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Trust Fund Recovery Penalty Case Raising Issues Regarding Deposit and Last Known Address

Posted on Apr. 19, 2023

In Ahmed v. Commissioner, No. 22-10191 (3rd Cir. 2023) the taxpayer appeals from a decision of the Tax Court that an attempted deposit of the amount of his liability was properly categorized as a payment ended his Collection Due Process (CDP) case due to mootness. On appeal, Mr. Ahmed gets another chance to prove the money he paid to the IRS should not moot his CDP case.

Along the way to its decision, the Third Circuit provide good background on the Trust Fund Recovery Penalty (TFRP), proper addressing of notices, deposit vs. payment and mootness.  Because it has so many procedural issues packed into one case, it provides a good case for a multifaceted procedural discussion.

Mr. Ahmed ran a business which failed to pay over the withheld income and social security taxes from its employees. The IRS determined that he was a responsible officer who willfully failed to pay over the money the corporation held in trust for the IRS. It sent Mr. Ahmed a notice setting out his liability and giving him the right to discuss the proposed assessment with Appeals. He says that he never received the notice. The court states that the envelope shows the street address as 5B but his CDP request form indicated that he lived at 58. The court noted other possible problems with the address.

Because he did not receive the notice giving him the right to go to Appeals as part of the TFRP determination process, his case went into the collection stream and eventually led to a CDP notice of federal tax lien filing (NFTL). When he received his CDP notice, he timely filed. Appeals sustained the filing of the NFTL resulting in a determination letter from which he filed a Tax Court petition. The Tax Court partially granted summary judgement to the IRS but remanded the case to Appeals for verification of the mailing of the TFRP notice to his last known address.

While Appeals began its reconsideration of the case, Mr. Ahmed remitted $625,000 to the IRS with the statement “Deposit in the Nature of a Cash Bond Under IRC 6603.” The accompanying letter also instructed the IRS to treat the remittance as a deposit. The IRS, however, determined he was ineligible for treatment of the payment as a deposit because a liability under 6672 does not fall within the sections covered by 6603 deposit procedures. So, the IRS treated the remittance as a payment and the payment mooted the CDP proceeding by satisfying his liability. It moved for dismissal of the CDP case as moot, the Tax Court dismissed the case for lack of jurisdiction and Mr. Ahmed appealed.

The Third Circuit states that the threshold question it must answer is whether the payment qualifies as a deposit. It then provides historical background on this issue pointing out that common law initially served as the basis for making this determination. The Supreme Court recognized tax deposits in Rosenman v. United States, 323 U.S. 658, 662-662 (1945). At the time of the Rosenman decision the IRC contained no provision regarding deposits versus payment. Following the Rosenman decision courts began using a facts and circumstances test which the court illustrates through a string citation of six cases decided between 1965 and 2013. Congress entered this area of the law in 2004 when it enacted 6603.

The court notes, as the IRS had determined, that 6603 does not apply to money remitted to the IRS with respect to a 6672 liability. Although 6603 does not apply to allow a deposit in this situation, 6672 has its own deposit provision in 6672(c) which allows a taxpayer to post a bond. Here, Mr. Ahmed was arguably prevented from using the specific provision due to the lack of receipt of the 6672 notice because the IRS mailed it to someplace other than his last known address. So, the issue turns back to whether the IRS sent a valid notice. Because the issue of the validity of the notice required by 6672(b) remains unresolved, the court notes that his remittance may have occurred prior to an appropriate assessment in which case the facts and circumstances test could render the remittance a deposit rather than a payment.

The court then notes that if the 6672 notice was sent to his last known address, then he should have used the bond provision of 6672(c) rather than seeking to make a deposit under 6603. If a valid notice was sent, the Tax Court’s decision was correct, and the payment mooted the CDP case with one possible exception. The court finds that he may be entitled to request interest abatement under 6404(h). The court explains the ability of the Tax Court to view his CDP request as also encompassing an interest abatement request and leaves it to the Tax Court to determine whether the request could be construed to cover interest abatement once the remittance issue is resolved.

The court also drops a footnote swatting away Mr. Ahmed’s effort to argue for a refund citing to McLane v. Commissioner, 24 F.4th 316 (2022) and Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006).  In the same footnote it also notes the CDP case involving the NFTL is moot because the IRS released the liens after treating the remittance as a payment.

So, Mr. Ahmed gets a trip back to Appeals where he will argue that the 6672 notice was improperly addressed. If he fails to convince Appeals, he can make the argument to the Tax Court and if he fails there head back to the Third Circuit. If he wins on the address issue, the remittance will be changed to a deposit, the IRS will send a new notice if it is still within the assessment period or he will have a complete victory if the statute has run. In the end the deposit issue is really a sidelight to the issue of proper notice. Based on the facts presented in the opinion the notice issue will be close if it is based on a typo of “5B” versus “58.”

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