141 T.C. 173">*174 LAUBER, Judge: This is a collection due process (CDP) appeal pursuant to section 6330(d)(1).¹ Petitioners challenge 141 T.C. 173">*175 a decision by the Internal Revenue Service (IRS or respondent) to levy on their assets for the purpose of collecting 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 payments 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, 2013 U.S. Tax Ct. LEXIS 23">*27 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 credibility determinations, Judge Holmes concludes that payments 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, T.C. Memo 2013-207, [slip op.] at *17. In this Opinion, we address the consequences for petitioners of the $91,223 balance of Tryco's payments.

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 separate checks to the IRS, in the aggregate amount of $571,917, with respect to petitioners' income tax liabilities 2013 U.S. Tax Ct. LEXIS 23">*28 for 1992 through 1995. These checks represented delinquent payments 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.

141 T.C. 173">*176 Each check Tryco issued was accompanied by a substantially 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 "Designated 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 remittance, or 2013 U.S. Tax Ct. LEXIS 23">*29 $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.^{32013 U.S. Tax Ct. LEXIS 23">*30} 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 restitution for the losses sustained by the Internal Revenue Service as a result of the offenses of conviction." See generallyU.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 magnitude of the "tax loss" would be taken into account for sentencing 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 additional funds to Tryco and, on June 1, 2000, Tryco remitted 141 T.C. 173">*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 represents 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 relatively small fine.

The IRS accepted 2013 U.S. Tax Ct. LEXIS 23">*31 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 liabilities, 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, concluding that Tryco's 1999 and 2000 payments "were not withheld at the source and * * * cannot be designated to the withholding of a specific employee." Petitioners timely petitioned this Court under section 6330(d)(1) for review of the Appeals officer's determination. They resided in Texas when they filed the petition.

Petitioners 2013 U.S. Tax Ct. LEXIS 23">*32 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 141 T.C. 173">*178 $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.

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. 2013 U.S. Tax Ct. LEXIS 23">*33 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 regulations 141 T.C. 173">*179 allow 2013 U.S. Tax Ct. LEXIS 23">*34 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 2013 U.S. Tax Ct. LEXIS 23">*35 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 "constitutes 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.; seesec. 31.6205-1(c)(3)(ii), Employment Tax Regs. (amounts payable 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 withheld 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 subsequently paid by the employee, section 3402(d) ensures against double collection by relieving the employer of liability 141 T.C. 173">*180 for that same 2013 U.S. Tax Ct. LEXIS 23">*36 tax. But it makes clear that the employer is not thereby relieved "from liability for any penalties or additions 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 provides 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 actually 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 withhold 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 payment cannot represent a withholding of tax "upon such wages." Seesec. 6513(b)(1) (employee deemed to have paid tax on April 15th following close of the tax year only when tax has been "actually deducted and withheld 2013 U.S. Tax Ct. LEXIS 23">*37 at the source"); see also Begier v. IRS, 496 U.S. 53">496 U.S. 53, 496 U.S. 53">60-61, 110 S. Ct. 2258">110 S. Ct. 2258, 110 L. Ed. 2d 46">110 L. Ed. 2d 46 (1990) ("Withholding thus occurs at the time of payment to the employee of his net wages."); Edwards v. Commissioner, 323 F.2d 751">323 F.2d 751, 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 part39 T.C. 78">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 withholding 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 withheld at the source only if the employer (a) contemporaneously withholds tax in the correct amount, or (b) corrects an underwithholding of the tax by making a "proper adjustment" within the period prescribed by section 6205(a)(1).

141 T.C. 173">*181 Neither of these conditions 2013 U.S. Tax Ct. LEXIS 23">*38 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 petitioners' offenses nor the $30,202 attributable to errors discovered 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">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 138 T.C. 228">id. at 238-239. We found no need to decide this question in McLaine, 2013 U.S. Tax Ct. LEXIS 23">*39 finding as a fact that no payment had been made by the corporation in the later years. See 138 T.C. 228">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 138 T.C. 228">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. 228">138 T.C. 242. 2013 U.S. Tax Ct. LEXIS 23">*40 That day has arrived. Petitioners distinctly advance an alternative 141 T.C. 173">*182 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.

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 jurisdiction 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 follow from his premise.

Section 6330(d)(1) governs judicial review of CDP determinations 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 2013 U.S. Tax Ct. LEXIS 23">*41 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 underlying 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. Seesec. 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 141 T.C. 173">*183 respondent should not levy to collect this tax because the tax, by virtue of Tryco's designated 2013 U.S. Tax Ct. LEXIS 23">*42 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 specific employee." We have jurisdiction to review that conclusion because it determines whether petitioners have unpaid income tax liabilities that are a proper subject of IRS collection 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">125 T.C. 14, 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." 125 T.C. 14">Id. at 26.

In 2013 U.S. Tax Ct. LEXIS 23">*43 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.

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 precedents. We generally review the Appeals officer's determination as to the propriety of particular collection action for abuse of discretion. Wadleigh v. Commissioner, 134 T.C. 280">134 T.C. 280, 134 T.C. 280">288 (2010); Sego v. Commissioner, 114 T.C. 604">114 T.C. 604, 114 T.C. 604">610 (2000). In some situations, the taxpayer may not have received a 141 T.C. 173">*184 notice of deficiency or may not otherwise have had an opportunity 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. 280">134 T.C. 288; 2013 U.S. Tax Ct. LEXIS 23">*44 Sego, 114 T.C. 604">114 T.C. 610; Goza v. Commissioner, 114 T.C. 176">114 T.C. 176, 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 determine 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 controversy 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 impermissible 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 2013 U.S. Tax Ct. LEXIS 23">*45 review would apply.

Respondent agrees that the law generally allows taxpayers to designate how voluntary 2013 U.S. Tax Ct. LEXIS 23">*46 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. Respondent'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 employment tax payment toward the income tax liability of a specific 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 accordingly reject respondent's argument and hold that petitioners should have received a credit of $91,223 toward their 1992-95 income 2013 U.S. Tax Ct. LEXIS 23">*47 tax liabilities by virtue of Tryco's designated payments.

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 designates. 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 collected 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 taxpayer provides specific written instructions for the application of a voluntary partial payment." Only where "no designation is made by the taxpayer" would the IRS apply the payment "in a manner serving its best interest."

141 T.C. 173">*186 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 position announced in the prior ruling. It similarly holds that, when "the taxpayer provides specific 2013 U.S. Tax Ct. LEXIS 23">*48 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. 5.12.2.21 (Aug. 15, 2008)).

The principle that the IRS must honor a taxpayer's designation 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 Commissioner'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 taxpayers who 'voluntarily' submit payments to the IRS to 2013 U.S. Tax Ct. LEXIS 23">*49 designate the tax liability to which the payment will apply." United States v. Energy Res. Co., 495 U.S. 545">495 U.S. 545, 495 U.S. 545">548, 110 S. Ct. 2139">110 S. Ct. 2139, 109 L. Ed. 2d 580">109 L. Ed. 2d 580 (1990); see Slodov v. United States, 436 U.S. 238">436 U.S. 238, 436 U.S. 238">252 n.15, 98 S. Ct. 1778">98 S. Ct. 1778, 56 L. Ed. 2d 251">56 L. Ed. 2d 251 (1978) (noting exception where payment "results from enforced collection methods"). These cases are appealable to the Court of Appeals for the Fifth Circuit. Seesec. 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">808 F.2d 411, 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 141 T.C. 173">*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, 2013 U.S. Tax Ct. LEXIS 23">*50 sec. 3, 2002-1 C.B. at 746); Cooley v. Commissioner, T.C. Memo. 2012-164, 103 T.C.M. 1875">103 T.C.M. 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.").^{82013 U.S. Tax Ct. LEXIS 23">*51}

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 141 T.C. 173">*188 acknowledges the IRS' policy of honoring an employer's designation of voluntary payments between these two types of taxes. In his view, 2013 U.S. Tax Ct. LEXIS 23">*52 however, petitioners inappropriately "seek to extend this policy beyond designating a payment for a specific type of tax and argue that an employer should be allowed to designate a payment as the withholding of a particular 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 payments as withholding for a specific employee," so that employees remain liable "for their separate and independent income tax obligations" notwithstanding the employer's designated payment thereof.

We find no such gloss on the IRS' policy of honoring designated tax payments in its published administrative position, which it is 2013 U.S. Tax Ct. LEXIS 23">*53 obligated to follow, Rauenhorst v. Commissioner, 119 T.C. 157">119 T.C. 157, 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">362 U.S. 145, 362 U.S. 145">177, 80 S. Ct. 630">80 S. Ct. 630, 4 L. Ed. 2d 623">4 L. Ed. 2d 623, 1960-1 C.B. 660 (1960). However, under a doctrine first enunciated in Steele v. United States, 280 F.2d 89">280 F.2d 89, 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 subtitle 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 employment 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 2013 U.S. Tax Ct. LEXIS 23">*54 dispute. See, e.g., Univ. of Chi. v. United States, 547 F.3d 773">547 F.3d 773, 547 F.3d 773">785 (7th Cir. 2008); Korobkin v. United States, 988 F.2d 975">988 F.2d 975, 988 F.2d 975">976 (9th141 T.C. 173">*189 Cir. 1993); Boynton v. United States, 566 F.2d 50">566 F.2d 50, 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 employment tax dispute by means of a test case, without the necessity 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 contractors." See, e.g., Bruecher Found. Servs., Inc. v. United States, 383 Fed. Appx. 381">383 Fed. Appx. 381 (5th Cir. 2010); Smoky Mountain Secrets, Inc. v. United States, 910 F. Supp. 1316">910 F. Supp. 1316 (E.D. Tenn. 1995); Theodore D. Peyser, Refund Litigation, 631-4th Tax Mgmt. (BNA) at 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 2013 U.S. Tax Ct. LEXIS 23">*55 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. Seesec. 6331(i)(2)(A). This bar against levies applies where the decision 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 designate 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 contractor" 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 proceeding.¹⁰141 T.C. 173">*190 Thus, in order to ensure that a decision 2013 U.S. Tax Ct. LEXIS 23">*56 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 distinct 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">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 calendar quarter for any worker whom the IRS had reclassified as an employee).^{112013 U.S. Tax Ct. LEXIS 23">*57}

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 contested class unless it can designate payments toward the tax liabilities of specific employees--i.e., designate which "portion[s]2013 U.S. Tax Ct. LEXIS 23">*58 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 voluntary 141 T.C. 173">*191 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 provides two ways to collect this tax: from the employer as withholding tax under sections 3402 and 3403, and from the employee when he files his annual Form 1040, U.S. Individual Income Tax Return. As the Supreme Court stated in Baral v. United States, 528 U.S. 431">528 U.S. 431, 528 U.S. 431">436, 120 S. Ct. 1006">120 S. Ct. 1006, 145 L. Ed. 2d 949">145 L. Ed. 2d 949 (2000): "Withholding 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 taxpayer-employee under section 1. The employer bears 2013 U.S. Tax Ct. LEXIS 23">*59 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 investor's income tax. In none 2013 U.S. Tax Ct. LEXIS 23">*60 of these contexts does the Code explicitly provide that the employee, distributee, or investor will receive, toward her principal liability, a credit for payments the payor makes toward its derivative liability. But 141 T.C. 173">*192 the IRS allows such a credit, as it must, because failure to do so would result in double collection of the same tax.^{132013 U.S. Tax Ct. LEXIS 23">*61}

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 collecting, 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">138 T.C. 348, 138 T.C. 348">357-358 (2012). In this setting, the employer bears principal 2013 U.S. Tax Ct. LEXIS 23">*62 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">665 F.2d 743, 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 141 T.C. 173">*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. SeeIRM 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 2013 U.S. Tax Ct. LEXIS 23">*63 amount once."). The Supreme Court recognized this policy 35 years ago in United States v. Sotelo, 436 U.S. 268">436 U.S. 268, 436 U.S. 268">279 n.12, 98 S. Ct. 1795">98 S. Ct. 1795, 56 L. Ed. 2d 275">56 L. Ed. 2d 275 (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 penalties."^{142013 U.S. Tax Ct. LEXIS 23">*64}

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 person's liability for the section 6672 penalty, so too there is no Code provision explicitly mandating that an employer's (designated 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 141 T.C. 173">*194 other. The IRS must allow a credit in both situations to avoid double collection of the same tax.^{152013 U.S. Tax Ct. LEXIS 23">*65}

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 2013 U.S. Tax Ct. LEXIS 23">*66 designated toward payment of their 1992-95 income tax liabilities. These funds were paid to the IRS pursuant to petitioners' plea agreement with the Department of Justice, which stated that they "may be required to make full restitution for the losses sustained by the Internal Revenue Service" as a result of their tax offenses. Petitioners successfully 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 petitioners' liability for the 1992-95 tax years that were the subject 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 141 T.C. 173">*195 employment tax payments to petitioners' income tax liabilities for 1992-95. Respondent's failure to honor this designation was an abuse of discretion. The $91,223 payments at issue, if properly credited 2013 U.S. Tax Ct. LEXIS 23">*67 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.^{162013 U.S. Tax Ct. LEXIS 23">*68}

An important corollary of our holding concerns penalties and interest. Section 6513(b)(1) provides that "[a]ny tax actually 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 following 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 withheld at the source," and no credit therefor is allowable to 2013 U.S. Tax Ct. LEXIS 23">*69 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 collect 141 T.C. 173">*196 any applicable interest and penalties. Tryco likewise remains liable for penalties and interest. Seesec. 3402(d); sec. 31.6205-1(c)(3)(ii), Employment Tax Regs.^{172013 U.S. Tax Ct. LEXIS 23">*70}

Appropriate decisions will be entered.

Reviewed by the Court.

COLVIN, FOLEY, GALE, GOEKE, 2013 U.S. Tax Ct. LEXIS 23">*71 WHERRY, KROUPA, GUSTAFSON, 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 petitioners' testimony played no role in the opinion of the Court 141 T.C. 173">*197 because the issues addressed are legal, not factual. Credibility of their testimony was important only to the factual findings Judge Holmes made as the trial Judge in the companion 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 referenced 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' Memorandum 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 2013 U.S. Tax Ct. LEXIS 23">*72 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 nonpayment of withheld taxes for tax years 1992-95. Similarly, Sharon Dixon was also later convicted for subsequent Federal 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 2013 U.S. Tax Ct. LEXIS 23">*73 saying to please pay the company's tax bill and designated them as well as payments of "withheld income taxes" for one or the other of the 141 T.C. 173">*198 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 2013 U.S. Tax Ct. LEXIS 23">*74 crediting scheme with one that we deem "fair".

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 141 T.C. 173">*199 "[Form] 941 taxes of the corporation * * * to be applied to the withheld income taxes" of James R. Dixon or Sharon Dixon for 2013 U.S. Tax Ct. LEXIS 23">*75 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 corporation 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 payments 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 2013 U.S. Tax Ct. LEXIS 23">*76 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 underwithholding 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

BUCH, J., dissenting: I join Judge Holmes' dissent, wherein he correctly observes that the relevant statutory scheme does 141 T.C. 173">*210 not allow Tryco to designate 2013 U.S. Tax Ct. LEXIS 23">*97 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.

The majority cites a series of revenue rulings and a revenue procedure for the proposition that "voluntary partial payments of assessed tax, penalty and interest are to be applied as the taxpayer designates." See op. Ct. p. 20. 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">119 T.C. 157, 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 perhaps 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 payment was less than the principal deficiency, the IRS held that no part of that lump-sum payment could be deducted 2013 U.S. Tax Ct. LEXIS 23">*98 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 141 T.C. 173">*211 method of accounting, a partial payment thereon tendered to and accepted by the District Director of Internal Revenue with specific directions by the taxpayer as to its application, will be applied, as a general rule, in accordance 2013 U.S. Tax Ct. LEXIS 23">*99 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.