Sec. 6603, added by the American Jobs Creation Act of 2004, P.L. 108-357, allows a taxpayer to deposit cash with the IRS that may subsequently be used to pay an underpayment of tax, suspending the running of interest on the portion of the underpayment deposited. The taxpayer may withdraw deposited amounts that have not been used to pay tax at any time, and the IRS is required to pay interest on the withdrawn amount for the deposit period at the applicable federal short-term rate to the extent the withdrawn amount is attributable to a disputable tax. Before the enactment of Sec. 6603, under the procedures set out in Rev. Proc. 84-58, taxpayers could make a "deposit in the nature of a cash bond," which suspended the running of interest on an underpayment, but the IRS would not pay interest on the deposit if it was withdrawn.
A deposit made under Sec. 6603 is an alternative to making an advance payment of tax. An advance payment of tax also suspends the running of interest on an underpayment, and interest is paid on any portion of the payment that is refunded. However, a taxpayer making an advance payment generally will lose access to the Tax Court and cannot recover the payment amount on demand, but instead must wait until a final determination of the taxpayer's liability for a refund (if an overpayment is determined). In addition, the interest rate paid on a refund of an advance payment of tax (the applicable federal short-term rate plus three percentage points or either two percentage points or one-half percentage point for corporations) is higher than the interest rate paid on the return of a deposit.
Rev. Proc. 2005-18, which supersedes Rev. Proc. 84-58, provides procedures for making deposits under Sec. 6603 to suspend the running of interest on potential underpayments, withdrawing those deposits, and converting deposits made under Rev. Proc. 84-58 to Sec. 6603 deposits. Recently, significant issues have arisen that are not addressed by either Sec. 6603 or Rev. Proc. 2005-18. The first issue is whether--and if so, how--a taxpayer can convert a Sec. 6603 deposit into an advance payment of tax.
Ability to Convert
In Principal Life Ins. Co., 95 Fed. Cl. 786 (2010), the U.S. Court of Federal Claims held that a taxpayer that has made a Sec. 6603 deposit cannot, at its request, convert it to an advance payment, based primarily on the ground that Rev. Proc. 2005-18 does not expressly provide for such a conversion. However, this rationale can be questioned....