Section 469(g)(1)(A) provides that the excess of --
(i) any loss from such activity for the taxable year (determined after the application of subsection (b)), over
(ii) any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),
shall be treated as a loss which is not from a passive activity.Rodolfo C. Uy v. Commissioner.
Docket No. 24177-05S . Filed April 8, 2008.
[Code Secs. 469 and 6001]
Tax Court: Summary opinion: Real estate: Passive activity losses. --
An individual was not entitled to deduct a current year passive activity loss (PAL), prior year PALs or suspended PALs arising from his rental real estate activities. First, the individual's entitlement to deductions for current and prior years' PALs could not be considered by the Tax Court because it was raised for the first time on brief. Even if the issue could be considered, the taxpayer did not provide adequate substantiation for a current net passive loss deduction in excess of the amount conceded by the IRS. Second, the deduction for prior years' losses could not be raised as an issue because the losses were not claimed on the individual's return and were not the type of deduction specified in his petition. Even if the issue could be raised, the taxpayer failed to provide any substantiation in support of the claimed prior years' losses. Finally, no deduction was allowed for suspended losses arising from the disposition of interests in passive activities. The individual had not claimed the amount on his return and raised the issue for the first time on brief, and he provided no proof as to the amounts of suspended losses.
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.
On his income tax returns for 2003 and 2004, petitioner claimed the following rental real estate and pass-through loss deductions which respondent disallowed:
2003 2004
Rental real estate $49,896 $5,400
Pass-through loss from S 63,176
corporation 54,393
Total
113,072 59,793
As a result of these disallowances, respondent determined deficiencies in petitioner's income taxes of $36,091 for 2003, and $24,098 for 2004. In computing the deficiencies respondent increased the amounts of alternative minimum tax shown on the returns and recomputed the amount of itemized deductions allowable, taking into account the limitations due to adjusted gross income under section 67.
After concessions,2 the remaining issues for decision are: (1) Whether we may consider petitioner's argument that he is entitled to deduct a current net passive activity loss and prior years' losses for 2003, and if so, whether petitioner has met his burden of proof with respect to these claims; and (2) whether petitioner is entitled to deduct certain other suspended passive activity losses for 2003.
Background
Some of the facts have been stipulated, and they are so found. We incorporate by reference the parties' stipulation of facts and the accompanying exhibits.
At the time the petition was filed, petitioner resided in New York, New York.
During the taxable year in issue, petitioner worked for Wakefield Medical Professionals, P.C., as a physician specializing in pediatric medicine. In this capacity petitioner managed five medical offices and a staff comprising five pediatricians and two interns.
In 2003 and 2004, in addition to working as a physician, petitioner was the sole owner of R & D Super Laundromat, an S corporation, located in Bronx, New York.
On his returns and in his petition, petitioner maintained that he actively participated in rental real estate and S corporation activities in 2003 and 2004.
Rental Real Estate Activities
Petitioner attached to his 2003 return a Schedule E, Supplemental Income and Loss, which listed six rental income properties. Petitioner reported deductible losses for five of these properties on line 23, Deductible rental real estate loss, as follows: (1) Residential co-op, 67-105 Burns Street, Apartment 105-3B --$5,845; (2) residential co-op, 67-109 Burns Street, Apartment 109-1B --$6,081; (3) residential building, 4409 Byron Avenue, Bronx, New York --$1,862; (4) residential condo, 301 W. 57th Street, Apartment #18B, New York --$15,346; and (5) condo, 201 Ohua Avenue, #1813, Honolulu, Hawaii --$20,762. Petitioner reported the $49,896 total of deductible rental real estate losses for the five properties on line 17, Rental real estate, royalties, partnerships, S corporations, trusts, etc., of his 2003 Form 1040, U.S. Individual Income Tax Return. Petitioner did not report as deductible a $3,150 loss for the sixth property, a residential condo located at 5401 Collins Avenue, Miami, Florida (the Collins Avenue property), which he listed on line 22, Income or (loss) from rental real estate or royalty properties of his Schedule E. Petitioner sold the Collins Avenue property on March 20, 2003, and the residential co-op located at 67-105 Burns Street, Apartment 105-3B (the Burns Street property) on June 23, 2003. Petitioner reported the sales on Form 4797, Sales of Business Property, as follows:
Burns Street Collins Avenue
Property Property
Gross sale price $100,000 $220,711
Cost or other basis 77,820 157,755
Depreciation 20,474 30,899
Adjusted basis 57,346 126,856
Total gain 42,654
93,855
Petitioner's total gain from the sale of business property for 2003 was $136,509.
Current and Prior Years' Losses
On Form 8582, Passive Activity Loss Limitations, which he attached to his 2003 return, petitioner reported a $3,150 net loss for rental real estate activities with active participation (line 1b) and a $74,218 loss for unallowed losses for prior years (line 1c). Petitioner computed these figures using Worksheet 1 --For Form 8582, Lines 1a, 1b, and 1c (Worksheet 1), which he attached to his 2003 return and on which he reported the following:
Prior Overall gain or
Current year years loss
Name of Net Net Unallowed
activity income loss loss Gain Loss
Residential
co-op -- -- $26,018 -- $26,018
Residential
co-op -- -- 6,862 -- 6,862
Residential
building -- -- 28,267 -- 28,267
Residential
condo -- $3,150 13,071 -- 16,221
Total -- 3,150 74,218 -- 77,368
Petitioner entered $77,368, the total of current and prior years' losses, on line 4 of Form 8582. On the basis of this entry, the form instructed petitioner to complete Part II, Special Allowance for Rental Real Estate With Active Participation. Because petitioner's modified adjusted gross income for 2003 --as reported on Part II --was $299,805, petitioner could not deduct any portion of the $77,368 from his nonpassive income for that year.3
Petitioner's Failure To Appear
This case was set for trial on February 5, 2007, at the Court's trial session in New York, New York. Petitioner did not appear at the calendar call. Petitioner's counsel, Mr. Iannone, appeared and asked for a continuance on the grounds that petitioner was out of town and that Mr. Iannone had been retained as counsel 2 days before the calendar call. The Court denied this motion, set the case for recall, and firmly instructed Mr. Iannone to meet with his client before trial.
When this case was recalled for trial, Mr. Iannone and respondent's counsel appeared and were heard. The parties filed a stipulation of facts with attached exhibits. Petitioner did not appear in court, and Mr. Iannone was unable to present any meaningful evidence as to the issues. The Court closed the proceedings and provided the parties with the opportunity to file posttrial briefs.
Discussion
The Commissioner's determination as set forth in a notice of deficiency is generally presumed correct, and the taxpayer bears the burden of showing that the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant to section 7491(a) the burden of proof as to factual matters shifts to the Commissioner where the taxpayer complies with substantiation requirements, maintains records, and cooperates fully with reasonable requests for witnesses, documents, and other information. On the basis of our review of the record, and for the reasons discussed infra, we conclude that petitioner did not comply with these requirements, and thus, the burden of proof remains with petitioner.
On brief petitioner argues that respondent carries the burden of proof as a result of his concession for 2003. We do not agree. Rule 142(a)(1) would place the burden of proof on respondent only if respondent pleaded a new matter in his answer. For the reasons discussed infra, we conclude that respondent did not plead or raise on brief any new matter, and therefore, respondent bears no additional burden of proof.
Deductions are a matter of legislative grace, and a taxpayer generally bears the burden of proving that he is entitled to the deductions claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934). A taxpayer bears the burden of proof with respect to his entitlement to claimed loss deductions. Lee v. Commissioner, T.C. Memo. 2006-70. A taxpayer is required to maintain records that are sufficient to enable the Commissioner to determine his correct tax liability. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Petitioner's Contentions
Petitioner's argument is based on a two-pronged approach. First, petitioner argues that he is entitled --at a minimum --to a $23,437 passive activity loss deduction for 2003. This amount --$23,437 --if coupled with the amount respondent conceded as petitioner's passive activity loss for 2003, $113,072, equals $136,509 of petitioner's total gain from passive activities, namely real estate, for 2003.
The $23,437 figure represents the $3,150 loss associated with the Collins Avenue property, which petitioner reported on line 22 of his Schedule E (but did not actually report as a deductible loss on line 23) and included on line 1b of his Form 8582, and $20,287 of the $74,218 of prior years' losses, which petitioner included on line 1c of his Form 8582.
Petitioner argues that the Forms 1040, for taxable years 1997 through 2002 which were attached as exhibits to his reply brief, substantiate adequately the $74,218 of prior years' losses.
Second, petitioner argues in the alternative that he is entitled to a $42,239 suspended loss deduction for 2003. Specifically, petitioner argues his claim to current and cumulative suspended losses of $26,018 and $16,221 ($42,239 total) for the Collins Avenue property and the Burns Street property, respectively, on the basis that he disposed of his entire interest in each activity in 2003.4 Petitioner claims that because he sold both of the properties in 2003, the unused or suspended passive activity losses associated with those properties should first be used to offset his passive income gain and, to the extent that gain is exceeded (in this case by $17,802, or $42,239 - $24,437), his nonpassive income for that year.
Respondent's Contentions
With respect to the deductible losses raised for the first time in petitioner's posttrial briefs, respondent contends that petitioner is barred from raising as a new issue for decision either his entitlement to deduct the current year loss associated with the Collins Avenue property or the prior years' losses for the taxable years 1997 through 2002 because: (1) The petition seeks relief specifically and only under section 469(c)(7) and; (2) even if petitioner were entitled to raise as an issue the aforementioned losses, he has not met his burden of proof.
Furthermore, respondent contends that petitioner is not entitled to suspended loss deductions of $26,018 and $16,221 for 2003 from his sale of the properties in that year because Worksheet 1 does not identify sufficiently the properties listed on Schedule E, and petitioner has failed to substantiate the suspended passive activity losses reported on Worksheet 1.
Current and Prior Years' Losses
With respect to petitioner's argument that he is entitled to claim current and prior years' losses for 2003, we agree with respondent that this issue was raised for the first time in petitioner's opening brief. The Court has consistently held that it will not consider issues raised for the first time on brief. Estate of Kleemeier v. Commissioner, 58 T.C. 241, 248-249 (1972). Contrary to petitioner's belief, this issue was not raised by respondent directly or by respondent's concession but was raised for the first time on brief by petitioner.
Assuming arguendo that we may consider this issue, petitioner cannot prevail. Petitioner argues on brief his entitlement to these losses on the basis that: (1) Respondent conceded that his rental real estate and S corporation activities were passive activities for 2003; (2) had he characterized these activities as passive activities when he filed his 2003 return, he would have claimed the $3,150 net passive loss deduction for the Collins Avenue property at that time; and (3) respondent had sufficient information in petitioner's return to adequately compute any allowable passive activity loss for 2003.
Respondent's concession that petitioner's rental real estate and S corporation activities were passive activities for 2003 does not entitle petitioner to claim additional passive loss deductions for that year; and even if it were to have this effect, petitioner would still be required to provide adequate substantiation for the claimed deductions. Petitioner has provided no proof establishing any amount of the current net passive activity loss deduction of $3,150 to which he now claims that he is entitled. Second, as petitioner admits, he did not claim this net passive loss deduction for 2003. Respondent's concession, in itself, does not permit petitioner to recharacterize the items of income and loss reported on his 2003 return. It is not respondent's duty, as petitioner argues, to recompute the losses a taxpayer may be entitled to claim following a concession by respondent. On the basis of the foregoing, we conclude that petitioner is not entitled to any additional amount of current net passive loss deduction for 2003 above the amount respondent conceded.
Regarding the prior years' losses, we note that the petition very clearly --and very narrowly --limited petitioner's claim to entitlement for relief to that provided for under sections 465, 469(c)(7), and 1016, thereby excluding from our consideration section 469(d), which governs prior years' passive activity losses. Moreover, the petition requests no overpayment but merely states that petitioner is "entitled to all of the deductions claimed on his 2003 and 2004 1040 tax returns".
In general, no deduction is allowed in a year for an individual taxpayer's passive activity losses in excess of passive activity income. However, excess losses may be carried forward to subsequent years to offset subsequent passive activity income. Sec. 469(a), (b), (d).
The prior years' passive losses at issue were not claimed on petitioner's 2003 return and therefore do not fall among those deductions that petitioner seeks entitlement to in his petition. We again correct petitioner's misguided argument that the losses in issue should be allowed on the basis of the figures listed on petitioner's 2003 return and the returns for taxable years 1997 through 2002. Not only did petitioner fail to substantiate any of the loss figures reported on his 2003 return; the returns for taxable years 1997 through 2002, which were attached to petitioner's reply brief, are not part of the evidence in this case. See Rule 143(b); Logsdon v. Commissioner, T.C. Memo. 1997-8.
Even if the Court had admitted these returns into evidence, they, by themselves, cannot substantiate the loss figures reported on petitioner's 2003 return. See Widemon v. Commissioner, T.C. Memo. 2004-162 (applying principle to capital losses). Accordingly, we conclude that petitioner is not entitled to raise these purported prior years' losses as an issue and that even if he were so entitled, he has failed to provide any substantiation to support the losses to which he claims he is entitled.
Suspended Passive Activity Losses
With regard to the treatment of a suspended passive activity loss, section 469(g)(1)(A) provides for such a loss when a taxpayer disposes of his entire interest in a passive activity in a transaction where all of the gain or loss realized on the disposition of the interest is recognized. Section 469(g)(1)(A) provides that the excess of --
(i) any loss from such activity for the taxable year (determined after the application of subsection (b)), over
(ii) any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),
shall be treated as a loss which is not from a passive activity.
Accordingly, the usual result upon a taxable disposition of a passive activity is that the taxpayer may use any remaining suspended passive activity loss allocated to that activity first against passive income from the same activity, then against net passive income from other passive activities, and then as a nonpassive loss.
On Worksheet 1, petitioner reported overall losses of $26,018 for a "residential co-op" and $16,221 for a "residential condo". No further description of these properties was included on Worksheet 1. Since petitioner's Schedule E characterizes three of the six total listed properties as "condo" and two of the six total listed properties as "co-op", it is impossible for the Court to ascertain definitively which of the Schedule E properties correspond to the figures reported on Worksheet 1. As previously stated, petitioner raised these suspended losses as a new issue, and therefore bears the burden of proof as to the amounts claimed.
Petitioner has not met his burden with respect to the standard for record keeping under section 6001. Petitioner provided no proof as to the amounts of the suspended losses to which he now claims that he is entitled. The only exhibits pertinent to this issue are petitioner's tax returns for 2003 and 2004. Contrary to petitioner's belief, a tax return alone is not proof of a taxpayer's entitlement to a deduction claimed therein; a tax return merely sets forth the taxpayer's claim. See Roberts v. Commissioner, 62 T.C. 834, 837 (1974); Seabord Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957). Without substantive evidence, we simply cannot determine whether petitioner is entitled to deduct losses for 2003 from the properties that he sold in that year.
After concessions, it is agreed that petitioner's rental real estate activities were passive activities during the years in issue. While we agree that under section 469(g)(1)(A) petitioner would be entitled to claim a suspended loss deduction for 2003 on the basis of his disposition of his entire interest in the aforementioned passive activities, he did not do so on his 2003 return. This issue was first raised on brief. Moreover, we lack the necessary proof that he did, in fact, incur these losses. Accordingly, and on the basis of the foregoing, we hold that petitioner has not met his burden with respect to this issue, and is therefore not entitled to claim a suspended loss deduction for the dispositions of his interests in the aforementioned passive activities for 2003.
To reflect the foregoing, including all concessions,
Decision will be entered under Rule 155.
1 Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2 Respondent concedes that petitioner is entitled to a $113,072 passive activity loss deduction for 2003. This amount represents the aggregate of petitioner's rental real estate loss of $49,896 and a pass-through loss of $63,176 stemming from his ownership of an S corporation. Respondent acknowledges that petitioner is entitled to deduct the aforementioned amounts as a passive activity loss on the basis of the $136,509 of passive activity gain that petitioner reported for 2003. Petitioner concedes that he is not entitled to a deduction for either rental real estate losses or a pass-through loss for the taxable year 2004. On brief petitioner concedes that for 2003 his S corporation activity was a passive activity. Inasmuch as petitioner failed to appear at trial and present credible evidence to support his contention that he was an active participant in his real estate activity for 2003, we deem this issue conceded.
3 A taxpayer who "actively participated" in a rental real estate activity may deduct a maximum loss of $25,000 per year related to the activity. Sec. 469(i)(1) and (2). This exception is fully phased out, however, when adjusted gross income (AGI) equals or exceeds $150,000. Sec. 469(i)(3)(A), (F). Petitioner reported AGI of $299,805. Under sec. 469(i)(3)(F)(iv), AGI is determined without regard to any passive activity or any loss allowable by reason of sec. 469(c)(7).
4 Although not contained in the petition, this argument was raised by petitioner's counsel during opening statements. Respondent's reply brief is responsive to this issue.
Wednesday, April 9, 2008
Tuesday, April 8, 2008
6672 Trust fund penalty
Among the factors indicative of the requisite authority over the corporate taxpayer's finances or general decision making to qualify an individual as a "responsible person," are:
whether the employee (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees.
Charles B. Erwinv. United States Of America,
U.S. District Court, Mid. Dist. N.C.; 1:06CV59, March 18, 2008.
[ Code Sec. 6672]
Assessment: Employment withholding taxes: Failure to pay taxes: Willfulness: Trust fund recovery penalty: Responsible person. --
The founder, shareholder and officer of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation's unpaid withholding taxes. The individual was a "responsible person" with respect to the corporation because he exercised significant control over the corporation's day-to-day activities, hired or fired management employees and accountants in charge of the corporation's payroll operations, reviewed weekly and monthly financial statements, personally guaranteed payments to vendors and directed checks to be written and expenses to be paid. Further, the individual acted willfully because he had reason to know that the taxes were not being paid, but directed that payments be made to creditors other than the IRS.
ORDER
BEATY, Chief Judge: This matter is before the Court on the Recommendation from the United States Magistrate Judge [Document #55] granting summary judgment in favor of the United States for unpaid payroll withholding taxes owed by GC Affordable Dining, Inc. ("GCAD"), a corporation in which Plaintiff was a shareholder, pursuant to 26 U.S.C. §6672. Plaintiff brought suit against the United States for the recovery of tax penalties assessed against him. The United States filed a Counterclaim against Plaintiff for a trust fund recovery penalty, plus interest, in the amount of $264,579.00, representing the payroll taxes required to be withheld from GCAD employees' wages during four quarters: the third quarter of 1998 and the first, second, and third quarters of 1999. The United States subsequently filed a Third-Party Complaint against Stephen C. Coggin ("Coggin"), William G. Pintner ("Pintner"), James Barry Light ("B. Light"), and Hartsell B. Light, Jr. ("H. Light") alleging the same claims alleged against Erwin [Document #9]. On September 19, 2007, the United States filed a Motion for Summary Judgment against Erwin on his claims as well as its counterclaims against Erwin [Document #45]. Erwin then filed a cross Motion for Summary Judgment against the United States on its counterclaims against him [Document #46]. On November 27, 2007, Magistrate Judge Dixon recommended that the Court deny Erwin's Motion for Summary Judgment and grant the United States' Motion for Summary Judgment [Document #55].
Within the time provided by 28 U.S.C. §636, Counsel for Plaintiff objected to the Recommendation. This Court reviewed de novo the Objections and the portions of the Magistrate Judge's Recommendation to which objection was made, and has made a determination which is in accord with the Magistrate Judge's decision. The Court will therefore adopt the Magistrate Judge's Recommendation.
Consequently, the Court will order that Plaintiff's Motion for Summary Judgment be denied, and that the United States Motion for Summary Judgment against Plaintiff Charles B. Erwin be granted. As a result of this determination, Plaintiff Erwin's claims against the United States will be dismissed and judgment will be entered in favor of the United States on its counterclaims against Plaintiff Erwin. 1
Because all claims by and against Plaintiff Erwin have now been resolved, the only remaining claims are those claims brought by the United States against the Third Party Defendants, Stephen C. Coggin, William G. Pintner, James Barry Light, and Hartsell B. Light, Jr. However, the United States has filed a Motion pursuant to Federal Rule of Civil Procedure 54(b) for Entry of Final Judgment Against Plaintiff Erwin and a Motion to Stay further proceedings against the Third Party Defendants [Document #67]. Plaintiff Erwin and Defendants Pintner, B. Light and H. Light all consent. 2 Having considered this motion, the Court finds that all of the claims by and against Plaintiff Erwin have been resolved, but that the United States' claims against the Third Party Defendants in this case remain unresolved. The Court further finds that there is no just reason for delay of the entry of final judgment as to the claims by and against Plaintiff Erwin. Therefore, the United States' motion will be granted and final judgment as to Plaintiff Erwin pursuant to Rule 54(b) will be entered contemporaneously herewith. Further, the Court concludes that a Stay as to the United States' claims against the Third Party Defendants in this case is appropriate pending final resolution of any appeal by Plaintiff Erwin.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
DIXON, United States Magistrate Judge: This matter is before the court on cross motions for summary judgment filed by Plaintiff Charles B. Erwin (doc. no. 46) and Defendant United States of America (doc. no. 45). Plaintiff filed this action after paying a portion of the amount allegedly due under a trust fund recovery penalty for unpaid payroll withholding taxes for GC Affordable Dining, Inc, ("GCAD"), assessed against him pursuant to 26 U.S.C. §6672. The government counterclaimed for a total of $264,579 in unpaid assessments, penalties and interest for the fourth quarter of 1998 and the first three quarters of 1999. The motions have been fully briefed and the matter is ripe for disposition. Because there has been no consent, I must address the motions by way of a recommendation. For the following reasons, it will be recommended that the court grant Defendant's motion for summary judgment and deny Plaintiff's motion for summary judgment.
II. Discussion
A. Summary Judgment Standard
Summary judgment is appropriate when there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Zahodnick v. International Bus. Machs. Corp., 135 F.3d 911, 913 (4th Cir. 1997). The party seeking summary judgment bears the burden of initially coming forward and demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met its burden, the non-moving party must then affirmatively demonstrate that there is a genuine issue of material fact which requires trial. Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). There is no issue for trial unless there is sufficient evidence favoring the non-moving party for a fact-finder to return a verdict for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Sylvia Dev. Corp. v. Calvert County, Md., 48 F.3d 810, 817 (4th Cir. 1995). Thus, the moving party can bear his burden either by presenting affirmative evidence or by demonstrating that the non-moving party's evidence is insufficient to establish his claim. Celotex Corp., 477 U.S. at 331 (Brennan, J., dissenting). When making the summary judgment determination the court must view the evidence, and all justifiable inferences from the evidence, in the light most favorable to the non-moving party. Zahodnick, 135 F.3d at 913; Halperin v. Abacus Tech. Corp., 128 F.3d 191, 196 (4th Cir. 1997).
B. Liability under 26 U.S.C. §6672
Federal law requires that employers withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See 26 U.S.C. §§3102(a) and 3402(a). The employer holds the withheld taxes `in trust' for the United States and must pay them over to the government on a regular basis. If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes and seek the unpaid funds from the employer. The relevant statute, 26 U.S.C. §6672(a), provides:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
Liability under section 6672, thus, requires proof that the actor (1) was a "responsible person" under a duty to collect, account for, and pay over trust fund taxes, and (2) willfully failed to discharge his duty. Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir. 1992). A party is not presumed to be a "responsible person," however, merely on the basis of his title. See O'Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992) (titular authority is not sufficient; substance of circumstances must demonstrate that officer exercises and uses authority over financial affairs or is under a duty to do so.) The Fourth Circuit has stated that, in determining responsibility under section 6672, the "crucial inquiry [is] whether the person had the effective power to pay taxes - that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay taxes owed." Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999) (quoting Barnett v. I.R.S., 988 F.2d 1449, 1455 (5th Cir. 1993)). Among the factors indicative of the requisite authority over the corporate taxpayer's finances or general decision making to qualify an individual as a "responsible person," are:
whether the employee (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees.
Id. These factors are to be evaluated together; no single factor is dispositive or determinative of authority. Barnett, 988 F.2d at 1455. There can be more than one person in a corporation who qualifies as a "responsible person", Plett, 185 F.3d at 219, and section 6672 applies to all responsible persons, not just the most responsible person. Turnbull v. United States, 929 F.2d 173, 178 (5th Cir. 1991).
1. Responsible person
Crediting all factual assertions which favor Plaintiff, the court nonetheless concludes that as to who is the "responsible person" under 26 U.S.C. §6672, no genuine issue of material fact precludes summary judgment for the Government, and summary judgment is therefore appropriate.
Upon review of the substance of Plaintiff's authority within GCAD, and applying the Plett factors, it is clear and beyond genuine issue that Plaintiff had the authority to direct that the tax payments be made. Concrete indications of Plaintiff's authority include the fact that he was involved in most, if not all, of the major decisions regarding GCAD, including lease negotiations, and hiring of the management team and the accountants who performed services for GCAD. In fact, all but one of the Plett factors go in the Government's favor.
a. Board of Directors
While an individual's title is not necessarily determinative, it is a factor to be considered. O'Connor, 956 F.2d at 50. Plaintiff here was a founder, shareholder and officer of GCAD. He started as a one-third shareholder, but by 2000 he owned 100 percent of the GCAD stock. He also served as Secretary and Treasurer during the entire period, and as Vice-President in the late 1990s and President as of February 1, 2000. This factor clearly favors the Government's position that Plaintiff was a "responsible person."
b. Control of company payroll
Plaintiff admits that, on several occasions, he and the other shareholders attempted to infuse capital into the corporation to pay the delinquent payroll taxes. In fact, Plaintiff admits that when he "learned that the Light Brothers had not satisfied [the withholding tax] obligations the shareholders raised capital and remitted $150,000 to the Light Brothers, expressly instructing the Light Brothers to cure the tax deficiency." (Plaintiff's memo in support of s.j. 12). Clearly, then, Plaintiff viewed himself (together with the other shareholders) to be responsible for payment of the payroll taxes and further had the authority to order that the taxes be paid. There is no evidence that Plaintiff himself personally oversaw the payroll, but there is evidence that he participated in the decision to hire the accountants who took care of the day-to-day payroll operations. Moreover, in late 1999, Plaintiff put his own management company, Chelda, in charge of GCAD's accounting functions, including payroll and withholding tax matters. (Pl. dep. 212.)
c. Payment of creditors
The evidence also shows that Plaintiff had decision-making authority over which creditors would be paid. He signed personal guarantees to several food vendors, ensuring that those bills would be paid. In his deposition, Plaintiff admitted that lease payments and food vendors were paid out of gross receipts which were available even in 2000 to pay down the tax delinquency. Barry Light, one of GCAD's accountants, testified that Plaintiff regularly gave instructions as to which creditors should be paid, and at one point at the end of 1998, Plaintiff and Coggin instructed Light to pay rents and expenses "but nothing on the taxes." (Barry Light dep. 78). While Plaintiff may not have exercised his authority on a daily basis, he clearly had the power to direct which payments were made and when they would be made.
d. Participation in day-to-day management
Plaintiff was involved in many facets of the GCAD operations from its startup in 1994 to the close of business in 2001. Plaintiff participated in the hiring and firing of GCAD's managers and accountants. He also participated in decisions regarding restaurant locations, negotiation of leases and other contracts, and personally guaranteed payments to food vendors so that they would extend credit to GCAD. In addition, Plaintiff admits that he reviewed weekly sales figures and monthly financial statements and visited the GCAD restaurants and met with the restaurant managers. According to Barry Light, daily sales figures for each store were faxed to Plaintiff and Coggin every day. (Barry Light dep. 68.) In fact, Barry Light and Pintner regarded Plaintiff's involvement to be on a daily basis. (Pintner dep. 33-34; Barry Light dep. 68.) Pintner testified that he "didn't do anything without [Coggin and Plaintiff's] awareness." (Pintner dep. 33.) Plaintiff testified that he reviewed the federal income tax returns for GCAD. (Pl. dep. 124.) Plaintiff clearly was more than a "passive investor" in GCAD. His participation in the operations of the corporation qualifies him as a responsible person.
e. Check-writing authority
There is no evidence in the record that Plaintiff had authority to write or sign checks on behalf of GCAD. Nevertheless, it is clear that, in light of his many roles in the corporation, he had the authority to direct checks be written and expenses be paid, and that he in fact exercised that authority on many occasions.
f. Hiring/firing authority
The final Plett factor is whether the individual had the authority to hire and fire employees. Plaintiff was actively involved in the hiring and firing of Markley, Pugal, Pintner, and the Light Brothers, all of whom were management employees or, in the case of the Light Brothers, individuals performing professional services to GCAD. There is no evidence that Plaintiff was involved in the hiring and/or firing of the individual restaurant managers or employees, but his participation in the hiring of the corporate managers clearly shows that he had authority over employment decisions.
In analyzing these factors, the court is cognizant that no one factor is controlling, and, indeed, that the salient, deciding point is whether Plaintiff had the effective power to see that the taxes were paid. The evidence clearly shows that Plaintiff had that power, stemming from his actual authority and ability, in view of his status as a founder, director, officer and shareholder and his day-to-day involvement in GCAD. Simply because Plaintiff may not have been present on a daily basis does not change the fact that at any point, by virtue of his authority, Plaintiff could have had substantial input into financial decisions of the corporation, and in fact, on numerous occasions he exercised that authority. Based upon the evidence set forth, supra, Plaintiff clearly falls within the parameters of a "responsible person" under section 6672. 8
2. Willfulness
To determine whether a responsible person "willfully" failed to collect, account for or remit payroll taxes to the United States, the court must "inquire whether the `responsible person' had `knowledge of nonpayment or reckless disregard of whether the payments were being made.' " Plett, 185 F.3d at 219 (citing Turpin, 970 F.2d at 1347). A responsible person's intentional preference of other creditors over the United States with knowledge of the nonpayment of payroll taxes establishes his willfulness as a matter of law. Plett, 185 F.3d at 219; United States v. Pomponio, 635 F.2d 293, 298 (4th Cir. 1980). An intentional preference is shown by establishing that the responsible person knew of or recklessly disregarded the existence of an unpaid payroll tax deficiency. Plett, 185 F.3d at 219; Turpin, 970 F.2d at 1347. One way in which willfulness may be established is to show that the responsible person made a "voluntary, conscious and intentional decision to prefer other creditors over the Government." Greenberg v. United States, 46 F.3d 239, 244 (3rd Cir. 1994).
Plaintiff asserts that because he was relying on "seasoned professional" accountants, he "had no reason to think that GCAD's IRS obligations were not being satisfied." (Pl. memo in support of s.j. 18). By the end of 1998, however, Plaintiff knew or had strong reason to know that GCAD was undergoing a financial crisis. In fact, in December 1998 Plaintiff learned that the Light Brothers had failed to make payroll tax deposits for a prior quarter. Plaintiff then made capital contributions and "strongly admonished" the Light Brothers to make timely tax payments in the future. His failure to monitor the situation after first becoming aware of the Light Brothers' actions is simply indefensible.
Even assuming, as Plaintiff claims, that he was not aware of the tax deficiencies until August 1999, his actions after that period show willfulness. During the third quarter of 1999, GCAD's payroll tax liability increased by $163,000, yet the corporation only made two tax deposits totaling $7,118.24. Thus, the withholding tax deficiency at the end of the third quarter of 1999 was over $150,000. Plaintiff made a capital contribution of $50,000, but GCAD still owed over $100,000 for that quarter. Moreover, prior deficiencies from 1998 and the first two quarters of 1999 were not satisfied. During this entire period, however, other creditors were paid and substantial sales revenues were generated. To be sure, GCAD was struggling financially; Plaintiff asserts that rents and expenses were paid just to keep the doors open. Nevertheless, as the court noted in Greenberg, "[i]t is no defense that the corporation was in financial distress and that funds were spent to keep the corporation in business with the expectation that sufficient revenue would later become available to pay the United States." 46 F.3d at 244. It must also be noted that Plaintiff himself raised funds to pay the first tax deficiencies. At the very least, at that point, and as an officer and shareholder of the company actively involved in many corporate decisions, Plaintiff was on notice that tax liability was an issue which might again be a problem in the future and that it was critical to stay on top of the matter and prevent future tax delinquency. After all, "the government cannot be made an unwilling partner in a business experiencing financial difficulties." Thibodeau v. United States, 828 F.2d 1499, 1506 (11th Cir. 1987).
Although not yet addressed by the Fourth Circuit, courts in other circuits have held that even if a "responsible person" is unaware that withholding taxes have gone unpaid in past quarters, a responsible person who becomes aware that taxes have gone unpaid in past quarters in which he was also a responsible person, is under a duty to use all "unencumbered funds" available to the corporation to pay those back taxes. See Thosteson v. United States, 331 F.3d 1294, 1300-01 (11th Cir. 2003); United States v. Kim, 111 F.3d 1351, 1357 (7th Cir. 1997); Honey v. United States, 963 F.2d 1083, 1089 (8th Cir. 1992); Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir. 1979). This duty extends not only to funds available to the corporation at the time the responsible person becomes aware, but also to any unencumbered funds acquired thereafter. Thosteson, 331 F.3d 1294. As explained by the Eleventh Circuit:
If the responsible person fails to use such unencumbered funds to satisfy the past unpaid liability, he is deemed personally liable for the taxes that went unpaid in the past while he was responsible. The responsible person deemed liable for the unpaid liability of past tax quarters is considered to have "willfully" failed to pay over the taxes for those past quarters, even though he was unaware at that time that the taxes were going unpaid.
Thosteson, 331 F.3d at 1301. Plaintiff was under a duty to reduce GCAD's accrued tax liability with funds acquired after the taxes had been withheld and the funds, presumably, were dissipated. Thus, once Plaintiff was made aware of the unpaid tax liability, payments made to creditors other than the IRS constituted willful violations of section 6672.
Plaintiff, relying on Turpin v. United States, 970 F.2d 1344 (4th Cir. 1992), argues that his knowledge of GCAD's past tax deficiency "does not, as a matter of law, establish that he acted willfully with respect to the next deficiency." (Pl. memo. in resp. to def. m.s.j. 16-17). Plaintiff's reliance on Turpin, however, is misplaced, because the plaintiff in that case was found, by a jury, to have neither known of nor to have recklessly disregarded the corporation's tax deficiency. Plaintiff here clearly knew of the tax deficiency as of August 1999, and there is evidence that GCAD generated over $5 million in gross receipts after that date. These funds were used to pay other creditors, including landlords and food vendors, together with employee wages, while the tax deficiencies remained unpaid. Moreover, even after the initial deficiencies were brought to Plaintiff's attention, he continued to entrust the financial management of the corporation to the Light Brothers, whom he knew to be unreliable. Under these facts, Plaintiff's reckless disregard demonstrates willfulness as a matter of law for the purposes of summary judgment.
III. Conclusion
Because Plaintiff is a responsible person under section 6672 and he willfully failed to pay withheld taxes to the IRS, IT IS RECOMMENDED that the motion of the United States for summary judgment (doc. no. 45) be GRANTED and Plaintiff's motion for summary judgment (doc. no. 46) be DENIED .
1 Plaintiff filed an action seeking a refund of tax penalties and related interest assessed to him under 26 U.S.C. §6672. Because the reasoning of the Magistrate Judge's Recommended decision applies equally to the claims by Plaintiff Erwin against the United States and the counterclaims by the United States against Plaintiff Erwin, and because the Magistrate Judge recommended granting the United States' Motion for Summary Judgment in its entirety, all of Plaintiff Erwin's claims against the United States will be dismissed.
Among the factors indicative of the requisite authority over the corporate taxpayer's finances or general decision making to qualify an individual as a "responsible person," are:
whether the employee (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees.
Charles B. Erwinv. United States Of America,
U.S. District Court, Mid. Dist. N.C.; 1:06CV59, March 18, 2008.
[ Code Sec. 6672]
Assessment: Employment withholding taxes: Failure to pay taxes: Willfulness: Trust fund recovery penalty: Responsible person. --
The founder, shareholder and officer of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation's unpaid withholding taxes. The individual was a "responsible person" with respect to the corporation because he exercised significant control over the corporation's day-to-day activities, hired or fired management employees and accountants in charge of the corporation's payroll operations, reviewed weekly and monthly financial statements, personally guaranteed payments to vendors and directed checks to be written and expenses to be paid. Further, the individual acted willfully because he had reason to know that the taxes were not being paid, but directed that payments be made to creditors other than the IRS.
ORDER
BEATY, Chief Judge: This matter is before the Court on the Recommendation from the United States Magistrate Judge [Document #55] granting summary judgment in favor of the United States for unpaid payroll withholding taxes owed by GC Affordable Dining, Inc. ("GCAD"), a corporation in which Plaintiff was a shareholder, pursuant to 26 U.S.C. §6672. Plaintiff brought suit against the United States for the recovery of tax penalties assessed against him. The United States filed a Counterclaim against Plaintiff for a trust fund recovery penalty, plus interest, in the amount of $264,579.00, representing the payroll taxes required to be withheld from GCAD employees' wages during four quarters: the third quarter of 1998 and the first, second, and third quarters of 1999. The United States subsequently filed a Third-Party Complaint against Stephen C. Coggin ("Coggin"), William G. Pintner ("Pintner"), James Barry Light ("B. Light"), and Hartsell B. Light, Jr. ("H. Light") alleging the same claims alleged against Erwin [Document #9]. On September 19, 2007, the United States filed a Motion for Summary Judgment against Erwin on his claims as well as its counterclaims against Erwin [Document #45]. Erwin then filed a cross Motion for Summary Judgment against the United States on its counterclaims against him [Document #46]. On November 27, 2007, Magistrate Judge Dixon recommended that the Court deny Erwin's Motion for Summary Judgment and grant the United States' Motion for Summary Judgment [Document #55].
Within the time provided by 28 U.S.C. §636, Counsel for Plaintiff objected to the Recommendation. This Court reviewed de novo the Objections and the portions of the Magistrate Judge's Recommendation to which objection was made, and has made a determination which is in accord with the Magistrate Judge's decision. The Court will therefore adopt the Magistrate Judge's Recommendation.
Consequently, the Court will order that Plaintiff's Motion for Summary Judgment be denied, and that the United States Motion for Summary Judgment against Plaintiff Charles B. Erwin be granted. As a result of this determination, Plaintiff Erwin's claims against the United States will be dismissed and judgment will be entered in favor of the United States on its counterclaims against Plaintiff Erwin. 1
Because all claims by and against Plaintiff Erwin have now been resolved, the only remaining claims are those claims brought by the United States against the Third Party Defendants, Stephen C. Coggin, William G. Pintner, James Barry Light, and Hartsell B. Light, Jr. However, the United States has filed a Motion pursuant to Federal Rule of Civil Procedure 54(b) for Entry of Final Judgment Against Plaintiff Erwin and a Motion to Stay further proceedings against the Third Party Defendants [Document #67]. Plaintiff Erwin and Defendants Pintner, B. Light and H. Light all consent. 2 Having considered this motion, the Court finds that all of the claims by and against Plaintiff Erwin have been resolved, but that the United States' claims against the Third Party Defendants in this case remain unresolved. The Court further finds that there is no just reason for delay of the entry of final judgment as to the claims by and against Plaintiff Erwin. Therefore, the United States' motion will be granted and final judgment as to Plaintiff Erwin pursuant to Rule 54(b) will be entered contemporaneously herewith. Further, the Court concludes that a Stay as to the United States' claims against the Third Party Defendants in this case is appropriate pending final resolution of any appeal by Plaintiff Erwin.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
DIXON, United States Magistrate Judge: This matter is before the court on cross motions for summary judgment filed by Plaintiff Charles B. Erwin (doc. no. 46) and Defendant United States of America (doc. no. 45). Plaintiff filed this action after paying a portion of the amount allegedly due under a trust fund recovery penalty for unpaid payroll withholding taxes for GC Affordable Dining, Inc, ("GCAD"), assessed against him pursuant to 26 U.S.C. §6672. The government counterclaimed for a total of $264,579 in unpaid assessments, penalties and interest for the fourth quarter of 1998 and the first three quarters of 1999. The motions have been fully briefed and the matter is ripe for disposition. Because there has been no consent, I must address the motions by way of a recommendation. For the following reasons, it will be recommended that the court grant Defendant's motion for summary judgment and deny Plaintiff's motion for summary judgment.
II. Discussion
A. Summary Judgment Standard
Summary judgment is appropriate when there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Zahodnick v. International Bus. Machs. Corp., 135 F.3d 911, 913 (4th Cir. 1997). The party seeking summary judgment bears the burden of initially coming forward and demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met its burden, the non-moving party must then affirmatively demonstrate that there is a genuine issue of material fact which requires trial. Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). There is no issue for trial unless there is sufficient evidence favoring the non-moving party for a fact-finder to return a verdict for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Sylvia Dev. Corp. v. Calvert County, Md., 48 F.3d 810, 817 (4th Cir. 1995). Thus, the moving party can bear his burden either by presenting affirmative evidence or by demonstrating that the non-moving party's evidence is insufficient to establish his claim. Celotex Corp., 477 U.S. at 331 (Brennan, J., dissenting). When making the summary judgment determination the court must view the evidence, and all justifiable inferences from the evidence, in the light most favorable to the non-moving party. Zahodnick, 135 F.3d at 913; Halperin v. Abacus Tech. Corp., 128 F.3d 191, 196 (4th Cir. 1997).
B. Liability under 26 U.S.C. §6672
Federal law requires that employers withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See 26 U.S.C. §§3102(a) and 3402(a). The employer holds the withheld taxes `in trust' for the United States and must pay them over to the government on a regular basis. If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes and seek the unpaid funds from the employer. The relevant statute, 26 U.S.C. §6672(a), provides:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
Liability under section 6672, thus, requires proof that the actor (1) was a "responsible person" under a duty to collect, account for, and pay over trust fund taxes, and (2) willfully failed to discharge his duty. Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir. 1992). A party is not presumed to be a "responsible person," however, merely on the basis of his title. See O'Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992) (titular authority is not sufficient; substance of circumstances must demonstrate that officer exercises and uses authority over financial affairs or is under a duty to do so.) The Fourth Circuit has stated that, in determining responsibility under section 6672, the "crucial inquiry [is] whether the person had the effective power to pay taxes - that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay taxes owed." Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999) (quoting Barnett v. I.R.S., 988 F.2d 1449, 1455 (5th Cir. 1993)). Among the factors indicative of the requisite authority over the corporate taxpayer's finances or general decision making to qualify an individual as a "responsible person," are:
whether the employee (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees.
Id. These factors are to be evaluated together; no single factor is dispositive or determinative of authority. Barnett, 988 F.2d at 1455. There can be more than one person in a corporation who qualifies as a "responsible person", Plett, 185 F.3d at 219, and section 6672 applies to all responsible persons, not just the most responsible person. Turnbull v. United States, 929 F.2d 173, 178 (5th Cir. 1991).
1. Responsible person
Crediting all factual assertions which favor Plaintiff, the court nonetheless concludes that as to who is the "responsible person" under 26 U.S.C. §6672, no genuine issue of material fact precludes summary judgment for the Government, and summary judgment is therefore appropriate.
Upon review of the substance of Plaintiff's authority within GCAD, and applying the Plett factors, it is clear and beyond genuine issue that Plaintiff had the authority to direct that the tax payments be made. Concrete indications of Plaintiff's authority include the fact that he was involved in most, if not all, of the major decisions regarding GCAD, including lease negotiations, and hiring of the management team and the accountants who performed services for GCAD. In fact, all but one of the Plett factors go in the Government's favor.
a. Board of Directors
While an individual's title is not necessarily determinative, it is a factor to be considered. O'Connor, 956 F.2d at 50. Plaintiff here was a founder, shareholder and officer of GCAD. He started as a one-third shareholder, but by 2000 he owned 100 percent of the GCAD stock. He also served as Secretary and Treasurer during the entire period, and as Vice-President in the late 1990s and President as of February 1, 2000. This factor clearly favors the Government's position that Plaintiff was a "responsible person."
b. Control of company payroll
Plaintiff admits that, on several occasions, he and the other shareholders attempted to infuse capital into the corporation to pay the delinquent payroll taxes. In fact, Plaintiff admits that when he "learned that the Light Brothers had not satisfied [the withholding tax] obligations the shareholders raised capital and remitted $150,000 to the Light Brothers, expressly instructing the Light Brothers to cure the tax deficiency." (Plaintiff's memo in support of s.j. 12). Clearly, then, Plaintiff viewed himself (together with the other shareholders) to be responsible for payment of the payroll taxes and further had the authority to order that the taxes be paid. There is no evidence that Plaintiff himself personally oversaw the payroll, but there is evidence that he participated in the decision to hire the accountants who took care of the day-to-day payroll operations. Moreover, in late 1999, Plaintiff put his own management company, Chelda, in charge of GCAD's accounting functions, including payroll and withholding tax matters. (Pl. dep. 212.)
c. Payment of creditors
The evidence also shows that Plaintiff had decision-making authority over which creditors would be paid. He signed personal guarantees to several food vendors, ensuring that those bills would be paid. In his deposition, Plaintiff admitted that lease payments and food vendors were paid out of gross receipts which were available even in 2000 to pay down the tax delinquency. Barry Light, one of GCAD's accountants, testified that Plaintiff regularly gave instructions as to which creditors should be paid, and at one point at the end of 1998, Plaintiff and Coggin instructed Light to pay rents and expenses "but nothing on the taxes." (Barry Light dep. 78). While Plaintiff may not have exercised his authority on a daily basis, he clearly had the power to direct which payments were made and when they would be made.
d. Participation in day-to-day management
Plaintiff was involved in many facets of the GCAD operations from its startup in 1994 to the close of business in 2001. Plaintiff participated in the hiring and firing of GCAD's managers and accountants. He also participated in decisions regarding restaurant locations, negotiation of leases and other contracts, and personally guaranteed payments to food vendors so that they would extend credit to GCAD. In addition, Plaintiff admits that he reviewed weekly sales figures and monthly financial statements and visited the GCAD restaurants and met with the restaurant managers. According to Barry Light, daily sales figures for each store were faxed to Plaintiff and Coggin every day. (Barry Light dep. 68.) In fact, Barry Light and Pintner regarded Plaintiff's involvement to be on a daily basis. (Pintner dep. 33-34; Barry Light dep. 68.) Pintner testified that he "didn't do anything without [Coggin and Plaintiff's] awareness." (Pintner dep. 33.) Plaintiff testified that he reviewed the federal income tax returns for GCAD. (Pl. dep. 124.) Plaintiff clearly was more than a "passive investor" in GCAD. His participation in the operations of the corporation qualifies him as a responsible person.
e. Check-writing authority
There is no evidence in the record that Plaintiff had authority to write or sign checks on behalf of GCAD. Nevertheless, it is clear that, in light of his many roles in the corporation, he had the authority to direct checks be written and expenses be paid, and that he in fact exercised that authority on many occasions.
f. Hiring/firing authority
The final Plett factor is whether the individual had the authority to hire and fire employees. Plaintiff was actively involved in the hiring and firing of Markley, Pugal, Pintner, and the Light Brothers, all of whom were management employees or, in the case of the Light Brothers, individuals performing professional services to GCAD. There is no evidence that Plaintiff was involved in the hiring and/or firing of the individual restaurant managers or employees, but his participation in the hiring of the corporate managers clearly shows that he had authority over employment decisions.
In analyzing these factors, the court is cognizant that no one factor is controlling, and, indeed, that the salient, deciding point is whether Plaintiff had the effective power to see that the taxes were paid. The evidence clearly shows that Plaintiff had that power, stemming from his actual authority and ability, in view of his status as a founder, director, officer and shareholder and his day-to-day involvement in GCAD. Simply because Plaintiff may not have been present on a daily basis does not change the fact that at any point, by virtue of his authority, Plaintiff could have had substantial input into financial decisions of the corporation, and in fact, on numerous occasions he exercised that authority. Based upon the evidence set forth, supra, Plaintiff clearly falls within the parameters of a "responsible person" under section 6672. 8
2. Willfulness
To determine whether a responsible person "willfully" failed to collect, account for or remit payroll taxes to the United States, the court must "inquire whether the `responsible person' had `knowledge of nonpayment or reckless disregard of whether the payments were being made.' " Plett, 185 F.3d at 219 (citing Turpin, 970 F.2d at 1347). A responsible person's intentional preference of other creditors over the United States with knowledge of the nonpayment of payroll taxes establishes his willfulness as a matter of law. Plett, 185 F.3d at 219; United States v. Pomponio, 635 F.2d 293, 298 (4th Cir. 1980). An intentional preference is shown by establishing that the responsible person knew of or recklessly disregarded the existence of an unpaid payroll tax deficiency. Plett, 185 F.3d at 219; Turpin, 970 F.2d at 1347. One way in which willfulness may be established is to show that the responsible person made a "voluntary, conscious and intentional decision to prefer other creditors over the Government." Greenberg v. United States, 46 F.3d 239, 244 (3rd Cir. 1994).
Plaintiff asserts that because he was relying on "seasoned professional" accountants, he "had no reason to think that GCAD's IRS obligations were not being satisfied." (Pl. memo in support of s.j. 18). By the end of 1998, however, Plaintiff knew or had strong reason to know that GCAD was undergoing a financial crisis. In fact, in December 1998 Plaintiff learned that the Light Brothers had failed to make payroll tax deposits for a prior quarter. Plaintiff then made capital contributions and "strongly admonished" the Light Brothers to make timely tax payments in the future. His failure to monitor the situation after first becoming aware of the Light Brothers' actions is simply indefensible.
Even assuming, as Plaintiff claims, that he was not aware of the tax deficiencies until August 1999, his actions after that period show willfulness. During the third quarter of 1999, GCAD's payroll tax liability increased by $163,000, yet the corporation only made two tax deposits totaling $7,118.24. Thus, the withholding tax deficiency at the end of the third quarter of 1999 was over $150,000. Plaintiff made a capital contribution of $50,000, but GCAD still owed over $100,000 for that quarter. Moreover, prior deficiencies from 1998 and the first two quarters of 1999 were not satisfied. During this entire period, however, other creditors were paid and substantial sales revenues were generated. To be sure, GCAD was struggling financially; Plaintiff asserts that rents and expenses were paid just to keep the doors open. Nevertheless, as the court noted in Greenberg, "[i]t is no defense that the corporation was in financial distress and that funds were spent to keep the corporation in business with the expectation that sufficient revenue would later become available to pay the United States." 46 F.3d at 244. It must also be noted that Plaintiff himself raised funds to pay the first tax deficiencies. At the very least, at that point, and as an officer and shareholder of the company actively involved in many corporate decisions, Plaintiff was on notice that tax liability was an issue which might again be a problem in the future and that it was critical to stay on top of the matter and prevent future tax delinquency. After all, "the government cannot be made an unwilling partner in a business experiencing financial difficulties." Thibodeau v. United States, 828 F.2d 1499, 1506 (11th Cir. 1987).
Although not yet addressed by the Fourth Circuit, courts in other circuits have held that even if a "responsible person" is unaware that withholding taxes have gone unpaid in past quarters, a responsible person who becomes aware that taxes have gone unpaid in past quarters in which he was also a responsible person, is under a duty to use all "unencumbered funds" available to the corporation to pay those back taxes. See Thosteson v. United States, 331 F.3d 1294, 1300-01 (11th Cir. 2003); United States v. Kim, 111 F.3d 1351, 1357 (7th Cir. 1997); Honey v. United States, 963 F.2d 1083, 1089 (8th Cir. 1992); Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir. 1979). This duty extends not only to funds available to the corporation at the time the responsible person becomes aware, but also to any unencumbered funds acquired thereafter. Thosteson, 331 F.3d 1294. As explained by the Eleventh Circuit:
If the responsible person fails to use such unencumbered funds to satisfy the past unpaid liability, he is deemed personally liable for the taxes that went unpaid in the past while he was responsible. The responsible person deemed liable for the unpaid liability of past tax quarters is considered to have "willfully" failed to pay over the taxes for those past quarters, even though he was unaware at that time that the taxes were going unpaid.
Thosteson, 331 F.3d at 1301. Plaintiff was under a duty to reduce GCAD's accrued tax liability with funds acquired after the taxes had been withheld and the funds, presumably, were dissipated. Thus, once Plaintiff was made aware of the unpaid tax liability, payments made to creditors other than the IRS constituted willful violations of section 6672.
Plaintiff, relying on Turpin v. United States, 970 F.2d 1344 (4th Cir. 1992), argues that his knowledge of GCAD's past tax deficiency "does not, as a matter of law, establish that he acted willfully with respect to the next deficiency." (Pl. memo. in resp. to def. m.s.j. 16-17). Plaintiff's reliance on Turpin, however, is misplaced, because the plaintiff in that case was found, by a jury, to have neither known of nor to have recklessly disregarded the corporation's tax deficiency. Plaintiff here clearly knew of the tax deficiency as of August 1999, and there is evidence that GCAD generated over $5 million in gross receipts after that date. These funds were used to pay other creditors, including landlords and food vendors, together with employee wages, while the tax deficiencies remained unpaid. Moreover, even after the initial deficiencies were brought to Plaintiff's attention, he continued to entrust the financial management of the corporation to the Light Brothers, whom he knew to be unreliable. Under these facts, Plaintiff's reckless disregard demonstrates willfulness as a matter of law for the purposes of summary judgment.
III. Conclusion
Because Plaintiff is a responsible person under section 6672 and he willfully failed to pay withheld taxes to the IRS, IT IS RECOMMENDED that the motion of the United States for summary judgment (doc. no. 45) be GRANTED and Plaintiff's motion for summary judgment (doc. no. 46) be DENIED .
1 Plaintiff filed an action seeking a refund of tax penalties and related interest assessed to him under 26 U.S.C. §6672. Because the reasoning of the Magistrate Judge's Recommended decision applies equally to the claims by Plaintiff Erwin against the United States and the counterclaims by the United States against Plaintiff Erwin, and because the Magistrate Judge recommended granting the United States' Motion for Summary Judgment in its entirety, all of Plaintiff Erwin's claims against the United States will be dismissed.
Monday, April 7, 2008
Amended "tax lien release" and "tax lien discharge" regulations
[ TD 9378]
RIN 1545-BE35
Release of Lien or Discharge of PropertyAGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
SUMMARY: This document contains final regulations related to release of lien and discharge of property under sections 6325, 6503, and 7426 of the Internal Revenue Code (Code). These regulations update existing regulations and contain procedures for processing a request made by a property owner for discharge of a Federal tax lien from his property under section 6325(b)(4). The regulations also clarify the impact of these procedures on sections 6503(f)(2) and 7426(a)(4) and (b)(5). These regulations reflect the enactment of sections 6325(b)(4), 6503(f)(2), and 7426(a)(4) by the IRS Restructuring and Reform Act of 1998.
DATES: Effective Date: These regulations are effective January 31, 2008.
Applicability Date: These regulations apply to any release of lien or discharge of property that is requested after January 31, 2008.
FOR FURTHER INFORMATION CONTACT: Debra A. Kohn, (202) 622-7985 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations that amend the Procedure and Administration Regulations (26 CFR part 301) under sections 6325, 6503, and 7426 of the Code. The IRS Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685) (RRA 1998), enacted sections 6325(b)(4), 6503(f)(2), 7426(a)(4), and 7426(a)(5) to provide a statutory mechanism for a person other than the person against whom the underlying tax was assessed, upon furnishing a deposit or bond, to obtain a discharge of the Federal tax lien from property owned by him, and for the IRS or the courts to determine the disposition of the deposit or bond amount. RRA 1998 thereby necessitated changes to the rules under sections 6325, 6503, and 7426.
On January 11, 2007, a notice of proposed rulemaking (REG-159444-04) relating to release of lien or discharge of property was published in the Federal Register (72 FR 1301-03). No comments were received and no public hearing was requested or held. Accordingly, the proposed regulations are adopted as amended by this Treasury decision. These final regulations generally retain the provisions of the proposed regulations but include one modification as explained in more detail below.
Explanation of Modification
The final regulations differ substantively in one respect from the version of the regulations set forth in the notice of proposed rulemaking. The proposed regulations interpret section 6325(b)(4)(D), which states that section 6325(b)(4)(A) is inapplicable "if the owner of the property is the person whose unsatisfied liability gave rise to the lien," as indicating that the procedures for obtaining a discharge of a Federal tax lien under section 6325(b)(4) are not available to a person who owns the subject property with the person whose tax liability gave rise to the lien (the taxpayer). Upon further consideration of this issue, it was decided that section 6235(b)(4)(D) should not be so interpreted, as that interpretation would unfairly leave some third-party property owners without a means to discharge Federal tax liens from their properties. Accordingly, the final regulations reflect an interpretation of section 6325(b)(4)(D) that makes the section 6325(b)(4) procedures available to a person who co-owns property with the taxpayer.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Debra A. Kohn of the Office of the Associate Chief Counsel (Procedure and Administration).
List of Subjects
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 401
Reporting and recordkeeping requirements, Taxes.
Adoption of Amendments to the Regulations
Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 301 and 401 are amended as follows:
PART 301 --PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6325-1 is amended as follows:
1. Paragraphs (a) and (b)(1)(i), (b)(2)(i), and (b)(2)(ii) and (b)(3) are revised.
2. Paragraph (b)(2)(iii) is redesignated as paragraph (b)(6) and revised.
3. Paragraph (b)(4) is redesignated as paragraph (b)(5) and revised.
4. A new paragraph (b)(4) is added.
5. Paragraphs (c)(1) and (c)(2) are amended by removing the language "district director" and adding the language "appropriate official" in its place, wherever it appears.
6. The first sentence of paragraph (d)(1) is amended by removing the language "A district director" and adding the language "The appropriate official" in its place, by removing the word "Code" and adding the language "Internal Revenue Code" in its place, and by removing the language "the district director" and adding the language "the appropriate official" in its place. The third sentence is amended by removing the language "a district director" and adding the language "the appropriate official" in its place, and removing the language "the district director" and adding "the appropriate official" in its place.
7. Paragraph (d)(2)(i) is amended by removing the language "A district director" and adding the language "The appropriate official" in its place, by removing the word "Code" and adding the language "Internal Revenue Code" in its place, and by removing the language "the district director" and adding the language "the appropriate official" in its place.
8. Paragraph (d)(2)(ii), Examples 1 through 4, are amended by removing the language "district director" and adding the language "appropriate official" in its place, wherever it appears.
9. Paragraphs (d)(3) and (d)(4) are amended by removing the language "district director" and adding the language "appropriate official" in its place, wherever it appears.
10. The first sentence of paragraph (e) is amended by removing the language "a district director" and adding the language "the appropriate official" in its place, and by removing the language "the district director" and adding the language "the appropriate official" in its place. The third and fourth sentences are amended by removing the language "district director" and adding the language "appropriate official" in its place.
11. Paragraphs (f)(1) and (f)(2)(i) are amended by removing the language "a district director" and adding the language "the appropriate official" in its place, paragraph (f)(2)(i)(b) is amended by removing the language "the district director" and adding the language "the appropriate official" in its place, and paragraph (f)(3) is amended by removing the word "Code" and adding the language "Internal Revenue Code" in its place.
12. Paragraphs (h) and (i) are added.
The revisions and additions read as follows:
§301.6325-1 Release of lien or discharge of property.
(a) Release of lien --(1) Liability satisfied or unenforceable. The appropriate official shall issue a certificate of release for a filed notice of Federal tax lien, no later than 30 days after the date on which he finds that the entire tax liability listed in such notice of Federal tax lien either has been fully satisfied (as defined in paragraph (a)(4) of this section) or has become legally unenforceable. In all cases, the liability for the payment of the tax continues until satisfaction of the tax in full or until the expiration of the statutory period for collection, including such extension of the period for collection as is agreed to.
(2) Bond accepted. The appropriate official shall issue a certificate of release of any tax lien if he is furnished and accepts a bond that is conditioned upon the payment of the amount assessed (together with all interest in respect thereof), within the time agreed upon in the bond, but not later than 6 months before the expiration of the statutory period for collection, including any agreed upon extensions. For provisions relating to bonds, see sections 7101 and 7102 and §§301.7101-1 and 301.7102-1.
(3) Certificate of release for a lien which has become legally unenforceable. The appropriate official shall have the authority to file a notice of Federal tax lien which also contains a certificate of release pertaining to those liens which become legally unenforceable. Such release will become effective as a release as of a date prescribed in the document containing the notice of Federal tax lien and certificate of release.
(4) Satisfaction of tax liability. For purposes of paragraph (a)(1) of this section, satisfaction of the tax liability occurs when --
(i) The appropriate official determines that the entire tax liability listed in a notice of Federal tax lien has been fully satisfied. Such determination will be made as soon as practicable after tender of payment; or
(ii) The taxpayer provides the appropriate official with proof of full payment (as defined in paragraph (a)(5) of this section) with respect to the entire tax liability listed in a notice of Federal tax lien together with the information and documents set forth in paragraph (a)(7) of this section. See paragraph (a)(6) of this section if more than one tax liability is listed in a notice of Federal tax lien.
(5) Proof of full payment. As used in paragraph (a)(4)(ii) of this section, the term proof of full payment means --
(i) An internal revenue cashier's receipt reflecting full payment of the tax liability in question;
(ii) A canceled check in an amount sufficient to satisfy the tax liability for which the release is being sought;
(iii) A record, made in accordance with procedures prescribed by the Commissioner, of proper payment of the tax liability by credit or debit card or by electronic funds transfer; or
(iv) Any other manner of proof acceptable to the appropriate official.
(6) Notice of a Federal tax lien which lists multiple liabilities. When a notice of Federal tax lien lists multiple tax liabilities, the appropriate official shall issue a certificate of release when all of the tax liabilities listed in the notice of Federal tax lien have been fully satisfied or have become legally unenforceable. In addition, if the taxpayer requests that a certificate of release be issued with respect to one or more tax liabilities listed in the notice of Federal tax lien and such liability has been fully satisfied or has become legally unenforceable, the appropriate official shall issue a certificate of release. For example, if a notice of Federal tax lien lists two separate liabilities and one of the liabilities is satisfied, the taxpayer may request the issuance of a certificate of release with respect to the satisfied tax liability and the appropriate official shall issue a release.
(7) Taxpayer requests. A request for a certificate of release with respect to a notice of Federal tax lien shall be submitted in writing to the appropriate official. The request shall contain the information required in the appropriate IRS Publication.
(b) Discharge of specific property from the lien --(1) Property double the amount of the liability. (i) The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if he determines that the fair market value of that part of the property remaining subject to the Federal tax lien is at least double the sum of the amount of the unsatisfied liability secured by the Federal tax lien and of the amount of all other liens upon the property which have priority over the Federal tax lien. In general, fair market value is that amount which one ready and willing but not compelled to buy would pay to another ready and willing but not compelled to sell the property.
* * * * *
(2) Part payment; interest of United States valueless --(i) Part payment. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if there is paid over to him in partial satisfaction of the liability secured by the Federal tax lien an amount determined by him to be not less than the value of the interest of the United States in the property to be so discharged. In determining the amount to be paid, the appropriate official will take into consideration all the facts and circumstances of the case, including the expenses to which the government has been put into the matter. In no case shall the amount to be paid be less than the value of the interest of the United States in the property with respect to which the certificate of discharge is to be issued.
(ii) Interest of the United States valueless. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to the Federal tax lien if he determines that the interest of the United States in the property to be so discharged has no value.
(3) Discharge of property by substitution of proceeds of sale. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if such part of the property is sold and, pursuant to a written agreement with the appropriate official, the proceeds of the sale are held, as a fund subject to the Federal tax liens and claims of the United States, in the same manner and with the same priority as the Federal tax liens or claims had with respect to the discharged property. This paragraph does not apply unless the sale divests the taxpayer of all right, title, and interest in the property sought to be discharged. Any reasonable and necessary expenses incurred in connection with the sale of the property and the administration of the sale proceeds shall be paid by the applicant or from the proceeds of the sale before satisfaction of any Federal tax liens or claims of the United States.
(4) Right of substitution of value --(i) Issuance of certificate of discharge to property owner who is not the taxpayer. If an owner of property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code submits an application for a certificate of discharge pursuant to paragraph (b)(5) of this section, the appropriate official shall issue a certificate of discharge of such property after the owner either deposits with the appropriate official an amount equal to the value of the interest of the United States in the property, as determined by the appropriate official pursuant to paragraph (b)(6) of this section, or furnishes an acceptable bond in a like amount. This paragraph does not apply if the person seeking the discharge is the person whose unsatisfied liability gave rise to the Federal tax lien. Thus, if the property is owned by both the taxpayer and another person, the other person may obtain a certificate of discharge of the property under this paragraph, but the taxpayer may not.
(ii) Refund of deposit and release of bond. The appropriate official may, in his discretion, determine that either the entire unsatisfied tax liability listed on the notice of Federal tax lien can be satisfied from a source other than the property sought to be discharged, or the value of the interest in the United States is less than the prior determination of such value. The appropriate official shall refund the amount deposited with interest at the overpayment rate determined under section 6621 or release the bond furnished to the extent that he makes this determination.
(iii) Refund request. If a property owner desires an administrative refund of his deposit or release of the bond, the owner shall file a request in writing with the appropriate official. The request shall contain such information as the appropriate IRS Publication may require. The request must be filed within 120 days after the date the certificate of discharge is issued. A refund request made under this paragraph neither is required nor is effective to extend the period for filing an action in court under section 7426(a)(4).
(iv) Internal Revenue Service's use of deposit if court action not filed. If no action is filed under section 7426(a)(4) for refund of the deposit or release of the bond within the 120-day period specified therein, the appropriate official shall, within 60 days after the expiration of the 120-day period, apply the amount deposited or collect on such bond to the extent necessary to satisfy the liability listed on the notice of Federal tax lien, and shall refund, with interest at the overpayment rate determined under section 6621, any portion of the amount deposited that is not used to satisfy the liability. If the appropriate official has not completed the application of the deposit to the unsatisfied liability before the end of the 60-day period, the deposit will be deemed to have been applied to the unsatisfied liability as of the 60th day.
(5) Application for certificate of discharge. Any person desiring a certificate of discharge under this paragraph (b) shall submit an application in writing to the appropriate official. The application shall contain the information required by the appropriate IRS Publication. For purposes of this paragraph (b), any application for certificate of discharge made by a property owner who is not the taxpayer, and any amount submitted pursuant to the application, will be treated as an application for discharge and a deposit under section 6325(b)(4) unless the owner of the property submits a statement, in writing, that the application is being submitted under another paragraph of section 6325 and not under section 6325(b)(4), and the owner in writing waives the rights afforded under paragraph (b)(4), including the right to seek judicial review.
(6) Valuation of interest of United States. For purposes of paragraphs (b)(2) and (b)(4) of this section, in determining the value of the interest of the United States in the property, or any part thereof, with respect to which the certificate of discharge is to be issued, the appropriate official shall give consideration to the value of the property and the amount of all liens and encumbrances thereon having priority over the Federal tax lien. In determining the value of the property, the appropriate official may, in his discretion, give consideration to the forced sale value of the property in appropriate cases.
* * * * *
(h) As used in this section, the term appropriate official means either the official or office identified in the relevant IRS Publication or, if such official or office is not so identified, the Secretary or his delegate.
(i) Effective/applicability date. This section applies to any release of lien or discharge of property that is requested after January 31, 2008.
Par. 3. Section 301.6503(f)-1 is amended as follows:
1. The section heading is revised.
2. The undesignated paragraph is designated as paragraph (a), a paragraph heading is added, and a new sentence is added immediately prior to the Example.
3. In newly designated paragraph (a), the language "a district director" is removed and the language "the appropriate official" is added in its place, the language "the district director" is removed and the language "the appropriate official" is added in its place, and in the Example the language "district director" is removed and the language "appropriate official" is added in its place, wherever it appears.
4. Paragraphs (b), (c), and (d) are added.
The revisions and additions read as follows:
§301.6503(f)-1 Suspension of running of period of limitation; wrongful seizure of property of third-party owner and discharge of lien for substitution of value.
(a) Wrongful seizure. * * * The following example illustrates the principles of this section:
* * * * *
(b) Discharge of wrongful lien for substitution of value. If a person other than the taxpayer submits a request in writing for a certificate of discharge for a filed Federal tax lien under section 6325(b)(4), the running of the period of limitations on collection after assessment under section 6502 for any liability listed in such notice of Federal tax lien shall be suspended for a period equal to the period beginning on the date the appropriate official receives a deposit or bond in the amount specified in §301.6325-1(b)(4)(i) and ending on the date that is 30 days after the earlier of --
(1) The date the appropriate official no longer holds, or is deemed to no longer hold, within the meaning of paragraph (b)(4)(iv) of this section, any amount as a deposit or bond by reason of taking such actions as prescribed in sections 6325(b)(4)(B) and (C); or
(2) The date the judgment secured under section 7426(b)(5) becomes final.
(c) As used in this section, the term appropriate official means either the official or office identified in the relevant IRS Publication or, if such official or office is not so identified, the Secretary or his delegate.
(d) Effective/applicability date. This section applies to any request for a certificate of discharge made after January 31, 2008.
Par. 4. In §301.7426-1, paragraphs (a)(4), (b)(5), and (d) are added.
§301.7426-1 Civil actions by persons other than taxpayers.
(a) * * *
(4) Substitution of value. A person who obtains a certificate of discharge under section 6325(b)(4) with respect to any property may, within 120 days after the day on which the certificate is issued, bring a civil action against the United States in a district court of the United States for a determination of whether the value of the interest of the United States (if any) in such property is less than the value determined by the appropriate official. A civil action under this provision shall be the exclusive judicial remedy for a person other than the taxpayer who obtains a certificate of discharge for a filed notice of Federal tax lien.
(b) * * *
(5) Substitution of value. If the court determines that the determination by the appropriate official of the value of the interest of the United States in the property exceeds the actual value of such interest, the court may grant a judgment ordering a refund of the amount deposited, or a release of the bond, to the extent that the aggregate of those amounts exceeds the value as determined by the court.
* * * * *
(d) Paragraphs (a)(4) and (b)(5) of this section apply to any request for a certificate of discharge made after January 31, 2008.
PART 401 --[REMOVED]
Par. 5. Part 401 is removed.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: January 9, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
SEC. 6325. RELEASE OF LIEN OR DISCHARGE OF PROPERTY.
6325(a) RELEASE OF LIEN. --Subject to such regulations as the Secretary may prescribe, the Secretary shall issue a certificate of release of any lien imposed with respect to any internal revenue tax not later than 30 days after the day on which --
6325(a)(1) LIABILITY SATISFIED OR UNENFORCEABLE. --The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable; or
6325(a)(2) BOND ACCEPTED. --There is furnished to the Secretary and accepted by him a bond that is conditioned upon the payment of the amount assessed, together with all interest in respect thereof, within the time prescribed by law (including any extension of such time), and that is in accordance with such requirements relating to terms, conditions, and form of the bond and sureties thereon, as may be specified by such regulations.
6325(b) DISCHARGE OF PROPERTY. --
6325(b)(1) PROPERTY DOUBLE THE AMOUNT OF THE LIABILITY. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to any lien imposed under this chapter if the Secretary finds that the fair market value of that part of such property remaining subject to the lien is at least double the amount of the unsatisfied liability secured by such lien and the amount of all other liens upon such property which have priority over such lien.
6325(b)(2) PART PAYMENT; INTEREST OF UNITED STATES VALUELESS. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to the lien if --
6325(b)(2)(A) there is paid over to the Secretary in partial satisfaction of the liability secured by the lien an amount determined by the Secretary, which shall not be less than the value, as determined by the Secretary, of the interest of the United States in the part to be so discharged, or
6325(b)(2)(B) the Secretary determines at any time that the interest of the United States in the part to be so discharged has no value.
In determining the value of the interest of the United States in the part to be so discharged, the Secretary shall give consideration to the value of such part and to such liens thereon as have priority over the lien of the United States.
6325(b)(3) SUBSTITUTION OF PROCEEDS OF SALE. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to the lien if such part of the property is sold and, pursuant to an agreement with the Secretary, the proceeds of such sale are to be held, as a fund subject to the liens and claims of the United States, in the same manner and with the same priority as such liens and claims had with respect to the discharged property.
6325(b)(4) RIGHT OF SUBSTITUTION OF VALUE. --
6325(b)(4)(A) IN GENERAL. --At the request of the owner of any property subject to any lien imposed by this chapter, the Secretary shall issue a certificate of discharge of such property if such owner --
6325(b)(4)(A)(i) deposits with the Secretary an amount of money equal to the value of the interest of the United States (as determined by the Secretary) in the property; or
6325(b)(4)(A)(ii) furnishes a bond acceptable to the Secretary in a like amount.
6325(b)(4)(B) REFUND OF DEPOSIT WITH INTEREST AND RELEASE OF BOND. --The Secretary shall refund the amount so deposited (and shall pay interest at the overpayment rate under section 6621), and shall release such bond, to the extent that the Secretary determines that --
6325(b)(4)(B)(i) the unsatisfied liability giving rise to the lien can be satisfied from a source other than such property; or
6325(b)(4)(B)(ii) the value of the interest of the United States in the property is less than the Secretary's prior determination of such value.
6325(b)(4)(C) USE OF DEPOSIT, ETC., IF ACTION TO CONTEST LIEN NOT FILED. --If no action is filed under section 7426(a)(4) within the period prescribed therefor, the Secretary shall, within 60 days after the expiration of such period --
6325(b)(4)(C)(i) apply the amount deposited, or collect on such bond, to the extent necessary to satisfy the unsatisfied liability secured by the lien; and
6325(b)(4)(C)(ii) refund (with interest as described in subparagraph (B)) any portion of the amount deposited which is not used to satisfy such liability.
6325(b)(4)(D) EXCEPTION. --Subparagraph (A) shall not apply if the owner of the property is the person whose unsatisfied liability gave rise to the lien.
6325(c) ESTATE OR GIFT TAX. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any or all of the property subject to any lien imposed by section 6324 if the Secretary finds that the liability secured by such lien has been fully satisfied or provided for.
6325(d) SUBORDINATION OF LIEN. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of subordination of any lien imposed by this chapter upon any part of the property subject to such lien if --
6325(d)(1) there is paid over to the Secretary an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States,
6325(d)(2) the Secretary believes that the amount realizable by the United States from the property to which the certificate relates, or from any other property subject to the lien, will ultimately be increased by reason of the issuance of such certificate and that the ultimate collection of the tax liability will be facilitated by such subordination, or
6325(d)(3) in the case of any lien imposed by section 6324B, if the Secretary determines that the United States will be adequately secured after such subordination.
6325(e) NONATTACHMENT OF LIEN. --If the Secretary determines that, because of confusion of names or otherwise, any person (other than the person against whom the tax was assessed) is or may be injured by the appearance that a notice of lien filed under section 6323 refers to such person, the Secretary may issue a certificate that the lien does not attach to the property of such person.
6325(f) EFFECT OF CERTIFICATE. --
6325(f)(1) CONCLUSIVENESS. --Except as provided in paragraphs (2) and (3), if a certificate is issued pursuant to this section by the Secretary and is filed in the same office as the notice of lien to which it relates (if such notice of lien has been filed) such certificate shall have the following effect:
6325(f)(1)(A) in the case of a certificate of release, such certificate shall be conclusive that the lien referred to in such certificate is extinguished;
6325(f)(1)(B) in the case of a certificate of discharge, such certificate shall be conclusive that the property covered by such certificate is discharged from the lien;
6325(f)(1)(C) in the case of a certificate of subordination, such certificate shall be conclusive that the lien or interest to which the lien of the United States is subordinated is superior to the lien of the United States; and
6325(f)(1)(D) in the case of a certificate of nonattachment, such certificate shall be conclusive that the lien of the United States does not attach to the property of the person referred to in such certificate.
6325(f)(2) REVOCATION OF CERTIFICATE OF RELEASE OR NONATTACHMENT. --If the Secretary determines that a certificate of release or nonattachment of a lien imposed by section 6321 was issued erroneously or improvidently, or if a certificate of release of such lien was issued pursuant to a collateral agreement entered into in connection with a compromise under section 7122 which has been breached, and if the period of limitation on collection after assessment has not expired, the Secretary may revoke such certificate and reinstate the lien --
6325(f)(2)(A) by mailing notice of such revocation to the person against whom the tax was assessed at his last known address, and
6325(f)(2)(B) by filing notice of such revocation in the same office in which the notice of lien to which it relates was filed (if such notice of lien had been filed).
Such reinstated lien (i) shall be effective on the date notice of revocation is mailed to the taxpayer in accordance with the provisions of subparagraph (A), but not earlier than the date on which any required filing of notice of revocation is filed in accordance with the provisions of subparagraph (B), and (ii) shall have the same force and effect (as of such date), until the expiration of the period of limitation on collection after assessment, as a lien imposed by section 6321 (relating to lien for taxes).
6325(f)(3) CERTIFICATES VOID UNDER CERTAIN CONDITIONS. --Notwithstanding any other provision of this subtitle, any lien imposed by this chapter shall attach to any property with respect to which a certificate of discharge has been issued if the person liable for the tax reacquires such property after such certificate has been issued.
6325(g) FILING OF CERTIFICATES AND NOTICES. --If a certificate or notice issued pursuant to this section may not be filed in the office designated by State law in which the notice of lien imposed by section 6321 is filed, such certificate or notice shall be effective if filed in the office of the clerk of the United States district court for the judicial district in which such office is situated.
6325(h) CROSS REFERENCE. --
For provisions relating to bonds, see chapter 73 (sec. 7101 and following).
[ TD 9378]
RIN 1545-BE35
Release of Lien or Discharge of PropertyAGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
SUMMARY: This document contains final regulations related to release of lien and discharge of property under sections 6325, 6503, and 7426 of the Internal Revenue Code (Code). These regulations update existing regulations and contain procedures for processing a request made by a property owner for discharge of a Federal tax lien from his property under section 6325(b)(4). The regulations also clarify the impact of these procedures on sections 6503(f)(2) and 7426(a)(4) and (b)(5). These regulations reflect the enactment of sections 6325(b)(4), 6503(f)(2), and 7426(a)(4) by the IRS Restructuring and Reform Act of 1998.
DATES: Effective Date: These regulations are effective January 31, 2008.
Applicability Date: These regulations apply to any release of lien or discharge of property that is requested after January 31, 2008.
FOR FURTHER INFORMATION CONTACT: Debra A. Kohn, (202) 622-7985 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations that amend the Procedure and Administration Regulations (26 CFR part 301) under sections 6325, 6503, and 7426 of the Code. The IRS Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685) (RRA 1998), enacted sections 6325(b)(4), 6503(f)(2), 7426(a)(4), and 7426(a)(5) to provide a statutory mechanism for a person other than the person against whom the underlying tax was assessed, upon furnishing a deposit or bond, to obtain a discharge of the Federal tax lien from property owned by him, and for the IRS or the courts to determine the disposition of the deposit or bond amount. RRA 1998 thereby necessitated changes to the rules under sections 6325, 6503, and 7426.
On January 11, 2007, a notice of proposed rulemaking (REG-159444-04) relating to release of lien or discharge of property was published in the Federal Register (72 FR 1301-03). No comments were received and no public hearing was requested or held. Accordingly, the proposed regulations are adopted as amended by this Treasury decision. These final regulations generally retain the provisions of the proposed regulations but include one modification as explained in more detail below.
Explanation of Modification
The final regulations differ substantively in one respect from the version of the regulations set forth in the notice of proposed rulemaking. The proposed regulations interpret section 6325(b)(4)(D), which states that section 6325(b)(4)(A) is inapplicable "if the owner of the property is the person whose unsatisfied liability gave rise to the lien," as indicating that the procedures for obtaining a discharge of a Federal tax lien under section 6325(b)(4) are not available to a person who owns the subject property with the person whose tax liability gave rise to the lien (the taxpayer). Upon further consideration of this issue, it was decided that section 6235(b)(4)(D) should not be so interpreted, as that interpretation would unfairly leave some third-party property owners without a means to discharge Federal tax liens from their properties. Accordingly, the final regulations reflect an interpretation of section 6325(b)(4)(D) that makes the section 6325(b)(4) procedures available to a person who co-owns property with the taxpayer.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Debra A. Kohn of the Office of the Associate Chief Counsel (Procedure and Administration).
List of Subjects
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 401
Reporting and recordkeeping requirements, Taxes.
Adoption of Amendments to the Regulations
Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 301 and 401 are amended as follows:
PART 301 --PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6325-1 is amended as follows:
1. Paragraphs (a) and (b)(1)(i), (b)(2)(i), and (b)(2)(ii) and (b)(3) are revised.
2. Paragraph (b)(2)(iii) is redesignated as paragraph (b)(6) and revised.
3. Paragraph (b)(4) is redesignated as paragraph (b)(5) and revised.
4. A new paragraph (b)(4) is added.
5. Paragraphs (c)(1) and (c)(2) are amended by removing the language "district director" and adding the language "appropriate official" in its place, wherever it appears.
6. The first sentence of paragraph (d)(1) is amended by removing the language "A district director" and adding the language "The appropriate official" in its place, by removing the word "Code" and adding the language "Internal Revenue Code" in its place, and by removing the language "the district director" and adding the language "the appropriate official" in its place. The third sentence is amended by removing the language "a district director" and adding the language "the appropriate official" in its place, and removing the language "the district director" and adding "the appropriate official" in its place.
7. Paragraph (d)(2)(i) is amended by removing the language "A district director" and adding the language "The appropriate official" in its place, by removing the word "Code" and adding the language "Internal Revenue Code" in its place, and by removing the language "the district director" and adding the language "the appropriate official" in its place.
8. Paragraph (d)(2)(ii), Examples 1 through 4, are amended by removing the language "district director" and adding the language "appropriate official" in its place, wherever it appears.
9. Paragraphs (d)(3) and (d)(4) are amended by removing the language "district director" and adding the language "appropriate official" in its place, wherever it appears.
10. The first sentence of paragraph (e) is amended by removing the language "a district director" and adding the language "the appropriate official" in its place, and by removing the language "the district director" and adding the language "the appropriate official" in its place. The third and fourth sentences are amended by removing the language "district director" and adding the language "appropriate official" in its place.
11. Paragraphs (f)(1) and (f)(2)(i) are amended by removing the language "a district director" and adding the language "the appropriate official" in its place, paragraph (f)(2)(i)(b) is amended by removing the language "the district director" and adding the language "the appropriate official" in its place, and paragraph (f)(3) is amended by removing the word "Code" and adding the language "Internal Revenue Code" in its place.
12. Paragraphs (h) and (i) are added.
The revisions and additions read as follows:
§301.6325-1 Release of lien or discharge of property.
(a) Release of lien --(1) Liability satisfied or unenforceable. The appropriate official shall issue a certificate of release for a filed notice of Federal tax lien, no later than 30 days after the date on which he finds that the entire tax liability listed in such notice of Federal tax lien either has been fully satisfied (as defined in paragraph (a)(4) of this section) or has become legally unenforceable. In all cases, the liability for the payment of the tax continues until satisfaction of the tax in full or until the expiration of the statutory period for collection, including such extension of the period for collection as is agreed to.
(2) Bond accepted. The appropriate official shall issue a certificate of release of any tax lien if he is furnished and accepts a bond that is conditioned upon the payment of the amount assessed (together with all interest in respect thereof), within the time agreed upon in the bond, but not later than 6 months before the expiration of the statutory period for collection, including any agreed upon extensions. For provisions relating to bonds, see sections 7101 and 7102 and §§301.7101-1 and 301.7102-1.
(3) Certificate of release for a lien which has become legally unenforceable. The appropriate official shall have the authority to file a notice of Federal tax lien which also contains a certificate of release pertaining to those liens which become legally unenforceable. Such release will become effective as a release as of a date prescribed in the document containing the notice of Federal tax lien and certificate of release.
(4) Satisfaction of tax liability. For purposes of paragraph (a)(1) of this section, satisfaction of the tax liability occurs when --
(i) The appropriate official determines that the entire tax liability listed in a notice of Federal tax lien has been fully satisfied. Such determination will be made as soon as practicable after tender of payment; or
(ii) The taxpayer provides the appropriate official with proof of full payment (as defined in paragraph (a)(5) of this section) with respect to the entire tax liability listed in a notice of Federal tax lien together with the information and documents set forth in paragraph (a)(7) of this section. See paragraph (a)(6) of this section if more than one tax liability is listed in a notice of Federal tax lien.
(5) Proof of full payment. As used in paragraph (a)(4)(ii) of this section, the term proof of full payment means --
(i) An internal revenue cashier's receipt reflecting full payment of the tax liability in question;
(ii) A canceled check in an amount sufficient to satisfy the tax liability for which the release is being sought;
(iii) A record, made in accordance with procedures prescribed by the Commissioner, of proper payment of the tax liability by credit or debit card or by electronic funds transfer; or
(iv) Any other manner of proof acceptable to the appropriate official.
(6) Notice of a Federal tax lien which lists multiple liabilities. When a notice of Federal tax lien lists multiple tax liabilities, the appropriate official shall issue a certificate of release when all of the tax liabilities listed in the notice of Federal tax lien have been fully satisfied or have become legally unenforceable. In addition, if the taxpayer requests that a certificate of release be issued with respect to one or more tax liabilities listed in the notice of Federal tax lien and such liability has been fully satisfied or has become legally unenforceable, the appropriate official shall issue a certificate of release. For example, if a notice of Federal tax lien lists two separate liabilities and one of the liabilities is satisfied, the taxpayer may request the issuance of a certificate of release with respect to the satisfied tax liability and the appropriate official shall issue a release.
(7) Taxpayer requests. A request for a certificate of release with respect to a notice of Federal tax lien shall be submitted in writing to the appropriate official. The request shall contain the information required in the appropriate IRS Publication.
(b) Discharge of specific property from the lien --(1) Property double the amount of the liability. (i) The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if he determines that the fair market value of that part of the property remaining subject to the Federal tax lien is at least double the sum of the amount of the unsatisfied liability secured by the Federal tax lien and of the amount of all other liens upon the property which have priority over the Federal tax lien. In general, fair market value is that amount which one ready and willing but not compelled to buy would pay to another ready and willing but not compelled to sell the property.
* * * * *
(2) Part payment; interest of United States valueless --(i) Part payment. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if there is paid over to him in partial satisfaction of the liability secured by the Federal tax lien an amount determined by him to be not less than the value of the interest of the United States in the property to be so discharged. In determining the amount to be paid, the appropriate official will take into consideration all the facts and circumstances of the case, including the expenses to which the government has been put into the matter. In no case shall the amount to be paid be less than the value of the interest of the United States in the property with respect to which the certificate of discharge is to be issued.
(ii) Interest of the United States valueless. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to the Federal tax lien if he determines that the interest of the United States in the property to be so discharged has no value.
(3) Discharge of property by substitution of proceeds of sale. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if such part of the property is sold and, pursuant to a written agreement with the appropriate official, the proceeds of the sale are held, as a fund subject to the Federal tax liens and claims of the United States, in the same manner and with the same priority as the Federal tax liens or claims had with respect to the discharged property. This paragraph does not apply unless the sale divests the taxpayer of all right, title, and interest in the property sought to be discharged. Any reasonable and necessary expenses incurred in connection with the sale of the property and the administration of the sale proceeds shall be paid by the applicant or from the proceeds of the sale before satisfaction of any Federal tax liens or claims of the United States.
(4) Right of substitution of value --(i) Issuance of certificate of discharge to property owner who is not the taxpayer. If an owner of property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code submits an application for a certificate of discharge pursuant to paragraph (b)(5) of this section, the appropriate official shall issue a certificate of discharge of such property after the owner either deposits with the appropriate official an amount equal to the value of the interest of the United States in the property, as determined by the appropriate official pursuant to paragraph (b)(6) of this section, or furnishes an acceptable bond in a like amount. This paragraph does not apply if the person seeking the discharge is the person whose unsatisfied liability gave rise to the Federal tax lien. Thus, if the property is owned by both the taxpayer and another person, the other person may obtain a certificate of discharge of the property under this paragraph, but the taxpayer may not.
(ii) Refund of deposit and release of bond. The appropriate official may, in his discretion, determine that either the entire unsatisfied tax liability listed on the notice of Federal tax lien can be satisfied from a source other than the property sought to be discharged, or the value of the interest in the United States is less than the prior determination of such value. The appropriate official shall refund the amount deposited with interest at the overpayment rate determined under section 6621 or release the bond furnished to the extent that he makes this determination.
(iii) Refund request. If a property owner desires an administrative refund of his deposit or release of the bond, the owner shall file a request in writing with the appropriate official. The request shall contain such information as the appropriate IRS Publication may require. The request must be filed within 120 days after the date the certificate of discharge is issued. A refund request made under this paragraph neither is required nor is effective to extend the period for filing an action in court under section 7426(a)(4).
(iv) Internal Revenue Service's use of deposit if court action not filed. If no action is filed under section 7426(a)(4) for refund of the deposit or release of the bond within the 120-day period specified therein, the appropriate official shall, within 60 days after the expiration of the 120-day period, apply the amount deposited or collect on such bond to the extent necessary to satisfy the liability listed on the notice of Federal tax lien, and shall refund, with interest at the overpayment rate determined under section 6621, any portion of the amount deposited that is not used to satisfy the liability. If the appropriate official has not completed the application of the deposit to the unsatisfied liability before the end of the 60-day period, the deposit will be deemed to have been applied to the unsatisfied liability as of the 60th day.
(5) Application for certificate of discharge. Any person desiring a certificate of discharge under this paragraph (b) shall submit an application in writing to the appropriate official. The application shall contain the information required by the appropriate IRS Publication. For purposes of this paragraph (b), any application for certificate of discharge made by a property owner who is not the taxpayer, and any amount submitted pursuant to the application, will be treated as an application for discharge and a deposit under section 6325(b)(4) unless the owner of the property submits a statement, in writing, that the application is being submitted under another paragraph of section 6325 and not under section 6325(b)(4), and the owner in writing waives the rights afforded under paragraph (b)(4), including the right to seek judicial review.
(6) Valuation of interest of United States. For purposes of paragraphs (b)(2) and (b)(4) of this section, in determining the value of the interest of the United States in the property, or any part thereof, with respect to which the certificate of discharge is to be issued, the appropriate official shall give consideration to the value of the property and the amount of all liens and encumbrances thereon having priority over the Federal tax lien. In determining the value of the property, the appropriate official may, in his discretion, give consideration to the forced sale value of the property in appropriate cases.
* * * * *
(h) As used in this section, the term appropriate official means either the official or office identified in the relevant IRS Publication or, if such official or office is not so identified, the Secretary or his delegate.
(i) Effective/applicability date. This section applies to any release of lien or discharge of property that is requested after January 31, 2008.
Par. 3. Section 301.6503(f)-1 is amended as follows:
1. The section heading is revised.
2. The undesignated paragraph is designated as paragraph (a), a paragraph heading is added, and a new sentence is added immediately prior to the Example.
3. In newly designated paragraph (a), the language "a district director" is removed and the language "the appropriate official" is added in its place, the language "the district director" is removed and the language "the appropriate official" is added in its place, and in the Example the language "district director" is removed and the language "appropriate official" is added in its place, wherever it appears.
4. Paragraphs (b), (c), and (d) are added.
The revisions and additions read as follows:
§301.6503(f)-1 Suspension of running of period of limitation; wrongful seizure of property of third-party owner and discharge of lien for substitution of value.
(a) Wrongful seizure. * * * The following example illustrates the principles of this section:
* * * * *
(b) Discharge of wrongful lien for substitution of value. If a person other than the taxpayer submits a request in writing for a certificate of discharge for a filed Federal tax lien under section 6325(b)(4), the running of the period of limitations on collection after assessment under section 6502 for any liability listed in such notice of Federal tax lien shall be suspended for a period equal to the period beginning on the date the appropriate official receives a deposit or bond in the amount specified in §301.6325-1(b)(4)(i) and ending on the date that is 30 days after the earlier of --
(1) The date the appropriate official no longer holds, or is deemed to no longer hold, within the meaning of paragraph (b)(4)(iv) of this section, any amount as a deposit or bond by reason of taking such actions as prescribed in sections 6325(b)(4)(B) and (C); or
(2) The date the judgment secured under section 7426(b)(5) becomes final.
(c) As used in this section, the term appropriate official means either the official or office identified in the relevant IRS Publication or, if such official or office is not so identified, the Secretary or his delegate.
(d) Effective/applicability date. This section applies to any request for a certificate of discharge made after January 31, 2008.
Par. 4. In §301.7426-1, paragraphs (a)(4), (b)(5), and (d) are added.
§301.7426-1 Civil actions by persons other than taxpayers.
(a) * * *
(4) Substitution of value. A person who obtains a certificate of discharge under section 6325(b)(4) with respect to any property may, within 120 days after the day on which the certificate is issued, bring a civil action against the United States in a district court of the United States for a determination of whether the value of the interest of the United States (if any) in such property is less than the value determined by the appropriate official. A civil action under this provision shall be the exclusive judicial remedy for a person other than the taxpayer who obtains a certificate of discharge for a filed notice of Federal tax lien.
(b) * * *
(5) Substitution of value. If the court determines that the determination by the appropriate official of the value of the interest of the United States in the property exceeds the actual value of such interest, the court may grant a judgment ordering a refund of the amount deposited, or a release of the bond, to the extent that the aggregate of those amounts exceeds the value as determined by the court.
* * * * *
(d) Paragraphs (a)(4) and (b)(5) of this section apply to any request for a certificate of discharge made after January 31, 2008.
PART 401 --[REMOVED]
Par. 5. Part 401 is removed.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: January 9, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
SEC. 6325. RELEASE OF LIEN OR DISCHARGE OF PROPERTY.
6325(a) RELEASE OF LIEN. --Subject to such regulations as the Secretary may prescribe, the Secretary shall issue a certificate of release of any lien imposed with respect to any internal revenue tax not later than 30 days after the day on which --
6325(a)(1) LIABILITY SATISFIED OR UNENFORCEABLE. --The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable; or
6325(a)(2) BOND ACCEPTED. --There is furnished to the Secretary and accepted by him a bond that is conditioned upon the payment of the amount assessed, together with all interest in respect thereof, within the time prescribed by law (including any extension of such time), and that is in accordance with such requirements relating to terms, conditions, and form of the bond and sureties thereon, as may be specified by such regulations.
6325(b) DISCHARGE OF PROPERTY. --
6325(b)(1) PROPERTY DOUBLE THE AMOUNT OF THE LIABILITY. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to any lien imposed under this chapter if the Secretary finds that the fair market value of that part of such property remaining subject to the lien is at least double the amount of the unsatisfied liability secured by such lien and the amount of all other liens upon such property which have priority over such lien.
6325(b)(2) PART PAYMENT; INTEREST OF UNITED STATES VALUELESS. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to the lien if --
6325(b)(2)(A) there is paid over to the Secretary in partial satisfaction of the liability secured by the lien an amount determined by the Secretary, which shall not be less than the value, as determined by the Secretary, of the interest of the United States in the part to be so discharged, or
6325(b)(2)(B) the Secretary determines at any time that the interest of the United States in the part to be so discharged has no value.
In determining the value of the interest of the United States in the part to be so discharged, the Secretary shall give consideration to the value of such part and to such liens thereon as have priority over the lien of the United States.
6325(b)(3) SUBSTITUTION OF PROCEEDS OF SALE. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any part of the property subject to the lien if such part of the property is sold and, pursuant to an agreement with the Secretary, the proceeds of such sale are to be held, as a fund subject to the liens and claims of the United States, in the same manner and with the same priority as such liens and claims had with respect to the discharged property.
6325(b)(4) RIGHT OF SUBSTITUTION OF VALUE. --
6325(b)(4)(A) IN GENERAL. --At the request of the owner of any property subject to any lien imposed by this chapter, the Secretary shall issue a certificate of discharge of such property if such owner --
6325(b)(4)(A)(i) deposits with the Secretary an amount of money equal to the value of the interest of the United States (as determined by the Secretary) in the property; or
6325(b)(4)(A)(ii) furnishes a bond acceptable to the Secretary in a like amount.
6325(b)(4)(B) REFUND OF DEPOSIT WITH INTEREST AND RELEASE OF BOND. --The Secretary shall refund the amount so deposited (and shall pay interest at the overpayment rate under section 6621), and shall release such bond, to the extent that the Secretary determines that --
6325(b)(4)(B)(i) the unsatisfied liability giving rise to the lien can be satisfied from a source other than such property; or
6325(b)(4)(B)(ii) the value of the interest of the United States in the property is less than the Secretary's prior determination of such value.
6325(b)(4)(C) USE OF DEPOSIT, ETC., IF ACTION TO CONTEST LIEN NOT FILED. --If no action is filed under section 7426(a)(4) within the period prescribed therefor, the Secretary shall, within 60 days after the expiration of such period --
6325(b)(4)(C)(i) apply the amount deposited, or collect on such bond, to the extent necessary to satisfy the unsatisfied liability secured by the lien; and
6325(b)(4)(C)(ii) refund (with interest as described in subparagraph (B)) any portion of the amount deposited which is not used to satisfy such liability.
6325(b)(4)(D) EXCEPTION. --Subparagraph (A) shall not apply if the owner of the property is the person whose unsatisfied liability gave rise to the lien.
6325(c) ESTATE OR GIFT TAX. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge of any or all of the property subject to any lien imposed by section 6324 if the Secretary finds that the liability secured by such lien has been fully satisfied or provided for.
6325(d) SUBORDINATION OF LIEN. --Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of subordination of any lien imposed by this chapter upon any part of the property subject to such lien if --
6325(d)(1) there is paid over to the Secretary an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States,
6325(d)(2) the Secretary believes that the amount realizable by the United States from the property to which the certificate relates, or from any other property subject to the lien, will ultimately be increased by reason of the issuance of such certificate and that the ultimate collection of the tax liability will be facilitated by such subordination, or
6325(d)(3) in the case of any lien imposed by section 6324B, if the Secretary determines that the United States will be adequately secured after such subordination.
6325(e) NONATTACHMENT OF LIEN. --If the Secretary determines that, because of confusion of names or otherwise, any person (other than the person against whom the tax was assessed) is or may be injured by the appearance that a notice of lien filed under section 6323 refers to such person, the Secretary may issue a certificate that the lien does not attach to the property of such person.
6325(f) EFFECT OF CERTIFICATE. --
6325(f)(1) CONCLUSIVENESS. --Except as provided in paragraphs (2) and (3), if a certificate is issued pursuant to this section by the Secretary and is filed in the same office as the notice of lien to which it relates (if such notice of lien has been filed) such certificate shall have the following effect:
6325(f)(1)(A) in the case of a certificate of release, such certificate shall be conclusive that the lien referred to in such certificate is extinguished;
6325(f)(1)(B) in the case of a certificate of discharge, such certificate shall be conclusive that the property covered by such certificate is discharged from the lien;
6325(f)(1)(C) in the case of a certificate of subordination, such certificate shall be conclusive that the lien or interest to which the lien of the United States is subordinated is superior to the lien of the United States; and
6325(f)(1)(D) in the case of a certificate of nonattachment, such certificate shall be conclusive that the lien of the United States does not attach to the property of the person referred to in such certificate.
6325(f)(2) REVOCATION OF CERTIFICATE OF RELEASE OR NONATTACHMENT. --If the Secretary determines that a certificate of release or nonattachment of a lien imposed by section 6321 was issued erroneously or improvidently, or if a certificate of release of such lien was issued pursuant to a collateral agreement entered into in connection with a compromise under section 7122 which has been breached, and if the period of limitation on collection after assessment has not expired, the Secretary may revoke such certificate and reinstate the lien --
6325(f)(2)(A) by mailing notice of such revocation to the person against whom the tax was assessed at his last known address, and
6325(f)(2)(B) by filing notice of such revocation in the same office in which the notice of lien to which it relates was filed (if such notice of lien had been filed).
Such reinstated lien (i) shall be effective on the date notice of revocation is mailed to the taxpayer in accordance with the provisions of subparagraph (A), but not earlier than the date on which any required filing of notice of revocation is filed in accordance with the provisions of subparagraph (B), and (ii) shall have the same force and effect (as of such date), until the expiration of the period of limitation on collection after assessment, as a lien imposed by section 6321 (relating to lien for taxes).
6325(f)(3) CERTIFICATES VOID UNDER CERTAIN CONDITIONS. --Notwithstanding any other provision of this subtitle, any lien imposed by this chapter shall attach to any property with respect to which a certificate of discharge has been issued if the person liable for the tax reacquires such property after such certificate has been issued.
6325(g) FILING OF CERTIFICATES AND NOTICES. --If a certificate or notice issued pursuant to this section may not be filed in the office designated by State law in which the notice of lien imposed by section 6321 is filed, such certificate or notice shall be effective if filed in the office of the clerk of the United States district court for the judicial district in which such office is situated.
6325(h) CROSS REFERENCE. --
For provisions relating to bonds, see chapter 73 (sec. 7101 and following).
Friday, April 4, 2008
Thomas Butti v. Commissioner.
The IRS abused its discretion by proceeding with the collection of a taxpayer's liabilities because it failed to show that it had issued a notice of deficiency before assessing the taxpayer's taxes.
The IRS relied on Postal Service Form 3877 to prove that the notice was issued. However, there was no proof offered by the Appeals officer that the notice he saw in the file was the final version of the notice, and his log indicated that the administrative file contained a default notice of deficiency.
Dkt. No. 11084-02L , TC Memo. 2008-82, April 3, 2008.
[Code Sec. 6330]
Assessment: Notice and demand: Notice of Deficiency: Abuse of discretion. --
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Chief Judge: Respondent sent a Notice of Determination Concerning Collection Action(s) Under Section 63201 and/or 6330 to petitioner with respect to a proposed levy to collect petitioner's unpaid income taxes for tax years 1989, 1990, and 1999.2 Petitioner timely filed a petition seeking our review of respondent's determination.
The issue for decision is whether respondent's determination to collect tax from petitioner for tax years 1989 and 1990 was an abuse of discretion. We conclude that it was because, as discussed below, the record does not show that a notice of deficiency had been issued to petitioner with respect to those years.
FINDINGS OF FACT3
A. Petitioner
Petitioner was incarcerated in the Wyoming Correctional Facility, Attica, New York, when the petition was filed. He lived in the State of New York before and after he was incarcerated.
Before he was incarcerated, petitioner was a licensed chiropractor practicing in Yonkers, New York. On August 18, 1994, he pleaded guilty to offering a false instrument for filing in the first degree, insurance fraud in the second degree, grand larceny in the second degree, and attempted grand larceny in the third degree.
B. The Notice of Deficiency for 1989 and 1990
Respondent sent article No. Z 009 132 166 by certified mail to petitioner at the Gowanda Correctional Facility, P.O. Box 311, Gowanda, NY 14070 (Gowanda) and article No. Z 009 132 167 by certified mail to petitioner at 47 Malverne Road, Scarsdale, NY 10583, on December 30, 1998. Respondent recorded the mailing on a U.S. Postal Service Form 3877, Acceptance of Registered, Insured, C.O.D. and Certified Mail, or its equivalent, a certified mail list, which stated at the top: "Statutory Notice of Deficiency for the years indicated have been sent to the following taxpayers". Gowanda received that item on January 4, 1999. Petitioner was not housed at Gowanda from October 22, 1998, to January 20, 1999.
Gowanda maintained a log for mail pertaining to inmates' legal proceedings. Petitioner signed that log in order to receive two items of certified mail on January 21, 1999. The log does not state the certified mail numbers of the items he received. Petitioner received various articles of certified mail from respondent while he was incarcerated at Gowanda.
C. The Section 6330 Hearing
Respondent issued a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, on November 8, 2000. In the final notice, respondent stated that petitioner owed $270,087.60 for 1989, $108,044.26 for 1990, and $5,507.84 for 1999.
On December 1, 2000, petitioner sent to respondent a Form 12153, Request for a Collection Due Process Hearing. Petitioner was incarcerated at the Wyoming Correctional Facility at that time. He attached an explanation in which he said he had not received the notice of deficiency and that he was not liable for tax in the amounts stated in the notice.
One of respondent's Appeals officers was assigned to petitioner's case on February 12, 2002. The Appeals officer kept an activity log for the case in which he said: (1) The case is very complex; (2) petitioner claims that he had no prior opportunity to contest the underlying liability and he did not receive the notice of deficiency; and (3) the "administrative file indicates that a defaulted * * * [notice of deficiency] is in [the administrative] file".
On May 1, 2002, the Appeals officer sent a letter to petitioner at the Wyoming Correctional Facility stating in part:
We scheduled the conference you requested on this case for * * * [9:30 a.m., May 21, 2002, at room 1137, 290 Broadway, New York, New York]. Please let me know within 10 days from the date of this letter whether this is convenient. If it is not, I will be glad to arrange another time.
Our meeting will be informal and you may present facts, arguments, and legal authority to support your position. If you plan to discuss new material, please send me copies at least five days before our meeting.
You should prepare statements of fact as affidavits, or sign them under penalties of perjury. * * *.
The Appeals officer knew that petitioner was incarcerated when he sent that letter. On May 15, 2002, petitioner wrote the following to the Appeals officer:
I received your May 1, 2002, correspondence affixed hereto, and I respond accordingly. I was transferred to the facility listed below and * * * Wyoming did not forward your correspondence expeditiously. Therefore, I apologize for the delayed response, but it is with just cause.
I commence by thanking you for scheduling a conference on this case. Unfortunately, I am faced with two challenges: (1) I am confined to solitary until July 16, 2002 and I do not have access to a telephone, legal documents, and/or transportation to even meet with you at this time. Furthermore and due to my indigency status as granted by both Federal and State courts, I am unable to retain an attorney, certified public accountant or person enrolled to practice before the Internal Revenue Service. I am currently petitioning a professional willing to assist pro bono.
* * * * * * * *
I humbly request a moratorium until I can either (1) access my complete file post July 16, 2002, (2) obtain a pro bono accountant or attorney or, (3) complete my due process right to a full and fair opportunity to appeal my criminal case. * * *.
Petitioner did not meet with the Appeals officer in New York on May 21, 2002. On that day, the Appeals officer wrote in his activity log that he had reviewed respondent's transcripts of account for petitioner's tax years 1989 and 1990, including Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters, and concluded that respondent had followed administrative and procedural requirements.
The Appeals officer received and read petitioner's May 15, 2002, letter on May 22, 2002. Even though he told petitioner he would reschedule the hearing at petitioner's request, the Appeals officer did not do so. On June 4, 2002, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. In it, respondent determined that respondent's collection action with respect to petitioner's tax years 1989, 1990, and 1999 was proper.
OPINION
1. Procedural Background
In Butti v. Commissioner, T.C. Memo. 2006-66, we held that respondent had not provided petitioner an opportunity for a hearing as required by section 6330(b) and that petitioner had not received a notice of deficiency and had no prior opportunity to dispute the underlying tax liability.
On April 10, 2006, we remanded this case to respondent to provide petitioner an opportunity for a hearing as required by section 6330(b). We also ordered the parties to provide status reports by July 7, 2006. By order dated October 18, 2006, the Court also required respondent to provide to petitioner so that petitioner would receive by October 20, 2006, copies of the notice of deficiency for 1989 and 1990 and Forms 4340 for those years. Respondent subsequently reported that (1) Respondent was unable to provide copies of the notices of deficiency issued to petitioner for 1989 and 1990 because the administrative files for those tax years are no longer available; and (2) respondent had provided petitioner with copies of Forms 4340 for 1989 and 1990 in September 2005, as part of the stipulation process before trial.
2. Requirement of Issuance of a Notice of Deficiency
The Secretary generally may not assess a deficiency in tax unless the Secretary has first mailed a notice of deficiency to the taxpayer.4 Sec. 6213(a).
Respondent does not contend that any of the statutory exceptions to issuing a notice of deficiency applies here. Thus, respondent may not proceed with collection unless respondent issued a notice of deficiency. See Manko v. Commissioner, 126 T.C. 195, 200-201 (2006); Freije v. Commissioner, 125 T.C. 14, 34-37 (2005).
3. Whether Respondent Issued a Notice of Deficiency to Petitioner
Respondent contends that a notice of deficiency was issued to petitioner. We disagree.
Respondent bears the burden of proving by competent and persuasive evidence that the notice of deficiency was properly mailed. Coleman v. Commissioner, 94 T.C. 82, 90 (1990); August v. Commissioner, 54 T.C. 1535, 1536-1537 (1970). The act of mailing may be proven by documentary evidence of mailing or by evidence of respondent's mailing practices corroborated by direct testimony. Coleman v. Commissioner, supra.
Where the existence of the notice of deficiency is not in dispute, a properly completed Form 3877 by itself is sufficient, absent evidence to the contrary, to establish that the notice was properly mailed to a taxpayer. United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984); Coleman v. Commissioner, supra at 91. However, where, as here, the existence of the notice of deficiency is in dispute, we have previously rejected the Commissioner's reliance on the presumption of regularity based solely on the Form 3877 under circumstances similar to those present here. Pietanza v. Commissioner, 92 T.C. 729 (1989), affd. without published opinion 935 F.2d 1282 (3d Cir. 1991); see also Koerner v. Commissioner, T.C. Memo. 1997-144 (a Form 3877 does not by itself establish that the Commissioner mailed a notice of deficiency); cf. Spivey v. Commissioner, T.C. Memo. 2001-29 (the Commissioner produced a copy of the notice of deficiency and witnesses described how notices of deficiency are produced and mailed), affd. 29 Fed. Appx. 575 (11th Cir. 2001).
Respondent contends that Pietanza is distinguishable; however, respondent has not shown that the facts present in this case differ in any material way from those in Pietanza. In Pietanza, as here, the Commissioner (1) lost the administrative file, (2) had no copies of a notice of deficiency, (3) did not establish that a final notice of deficiency ever existed, (4) relied on a Postal Service Form 3877, and (5) did not introduce evidence showing how the Commissioner's personnel prepare and mail notices of deficiency.
The Commissioner in Pietanza produced a draft copy of the notice of deficiency but did not establish that a final notice ever existed. Here, the Appeals officer testified that he saw a copy of the notice of deficiency, but he did not say whether it was a final version. Further, his testimony is curious in the light of the contemporaneous entry in his log, which states only that the administrative file indicates that a defaulted notice of deficiency is in the administrative file. We do not understand why the Appeals officer would have chosen that language if he had seen the notice of deficiency. Thus, as in Pietanza, the record does not show that respondent issued a final notice of deficiency. Respondent has provided no reason that this case is not bound by our holding in Pietanza.
4. Conclusion
We conclude that respondent's determination to proceed with collection of petitioner's tax liabilities for 1989 and 1990 was in error and thus an abuse of discretion because respondent failed to show that respondent issued a notice of deficiency before assessing petitioner's taxes.
Decision will be entered for petitioner.
1 Section references are to the Internal Revenue Code as amended.
2 Petitioner's tax liability for 1999 is no longer at issue.
3 For convenience, some of the findings of fact which appeared in Butti v. Commissioner, T.C. Memo. 2006-66, are repeated here.
4 A deficiency notice is not required to assess taxes where there is no deficiency. For example, the Secretary may assess without a deficiency notice the amount of tax shown due on a return. Sec. 6201(a)(1).
The IRS abused its discretion by proceeding with the collection of a taxpayer's liabilities because it failed to show that it had issued a notice of deficiency before assessing the taxpayer's taxes.
The IRS relied on Postal Service Form 3877 to prove that the notice was issued. However, there was no proof offered by the Appeals officer that the notice he saw in the file was the final version of the notice, and his log indicated that the administrative file contained a default notice of deficiency.
Dkt. No. 11084-02L , TC Memo. 2008-82, April 3, 2008.
[Code Sec. 6330]
Assessment: Notice and demand: Notice of Deficiency: Abuse of discretion. --
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Chief Judge: Respondent sent a Notice of Determination Concerning Collection Action(s) Under Section 63201 and/or 6330 to petitioner with respect to a proposed levy to collect petitioner's unpaid income taxes for tax years 1989, 1990, and 1999.2 Petitioner timely filed a petition seeking our review of respondent's determination.
The issue for decision is whether respondent's determination to collect tax from petitioner for tax years 1989 and 1990 was an abuse of discretion. We conclude that it was because, as discussed below, the record does not show that a notice of deficiency had been issued to petitioner with respect to those years.
FINDINGS OF FACT3
A. Petitioner
Petitioner was incarcerated in the Wyoming Correctional Facility, Attica, New York, when the petition was filed. He lived in the State of New York before and after he was incarcerated.
Before he was incarcerated, petitioner was a licensed chiropractor practicing in Yonkers, New York. On August 18, 1994, he pleaded guilty to offering a false instrument for filing in the first degree, insurance fraud in the second degree, grand larceny in the second degree, and attempted grand larceny in the third degree.
B. The Notice of Deficiency for 1989 and 1990
Respondent sent article No. Z 009 132 166 by certified mail to petitioner at the Gowanda Correctional Facility, P.O. Box 311, Gowanda, NY 14070 (Gowanda) and article No. Z 009 132 167 by certified mail to petitioner at 47 Malverne Road, Scarsdale, NY 10583, on December 30, 1998. Respondent recorded the mailing on a U.S. Postal Service Form 3877, Acceptance of Registered, Insured, C.O.D. and Certified Mail, or its equivalent, a certified mail list, which stated at the top: "Statutory Notice of Deficiency for the years indicated have been sent to the following taxpayers". Gowanda received that item on January 4, 1999. Petitioner was not housed at Gowanda from October 22, 1998, to January 20, 1999.
Gowanda maintained a log for mail pertaining to inmates' legal proceedings. Petitioner signed that log in order to receive two items of certified mail on January 21, 1999. The log does not state the certified mail numbers of the items he received. Petitioner received various articles of certified mail from respondent while he was incarcerated at Gowanda.
C. The Section 6330 Hearing
Respondent issued a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, on November 8, 2000. In the final notice, respondent stated that petitioner owed $270,087.60 for 1989, $108,044.26 for 1990, and $5,507.84 for 1999.
On December 1, 2000, petitioner sent to respondent a Form 12153, Request for a Collection Due Process Hearing. Petitioner was incarcerated at the Wyoming Correctional Facility at that time. He attached an explanation in which he said he had not received the notice of deficiency and that he was not liable for tax in the amounts stated in the notice.
One of respondent's Appeals officers was assigned to petitioner's case on February 12, 2002. The Appeals officer kept an activity log for the case in which he said: (1) The case is very complex; (2) petitioner claims that he had no prior opportunity to contest the underlying liability and he did not receive the notice of deficiency; and (3) the "administrative file indicates that a defaulted * * * [notice of deficiency] is in [the administrative] file".
On May 1, 2002, the Appeals officer sent a letter to petitioner at the Wyoming Correctional Facility stating in part:
We scheduled the conference you requested on this case for * * * [9:30 a.m., May 21, 2002, at room 1137, 290 Broadway, New York, New York]. Please let me know within 10 days from the date of this letter whether this is convenient. If it is not, I will be glad to arrange another time.
Our meeting will be informal and you may present facts, arguments, and legal authority to support your position. If you plan to discuss new material, please send me copies at least five days before our meeting.
You should prepare statements of fact as affidavits, or sign them under penalties of perjury. * * *.
The Appeals officer knew that petitioner was incarcerated when he sent that letter. On May 15, 2002, petitioner wrote the following to the Appeals officer:
I received your May 1, 2002, correspondence affixed hereto, and I respond accordingly. I was transferred to the facility listed below and * * * Wyoming did not forward your correspondence expeditiously. Therefore, I apologize for the delayed response, but it is with just cause.
I commence by thanking you for scheduling a conference on this case. Unfortunately, I am faced with two challenges: (1) I am confined to solitary until July 16, 2002 and I do not have access to a telephone, legal documents, and/or transportation to even meet with you at this time. Furthermore and due to my indigency status as granted by both Federal and State courts, I am unable to retain an attorney, certified public accountant or person enrolled to practice before the Internal Revenue Service. I am currently petitioning a professional willing to assist pro bono.
* * * * * * * *
I humbly request a moratorium until I can either (1) access my complete file post July 16, 2002, (2) obtain a pro bono accountant or attorney or, (3) complete my due process right to a full and fair opportunity to appeal my criminal case. * * *.
Petitioner did not meet with the Appeals officer in New York on May 21, 2002. On that day, the Appeals officer wrote in his activity log that he had reviewed respondent's transcripts of account for petitioner's tax years 1989 and 1990, including Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters, and concluded that respondent had followed administrative and procedural requirements.
The Appeals officer received and read petitioner's May 15, 2002, letter on May 22, 2002. Even though he told petitioner he would reschedule the hearing at petitioner's request, the Appeals officer did not do so. On June 4, 2002, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. In it, respondent determined that respondent's collection action with respect to petitioner's tax years 1989, 1990, and 1999 was proper.
OPINION
1. Procedural Background
In Butti v. Commissioner, T.C. Memo. 2006-66, we held that respondent had not provided petitioner an opportunity for a hearing as required by section 6330(b) and that petitioner had not received a notice of deficiency and had no prior opportunity to dispute the underlying tax liability.
On April 10, 2006, we remanded this case to respondent to provide petitioner an opportunity for a hearing as required by section 6330(b). We also ordered the parties to provide status reports by July 7, 2006. By order dated October 18, 2006, the Court also required respondent to provide to petitioner so that petitioner would receive by October 20, 2006, copies of the notice of deficiency for 1989 and 1990 and Forms 4340 for those years. Respondent subsequently reported that (1) Respondent was unable to provide copies of the notices of deficiency issued to petitioner for 1989 and 1990 because the administrative files for those tax years are no longer available; and (2) respondent had provided petitioner with copies of Forms 4340 for 1989 and 1990 in September 2005, as part of the stipulation process before trial.
2. Requirement of Issuance of a Notice of Deficiency
The Secretary generally may not assess a deficiency in tax unless the Secretary has first mailed a notice of deficiency to the taxpayer.4 Sec. 6213(a).
Respondent does not contend that any of the statutory exceptions to issuing a notice of deficiency applies here. Thus, respondent may not proceed with collection unless respondent issued a notice of deficiency. See Manko v. Commissioner, 126 T.C. 195, 200-201 (2006); Freije v. Commissioner, 125 T.C. 14, 34-37 (2005).
3. Whether Respondent Issued a Notice of Deficiency to Petitioner
Respondent contends that a notice of deficiency was issued to petitioner. We disagree.
Respondent bears the burden of proving by competent and persuasive evidence that the notice of deficiency was properly mailed. Coleman v. Commissioner, 94 T.C. 82, 90 (1990); August v. Commissioner, 54 T.C. 1535, 1536-1537 (1970). The act of mailing may be proven by documentary evidence of mailing or by evidence of respondent's mailing practices corroborated by direct testimony. Coleman v. Commissioner, supra.
Where the existence of the notice of deficiency is not in dispute, a properly completed Form 3877 by itself is sufficient, absent evidence to the contrary, to establish that the notice was properly mailed to a taxpayer. United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984); Coleman v. Commissioner, supra at 91. However, where, as here, the existence of the notice of deficiency is in dispute, we have previously rejected the Commissioner's reliance on the presumption of regularity based solely on the Form 3877 under circumstances similar to those present here. Pietanza v. Commissioner, 92 T.C. 729 (1989), affd. without published opinion 935 F.2d 1282 (3d Cir. 1991); see also Koerner v. Commissioner, T.C. Memo. 1997-144 (a Form 3877 does not by itself establish that the Commissioner mailed a notice of deficiency); cf. Spivey v. Commissioner, T.C. Memo. 2001-29 (the Commissioner produced a copy of the notice of deficiency and witnesses described how notices of deficiency are produced and mailed), affd. 29 Fed. Appx. 575 (11th Cir. 2001).
Respondent contends that Pietanza is distinguishable; however, respondent has not shown that the facts present in this case differ in any material way from those in Pietanza. In Pietanza, as here, the Commissioner (1) lost the administrative file, (2) had no copies of a notice of deficiency, (3) did not establish that a final notice of deficiency ever existed, (4) relied on a Postal Service Form 3877, and (5) did not introduce evidence showing how the Commissioner's personnel prepare and mail notices of deficiency.
The Commissioner in Pietanza produced a draft copy of the notice of deficiency but did not establish that a final notice ever existed. Here, the Appeals officer testified that he saw a copy of the notice of deficiency, but he did not say whether it was a final version. Further, his testimony is curious in the light of the contemporaneous entry in his log, which states only that the administrative file indicates that a defaulted notice of deficiency is in the administrative file. We do not understand why the Appeals officer would have chosen that language if he had seen the notice of deficiency. Thus, as in Pietanza, the record does not show that respondent issued a final notice of deficiency. Respondent has provided no reason that this case is not bound by our holding in Pietanza.
4. Conclusion
We conclude that respondent's determination to proceed with collection of petitioner's tax liabilities for 1989 and 1990 was in error and thus an abuse of discretion because respondent failed to show that respondent issued a notice of deficiency before assessing petitioner's taxes.
Decision will be entered for petitioner.
1 Section references are to the Internal Revenue Code as amended.
2 Petitioner's tax liability for 1999 is no longer at issue.
3 For convenience, some of the findings of fact which appeared in Butti v. Commissioner, T.C. Memo. 2006-66, are repeated here.
4 A deficiency notice is not required to assess taxes where there is no deficiency. For example, the Secretary may assess without a deficiency notice the amount of tax shown due on a return. Sec. 6201(a)(1).
No statute of limitations for tax fraud
In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. See sec. 6501(c)(1). A fraudulent return deprives the taxpayer the bar of the statutory period of limitations for that year. See Badaracco v. Commissioner, 464 U.S. 386, 396 (1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102 T.C. 380, 385 (1994).
Industrial Electrical and Instrumentation, Inc., v. Commissioner.
Dkt. No. 19355-05 , TC Memo. 2008-84, April 3, 2008.
[Code Sec. 6501]
Statute of limitations: Understatement of income: Fraud. --
The IRS was not barred by the statute of limitations from assessing a tax liability against a corporation for two tax years for amounts received by three of its shareholders for services performed in the name of the corporation. Because the corporation filed false or fraudulent returns for those years by intentionally underreporting its income, there was no statute of limitations on assessing a deficiency against it with respect to such returns.
[Code Sec. 6663]
Penalties: Understatement of income: Fraud penalty. --
A corporation was required to include in income for two tax years amounts received by three of its shareholders for services performed in the name of the corporation. The corporation was also liable for a civil fraud penalty for the two tax years. The indications of fraud were that the corporation understated its gross receipts and taxable income, maintained inadequate records, failed to provide a plausible or consistent explanation for the unreported income, filed false documents by not disclosing the identity of the three shareholders on the corporation's returns, and paid its workers in cash to conceal its activities. Further, the three shareholders concealed income by not depositing checks made out to the corporation into the corporation's bank account but instead cashing them or depositing them into third-party accounts. --CCH.
Robert A. Shupack, for petitioner; W. Robert Abramitis and Justin L. Campolieta, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
OPINION
I. Unreported Income
The Commissioner's determinations generally are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548, 550 (9th Cir. 1995). Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds are not taxable. Tokarski v. Commissioner, 87 T.C. 74 (1986).
There is ample evidence linking petitioner to an income-producing activity (IEI), and respondent has demonstrated that petitioner received unreported income.
II. Fraud
The fraud penalty is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from a taxpayer's fraud. See Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Fraud is intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing. See McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975).
The Commissioner has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b). To satisfy the burden of proof, the Commissioner must show: (1) An underpayment exists; and (2) the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990). The Commissioner must meet this burden through affirmative evidence because fraud is never presumed. See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).
A. Underpayment
An "underpayment" is the amount by which the tax imposed exceeds the excess of the sum of the amount shown as the tax by the taxpayer on his return, plus amounts not so shown that were previously assessed (or collected without assessment), over the amount of rebates made. See sec. 6664(a).
Petitioner argues that there is no underpayment because the money the Pennys earned performing electrical contracting services was income either to the Pennys or to Omni. Further, petitioner claims that it was not actively engaged in the performance of electrical contracting services during the years at issue but merely allowed the Pennys to use its name, its credit, and Mr. White's electrical contracting license. We disagree.
The Pennys wanted to engage in the electrical contracting business but did not have a license to do so. In fact, the State of Florida enjoined Stewart from being in the electrical contracting business. As a result, the Pennys made a deal with Mr. White whereby they would become officers and shareholders of IEI and thus have access to a license and be able to engage in the electrical contracting business.
Income is be taxed to the individual or entity which earns it. Lucas v. Earl, 281 U.S. 111 (1930). Petitioner cannot contract away its liability for Federal income taxes, nor can it anesthetize us to the fact that it tried to do so. Gibson v. Commissioner, T.C. Memo. 1982-374. Further, taxation of income cannot be escaped by anticipatory arrangements assigning it to someone else. Id. The "Agreement to Qualify" was an anticipatory agreement that attempted to assign all of petitioner's income to the Pennys and/or Omni despite the fact that the work was performed by or on behalf of petitioner.
Respondent has shown by clear and convincing evidence that during the taxable years at issue, petitioner engaged in the electrical contracting business and did not report all of its gross receipts on its tax returns. Proceeds of checks that were not deposited into petitioner's checking account were not reported on petitioner's tax return. Instead of depositing the checks into petitioner's bank account, the Pennys, officers and shareholders of petitioner, either cashed the checks at check cashing stores or endorsed them over to Classic or to the Harlan Trust.
.
Accordingly we conclude that petitioner understated its income in both 1999 and 2000.
B. Fraudulent Intent
The Commissioner must prove that a portion of the underpayment for each taxable year at issue was due to fraud. Sec. 7454(a); see also Profl. Servs. v. Commissioner, 79 T.C. 888, 930 (1982). The existence of fraud is a question of fact to be resolved from the entire record. See Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978). Because direct proof of a taxpayer's intent is rarely available, fraud may be proven by circumstantial evidence, and reasonable inferences may be drawn from the relevant facts. See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984). A taxpayer's entire course of conduct can be indicative of fraud. See Stone v. Commissioner, 56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969). The following badges of fraud have been used to prove fraud: (1) Understating income, (2) maintaining inadequate records, (3) implausible or inconsistent explanations of behavior, (4) concealment of income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) an intent to mislead which may be inferred from a pattern of conduct, (8) lack of credibility of the taxpayer's testimony, (9) filing false documents, (10) failing to file tax returns, and (11) dealing in cash. No single factor is necessarily sufficient to establish fraud. A combination of a number of factors constitutes persuasive evidence. Below we discuss the factors that we find to be present.
In the case of a corporation, such as petitioner, the fraudulent activities of a corporate agent or officer may be imputed to the corporation if: (1) The wrongdoer so dominates the corporation that it is, in reality, a creature of his will, his alter ego or, (2) the agent was acting in behalf of, and not against the interests of, the corporation. M.J. Laputka & Sons, Inc. v. Commissioner, T.C. Memo. 1981-730.
1. Understating Income
Petitioner, as we found above, understated its gross receipts in both 1999 and 2000, and as a result also understated its taxable income in both years. Only funds deposited into petitioner's bank account were reported on its return. However, petitioner earned significantly more than was deposited into the account. Petitioner argues that the money from electrical contracting services belonged to Omni or the Pennys individually. We disagree. See supra.
2. Maintaining Inadequate Records
Petitioner kept a "transaction detail" report that was little more than a reflection of the activity of petitioner's corporate account. Petitioner's "transaction detail" report did not reflect the checks that were cashed at check cashing stores or endorsed to Classic or the Harlan Trust. The report did not reflect all of petitioner's business.
3. Implausible or Inconsistent Explanations of Behavior
In his testimony, Mr. White acknowledged that he was aware that petitioner was working on the Archdiocese job and that it was a "significant" job. Mr. White claimed that the income from this work was the Pennys', he did not know how much the job was worth, and it was not his business to know. Despite these claims, Mr. White endorsed a check from the archdiocese payable to petitioner in the amount of $132,332.80.
4. Concealment of Income or Assets
The stockholders and officers of petitioner concealed petitioner's income through various methods. In 1999 officers and shareholders of petitioner endorsed over to Classic checks totaling $300,445 payable to petitioner.18 In 1999, officers and shareholders of petitioner cashed at check cashing stores checks totaling $1,143,655.10 made out to petitioner.19 In 2000, officers and shareholders of petitioner cashed at check cashing stores checks totaling $1,568,7335.50 made out to petitioner.20 Also in 2000, officers and shareholders of petitioner endorsed over to the Harlan Trust checks totaling $851,123 made out to petitioner.21 By not depositing the money in the corporate account and distributing the money from the corporation, petitioner avoided "double taxation" on millions of dollars.
Officers and shareholders of petitioner exhibited a pattern of concealment of IEI's income during the years at issue. The incidents were not isolated, but were continuous throughout the 2-year period.
5. An Intent To Mislead
The behavior described in relation to the concealment of income also indicates an intent to mislead. Once again, the behavior was continuous on the part of petitioner's officers and shareholders.
6. Filing False Documents
Petitioner's 1999 and 2000 tax returns indicate that Mr. White was the sole shareholder. The two tax returns failed to disclose that the Pennys were shareholders and officers who collectively owned 49 percent of petitioner.22 As we have found, the returns understated petitioner's income by large amounts for both 1999 and 2000.
7. Dealing in Cash
During 1999 and 2000, petitioner dealt in cash. The cashing of checks at check cashing stores has been detailed supra. In addition, petitioner paid its workers in cash. Michael Delucia and Jamie Massey testified that petitioner paid them in cash for their services performed for petitioner.
8. Petitioner's Arguments
Petitioner relies heavily on the argument that the Pennys were not officers of petitioner and that Mr. White was the only officer. Petitioner argues that Mr. White's actions were not fraudulent, and therefore neither were petitioner's. We disagree. Mr. White endorsed a check payable to IEI in the amount of $132,332.80 that he knew was never reported on petitioner's tax return. Mr. White was more involved with petitioner than he claimed. Mr. White knew that petitioner had a major project at LaSalle and work at other locations, yet the documents he turned over to Mr. Cole did not include much of the income those jobs generated for petitioner. Pursuant to Fla. Stat. Ann. sec. 607.0830 (West 2007), a director must discharge his or her duties in good faith, with ordinary care, and in a manner he or she believes to be in the best interests of the corporation. Even if we assume arguendo that Mr. White's conduct on behalf of petitioner was not fraudulent, the Pennys were officers and shareholders of petitioner; and their actions in their capacity as officers and shareholders of petitioner also establish that petitioner is liable for the civil fraud penalty. The Pennys, who were 49-percent shareholders, were, together with Mr. White, the dominant figures of petitioner. See M.J. Laputka & Sons, Inc. v. Commissioner, supra. Petitioner's counsel admitted at trial that Stewart was a "thief, a liar, and a crook". Stewart, however, was the general manager of IEI's Miami branch, a vice president, and together with Lance, Sean, and Donna ran that branch of petitioner on a day-to-day basis.
All of the electrical contracting work that petitioner undertook in 1999 and 2000 was the result of the Pennys' efforts. Pursuant to Florida law, when in the usual course of business of a corporation an officer or other agent is held out by the corporation, or has been permitted to act for it or manage its affairs, in such a way as to justify third persons who deal with him in inferring or assuming that he is doing an act within the scope of his authority, the corporation is bound thereby. Edward J. Gerrits, Inc. v. McKinney, 410 So. 2d 542 (Fla. Dist. Ct. App. 1982).
We conclude that respondent has proven by clear and convincing evidence that petitioner fraudulently underpaid its taxes for 1999 and 2000.
Once the Commissioner establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and subject to a 75-percent penalty, except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud. Sec. 6663(a) and (b). Petitioner has not proven that any part of either underpayment is not attributable to fraud. Therefore, the underpayments for 1999 and 2000 are subject to the 75-percent penalty.
III. Period of Limitations
Petitioner argues that respondent cannot assess the tax liabilities petitioner reported on its tax returns because the statutory periods of limitations have expired.
In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. See sec. 6501(c)(1). A fraudulent return deprives the taxpayer the bar of the statutory period of limitations for that year. See Badaracco v. Commissioner, 464 U.S. 386, 396 (1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102 T.C. 380, 385 (1994).
We found that petitioner filed fraudulent income tax returns for 1999 and 2000; therefore, the periods of limitations on assessment for both of these years remain open.
In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered for respondent.
In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. See sec. 6501(c)(1). A fraudulent return deprives the taxpayer the bar of the statutory period of limitations for that year. See Badaracco v. Commissioner, 464 U.S. 386, 396 (1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102 T.C. 380, 385 (1994).
Industrial Electrical and Instrumentation, Inc., v. Commissioner.
Dkt. No. 19355-05 , TC Memo. 2008-84, April 3, 2008.
[Code Sec. 6501]
Statute of limitations: Understatement of income: Fraud. --
The IRS was not barred by the statute of limitations from assessing a tax liability against a corporation for two tax years for amounts received by three of its shareholders for services performed in the name of the corporation. Because the corporation filed false or fraudulent returns for those years by intentionally underreporting its income, there was no statute of limitations on assessing a deficiency against it with respect to such returns.
[Code Sec. 6663]
Penalties: Understatement of income: Fraud penalty. --
A corporation was required to include in income for two tax years amounts received by three of its shareholders for services performed in the name of the corporation. The corporation was also liable for a civil fraud penalty for the two tax years. The indications of fraud were that the corporation understated its gross receipts and taxable income, maintained inadequate records, failed to provide a plausible or consistent explanation for the unreported income, filed false documents by not disclosing the identity of the three shareholders on the corporation's returns, and paid its workers in cash to conceal its activities. Further, the three shareholders concealed income by not depositing checks made out to the corporation into the corporation's bank account but instead cashing them or depositing them into third-party accounts. --CCH.
Robert A. Shupack, for petitioner; W. Robert Abramitis and Justin L. Campolieta, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
OPINION
I. Unreported Income
The Commissioner's determinations generally are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548, 550 (9th Cir. 1995). Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds are not taxable. Tokarski v. Commissioner, 87 T.C. 74 (1986).
There is ample evidence linking petitioner to an income-producing activity (IEI), and respondent has demonstrated that petitioner received unreported income.
II. Fraud
The fraud penalty is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from a taxpayer's fraud. See Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Fraud is intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing. See McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975).
The Commissioner has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b). To satisfy the burden of proof, the Commissioner must show: (1) An underpayment exists; and (2) the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990). The Commissioner must meet this burden through affirmative evidence because fraud is never presumed. See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).
A. Underpayment
An "underpayment" is the amount by which the tax imposed exceeds the excess of the sum of the amount shown as the tax by the taxpayer on his return, plus amounts not so shown that were previously assessed (or collected without assessment), over the amount of rebates made. See sec. 6664(a).
Petitioner argues that there is no underpayment because the money the Pennys earned performing electrical contracting services was income either to the Pennys or to Omni. Further, petitioner claims that it was not actively engaged in the performance of electrical contracting services during the years at issue but merely allowed the Pennys to use its name, its credit, and Mr. White's electrical contracting license. We disagree.
The Pennys wanted to engage in the electrical contracting business but did not have a license to do so. In fact, the State of Florida enjoined Stewart from being in the electrical contracting business. As a result, the Pennys made a deal with Mr. White whereby they would become officers and shareholders of IEI and thus have access to a license and be able to engage in the electrical contracting business.
Income is be taxed to the individual or entity which earns it. Lucas v. Earl, 281 U.S. 111 (1930). Petitioner cannot contract away its liability for Federal income taxes, nor can it anesthetize us to the fact that it tried to do so. Gibson v. Commissioner, T.C. Memo. 1982-374. Further, taxation of income cannot be escaped by anticipatory arrangements assigning it to someone else. Id. The "Agreement to Qualify" was an anticipatory agreement that attempted to assign all of petitioner's income to the Pennys and/or Omni despite the fact that the work was performed by or on behalf of petitioner.
Respondent has shown by clear and convincing evidence that during the taxable years at issue, petitioner engaged in the electrical contracting business and did not report all of its gross receipts on its tax returns. Proceeds of checks that were not deposited into petitioner's checking account were not reported on petitioner's tax return. Instead of depositing the checks into petitioner's bank account, the Pennys, officers and shareholders of petitioner, either cashed the checks at check cashing stores or endorsed them over to Classic or to the Harlan Trust.
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Accordingly we conclude that petitioner understated its income in both 1999 and 2000.
B. Fraudulent Intent
The Commissioner must prove that a portion of the underpayment for each taxable year at issue was due to fraud. Sec. 7454(a); see also Profl. Servs. v. Commissioner, 79 T.C. 888, 930 (1982). The existence of fraud is a question of fact to be resolved from the entire record. See Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978). Because direct proof of a taxpayer's intent is rarely available, fraud may be proven by circumstantial evidence, and reasonable inferences may be drawn from the relevant facts. See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984). A taxpayer's entire course of conduct can be indicative of fraud. See Stone v. Commissioner, 56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969). The following badges of fraud have been used to prove fraud: (1) Understating income, (2) maintaining inadequate records, (3) implausible or inconsistent explanations of behavior, (4) concealment of income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) an intent to mislead which may be inferred from a pattern of conduct, (8) lack of credibility of the taxpayer's testimony, (9) filing false documents, (10) failing to file tax returns, and (11) dealing in cash. No single factor is necessarily sufficient to establish fraud. A combination of a number of factors constitutes persuasive evidence. Below we discuss the factors that we find to be present.
In the case of a corporation, such as petitioner, the fraudulent activities of a corporate agent or officer may be imputed to the corporation if: (1) The wrongdoer so dominates the corporation that it is, in reality, a creature of his will, his alter ego or, (2) the agent was acting in behalf of, and not against the interests of, the corporation. M.J. Laputka & Sons, Inc. v. Commissioner, T.C. Memo. 1981-730.
1. Understating Income
Petitioner, as we found above, understated its gross receipts in both 1999 and 2000, and as a result also understated its taxable income in both years. Only funds deposited into petitioner's bank account were reported on its return. However, petitioner earned significantly more than was deposited into the account. Petitioner argues that the money from electrical contracting services belonged to Omni or the Pennys individually. We disagree. See supra.
2. Maintaining Inadequate Records
Petitioner kept a "transaction detail" report that was little more than a reflection of the activity of petitioner's corporate account. Petitioner's "transaction detail" report did not reflect the checks that were cashed at check cashing stores or endorsed to Classic or the Harlan Trust. The report did not reflect all of petitioner's business.
3. Implausible or Inconsistent Explanations of Behavior
In his testimony, Mr. White acknowledged that he was aware that petitioner was working on the Archdiocese job and that it was a "significant" job. Mr. White claimed that the income from this work was the Pennys', he did not know how much the job was worth, and it was not his business to know. Despite these claims, Mr. White endorsed a check from the archdiocese payable to petitioner in the amount of $132,332.80.
4. Concealment of Income or Assets
The stockholders and officers of petitioner concealed petitioner's income through various methods. In 1999 officers and shareholders of petitioner endorsed over to Classic checks totaling $300,445 payable to petitioner.18 In 1999, officers and shareholders of petitioner cashed at check cashing stores checks totaling $1,143,655.10 made out to petitioner.19 In 2000, officers and shareholders of petitioner cashed at check cashing stores checks totaling $1,568,7335.50 made out to petitioner.20 Also in 2000, officers and shareholders of petitioner endorsed over to the Harlan Trust checks totaling $851,123 made out to petitioner.21 By not depositing the money in the corporate account and distributing the money from the corporation, petitioner avoided "double taxation" on millions of dollars.
Officers and shareholders of petitioner exhibited a pattern of concealment of IEI's income during the years at issue. The incidents were not isolated, but were continuous throughout the 2-year period.
5. An Intent To Mislead
The behavior described in relation to the concealment of income also indicates an intent to mislead. Once again, the behavior was continuous on the part of petitioner's officers and shareholders.
6. Filing False Documents
Petitioner's 1999 and 2000 tax returns indicate that Mr. White was the sole shareholder. The two tax returns failed to disclose that the Pennys were shareholders and officers who collectively owned 49 percent of petitioner.22 As we have found, the returns understated petitioner's income by large amounts for both 1999 and 2000.
7. Dealing in Cash
During 1999 and 2000, petitioner dealt in cash. The cashing of checks at check cashing stores has been detailed supra. In addition, petitioner paid its workers in cash. Michael Delucia and Jamie Massey testified that petitioner paid them in cash for their services performed for petitioner.
8. Petitioner's Arguments
Petitioner relies heavily on the argument that the Pennys were not officers of petitioner and that Mr. White was the only officer. Petitioner argues that Mr. White's actions were not fraudulent, and therefore neither were petitioner's. We disagree. Mr. White endorsed a check payable to IEI in the amount of $132,332.80 that he knew was never reported on petitioner's tax return. Mr. White was more involved with petitioner than he claimed. Mr. White knew that petitioner had a major project at LaSalle and work at other locations, yet the documents he turned over to Mr. Cole did not include much of the income those jobs generated for petitioner. Pursuant to Fla. Stat. Ann. sec. 607.0830 (West 2007), a director must discharge his or her duties in good faith, with ordinary care, and in a manner he or she believes to be in the best interests of the corporation. Even if we assume arguendo that Mr. White's conduct on behalf of petitioner was not fraudulent, the Pennys were officers and shareholders of petitioner; and their actions in their capacity as officers and shareholders of petitioner also establish that petitioner is liable for the civil fraud penalty. The Pennys, who were 49-percent shareholders, were, together with Mr. White, the dominant figures of petitioner. See M.J. Laputka & Sons, Inc. v. Commissioner, supra. Petitioner's counsel admitted at trial that Stewart was a "thief, a liar, and a crook". Stewart, however, was the general manager of IEI's Miami branch, a vice president, and together with Lance, Sean, and Donna ran that branch of petitioner on a day-to-day basis.
All of the electrical contracting work that petitioner undertook in 1999 and 2000 was the result of the Pennys' efforts. Pursuant to Florida law, when in the usual course of business of a corporation an officer or other agent is held out by the corporation, or has been permitted to act for it or manage its affairs, in such a way as to justify third persons who deal with him in inferring or assuming that he is doing an act within the scope of his authority, the corporation is bound thereby. Edward J. Gerrits, Inc. v. McKinney, 410 So. 2d 542 (Fla. Dist. Ct. App. 1982).
We conclude that respondent has proven by clear and convincing evidence that petitioner fraudulently underpaid its taxes for 1999 and 2000.
Once the Commissioner establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and subject to a 75-percent penalty, except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud. Sec. 6663(a) and (b). Petitioner has not proven that any part of either underpayment is not attributable to fraud. Therefore, the underpayments for 1999 and 2000 are subject to the 75-percent penalty.
III. Period of Limitations
Petitioner argues that respondent cannot assess the tax liabilities petitioner reported on its tax returns because the statutory periods of limitations have expired.
In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. See sec. 6501(c)(1). A fraudulent return deprives the taxpayer the bar of the statutory period of limitations for that year. See Badaracco v. Commissioner, 464 U.S. 386, 396 (1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102 T.C. 380, 385 (1994).
We found that petitioner filed fraudulent income tax returns for 1999 and 2000; therefore, the periods of limitations on assessment for both of these years remain open.
In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered for respondent.
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