Rev. Rul. 80-35

1980-1 C.B. 305, 1980-6 I.R.B. 10.

                       Internal Revenue Service
                                 Revenue Ruling

             PENALTIES; RETURN PREPARERS; DEPOSIT OF REFUND CHECKS

                          Published: February 11, 1980

Section 6695.--Other Assessable Penalties with Respect to the Preparation of Income Tax Returns for Other Persons, 26 CFR 1.6695-1: Other assessable penalties with respect to the preparation of income tax returns for other persons.

  Penalties; return preparers; deposit of refund checks. A business manager prepares income tax returns for clients who maintain special checking accounts against which the business manager is authorized to sign certain checks on their behalf. The clients' federal income tax refunds are mailed to the business manager, who has the clients endorse the check and deposits them in the special accounts. The business manager is not subject to the penalty imposed by section 6695(f) of the Code regarding the negotiation of checks by return preparers.

ISSUE

  Is an income tax return preparer subject to the penalty imposed by section 6695(f) of the Internal Revenue Code if the preparer, acting as the business manager of the taxpayer, deposits a Federal income tax refund check in the client's special checking account after the client has endorsed the check?

FACTS

  X, a business manager, prepares income tax returns for clients and is an income tax return prepared as defined in section 7701(a)(36) of the Code.

  X requires each client to have a checking account, against which under a power of attorney on file with the bank, X is authorized to sign checks on behalf of the client.  X may sign checks only upon the specific authorization of the client.

  Pursuant to a power of attorney on file with the Internal Revenue Service, the client's Federal income tax refund is mailed to X.  X has the client endorse the check and then, pursuant to the client's specific instructions, X deposits the check in the client's checking account.

LAW AND ANALYSIS

  Section 6695(f) of the Code provides that any person who is an income tax return preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect to the taxes imposed by subtitle A which is issued to a taxpayer (other than the income tax return preparer) shall pay a penalty of $500 with respect to each such check.

  Section 1.6695-1(f) of the Income Tax Regulations provides that no person who is an income tax return preparer may endorse or otherwise negotiate, directly or through an agent, a check for the refund of tax under subtitle A of the Code which is issued to a taxpayer other than the preparer if the person was a preparer of the return which gave rise to the refund check.

  Section 3-202(1) of the Uniform Commercial Code provides that negotiation is the transfer of an instrument in such form that the transferee becomes a holder.  If the instrument is payable to order it is negotiated by delivery with any necessary indorsement; if payable to bearer it is negotiated by delivery.

  In this situation, the client has not transferred any rights in the check to the business manager (income tax return preparer), who is an agent for the client.  The business manager delivers the check to the bank pursuant to the client's specific instructions.  It is the client, and not the business manager that is transferring the check to the bank and, therefore, it is the client that is negotiating the check.  This is true whether the client endorses the refund check 'for deposit only,' 'Pay to the order of' (name of the depository bank), or with only his or her own name.  The delivery of the check by the business manager is done on behalf of the client and is performed solely in the business manager's capacity as an agent.

HOLDING

  X is not subject to the penalty imposed by section 6695(f) of the Code for depositing a Federal income tax refund check in a client's special account after the client has endorsed the check.

Rev. Rul. 80-35, 1980-1 C.B. 305, 1980-6 I.R.B. 10.