                   T.C. Memo. 1999-221



                UNITED STATES TAX COURT



       ESTATE OF STELLA ADLER WILSON, DECEASED,
      ELEANOR SHELDON, EXECUTRIX, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 47120-86.



     D made a voluntary payment on Dec. 31, 1986, part of
which satisfied the entire income tax deficiency as
reflected in the deficiency notice for her taxable year
1980. More than 5 years later, the IRS reallocated a
portion of the deficiency payment to other taxable years as
to which there were outstanding assessments. The balance of
D's Dec. 31, 1986, payment equaled accrued interest on the
1980 income tax deficiency. The IRS treated this amount on
its records as a "designated interest payment". On Mar. 9,
1998, P, D's executor, made a voluntary payment in the
amount of $30,000 which was designated to the taxable year
1980 and the 2 succeeding years. P contends that there is
an overpayment of Federal income tax for the taxable year
1980 in the amount of $30,000 due to unauthorized
reallocations of D's voluntary "designated" payment of tax
in 1986.
                                 - 2 -


             Held: R may not reallocate D's 1980 tax payment to
        satisfy outstanding assessments for years other than 1980.


        Howard Philip Newman, for petitioner.

     Jeffrey Johnson, for respondent.



                          MEMORANDUM OPINION

     NIMS, Judge:     Respondent determined deficiencies and

additions to tax with respect to the Federal income tax of Stella

Adler Wilson (decedent) for the taxable years 1980, 1981, and

1982.     Decedent, the original petitioner, died in 1992, and by

Order dated October 21, 1997, her estate was substituted as

petitioner.

     This case initially involved a number of partnership-related

issues.     However, these have all been resolved by stipulation.

     When petitioner reviewed respondent's proposed computation

of tax due, a question emerged over the application of a payment

to a specific tax liability.     By Order of the Court, petitioner

was permitted to amend her pleadings to claim an overpayment for

the taxable year 1980.    There is no dispute that the claim was

timely.

     Petitioner contends that there is an overpayment of Federal

income taxes for the taxable year 1980 in the amount of $30,000

due to the IRS's unauthorized reallocation of a voluntary

"designated" payment of tax, from decedent's taxable year 1980
                                 - 3 -


account to other taxable years in which there were outstanding

and unpaid assessments.   Respondent contends that there is an

underpayment of income tax for the taxable year 1980 in the

amount of $2,597 and that the reallocation of decedent's payment

was proper.

     The sole issues for decision are whether decedent's

voluntary payment was a "designated" payment of her 1980 income

tax, and whether respondent's subsequent reallocation was proper.

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue.   All Rule references are to the Tax Court Rules of

Practice and Procedure.   All dollar amounts are rounded to the

nearest dollar.

     This case was submitted fully stipulated.      The stipulation

of facts and the attached exhibits are incorporated herein by

this reference.   At the time the petition was filed, decedent

resided in New York, New York.

                            Background

     Decedent timely filed Federal income tax returns for the

taxable years 1980, 1981, and 1982.      Respondent timely mailed

statutory notices of deficiency on October 14, 1986, determining

income tax deficiencies and additions to tax for decedent's 1980,

1981, and 1982 taxable years, as follows:
                                     - 4 -

                                            Additions to Tax
Year        Deficiency   Sec. 6659   Sec. 6653(a)  Sec. 6653(a)(1)   Sec. 6653(a)(2)
1980         $89,410      $26,768       $4,470          ---               ---
1981          36,601       10,980         ---          $1,830        50% of the
                                                                     interest due on
                                                                     $36,601

1982          4,602        1,381                          230        50% of the
                                                                     interest due on
                                                                     $4,602



       Respondent also determined that, pursuant to section 6621,

interest on substantial underpayments attributable to tax-

motivated transactions for the taxable years 1980, 1981, and 1982

would be 120 percent of the adjusted rate.

       The petition was filed on December 15, 1986.

       On December 31, 1986, decedent made a single voluntary

payment of $185,327.       As of the same date, respondent credited

$89,410 to decedent's account for the taxable year 1980 as a

"Subsequent Payment".        This amount equaled the 1980 income tax

deficiency determined by respondent.            Under respondent's

procedures, a "Subsequent Payment" designation is used when a

taxpayer does not make a designation with respect to whether a

remittance constitutes a payment of tax or a deposit in the

nature of a cash bond.

       Respondent credited the remaining $95,917 to decedent's

account for the taxable year 1980 as a "Designated Interest

Payment".

       On July 13, 1992, respondent transferred the following

amounts out of decedent's account for the taxable year 1980 and
                                - 5 -


applied those amounts to satisfy liabilities for other taxable

years in which unpaid assessments were pending, as follows:

              Amount       Amount of Original   Date of Original
Year        Transferred        Assessment          Assessment
1978           $1,800            $7,408             05/14/79
1984              236             6,662             12/02/85
1989           30,561            23,130             02/03/92


       The transfer in the amount of $30,561 from decedent's

account for the taxable year 1980 resulted in an overpayment for

the 1989 taxable year.    Respondent issued a refund for the 1989

taxable year on April 19, 1993, in the amount of $12,376, of

which $1,163 was interest.    The refund appears to have resulted

from abatement of interest and penalties made after the $30,561

reallocation from 1980 in 1992, plus certain other overpayment

credits transferred.

       On March 9, 1998, petitioner made a payment in the amount of

$30,000.    Petitioner designated this payment to be applied toward

the deficiency for the taxable year 1980.    If any excess amount

remained, that amount was to be applied toward the deficiencies

for the 1981 and 1982 taxable years.    The record contains no

explanation as to why petitioner made this payment, and in this

particular amount.    Respondent credited $30,000 to petitioner's

account for the taxable year 1998.

       Howard P. Newman (Newman), who represents petitioner in this

case, has been an attorney since January 1979.    He worked for
                               - 6 -


District Counsel, IRS, for 4-1/2 years and then left to enter

private practice.   He earned an LL.M. (tax) degree from New York

University in 1983.

     In 1986, Newman was a practitioner working solely on Federal

income tax and related matters.   In that year he wrote letters to

all of his clients who had pending tax matters, including

decedent, advising them that, due to changes in the law, if they

wished to deduct interest on tax liabilities, either "determined"

or contested, they had until December 31, 1986, to pay both the

tax and the interest thereon in full.    Decedent apparently was

motivated by this letter to make her $185,327 payment on December

31, 1986, although in a recently filed status report Newman

states that he never heard from decedent in response to his

letter.

                            Discussion

     Petitioner argues that decedent made a voluntary payment of

tax on December 31, 1986, in the amount of $89,410, the exact

amount of the deficiency for 1980, which, petitioner claims, was

"designated to the taxable year 1980".    She urges that the

$89,410 was part of a total remittance of $185,327, the balance

of which, it is agreed, the IRS treated as a designated payment

of interest.   Petitioner further argues that (1) since decedent's

voluntary payment was so designated, respondent was bound to

honor her designation; (2) respondent's 1992 reallocations of
                               - 7 -


$1,800, $236, and $30,561 to the taxable years 1978, 1984, and

1989, respectively, were improper; and (3) petitioner is

therefore entitled to add the reallocations back to the taxable

year 1980.   Thus, petitioner contends that, since she made a

$30,000 voluntary tax payment on March 9, 1998, which was

"designated to the taxable year 1980" and the 2 subsequent years,

there was no deficiency for the 1980 taxable year, thereby

resulting in a $30,000 overpayment.

     Respondent argues that the IRS's reallocations were proper

because decedent did not designate her voluntary payment in a

manner that supersedes the IRS's discretionary authority to

reallocate voluntary taxpayer remittances.   According to

respondent, the IRS has discretion to reallocate voluntary

taxpayer remittances so long as the remittance is not designated

a deposit in the nature of a cash bond (deposit).   In the absence

of evidence of such a designation, the IRS deems the remittance a

payment of tax and may therefore reallocate the payment of tax to

any taxable years in which assessments are outstanding.     If

respondent's reallocations are proper, then respondent asserts

that petitioner has an underpayment of $2,597 for the taxable

year 1980, determined as follows (additions to tax under sections

6653(a) and 6659 were conceded by respondent):
                                - 8 -


     Tax year ending:   12-31-80

     _______________________________________________________
                                        Date        Amount
     _______________________________________________________
     REVISED LIABILITY                 xxxxxxxx   $95,203.00
     Assessment - tax per return       xxxxxxxx     5,793.00
     Additional assessment

     Abatement
     _______________________________________________________
     TOTAL ASSESSMENT                  xxxxxxxx     5,793.00
     INCREASE/(DECREASE) In ASSESSMENT xxxxxxxx    89,410.00
     _______________________________________________________

     Revised liability                      xxxxxxxx    95,203.00
     Payments
     Credit applied from 1979 year          04-15-80     3,609.10
     Estimated tax payment                  09-22-80       922.00
     Estimated tax payment                  01-21-81     2,000.00
     Subsequent payment                     12-31-86    89,410.00
     Subsequent payment                     03-09-98    30,000.00

     Less refunds or credits:
     Overpayment credit elect               04-15-81      (738.00)

        Transferred to 1981
                                        1
     Credit transferred to 1989           12-31-86     (30,561.18)
                                        1
     Credit transferred to 1984           12-31-86        (236.14)
                                        1
     Credit transferred to 1978           12-31-86      (1,800.01)

     _______________________________________________________

     TOTAL PAYMENTS                       xxxxxxxx   92,605.77
     BALANCE DUE/(OVERPAYMENT)            xxxxxxxx    2,597.23
     _______________________________________________________
           1
             These credits were actually transferred on July 13,
     1992.

     Thus, petitioner's entitlement to an overpayment for the

taxable year 1980 hinges upon whether the IRS had the authority

to reallocate petitioner's voluntary tax payment of $89,410,

which petitioner claims was designated for the taxable year 1980.
                                - 9 -


       Respondent finds himself on the horns of a dilemma in this

case.    On the one hand, he is constrained by Rosenman v. United

States, 323 U.S. 658 (1945), where the Supreme Court held that a

claim for refund for a remittance made as a "deposit" rather than

as a "payment" was not time barred by the predecessor to section

6511.    See Ertman v. United States, 165 F.3d 204, 206 (2d Cir.

1999).    Thus, if decedent's 1986 remittance was a deposit,

petitioner would, in general, be entitled to recover it without

interest, at any time before the IRS is entitled to assess the

tax.    See Rev. Proc. 84-58, sec. 4.01, 1984-2 C.B. 501, 502.

       On brief, respondent expends substantial effort to establish

that decedent's 1986 remittance was not a deposit.    (For

simplicity, when referring to decedent's "remittance" we refer to

the $89,410 segment of her $185,327 remittance, except where

noted.)    But respondent need not have made this effort, because

petitioner readily agrees that decedent's remittance was not a

deposit.

       The alternative with which respondent must therefore deal is

how to categorize the remittance, and respondent appears to agree

that the remittance constitutes a payment of tax.    As a matter of

fact, in his reply brief respondent cites Ertman v. United

States, supra, for the proposition that where a payment is

explicitly defined by the Code as a payment of tax, that payment

is a payment of tax rather than a deposit.    (As respondent notes
                                - 10 -


in his reply brief, Ertman was decided by the U.S. Court of

Appeals for the Second Circuit, the court to which this case

would normally be appealed, after opening briefs were filed in

this case.)   In Ertman, the Court of Appeals held that

remittances submitted with Forms 4868, Application for Automatic

Extension of Time to File U.S. Individual Income Tax Return,

constituted payments, not deposits, and therefore the taxpayers'

entitlement to refunds was limited by section 6511.    See id.

     Respondent goes on to point out that his own revenue

procedure, Rev. Proc. 84-58, supra section 4.03, 1984-2 C.B. at

502-503, explicitly says that any payment which is "specifically

designated as a deposit in the nature of a cash bond will be

treated as a payment of tax if it is made in response to a

proposed liability * * * and remittance in full of the proposed

liability is made."   (Emphasis added.)    Respondent nevertheless

argues that because decedent's remittance was "undesignated", the

IRS was authorized to reallocate it.

     Where a taxpayer makes an involuntary payment, the IRS may

allocate or reallocate the payment as it sees fit, regardless of

taxpayer designation, if any.    As we stated in Amos v.

Commissioner, 47 T.C. 65, 69 (1966):     "An involuntary payment of

Federal taxes means a payment received by agents of the United

States as a result of distraint or levy or from a legal
                              - 11 -


proceeding in which the Government is seeking to collect its

delinquent taxes or file a claim therefor."   Respondent does not

argue that decedent made an involuntary payment in this case.

     In the same vein, if a taxpayer makes a voluntary payment

without directing application of funds, the IRS may make whatever

allocation it chooses.   See Estate of Baumgardner v.

Commissioner, 85 T.C. 445, 459 (1985).   However, where a taxpayer

makes voluntary payments to the IRS, he does have a right to

direct the application of payments to whatever type of liability

he chooses.   See Muntwyler v. United States, 703 F.2d 1030, 1032

(7th Cir. 1983); Estate of Baumgardner v. Commissioner, supra at

459-460.

     Having postulated the foregoing principles, we must now

decide whether decedent did, in fact, designate the December 31,

1986, remittance as a payment of her 1980 income tax--i.e., the

type of liability decedent chose--and if so, whether respondent

was free on July 13, 1992, to reallocate some of the 1986

payment, i.e., $32,597 thereof, to assessments for other years,

one of which--1989--was 3 years in the future at the time

decedent made her 1986 payment.

     We are satisfied that decedent designated her entire

voluntary payment as a payment of income tax and interest for

1980.   A transcript of decedent's IRS account for 1980 reflects,

under date of 12/31/86, as a "Subsequent Payment" the amount of
                              - 12 -


$89,410--the exact amount of the 1980 income tax deficiency

determined in the deficiency notice.    Also, under the same date,

the same transcript reflects as a "Designated Interest Payment"

the amount of $95,916.67.   Decedent's total payment, which

appears to have been motivated by Newman's letter to his tax

clients, was in conformity with the provisions of Rev. Proc. 84-

58, supra, which deals extensively with procedures for taxpayers

to make remittances to stop the running of interest on

deficiencies.   Rev. Proc. 84-58, supra section 5.03, 1984-2 C.B.

at 503, states that "A taxpayer wishing to stop the running of

all interest must make a payment or deposit sufficient to cover

all accrued interest as of the date of remittance as well as the

entire amount of the underlying tax."   This decedent did.

     The record is silent as to why the IRS treated the tax

payment as a "subsequent payment" while at the same time treating

the interest payment as a "designated" interest payment.

Whatever may have been intended by the subsequent payment label

in the IRS records, this is merely an entry characterized by the

IRS, and the records to this extent are not dispositive of the

issue.   See Estate of Baumgardner v. Commissioner, supra at 459.

     Nevertheless, we are satisfied that decedent effectively

designated her total remittance as a payment of 1980 tax and the

interest thereon, notwithstanding the fact that neither party has

located any communication from decedent to the IRS making that
                              - 13 -


designation.   It has to follow, moreover, that since the IRS

found the $95,916.67 to be a designated interest payment, the

$89,410 must have likewise been a designated tax payment.   To

argue otherwise, as respondent does, is to fly in the face of his

own revenue procedure.

     Section 6213(b)(4) provides an exception to the general rule

of section 6213(a), that no assessment may be made, among other

things, while a case is pending in the Tax Court.   Under section

6213(b)(4), any amount paid as a tax or in respect of a tax may

be assessed upon the receipt of such payment notwithstanding the

provisions of section 6213(a).

     Rev. Proc. 84-58, supra section 4.01, 1984-2 C.B. at 502,

provides that "a remittance made after the mailing of a notice of

deficiency in complete or partial satisfaction of the deficiency

will, absent any instructions from the taxpayer, be considered a

payment of tax and will be posted to the taxpayer's account as

such as soon as possible."   While not expressly stated, the

manifest implication of this language is that a specific tax as

to type and year, i.e., the tax determined in the deficiency

notice, is what is paid, and not any tax that the IRS may choose.

We believe a remittance in full payment of the tax in response to

a deficiency notice fulfills this IRS administrative requirement,

and that decedent's 1986 remittance should have been treated as a

payment of tax for 1980.   For the foregoing reasons, we hold that
                              - 14 -


decedent's 1986 remittance was a voluntary payment designated as

a payment in full of her 1980 tax, reflected in the deficiency

notice.   Consequently, respondent was without authority to

reallocate the 1980 tax payment--over 5 years later--to

assessments for different years.

     Since part of decedent's 1986 payment was reallocated from

1980 to 3 other years as to which there were outstanding

assessments as of July 13, 1992, when the reallocation was made,

($12,376, was refunded to petitioner on April 19, 1993),

respondent argues that petitioner is seeking an unwarranted

windfall to which she is not entitled.   Petitioner correctly

points out, however, that the issue before the Court is whether

decedent's payment was designated to a specific year--1980.

Since we have found that decedent so designated her payment, the

consequences of the IRS's reallocation of the payment to other

years not before the Court are irrelevant, and in any event not

within our limited jurisdiction.   See sec. 7442; Belloff v.

Commissioner, 996 F.2d 607, 611 (2d Cir. 1993), affg. T.C. Memo.

1991-350.

     Respondent has not, in his pleadings or on brief, raised an

issue as to the applicability of section 6402(a), which provides

that the Secretary, within the applicable period of limitations,

may credit an overpayment, including any interest allowed

thereon, against any liability in respect of an internal revenue
                                - 15 -


tax on the part of the person who made the overpayment.   That

issue is not, therefore, before the Court, and we express no

opinion with respect thereto.

     Petitioner designated the $30,000 payment which she made on

March 9, 1998, to be applied toward the deficiency for 1980, with

any excess amount to be applied toward the deficiency for the

taxable year 1981, and if any excess amount remained, to be

applied toward the deficiency for 1982.   To the extent there is

an overpayment, the overpayment will be determined pursuant to

section 6512 by a decision under Rule 155.

     To properly account for the $30,000 payment, the settled

issues, and what we have held in this case, a recomputation will

be necessary, and

                                     Decision will be entered

                                under Rule 155.
