Opinion
Case No. 7-03-03177-7
April 2, 2004
DECISION AND ORDER
Facts:
Debtor Salvatore D. Barranco, M.D. underreported his taxable income to the Internal Revenue Services (the "Service") from 1982 to 1992 and his tax liability is approximately $6,000,000. According to the Service's uncontested schedules, approximately $1,700,000 of the $6,000,000 liability is for income taxes the Service assessed on Debtor's unreported income, and the remaining liability is accrued penalties and interest on the assessed taxes.
Debtor filed a voluntary chapter 7 petition on May 20, 2003, and this Court closed his case by order of August 19, 2003. Pursuant to Debtor's motion, this Court reopened his case on September 10, 2003. On November 10, 2003, Debtor filed a Motion For Determination Of Tax Liability Pursuant To 11 U.S.C. § 505 (the "Section 505 Motion"). Debtor's Section 505 Motion seeks to have this Court allocate previous tax payments in excess of $1,900,000 he made to the Service in the manner most favorable to him, rather than the manner in which the Service allocated the payments. Specifically, Debtor asks this Court to order the Service to allocate the previous payments first to the assessed income tax deficiencies for all years, and secondly to allocate the remaining amount of the payments to assessed interest and penalties. At the time Debtor submitted the payment, he did not specify how he wished the Service to make the allocation, and consequently, the Service allocated the previous tax payments to "tax, penalty, and interests, in that order, for the earliest period, then . . . for the next succeeding period." Internal Revenue Service's Opposition To Debtor's Motion For A Determination Of Tax Liability Under § 505; citing Rev. Rul. 79-284 (1979) ("If no designation is made, the payments will be allocated to tax, penalty, and interest in a manner serving the best interest of the Service.").
Discussion:
Having considered the authorities submitted and the arguments of the Debtor and the Service, the Court will deny Debtor's Section 505 Motion. Rev. Proc. 2002-26 (2002) supersedes Rev. Rul. 79-284 (1979). Rev. Proc. 2002-26 § 3.01 states, "[A]t 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." Section 3.02 further states,
If additional taxes, penalty, and interest for one or more taxable periods have been assessed against a taxpayer . . . at the time the taxpayer voluntarily tenders a partial payment that is accepted by the Service and the taxpayer does not provide specific written directions as to the application of payment, the Service will apply the payment to periods in the order of priority the Service determines will serve its best interest. The payment will be applied to . . . successive periods in descending order of priority until the payment is absorbed. If the amount applied to a period is less than the liability for the period, the amount will be applied to tax, penalty, and interest, in that order, until the amount is absorbed.
Rev. Proc. 2002-26 clearly supports the Service's allocation of Debtor's voluntary partial payment absent Debtor's instructions at the time of the payment to allocate the amount in a contrary manner.
While the Service's Opposition to Debtor's Motion For A Determination of Tax Liability Under § 505 relies on Rev. Rul. 79-284, and not the subsequent Rev. Proc. 2002-26, which supersedes the former, the reliance on either the Revenue Ruling or the Revenue Procedure would not mandate contrary rulings in the instant case. Rev. Rul. 79-284 simply provides that the Service will allocate between tax, penalty, and interest "in a manner serving the best interest of the Service" to voluntary payments the allocation of which the taxpayer has not designated. Rev. Proc. 2002-26, cited above, merely provides greater instruction as to how the Service will allocate undesignated voluntary payments between tax, penalty, and interest of several periods. The Service's allocation of Debtor's voluntary and undesignated payments to tax, penalty, and interest, in that order, for the earliest period, then for the next succeeding period, complies with Rev. Proc. 2002-26, and complies with the superseded Rev. Rul. 79-284 which the Service relies upon in its motion.
Numerous decisions support the Service's position. The Court in United States v. Pepperman recognizes that "taxpayers may designate the application of tax payments that are voluntarily\ made. . . ." 976 F.2d 123, 127 (3rd Cir. 1992); citing Rev. Rul. 79-284, Rev. Rul. 73-304 (both superseded by Rev. Proc. 2002-26 which reaches a similar conclusion); In re Ribs-R-Us, 828 F.2d 199, 200-01 (3rd Cir. 1987). If the taxpayer does not designate the application of a voluntary payment, the Service may apply the voluntary payment to the taxpayer's liabilities in whatever manner it chooses. Sotir v. United States, 978 F.2d 29, 30 (1st Cir. 1992), cert. denied 507 U.S. 961 (1993); citing Davis v. United States, 961 F.2d 867, 878 (9th Cir. 1992); Wood v. United States, 808 F.2d 411, 416 (5th Cir. 1987); Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983); Rev. Rul. 79-284; see also Kinnie v. United States, 994 F.2d 279, 287 (6th Cir. 1993), (stating that the taxpayer must provide the Service with written instruction for the application of voluntary payments before the Service will be bound by the taxpayer's instructions); citing Rev. Rul. 73-305; modified by Rev. Rul. 79-284; superseded by Rev. Proc. 2002-26. In Rev. Proc. 2002-26 the Service has announced its intent with respect to all taxpayers to allocate voluntary payments first to tax, then penalty, then interest in that order for each successive year, starting with the earliest year of liability, unless the taxpayer designates otherwise.
Conclusion:
Debtor's Motion For Determination Of Tax Liability Pursuant To 11 U.S.C. § 505 is contrary to the procedures set forth in both Rev. Proc. 2002-26 and the superseded Rev. Rul. 79-284 for the application of undesignated and voluntary partial payments on account of assessed tax, penalty, and interest. Numerous Circuits have upheld the Service's authority to allocate undesignated and voluntary payments in the manner of its choosing, and clearly, the Service may allocate Debtor's partial payment as it did in this instant case. Consequently, Debtor's motion fails, and this Court must uphold the Service's allocation of his $1,900,000 in tax payments. Accordingly, it is
ORDERED.
Debtor's Motion For Determination Of Tax Liability Pursuant To 11 U.S.C. § 505 is dismissed.