Opinion ID: 581460
Heading Depth: 2
Heading Rank: 2

Heading: Reallocation of Tax Payments

Text: 70 Davis argues alternatively that, if he is liable for some penalty, his assessment for the last quarter of 1981 was improperly inflated by the IRS's reallocation of payments from the 1981 trust fund tax debt to non-trust fund tax liabilities. 71 At the outset, we are confronted with the question of what standard of review to apply to the district court's refusal to reduce the 1981 assessment. The government characterizes this as a question of law to be reviewed de novo, although the cases it cites neither establish a standard of review nor involve the issue on appeal here. See Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed. 199 (1932); Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir.1983). 72 At least one district court has treated a request for an order directing the IRS to reverse a reallocation of taxes as a motion for a writ of mandamus directing the IRS to undo the reallocation. Skwarlo v. United States, No. 82-C-500, slip op. (N.D.Ill. June 25, 1982). 73 We agree with the Skwarlo court and hold that Davis's argument should be treated as an appeal from the denial of mandamus, which is reviewable for an abuse of discretion. Fallini v. Hodel, 783 F.2d 1343, 1345 (9th Cir.1986). Such a standard of review recognizes the IRS's general authority to allocate as it sees fit undesignated payments. See Muntwyler, 703 F.2d at 1032. The district court, after all, does not make the allocations or reallocations. The amount of the penalty is mandated by statute to be commensurate with the taxes owed. Thus, only when the tax debt itself changes can the 100% penalty amount be reduced. What Davis effectively seeks is an order of mandamus requiring the IRS to return to its original allocation of ITAC's payments. 74 The parties do not dispute that this was a voluntary payment--that is, a payment not made pursuant to judicial or administrative order. United States v. Technical Knockout Graphics, Inc. (In re Technical Knockout Graphics, Inc.), 833 F.2d 797, 802 (9th Cir.1987). When a taxpayer submits a voluntary payment, she may designate to which liability the money should be applied. Id. at 799; Muntwyler, 703 F.2d at 1032. If the taxpayer fails to target the funds to a specific liability, the IRS may apply the payment as it sees fit. Wood, 808 F.2d at 416; Muntwyler, 703 F.2d at 1032. 75 IRS policy is to credit undesignated payments first to non-trust fund liabilities and only secondly to trust fund liabilities. This practice has been previously blessed by a multitude of courts. United States v. Schroeder, 900 F.2d 1144, 1149 (7th Cir.1990); accord Liddon v. United States, 448 F.2d 509, 513 (5th Cir.1971) (IRS may apply undesignated payments to debt with greatest risk of non-collection), cert. denied, 406 U.S. 918, 92 S.Ct. 1769, 32 L.Ed.2d 117 (1972). 76 Few courts have addressed the IRS's authority to reallocate payments, as it did here, in light of new information or changed circumstances affecting debt collectibility. We have previously condoned a reallocation that reduced a taxpayer's section 6672 liability. Mattingly v. United States, 939 F.2d 816, 819-20 (9th Cir.1991). A bankruptcy court has specifically approved the reallocation of involuntary bankruptcy payments to non-trust fund taxes. Neier v. United States, 127 B.R. 669, 674 (D.Kan.1991). Involuntary payments, like undesignated payments, may be credited as the IRS desires. Muntwyler, 703 F.2d at 1032. One other district court, in dicta, summarily dismissed a challenge to an IRS reallocation: 77 It may be, as plaintiffs assert, that the proceeds of the checks were applied first to Dav-el's trust fund obligation and later reallocated to Dav-el's non-trust fund obligation. It is material that the money is now allocated to the non-trust fund obligation.... It is immaterial whether a prior allocation was made to the trust fund obligation. 78 Ellis v. United States, 87-2 U.S. Tax Cas. (CCH) 9418, at 89,159 n. 1 (W.D.Wis.1987). 79 We find no basis for reversing the district court's decision not to order a reallocation of Davis's taxes. To the contrary, we find three significant problems with Davis's position. 80 First, Davis's attempted employment of state debtor/creditor law to define how undesignated payments should be treated raises the specter of a plethora of different rules and requirements governing IRS treatment of undesignated payments. The Supreme Court has expressly warned against creating a checkerboard of federal tax law. Burnet, 287 U.S. at 110, 53 S.Ct. at 77. State law will be incorporated as a part of the federal taxing scheme only when the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law. Id. Davis has made no such showing in this case. 81 Second, straitjacketing the IRS into its initial allocation decisions would be inconsistent with the goal of maximizing tax revenues. 82 The defendant claims that the United States has failed to apply funds received by it in such a way as to relieve him of the responsible officer assessment against him. This charge is not denied, in fact for the Commissioner of Internal Revenue to have done otherwise would have been to shirk his responsibility to insure that the maximum amount of assessed tax be collected. 83 De Beradinis, 395 F.Supp. at 952. Adjustments of allocations should be permitted as new information comes to the IRS. 4 84 Third, Davis has made no showing that he was injured by the reallocation or that he detrimentally relied on the original allocation. Davis concedes that, had the IRS originally allocated the payments along their current lines, his penalty would have been identical to what it now is. The reallocation thus has not increased his penalty beyond that for which he was eligible in the first instance. 85 Davis, moreover, would be hard-pressed to demonstrate detrimental reliance. He made no effort to designate ITAC's payments, thereby waiving any interest in how the IRS allocated the money. As an experienced business person, he should have been aware of the IRS policy to target undesignated payments to non-trust fund taxes first. 86 Given the lack of actual injury, the dangers of incorporating state law, and the need to preserve IRS flexibility, we refuse to tie the IRS's hands in the manner advocated by Davis. We therefore affirm the district court's denial of Davis's motion for reduction of penalty. 5 While perhaps a different rule will apply in cases where the taxpayer can show actual harm from the reallocation or a failure of the IRS to follow a designation on a voluntary payment, this is not such a case. 6