Summary

The taxpayers were a corporation that supplies coal to utility companies and its principal shareholders.

In 1985, the IRS made jeopardy assessments against taxpayers for over $21 million in taxes, penalties, and interest for the tax years 1981 through 1983. The IRS then served levy notices on financial institutions holding liquid assets and other property of the taxpayers.

Subsequently, about $170,000 was remitted to the IRS, which was applied to the assessment against of an individual taxpayer, and about $115,000 was remitted to the IRS and applied to the assessment against the company.

In 1986, the taxpayers entered into an escrow agreement with the IRS, under which the liquid assets of the taxpayers were placed in an escrow account pending final resolution of their tax liabilities. After the execution of the escrow agreement, the IRS issued notices of deficiencies to the taxpayers. This was followed by the taxpayers’ petitions to the Tax Court. In March 1991, the Tax Court litigation was resolved by settling the tax liabilities—including taxes, penalties, and underpayment interest—in three stipulated decisions. The company agreed to deficiencies and additions to taxes totaling about $316,000, while the stipulated decision in the shareholders’ case determined a liability for deficiencies and additions to taxes exceeding $2.3 million.

The taxpayers paid the stipulated amounts out of funds separate from those in the escrow account. The three stipulations expressly reserved for the taxpayers the right “to pursue an action in the appropriate federal court with respect to the interest claimed to be due by the IRS on the respective deficiencies.” Shortly thereafter, the levies and escrowed funds were released.

The taxpayers filed suit in the Court of Federal Claims to recover interest they paid on the taxes for the period while the funds belonging to them were subject to IRS levies and were held in the escrow account. In 2003, the court granted summary judgment in favor of the United States on taxpayers’ refund claims, holding that the taxpayers were not entitled to recover the interest they had paid because the levies and the placement of their funds in escrow did not constitute the payment of their unpaid taxes, so as to stop the accrual of underpayment interest under section 6601(a).

The Federal Circuit today affirmed, finding that neither the IRS levies nor the placement of the taxpayers’ funds in the escrow account constituted the payment of tax liabilities so as to stop the accrual of underpayment interest.