## Facts

- In 1999, Michael Zarky received $874 of bank interest and had roughly $200,000 in brokerage sales proceeds.
- The bank withheld $270 of federal income tax from the interest as backup withholding and remitted it to the IRS.
- Zarky did not file a 1999 federal income tax return.
- In February 2003, the IRS issued a notice of deficiency for 1999, asserting the brokerage-sale proceeds should have been included in income.
- Zarky timely petitioned the United States Tax Court, disputing the deficiency and seeking a refund of the $270 withheld.
- During the case, the IRS conceded there was no deficiency and that Zarky had overpaid 1999 tax by $270, but argued any refund was barred by the refund limitations rules.

## Issues

1. Whether the Tax Court could determine and allow a refund (or credit) of Zarky’s $270 overpayment in a deficiency case despite his failure to file a return.
2. Whether the $270 of backup withholding was a “payment” made within the applicable look-back period under I.R.C. §§ 6511(b) and 6512(b)(3), measured from the mailing of the notice of deficiency.

## Decision

- The Tax Court held it had authority under I.R.C. § 6512(b) to determine an overpayment in the deficiency proceeding, subject to the statutory look-back limitations.
- The court treated the $270 of backup withholding as a tax payment made within the applicable look-back period.
- Because the notice of deficiency was mailed within the relevant statutory period and the $270 was deemed paid within the allowable window, the limitations rules did not bar a refund.
- The court held Zarky was entitled to the $270 overpayment.

## Legal Principles

- In a deficiency case, the Tax Court may determine an overpayment and allow a credit or refund under I.R.C. § 6512(b), but only to the extent permitted by § 6512(b)(3)’s look-back rules (which track the limitations concepts in § 6511).
- Amounts withheld at the source and remitted to the IRS (including backup withholding) are treated as tax payments for limitations and overpayment purposes, even if the taxpayer never files a return.
- If the tax is treated as paid within the applicable look-back period measured from the notice of deficiency, the Tax Court may order a refund or credit of the overpayment notwithstanding the IRS’s limitations defense.

## Conclusion

The Tax Court concluded that the $270 of backup withholding was a timely tax payment under the statutory look-back rules, so it could determine the conceded $270 overpayment and allow Zarky a refund (or credit) in that amount in the deficiency proceeding despite the absence of a filed return.


Zarky v. Commissioner, 123 T.C. 132 (2004)