CCA 200916028: Fraud-induced payroll deposits may be returned as restitution

Plain-English summary

Chief Counsel reviewed two cases involving deposits for fraudulent and fictitious payrolls. It agreed that the purported clients were not entitled to refunds and that the IRS should deny the identified refund claims. The entities that remitted their own funds could nevertheless receive the money back. Counsel advised treating those returns as restitution because no tax was owed or paid, rather than relying primarily on the more limited refund rationale associated with Williams.

Ruling snapshot

• Question: Could the IRS return deposits made from a payor's own funds for fictitious payrolls, even though the purported clients had no valid refund claims?
• Outcome: Advice given: return the payors' funds as restitution but deny the purported clients' refund claims.
• Key authorities: IRC § 6402; Rev. Ruls. 2005-49, 2005-50; EC Term of Years Trust v. United States, 550 U.S. 429 (2007).

Full text (IRS public release)

ID: CCA-121601-08 Number: 200916028
Release Date: 4/17/2009
Office: --------------
UILC: 6402.05-00

From: ----------------
Sent: Monday, December 15, 2008 3:42 PM
To: -------------------
Cc: ------------------------------------------------------------
Subject: --------------------------------------------------------------------------------------------------------------------
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You sent in a memorandum for post-review for each of the two cases referenced above. In the first case, we agree the purported client would not be entitled to a refund for the reasons stated in the memorandum. Furthermore, we agree that the Service may return to the payor what the payor remitted out of its own funds. ----------------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------------------------------- the Service may rely on Williams in part in deciding to return the funds to the payor. However, in light of our position on the limited applicability of Williams, if any, after the issuance of the revenue rulings and subsequent case law following Williams, the better legal rationale for returning the funds is restitution, based on the theory that there is no tax owed and no tax paid. See Rev. Rul. 2005-50; Rev. Rul. 2005-49; EC Term of Years Trust, 550 U.S. 429 (2007). In that regard, money had and received by the Service is still in its possession, and if the allegations are true, there never was an obligation to withhold or deposit tax from the fraudulent and fictitious payroll.

Similarly, in the second case-------------------------------------------------------------------------------- we do not disagree with the memorandum insofar as it states that the funds may be returned. But, as in the first case, we think the legal rationale for returning the funds would be restitution. If the deposits here were induced by fraud, there was no obligation to withhold or deposit tax for the fictitious payrolls. Regarding the refund claims, if any, mentioned on page 7 of the memorandum, for the reasons stated there we agree with your recommendation that the Service deny those claims.

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