Friday, December 9, 2011
II. Review De Novo Petitioner requested relief as it relates to the assessed additions to tax pursuant to sections 6651(a)(1) and (2) and 6654(a) on the grounds of reasonable cause. The aforementioned sections permit relief from assessed additions to tax when it is shown that the taxpayer's failure to comply was due to reasonable cause and not willful neglect. 9 See sec. 6651(a)(1) and (2). The Court's standard of review on what elements must be present to constitute “reasonable cause” is de novo. United States v. Boyle, 469 U.S. 241, 249 [55 AFTR 2d 85-1535] n.8 (1985) (”[W]hat elements must be present to constitute `reasonable cause' is a question of law.”). Whether those elements are present in a given case is a question The burden of proving reasonable cause and lack of of fact. Id.
Id. at 244. willful neglect rests on the taxpayer.
A. Section 6651(a)(1): Failure To File a Timely Return Section 6651(a)(1) imposes an addition to tax for failure to file a timely Federal income tax return unless the taxpayer can demonstrate that such failure is due to reasonable cause and not due to willful neglect. 10 The Code does not define reasonable cause nor willful neglect. However, the regulations explain that reasonable cause for the failure to file a timely return exists if the taxpayer exercised ordinary business care and prudence but was unable to file his return within the time prescribed by law. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. The term “willful neglect” has been read as meaning “conscious, intentional failure or reckless indifference.” United States v. Boyle, supra at 245.
Respondent determined that petitioner is liable for an addition to tax under section 6651(a)(1) for tax years 2000 and 2002. The parties stipulated that petitioner filed late returns for both of the years at issue, filing his return for 2000 in 2006 and his return for 2002 in 2007. Petitioner was assessed a tax liability of $21,958 for 2000 and $20,205 for 2002.
Petitioner sets forth two arguments as to why he had reasonable cause and was thus excused from filing a timely return for the tax years 2000 and 2002: (1) Petitioner claims to have suffered undue financial hardship, and (2) petitioner experienced the prolonged sickness and illness of an immediate family member. Without venturing into whether petitioner actually did suffer undue financial hardship, we reject the argument that reasonable cause due to financial hardship is a basis to abate additions to tax. Under the standard of “ordinary business care and prudence” set forth in the regulations, petitioner was not excused from timely filing even if he would have been unable to pay. One's ability to pay a tax liability has no bearing on the ability to file one's tax return. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Ordinary business care and prudence required petitioner to file his return timely and address the inability to pay the liability as a separate issue.
Petitioner also alleges reasonable cause because of prolonged sickness and illness of an immediate family member. In the Ninth Circuit, where this case would be appealable absent a stipulation to the contrary, a taxpayer's or a member of his immediate family's serious illness can constitute reasonable cause. Van Camp & Bennion v. United States, 251 F.3d 862, 867 [87 AFTR 2d 2001-2408] (9th Cir. 2001); see United States v. Boyle, supra at 243 n.1; sec. 301.6651-1(c)(1), Proced. & Admin. Regs. The Court of Appeals for the Seventh Circuit has determined that “the type of illness or debilitation that might create reasonable cause is one that because of severity or timing makes it virtually impossible for the taxpayer to comply—things like emergency hospitalization or other incapacity occurring around tax time.” Carlson v. United States, 126 F.3d 915, 923 [80 AFTR 2d 97-6558] (7th Cir. 1997).
Petitioner provided some medical billing records of his former wife, who he was married to during the tax years at issue. The records indicate that she underwent a mastectomy in the end of April 2002 and then possibly had reconstructive surgery related to the mastectomy in July 2002. 11 When determining whether a taxpayer had reasonable cause due to serious illness of an immediate family member we consider whether “tax duties were attended to promptly when the illness passed”. Internal Revenue Manual pt. 126.96.36.199.2.2.1(3)(G) (Nov. 25, 2011). We sympathize with petitioner and his former wife regarding her previous health problems. However, the two procedures occurred approximately 1 year and 8 months, respectively, before the filing deadline that petitioner missed.
Even if we give petitioner the benefit of the doubt that his former wife's ailments precluded the timely filing of his 2002 tax returns by April 15, 2003, petitioner did not file his 2002 tax return until October 2007, more than 5 years after his former wife's last procedure. Petitioner was required to promptly file his return for 2002 once his former wife's illness had passed; petitioner offered no evidence to show that his former wife was still ailing until October 2007. We also note that petitioner did not attempt to comply with his duty to timely file his 2002 Federal income tax return by requesting an extension of time to file.
During this time petitioner still managed to conduct the rest of his financial affairs with ordinary business care and prudence, such as paying his mortgage on time. He was also able to perform the essential functions of his day-to-day activities, including going to work and making an income in excess of $100,000 during the 2002 tax year. See Wright v. Commissioner, T.C. Memo. 1998-224 [1998 RIA TC Memo ¶98,224], affd. without published opinion 173 F.3d 848 [83 AFTR 2d 99-2621] (2d Cir. 1999). We conclude that petitioner has failed to establish reasonable cause to abate the addition to tax pursuant to section 6651(a)(1) for 2000 or 2002.
B. Section 6651(a)(2): Failure To Pay Amount of Tax Section 6651(a)(2) imposes an addition to tax for failure to pay the amount of tax shown on the taxpayer's Federal income tax return on or before the payment due date, unless such failure is due to reasonable cause and not due to willful neglect. 12 A failure to pay will be considered due to reasonable cause if the taxpayer makes a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer undue hardship if he paid on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Petitioner asserts the same reasonable cause arguments for section 6651(a)(2) as he did for section 6651(a)(1)—undue financial hardship and the prolonged illness of an immediate family member.
In determining whether the taxpayer was unable to pay the tax in spite of the exercise of ordinary business care and prudence in providing for payment of his tax liability, consideration will be given to all the facts and circumstances of the taxpayer's financial situation. Van Camp & Bennion v. United States, supra at 867. For the same reasons we found that petitioner failed to show reasonable cause for failing to file his Federal returns on time, petitioner has failed to show that he exercised ordinary business care and prudence in failing to pay his tax liabilities for 2000 and 2002 on time.
Petitioner cannot rely on undue financial hardship alone to excuse his inability to pay taxes. The regulations require a showing of reasonable cause even if undue hardship would be suffered. As the District Court noted in Wolfe v. United States, 612 F. Supp. 605, 608 [56 AFTR 2d 85-5226] (D. Mont. 1985), affd. 798 F.2d 1241 [58 AFTR 2d 86-5678] (9th Cir. 1986), opinion amended, 806 F.2d 1410 (9th Cir. 1986): “Almost every non-willful failure to pay taxes is a result of financial difficulties.” We conclude that petitioner is liable for the section 6651(a)(2) addition to tax for 2000 and 2002.
C. Section 6654(a): Failure To Pay Estimated Tax
Section 6654(a) imposes an addition to tax for the underpayment of any installment of estimated tax. 13 The underpayment addition rate is determined pursuant to section 6621 and is applied to the amount of the estimated tax underpayment for the period of underpayment. Sec. 6654(a) and (b). Except for the narrow circumstances provided for in section 13
Sec. 6654(c)(1) requires the payment of four installments of a taxpayer's estimated tax liability for each taxable year. Each required installment of estimated tax is equal to 25 percent of the required annual payment. 6654(e)(3)(A) and (B), no reasonable cause exception exists to the section 6654(a) addition to tax.
The narrow exceptions to section 6654(a) provide that an addition to tax will not be imposed if the Secretary determines that (1) By reason of casualty, disaster, or unusual circumstances the additions assessed would be inequitable or unfair or; (2) the taxpayer retired (after reaching age 62) or became disabled in either the taxable year for which estimated tax payments were required or in the taxable year preceding such year and such underpayment was due to reasonable cause and not willful neglect.
Petitioner asserts the same reasonable cause arguments for section 6654(a) as he did for section 6651(a)(1) and (2). Petitioner did not introduce any evidence that he was retired, nor did he put forth any evidence that he was disabled. Therefore he does not fall into the narrow exception for reasonable cause pursuant to section 6654(e)(3)(B). The record does not establish that petitioner's failure to make estimated tax payments for 2002 was due to casualty, disaster, or other unusual circumstances, and we are not persuaded that the imposition of the section 6654 addition to tax would be against equity and good conscience. We conclude that petitioner is liable for the section 6654 addition to tax for 2002.
D. Offer-in-Compromise Petitioner submitted an offer-in-compromise based on doubt as to collectability during the face-to-face conference on August 20, 2009. The offer-in-compromise was a 24-month short-term periodic payment offer made pursuant to section 7122(c)(1)(B). The payment offer required petitioner to make monthly payments of $272.66. Pursuant to section 7122(c)(1)(B)(i) petitioner submitted payment of the first installment with the offer-in- compromise.
Section 7122(c)(1)(B)(ii) required petitioner to make regular payments during the period respondent was evaluating the offer-in-compromise. Petitioner failed to make continuous payments beginning in January 2010. In late March of 2010 petitioner made his January and February payments after being notified by Officer Conley that a failure to pay would result in the offer-in-compromise's being deemed withdrawn by petitioner.
Petitioner subsequently failed to make timely payments for March, April, and May 2010. Once again Officer Conley sent a letter to petitioner notifying him of the consequences of a failure to pay and to adhere to the terms of his offer-in- compromise. Petitioner responded by sending in only one payment for the month of March. We conclude that pursuant to section 7122(c)(1)(B)(ii), petitioner's continued payment noncompliance was permissibly treated by respondent as a withdrawal by petitioner of his offer-in-compromise.
III. Conclusion As detailed above petitioner is liable for the sections 6651(a)(1) and (2) and 6654(a) additions to tax. Further, respondent did not abuse his discretion in rejecting petitioner's offer-in-compromise. Therefore, the notice of determination respondent issued to petitioner dated June 2, 2008, is sustained in its entirety.
To reflect the foregoing, Decision will be entered for respondent.
Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and applicable to the periods at issue.
The required documentation included a completed Form 433-A, Collection Information Statement for Individuals, proof of estimated tax payments for 2008, and delinquent tax returns for 2006 and 2007. Consequently, without these items, petitioner was not eligible for any collection alternatives.
Respondent requested nine documents, plus the completed Form 656, Offer in Compromise, and Form 433-A. The other documents were: (1) Bank statements from January 2008 to date;
(2) paycheck stubs for the previous 6 months; (3) payoff letters from mortgage lenders; (4) a copy of petitioner's current lease agreement; (5) copies of previous 6 months of rent payments; (6) copies of previous 6 months of mortgage payments; (7) 2008 Federal tax return; (8) an amended 2002 Federal tax return; and (9) documentation to substantiate any medical expenses incurred during the tax years 2000 and 2002 for treatment of petitioner's former wife's breast cancer.
A face-to-face conference was originally scheduled for June 16, 2009. On June 4, 2009, petitioner requested that the conference be rescheduled to a later date. Respondent granted the request and rescheduled the face-to-face conference for Aug. 5, 2009. On July 27, petitioner once again requested that the conference be rescheduled to a later date. Respondent granted the request and rescheduled the face-to-face conference for Aug. 20, 2009.
Petitioner originally wrote $10,000 as his offer-in- compromise but did so under the erroneous belief that refunds, such as his stimulus refund, which the IRS had already taken, would be considered as part of his offer. Petitioner modified the Form 656 to change the offer-in-compromise amount to reflect these amounts.
In the Memphis Unit's preliminary decision to reject petitioner's offer-in-compromise, a clerical mistake was made as to the amount petitioner offered. The introduction of the letter stated that the offer was “in the amount of $1,200.” However, a further reading of the letter reveals that the decision was based on an offer of the correct amount of $6,544.
The parties stipulated that the underlying tax liabilities for 2000 and 2002 are not in dispute. However, the Court is not bound to stipulations as to matters of law, especially when the stipulations are erroneous. King v. United States, 641 F.2d 253, 258 [47 AFTR 2d 81-1330] (5th Cir. 1981); Greene v. Commissioner, 85 T.C. 1024, 1026 n.3 (1985).
Inasmuch as petitioner filed delinquent tax returns for 2000 and 2002 reporting tax due of $21,958 and $20,205, respectively, respondent was authorized under sec. 6201(a) to assess said amounts without issuing a notice of deficiency. In addition, respondent was free to assess the additions to tax under secs. 6651(a)(1) and (2) and 6654 without first issuing a notice of deficiency. See sec. 6665(b).
No general reasonable cause exception exists with regard to an addition to tax assessed under sec. 6654(a). Relief is available, however, pursuant to the narrow exception of sec. 6654(e)(3)(B).
The amount of the addition to tax is 5 percent of the amount required to be shown as tax on the return for each month or portion thereof that the delinquency continues, up to a maximum of 25 percent. Sec. 6651(a)(1).
Petitioner's former wife's treatments for cancer did not begin until 1 year after his 2000 Federal income tax return was due, and therefore did not constitute reasonable cause for his failure to timely file the return for the 2000 tax year.
The sec. 6651(a)(2) addition to tax is 0.5 percent of the amount of tax shown on the return, with an additional 0.5 percent per month during which the failure to pay continues, up to a maximum of 25 percent. The 5-percent failure to file penalty is reduced to 4.5 percent for any month that the failure to pay penalty is also assessed. Sec. 6651(c).