                                               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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                                     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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                                        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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                                     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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                                     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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                                     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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                                     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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                                        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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                                     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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                                                                                      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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                                     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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                                     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 respondent to a position that is
                                     not taken in any of the cited guidance.
                                        Where there is a linear progression of guidance, it is per-
                                     haps best to start at the beginning, which, in this instance,
                                     is an income tax ruling from 1947. At the time, interest was
                                     deductible for individuals and businesses, and the IRS
                                     addressed the question of whether a taxpayer who made a
                                     lump-sum payment in compromise of tax, penalties, and
                                     interest could deduct interest. Where that lump-sum pay-
                                     ment was less than the principal deficiency, the IRS held
                                     that no part of that lump-sumpayment could be deducted as
                                     interest. I.T. 3852, 1947–1 C.B. 15. What is clear is that this
                                     ruling dealt only with the question of interest deductions; it
                                     appeared under the heading in the Cumulative Bulletin
                                     ‘‘SECTION 23(b).— DEDUCTIONS FROM GROSS INCOME:
                                     INTEREST.’’
                                        Rev. Rul. 58–239, 1958–1 C.B. 94, likewise dealt with the
                                     issue of interest deductions. That ruling reaffirmed I.T. 3852,
                                     supra. But it went on to explain that an undesignated partial
                                     payment would be applied first to tax, then penalties, and
                                     then interest. And where there are liabilities for multiple
                                     years, the payment would be applied to the earliest year
                                     first. What does this have to do with the designation of a
                                     payment? It was this ruling that began the IRS’ practice of
                                     allowing taxpayers to designate that their payments be
                                     applied to specific liabilities. The rule was quite specific:
                                            Where additional taxes, penalty and interest are assessed for one or
                                           more years against a taxpayer whose income is reported on the cash




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                                     (173)                            DIXON v. COMMISSIONER                                        211


                                           method of accounting, a partial payment thereon tendered to and
                                           accepted by the District Director of Internal Revenue with specific direc-
                                           tions by the taxpayer as to its application, will be applied, as a general
                                           rule, in accordance with such directions. The amount of interest satisfied
                                           by such a partial payment will be deductible in computing taxable
                                           income for the year in which the payment is made. [Rev. Rul. 58–239,
                                           1958–1 C.B. at 95.]

                                     This ruling addressed only the issue of the deductibility of
                                     interest by a taxpayer making a partial payment. It had
                                     absolutely nothing to do with the ability to designate a pay-
                                     ment toward a third party’s liability. Again, if the plain lan-
                                     guage of the ruling was not clear enough, the ruling appears
                                     in the Cumulative Bulletin under a section headed ‘‘SEC-
                                     TION 163.— INTEREST’’ with a subheading ‘‘(Also Section
                                     6601: 301.6601.1)’’, which is a reference to the Code section
                                     for underpayment interest. See Rev. Rul. 58–239, 1958–1
                                     C.B. at 93–94.
                                       Next came Rev. Rul. 73–305, 1973–2 C.B. 43, which super-
                                     seded Rev. Rul. 58–239, supra. The issue in that ruling
                                           relates to the application, by the Internal Revenue Service, of a partial
                                           payment of tax, penalty, and interest, assessed for one or more taxable
                                           periods, made by a taxpayer regularly employing the cash receipts and
                                           disbursements method of accounting. The specific question is whether
                                           the interest, if any, satisfied by such payment, is deductible for Federal
                                           income tax purposes in the year in which it is paid. [Rev. Rul. 73–305,
                                           1973–2 C.B. at 43.]

                                     Again, the issue was interest deductions. And again, if the
                                     issue was not clear enough from the ruling itself, it was fur-
                                     ther emphasized by the major heading in the Cumulative
                                     Bulletin under which the ruling was printed: ‘‘Section 163.—
                                     Interest’’. Rev. Rul. 73–305, 1973–2 C.B. at 42. The sub-
                                     heading again narrowed it to ‘‘26 C.F.R. 1.163–1: Interest
                                     deduction in general.’’ Id., 1973–2 C.B. at 43. As the Court
                                     notes, this ruling explicitly stated that it did not apply to
                                     withheld employment taxes.
                                       That limitation was lifted with Rev. Rul. 79–284, 1979–2
                                     C.B. 83. At the risk of being redundant, this ruling also falls
                                     under the heading ‘‘Section 163.—Interest’’ and the sub-
                                     heading ‘‘26 C.F.R. 1.163–1: Interest deduction in general.’’
                                       Which brings us to Rev. Proc. 2002–26, 2002–1 C.B. 746.
                                     This is the last in the line of administrative guidance
                                     addressing this issue, and it superseded those that came




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                                     before it. Its text continues to address the issue of the
                                     ordering of payments. The revenue procedure concludes:
                                           If any part of a payment is applied to interest under the rules set forth
                                           in this revenue procedure, the amount applied to interest is treated for
                                           purposes of § 163 of the Code as interest paid in the year in which the
                                           payment is made. Under § 163, interest paid or accrued in a taxable
                                           year may be deducted in calculating taxable income for the year except
                                           to the extent such interest is personal interest as defined in § 163(h) and
                                           § 1.163–9T(b)(2) of the Income Tax Regulations or is otherwise dis-
                                           allowed under applicable provisions of the Internal Revenue Code and
                                           Income Tax Regulations. [Id. sec. 3.04, 2002–1 C.B. at 746.]

                                        What is clear throughout the history of these revenue
                                     rulings and this final revenue procedure is that the IRS was
                                     addressing one issue, and one issue only: the deductibility of
                                     a partial payment of tax, penalties, and interest. There is no
                                     statement in any of these revenue procedures that the IRS
                                     agrees to accept the designation of a payment against both
                                     the taxpayer’s liability and that of a third party.
                                        Rauenhorst rightly holds that the Commissioner should be
                                     held to positions taken in published guidance. But in that
                                     case, ‘‘Respondent’s position * * * directly contradicted his
                                     long-standing and clearly articulated administrative posi-
                                     tion’’. Rauenhorst v. Commissioner, 119 T.C. at 171 (citing
                                     Phillips v. Commissioner, 88 T.C. 529, 534 (1987), aff ’d, 851
                                     F.2d 1492 (D.C. Cir. 1988)). Here, the majority forges a posi-
                                     tion that is neither longstanding nor clearly articulated by
                                     the Commissioner in any published guidance and then holds
                                     the Commissioner to that position. Rauenhorst does not go
                                     that far.
                                     Judicial Authority
                                        The majority’s citation of judicial sources of authority
                                     starts with an unremarkable statement: ‘‘The principle that
                                     the IRS must honor a taxpayer’s designation of a voluntary
                                     tax payment has been recognized repeatedly by the courts.’’
                                     See op. Ct. p. 186. And the Court then acknowledges: ‘‘We
                                     have discovered no case addressing the specific fact pattern
                                     involved here, where a taxpayer designates a voluntary pay-
                                     ment toward the income tax liability of a named third party.’’
                                     Id. Unfortunately, the majority then cites a litany of cases as
                                     if they supported the Court’s position. They do not.




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                                     (173)                            DIXON v. COMMISSIONER                                        213


                                        The Court begins with United States v. Energy Res. Co.,
                                     495 U.S. 545 (1990). In that case, the Supreme Court held
                                     that a bankruptcy court has the authority to designate to
                                     which among several liabilities a court-ordered payment
                                     must be applied. Citing the same administrative guidance
                                     discussed above, the Supreme Court merely observed what
                                     IRS policy permits—the designation of a voluntary payment.
                                     Id. at 548. The Supreme Court’s holding is unrelated to that
                                     point; it held that the Bankruptcy Code gives bankruptcy
                                     courts broad authority to modify creditor-debtor relation-
                                     ships, including ordering the IRS to apply payments in a spe-
                                     cific manner among the liabilities of the debtor. Id. at 549.
                                     This is not even analogous to the facts before us.
                                        The Fifth Circuit authority cited by the majority is no
                                     more apt. In Wood v. United States, 808 F.2d 411 (5th Cir.
                                     1987), the plaintiff argued that the IRS should have applied
                                     certain payments to withholding taxes and not to the
                                     employer’s share of the Federal Insurance Contributions Act
                                     (FICA) taxes. The plaintiff lost on the facts; the court con-
                                     cluded that the payments had not been unambiguously des-
                                     ignated to withholding taxes. But throughout the opinion, the
                                     Court of Appeals’ focus is the application of a payment
                                     amongst the taxpayer’s liabilities, not the liabilities of a third
                                     party. The paragraph discussing the application of voluntary
                                     payments makes this clear.
                                           It is well established that in the absence of a direction by the taxpayer
                                           the IRS can apply a payment to any outstanding tax liability of the tax-
                                           payer. The IRS has announced its intention to follow this practice in
                                           applying employment tax deposits. This circuit has approved the applica-
                                           tion of corporate funds to FICA employers’ tax liabilities before applying
                                           the funds to withholding taxes in the absence of a direction by the tax-
                                           payer. But if a taxpayer directs that a payment be applied in a certain
                                           manner, the IRS must abide by the taxpayer’s direction. [Id. at 416;
                                           emphasis added; internal citations omitted.]

                                     Only by pulling this last quoted sentence out of context is the
                                     majority able to cite Wood for support.
                                       In fact, all of the cases cited by the majority stand for the
                                     same unremarkable proposition: when a taxpayer makes a
                                     partial payment, the taxpayer may designate that the pay-
                                     ment be applied to specific liabilities amongst multiple out-
                                     standing liabilities of the taxpayer. That is not the case
                                     before us.




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                                     214                 141 UNITED STATES TAX COURT REPORTS                                    (173)


                                     Conclusion
                                       Here, Tryco and the Dixons want to designate that a pay-
                                     ment be applied simultaneously to two separate liabilities.
                                     Judge Holmes’ dissent correctly observes that such a des-
                                     ignation is not supported by the statutory scheme. It is also
                                     not supported by either administrative or judicial authority.
                                     By using Rauenhorst to hold the Commissioner to a position
                                     he has never adopted, the Court goes too far. And the
                                     caselaw provides no support for the double-dipping that the
                                     opinion of the Court allows. As a result, I must dissent.
                                       HALPERN and HOLMES, JJ., agree with this dissent.

                                                                               f




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