers, but with this holding we’re requiring them to build

time machines too.

IV.

The majority glosses over some of the other tax con-

sequences of its decision today. The Dixons had to contribute

$602,119 to Tryco because Tryco wasn’t doing much business

anymore. The Dixons were controlling shareholders, and

their capital contributions would have increased their bases

in the Tryco stock. See secs. 351(a) (applies to controlling

shareholder), 358(a)(1), 1012; see also sec. 1016(a); Commis-

sioner v. Fink, 483 U.S. 89, 94 (1987) (same for noncontrol-

ling shareholders); Love v. Commissioner, T.C. Memo. 2012–

166, 2012 WL 2135598, at *9; sec. 1.1016–2(a), Income Tax

Regs. Tryco’s employment-tax burden is smaller to the extent

of the payments that it made, but it is still so large that the

company stock may still be worthless, manufacturing a tidy

loss for the Dixons. When the Dixons eventually abandon or

sell Tryco, they’ll get a bigger loss than they otherwise would

have because of their increased bases.

And we shouldn’t forget that Tryco was the Dixons’

employer. As the majority acknowledges, see op. Ct. note 17,

employers that pay their employees’ bills are treated as if

they were paying wages instead, see Old Colony Trust Co. v.

Commissioner, 279 U.S. 716, 729 (1929). But Tryco’s pay-

ments were in 1999 and 2000, meaning the Dixons have

untaxed income for 1999 and 2000, years for which assess-

ment is now barred by the statute of limitations (assuming

that the Dixons began filing their tax returns on time). We

also shouldn’t forget that paying wages—this time in the

form of paying tax bills—also comes with its own withholding

tax obligations for Tryco under section 3403, which it, once

again, won’t have fulfilled.

V.

If the Dixons wanted to pay their own tax liability, they

could have and should have sent the checks to the IRS

to 1993; and $22,981 to 1995. The majority seems to let this work, too,

even though there is no authority anyone has cited requiring the IRS to

allow a taxpayer to later change its designation once it’s made.

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(173) DIXON v. COMMISSIONER 209

directly, with a letter stating that the payments were for

their own income-tax liability. That should have created a

credit for Tryco under section 3402(d). Alternatively, the

Dixons could have used Tryco as a mere agent to pay their

own income-tax liability. What they could have gained from

sending the money through their corporation first is unclear,

but they’d still have their own tax bill wiped out, and Tryco’s

tax bill would be reduced an equal amount under section

3402(d). They’d just need to be clear about what debt they

were trying to pay, and the IRS would obey. The Dixons did

what they did because they were swinging for the fences—

they wanted to reduce Tryco’s employment-tax bill, reduce

their own income-tax liabilities, bump up their bases in prob-

ably worthless Tryco stock, and use section 31 to erase many

years of penalties and interest. I don’t blame them for

trying—the law was, and after today, will remain, unclear.

I do also acknowledge that in situations like this one, the

result I’m advocating may seem harsh. But Congress in its

wisdom created an asymmetric crediting scheme. If the

Dixons had paid their tax debt directly, they would have cre-

ated a credit for Tryco under section 3402(d) without quali-

fication. But the reverse isn’t true; even though Tryco paid

its tax debt with the Dixons’ capital contribution, it can’t

create a credit for the Dixons because its payment was late.

I do note that the money that the Dixons contributed to

Tryco, and that Tryco then paid over, does reduce the giant

employment and withholding tax debt that Tryco owes. (And

that, if the Dixons were ever held to be responsible parties

for the original nonpayment of Tryco’s taxes, would reduce

that part of their debt to the government.)

That may not be fair, or even logical, but it is unambig-

uously what the Dixons asked the IRS to do and what the

unambiguous language of the Code requires here. This Court

doesn’t have the power to rewrite it or the unbridled discre-

tion to do whatever we deem ‘‘fair’’. I must, respectfully, dis-

sent.

HALPERN and BUCH, JJ., agree with this dissent.

BUCH, J., dissenting: I join Judge Holmes’ dissent, wherein

he correctly observes that the relevant statutory scheme does

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210 141 UNITED STATES TAX COURT REPORTS (173)

not allow Tryco to designate a payment for its own benefit

and also for the benefit of the Dixons. I write separately to

address two other sources of authority that the majority

cites.

Administrative Authority

The majority cites a series of revenue rulings and a rev-

enue procedure for the proposition that ‘‘voluntary partial

payments of assessed tax, penalties and interest are to be

applied as the taxpayer designates.’’ See op. Ct. p. 185. This

statement, so far as it goes, is unremarkable. But the

majority stretches that guidance well beyond its terms, and

then, citing Rauenhorst v. Commissioner, 119 T.C. 157, 171–

173 (2002), attempts to hold re

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