April 16, 2013 

In the Matter of the Petition by   )  
                                                  )                                                          
AARON THORNE                       )                          
                                                  )                                                          
at                                               )                                 
                                                  )                                                         
Pittsburgh, PA                           ) 

P.S. Docket No. DCA 12-319

APPEARANCE FOR PETITIONER: 
Albert E. Lum

APPEARANCE FOR RESPONDENT: 
Claire M. Mankowski

DECISION ON MOTION FOR RECONSIDERATION

Petitioner, Aaron Thorne, seeks a partial reconsideration of the Final Decision Under the Debt Collection Act of 1982 (hereinafter “the Decision”) which was issued on January 11, 2013.  See Aaron Thorne, P.S. Docket Nos. DCA 12-318 and DCA 12-319 (January 11, 2013).  The Motion for Reconsideration was timely filed.  See 39 C.F.R. § 961.9 (2012). 

The Decision resolved two debt assessments.  The debt addressed in P.S. Docket No. DCA 12-318 is not at issue.  Rather, Petitioner’s motion applies only to that portion of the Decision involving P.S. Docket No. DCA 12-319 which allowed Respondent to collect $1,812.83¹ of the alleged $1,962.93 debt and prohibited Respondent from collecting $150.10.

Because the Decision was issued in 2013, Respondent believes that additional tax consequences attach to the debt.  Respondent sent Petitioner a new invoice seeking to collect an additional debt of $556.18 along with the $1,812.83.   When Petitioner learned of the newly asserted debt, he filed an objection with my office dated February 6, 2013.  Based on a February 11, 2013 conference with the parties, I deemed the objection to constitute a request for reconsideration.  See Order and Memorandum of Telephone Conference, February 12, 2013.  A hearing was held in Pittsburgh, Pennsylvania, to address whether Respondent has applied correctly the tax regulations and the amount of taxes it sought to recoup.²

FINDINGS OF FACT³

1. Petitioner is a Postal Service employee who was reassigned.  The reassignment resulted in a lower annual salary.  However, Respondent continued to pay Petitioner at his old salary rate for six pay periods.  Respondent’s error resulted in a net overpayment of $1,812.83 which represents the gross overpayment minus taxes.  See Aaron Thorne, P.S. Docket Nos. DCA 12-318 and DCA 12-319 (January 11, 2013).
2. The overpayment occurred in 2012.  Based on the Decision, Respondent’s Eagan Accounting Service Center wrote off $150.10 which the Decision denied (Tr. 96).⁴   Respondent also sent $556.18 to the federal, state, and local governments for taxes on Petitioner’s behalf (Exh. 8). 
3. If Petitioner had repaid the $1,812.83 in 2012 of an overpayment made in 2012, Respondent could have addressed the tax consequences within that year (Tr. 52, 73, 74; see also, Exh. 12, IRS Publication 15, Circular E, Employer’s Tax Guide for 2013, Wage Repayments at 34).  However, because Respondent could no longer retrieve the $556.18 from the federal, state, and local governments, Respondent seeks to collect this money from Petitioner.  Respondent now seeks to collect the gross pay instead of the net pay (Tr. 120-28).
4. The Decision was issued on January 11, 2013, which will result in repayment being made in 2013.  Repayment in 2013 changes the tax consequences.  (Tr. 73, 74, 131-34, and 139; Exh. 8).
5. Respondent applied the required tax rates to account for federal, state, local, Social Security, and Medicare taxes to the $1,962.93 to reach an amount of $556.18 (Tr. 60-69; Exh. 8).  Respondent offered no documents or testimony explaining how taxes would be calculated based on the $1,812.83 amount in the Decision.  The new tax debt of $556.18 represents 28.33% of $1,962.93 (Tr. 73; Exh. 8).  Applying the 28.33% to the $1,812.83 yields $513.57, a difference of $42.61.
6. Respondent sent a new invoice to Petitioner seeking $556.18, but did not send a Notice of Involuntary Administrative Salary Offset.  Based on the new invoice, Petitioner filed this request for reconsideration.  Respondent did not seek reconsideration. 

DECISION

Because this dispute crossed the calendar year, Respondent recalculated the debt to accommodate the tax consequences (Finding 4; see also, Exh. 12, IRS Publication 15, Circular E, Employer’s Tax Guide for 2013, Wage Repayments at 34).  Income is earned for tax purposes by an employee in the year in which it is actually or constructively received.  See 26 C.F.R. §§ 1.451-2, 31.3121(a), 31.3301-4 (2013).  The Postal Service is required to withhold taxes and forward this money to the federal, state, and local governments in the year in which the income is earned.  See 26 U.S.C. § 3402; 26 C.F.R. § 31.3402(a)-1 (2013).  Respondent withheld taxes in 2012 on the wages it paid to Petitioner in that year (Finding 2).

Petitioner presents two arguments.  First, Petitioner alleges that he paid taxes in 2012 on the overpaid salary.  The Postal Service withheld money for taxes in 2012 and sent it to the tax authorities (Finding 2).  A new debt of $556.18 for the same wages would be paying taxes twice on the same salary.  From Petitioner’s perspective, he never received the $556.18 because Respondent sent it to the federal, state, and local governments.  From Respondent’s perspective, it can no longer recover these payments from the federal, state, and local governments and, therefore, should be repaid (Finding 3). 

While it initially may seem that the employee pays the taxes twice (once to the taxing authorities and once when returning money to Respondent), such is not the case.

The wages paid in error in the prior year remain taxable to the employee for that year.  This is because the employee received and had use of those funds during that year.  The employee is not entitled to file an amended return (Form 1040X) to recover the income tax on these wages.  Instead, the employee is entitled to a deduction (or credit in some cases) for the repaid wages on his or her income tax return for the year of repayment.

See IRS Publication 15 for 2013 at 34 (emphasis added).  The IRS further explains the remedy to the taxpayer who repays gross wages (i.e., net pay plus taxes) in a subsequent year. 

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year [2013] in which you repaid it. 

See IRS Publication 525 Taxable and Nontaxable Income For Use In Preparing 2012 Returns at 33 (emphasis added).  In other words, the Postal Service is seeking the gross amount of the wages it has paid:  the taxes it forwarded to the tax authorities (attributable to Petitioner in 2012) and the net salary paid to Petitioner.  Petitioner ultimately is not paying the taxes twice because he can claim a deduction for the full amount he repays Respondent.

Petitioner’s also argues the principal of res judicata (claim preclusion) prevents the Postal Service from recovering from him taxes it sent to the federal, state, and local governments.  See Robert E. Maloney, P.S. Docket No. AO 07-183 (November 2, 2007)(a judgment on the merits of a prior suit bars a second suit involving the same parties on the same cause of action).  This argument is persuasive in part.  The Postal Service is correct that it should be allowed to collect the gross amount of wages.  However, Respondent is seeking to reopen the litigation as to the amount of net pay.  The amount of $1,812.83, not $1,962.93, was decided in Respondent’s favor. 

Respondent did not submit a request for reconsideration; accordingly, that part of the Decision stands.  It follows then that recoverable tax payments can be based only on the $1,812.83, not $1,962.93.  Accordingly, using the 28.33% tax rate applied to $1,812.83 creates a corresponding amount due of $513.57, not $556.18 (Finding 5).⁵

ORDER

Petitioner’s Motion for Reconsideration is granted in part and denied in part.  Respondent may collect by administrative salary offset $513.57 (in addition to the $1,812.83 allowed in the Decision).

Peter F. Pontzer
Administrative Judge

 ^1. Respondent did not send a Notice of Involuntary Administrative Salary Offset to support the new $556.18 debt assessment.  Petitioner waived the requirement for notice.  (Tr. 19-20).  For jurisdiction purposes, the waiver of notice renders academic the difference between whether this litigation should be characterized as a request for reconsideration or a new debt under the Debt Collection Act.

 ^2. The undersigned Administrative Judge presided via telephone from the Office of the Judicial Officer in Arlington, Virginia.

 ^3. Familiarity with the Decision is presumed.  These Findings of Fact are presented in order to address the Motion for Reconsideration.

 ^4. The Eagan Accounting Service Center is the centralized payroll office which handles Respondent’s wage disbursements.  The Payroll Office is responsible for making adjustments to an employee’s salary when necessary.  (Tr. 50-51).  

^5.   Respondent wrote off the $150.10 which it could not collect.  Respondent did not offer testimony explaining how it would address taxes associated with this amount.