Deaton Oil Company, LLC v. United States , 904 F.3d 634 ( 2018 )

United States Court of Appeals
For the Eighth Circuit
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No. 17-2326
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Deaton Oil Company, LLC
lllllllllllllllllllllPlaintiff - Appellant
v.
United States of America
lllllllllllllllllllllDefendant - Appellee
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Appeal from United States District Court
for the Western District of Arkansas - Hot Springs
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Submitted: April 10, 2018
Filed: September 21, 2018
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Before SMITH, Chief Judge, WOLLMAN and LOKEN, Circuit Judges.
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SMITH, Chief Judge.
Taxpayer Deaton Oil Company, LLC (“Deaton”) appeals the district court’s1
dismissal with prejudice of its suit seeking refund, abatement, and recovery of
delinquent tax penalties assessed against it. We affirm.
1
The Honorable P.K. Holmes, III, Chief Judge, United States District Court for
the Western District of Arkansas.
I. Background
When reviewing the grant of a motion to dismiss, we accept as true the
allegations set forth in the complaint. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
The complaint alleged the following facts. In March 2014, the Internal Revenue
Service (IRS) notified Deaton that it had failed to pay employment taxes from 2010
to 2013 or to timely file the required quarterly reports. That same month, Deaton
remitted payment of over $250,000 for the unpaid taxes to the IRS; in 2015, it paid
the penalties and interest assessed as a result of the delinquent taxes. Deaton
conducted an internal investigation into the matter. It found that Tony Rather,
Deaton’s operations manager during the relevant time period, failed to pay its taxes.
Rather’s duties included ensuring that Deaton filed and paid its employment taxes.
Unfortunately, Rather proved to be untrustworthy. He missed filing deadlines and did
not inform Deaton’s owner, Jack Beavert, of the numerous IRS delinquency notices
he had received. In addition, Rather began settlement negotiations with the IRS
without Deaton’s approval.
After payment of its delinquent taxes, Deaton submitted a Form 843 (Claim for
Refund and Request for Abatement) seeking a refund of penalties and interest.
Deaton claimed that reasonable cause justified its tax delinquency. In addition to
citing Rather’s actions, Deaton also claimed that its outside CPA gave assurances that
Deaton paid its taxes in a timely manner. The CPA, however, did not verify that the
taxes were actually paid but instead relied on Rather’s representations that he had
paid them.
The IRS refunded most of the penalties and interest assessed for 2013, but it
denied relief as to 2010, 2011, and 2012. Deaton subsequently filed suit against the
IRS to compel a refund of the remaining penalties and interest. The IRS filed a
motion to dismiss, arguing that Deaton had failed to set forth facts that meet the
reasonable cause standard set forth in United States v. Boyle, 469 U.S. 241 (1985).
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The IRS argued that under Boyle, a taxpayer’s duty to file its returns and pay its
employment taxes is non-delegable and therefore cannot be excused by an agent’s
misconduct.
Deaton argued that Boyle and other authority cited by the IRS could be
distinguished. Deaton contended those cases involved less egregious misconduct than
that presented in its case. Deaton relied on In re American Biomaterials Corp., 954
F.2d 919 (3rd Cir. 1992), for the proposition that profound misconduct coupled with
concealment of that wrongdoing prevents a taxpayer from discovering a delinquency
and timely fulfilling its tax obligations. Deaton averred that its reliance on an outside
CPA compares favorably with that of the taxpayer in Estate of Thouron v. United
States, 752 F.3d 311 (3rd Cir. 2014). In Thouron, the court held that reliance on an
expert for tax advice might excuse a late filing. Id. at 315–16. Additionally, Deaton
noted that the cases cited by the IRS were not decided at the 12(b)(6) stage, but rather
at summary judgment or at trial. In its reply, the IRS stated that American
Biomaterials was inapposite because, unlike here, that case dealt with embezzlement
by the CEO/chairman of the board and CFO/treasurer. This case, the IRS argued,
involves an individual employee subject to company oversight.
The district court dismissed the case in a brief written order. The court held that
“Deaton had an obligation to timely remit employment taxes. Deaton’s reliance on its
agents—an employee and an outside CPA—cannot constitute reasonable cause for
its failure to remit those taxes. Deaton’s allegations do not state a claim, and dismissal
of this matter is proper.” Deaton Oil Co., LLC v. United States, No. 6:16-CV-06093,
2017 WL 2493280, at *1 (W.D. Ark. May 23, 2017) (citing Boyle, 469 U.S. at 246;
Conklin Bros. of Santa Rosa, Inc. v. United States, 986 F.2d 315 (9th Cir. 1993)).
Additionally, the district court denied Deaton leave to amend based on Deaton’s
failure to attach a copy of its proposed amendment. The court also determined that
amendment “would be futile.” Id. at *2. The court stated, “Deaton’s complaint is not
being dismissed because it lacks sufficient factual allegations to state one of the
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elements of a claim, or for some similar reason. It is being dismissed because the
factual allegations demonstrate that Deaton is not entitled to relief.” Id. The district
court dismissed the action with prejudice and entered judgment in favor of the IRS.
Deaton timely appeals.
II. Discussion
We review de novo the district court’s grant of a motion to dismiss,
accepting as true all factual allegations in the complaint and drawing all
reasonable inferences in favor of the nonmoving party. To survive a
motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face. A
claim has facial plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.
Richter v. Advance Auto Parts, Inc., 686 F.3d 847, 850 (8th Cir. 2012) (cleaned up).
Deaton argues that its failures to file timely tax returns and timely pay its taxes
were excusable. Factually, it relies on Rather’s malfeasance and “Deaton’s reliance
on its outside CPA to review and confirm that all employment taxes were being paid
and all returns were being filed.” Appellant’s Br. at 17. The facts, whether considered
singularly or together, do not excuse Deaton’s tax law compliance failures. We hold
that the facts set forth in the complaint do not support a finding of reasonable cause.
Consequently, we affirm.
The Internal Revenue Code imposes penalties on those who fail to timely pay
certain federal taxes. See, e.g., 26 U.S.C. § 6651 (addressing failure to file tax return
or pay tax liability); id. § 6656 (addressing failure to deposit taxes as required). These
provisions apply to employment taxes. An employer is required to withhold these
taxes, place them into a trust fund, and report on a quarterly basis. Staff IT, Inc. v.
United States, 482 F.3d 792, 798 (5th Cir. 2007) (citing 26 U.S.C. §§ 3102(a),
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3402(a), 7501, 3403, & 6011(a)). Failure to do so subjects the taxpayer to mandatory
penalties. Id. “To escape the penalties, the taxpayer bears the heavy burden of proving
both (1) that the failure did not result from willful neglect, and (2) that the failure was
due to reasonable cause. Boles Trucking, Inc. v. United States, 77 F.3d 236, 241 (8th
Cir. 1996) (cleaned up). Though “willful neglect” and “reasonable cause” are not
defined by the Internal Revenue Code, a Treasury Department regulation provides:
[i]f the taxpayer exercised ordinary business care and prudence and was
nevertheless unable to file the return within the prescribed time, then the
delay is due to a reasonable cause. A failure to pay will be considered to
be due to reasonable cause to the extent that the taxpayer has made a
satisfactory showing that he exercised ordinary business care and
prudence in providing for payment of his tax liability and was
nevertheless . . . unable to pay the tax . . . .
26 C.F.R. § 301.6651-1(c)(1). Boyle expanded on this principle.
In Boyle, an estate hired a lawyer to assure its tax law compliance. 469 U.S. at
242. However, despite several conversations on the matter with the executor (the
decedent’s son), the attorney, due to a calendaring issue, did not file the return on
time. Id. at 242–43. Upon discovery of this oversight, the estate filed its return and
paid its tax obligation, including late penalties and interest. Id. at 243–44. The
executor then brought a refund suit against the IRS, claiming that his reliance on an
attorney who simply failed to fulfill his duty was reasonable cause for failure to file
on time. Id. at 244. The Court, recognizing the importance of deadlines to the
administration of the tax system, held that the filing of taxes was a non-delegable
duty, and an agent’s failure to act as expected did not absolve the principal of that
duty:
The time has come for a rule with as “bright” a line as can be
drawn consistent with the statute and implementing regulations.
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Deadlines are inherently arbitrary; fixed dates, however, are often
essential to accomplish necessary results. The Government has millions
of taxpayers to monitor, and our system of self-assessment in the initial
calculation of a tax simply cannot work on any basis other than one of
strict filing standards. Any less rigid standard would risk encouraging
a lax attitude toward filing dates. Prompt payment of taxes is imperative
to the Government, which should not have to assume the burden of
unnecessary ad hoc determinations.
Congress has placed the burden of prompt filing on the executor,
not on some agent or employee of the executor. The duty is fixed and
clear; Congress intended to place upon the taxpayer an obligation to
ascertain the statutory deadline and then to meet that deadline, except in
a very narrow range of situations. Engaging an attorney to assist in the
probate proceedings is plainly an exercise of the “ordinary business care
and prudence” prescribed by the regulations, 26 CFR § 301.6651-1(c)(1)
(1984), but that does not provide an answer to the question we face here.
To say that it was “reasonable” for the executor to assume that the
attorney would comply with the statute may resolve the matter as
between them, but not with respect to the executor’s obligations under
the statute. Congress has charged the executor with an unambiguous,
precisely defined duty to file the return within nine months; extensions
are granted fairly routinely. That the attorney, as the executor’s agent,
was expected to attend to the matter does not relieve the principal of his
duty to comply with the statute.
Id. at 249–50 (footnotes omitted).
In so holding, the Court distinguished between relying on an agent for
professional legal advice and relying on an agent on non-technical, non-specialized
matters:
When an accountant or attorney advises a taxpayer on a matter of
tax law, such as whether a liability exists, it is reasonable for the
taxpayer to rely on that advice. Most taxpayers are not competent to
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discern error in the substantive advice of an accountant or attorney. To
require the taxpayer to challenge the attorney, to seek a “second
opinion,” or to try to monitor counsel on the provisions of the Code
himself would nullify the very purpose of seeking the advice of a
presumed expert in the first place. “Ordinary business care and
prudence” do not demand such actions.
By contrast, one does not have to be a tax expert to know that tax
returns have fixed filing dates and that taxes must be paid when they are
due. In short, tax returns imply deadlines. Reliance by a lay person on
a lawyer is of course common; but that reliance cannot function as a
substitute for compliance with an unambiguous statute. Among the first
duties of the representative of a decedent’s estate is to identify and
assemble the assets of the decedent and to ascertain tax obligations.
Although it is common practice for an executor to engage a professional
to prepare and file an estate tax return, a person experienced in business
matters can perform that task personally.
...
It requires no special training or effort to ascertain a deadline
and make sure that it is met. The failure to make a timely filing of a tax
return is not excused by the taxpayer’s reliance on an agent, and such
reliance is not “reasonable cause” for a late filing under § 6651(a)(1).
Id. at 251–52 (second emphasis added) (citation omitted). In a footnote, the Court
also recognized that a taxpayer’s “disability” could provide reasonable cause for
failure to meet a tax obligation:
The administrative regulations and practices exempt late filings
from the penalty when the tardiness results from postal delays, illness,
and other factors largely beyond the taxpayer’s control. . . . This
principle might well cover a filing default by a taxpayer who relied on
an attorney or accountant because the taxpayer was, for some reason,
incapable by objective standards of meeting the criteria of “ordinary
business care and prudence.” In that situation, however, the disability
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alone could well be an acceptable excuse for a late filing.
But this case does not involve the effect of a taxpayer’s disability;
it involves the effect of a taxpayer’s reliance on an agent employed by
the taxpayer, and our holding necessarily is limited to that issue rather
than the wide range of issues that might arise in future cases under the
statute and regulations.
Id. at 248 n.6.
Deaton’s principal authority, American Biomaterials, is unpersuasive. In that
case, the Third Circuit held that a company’s failure to file its taxes was excused by
the fact that its principal decisionmakers with regard to financial and tax matters were
embezzling from the company. 954 F.2d at 927.
In the course of a bankruptcy proceeding, a company challenged penalties it
was assessed for non-payment of taxes as a result of embezzlement committed by its
CEO and its CFO. Id. at 921.2 The government attempted to hold the company
responsible under a strict vicarious liability theory. Id. at 926. The court
acknowledged Boyle’s holding that a taxpayer’s duty to file its taxes is non-delegable,
but it held that the officers’ criminal conduct divested them of their apparent authority
on tax matters, rendering a vicarious liability theory inappropriate. Id. at 927.
Nonetheless, the court held that this did not end the inquiry, because
[i]f a corporation has lax internal controls or fails to secure competent
external auditors to ensure the filing of timely tax returns and deposit
and payment of taxes, it fails to show reasonable cause or absence of
willful neglect and is itself liable for statutory penalties, notwithstanding
its lack of vicarious liability for the criminal actions of its agents.
2
The CEO also served as president and chairman of the board, and the CFO was
also the company’s treasurer.
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Id. (citation omitted). Because the government relied only on a strict liability theory,
the court held that the government waived the issue of the company’s internal
controls and therefore ruled in the company’s favor.
Notably, though the court ultimately ruled in the company’s favor, its decision
expressly did not rely on the company’s contention
that its board of directors reasonably relied on the oversight of the
corporation’s financial affairs by an independent accountant, that the
corporation’s 1984-87 operating losses also resulted from the
embezzlements of [CEO] and [CFO], and therefore that its
noncompliance with the tax code was as excusable as if American were
an individual who is rendered incompetent by mental or physical
disability.
Id. at 923 (citation omitted).
In contrast to American Biomaterials, the Ninth Circuit’s decision in Conklin
Brothers relies much more heavily on Boyle. In Conklin Brothers, a business’s
(Conklin Brothers) office manager/controller, Diana Stornetta, failed to ensure that
Conklin Brothers timely fulfilled its employment tax filing and payment obligations
over a period of more than two years. 986 F.2d at 316. However, when Stornetta
received the IRS notice of late penalty fees,
neither Conklin’s officers nor its accountants were aware of the
assessments because Stornetta allegedly intercepted and screened the
mail. Additionally, Stornetta allegedly altered check descriptions and the
quarterly reports (Form 941) when she later paid these assessments. The
alterations made it appear that the tax payments were solely for the
current period. Stornetta also allegedly concealed the deficiencies by
undertaking the performance herself of all payroll functions.
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Purportedly, she did this by telling payroll clerks not to prepare the tax
deposit checks anymore and that she would take care of it.
Id. Even though the wrongdoing was all Stornetta’s, the court noted that she had only
limited power in conducting her duties; importantly, to issue a payroll tax check,
Stornetta either had to have it signed by Gary Bowers, the company’s president and
majority shareholder, or sign it herself with a countersignature from the company’s
corporate secretary. Id.
Conklin Brothers, the taxpayer, only became aware of the delinquency after
Stornetta’s sudden resignation. Id. After paying the penalty, Conklin Brothers filed
suit seeking a refund on the basis that “Stornetta’s intentional misconduct disabled
it from adhering timely to its tax obligation.” Id. at 318. However, the court
interpreted Boyle to mean that a corporate agent’s failure to act as she is supposed to
only excuses the corporation’s failure to pay if the company “can show that it was
disabled from complying timely.” Id. (citing Boyle, 469 U.S. at 248 n.6).
The Ninth Circuit looked to American Biomaterials and the language in Boyle
regarding disability and rejected the claim that Stornetta’s actions disabled her
company. Id. The court held that “Stornetta’s deficient and improper conduct was not
largely beyond Conklin’s control” because, unlike the embezzlers in American
Biomaterials, she was subject to the supervision of both Bowers and the company’s
outside accountants. Id. The court therefore held that there was no reasonable cause
for Conklin Brothers’s delinquency. Id. at 319.
Applying these cases to the instant facts, we conclude that under Boyle, an
agent’s failure to fulfill his duty to his principal to file tax returns and make payments
on behalf of the principal does not constitute reasonable cause for the principal’s
failure to comply with its tax obligations unless that failure actually rendered the
principal disabled with regard to its tax obligations. We also conclude that disability
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is a high bar that is not satisfied if the errant agent is subject to the control of his
principal, whether that principal sufficiently exercised that control or not.
Though Deaton relies on American Biomaterials, we conclude it is materially
distinguishable. In that case, dishonest financial management officials who were
solely responsible for filing tax returns and making payments “incapacitated
American and rendered it unable to file its tax returns and pay taxes due.” 954 F.2d
at 922. The government argued that the bankrupt taxpayer was vicariously liable as
a matter of law for the actions of its dishonest officials, not that their actions fell short
of being a “disability” under Boyle. Id. at 928. In this case, Rather worked within a
corporate structure in which he fell under the supervision of at least one person, the
company’s owner. See Complaint at 4 , ¶ 14; 5, ¶ 19; and 9, ¶ 34, Deaton Oil Co.,
LLC v. United States, No. 6:16-CV-06093, (W.D. Ark. Sept. 22, 2016), ECF No. 1
(implicitly describing Beavert as Rather’s superior). Therefore, the taxpayer was not
disabled, and even if it was, its disability was not brought about by circumstances
beyond its control. As such, Rather’s actions do not constitute reasonable cause.
Based on our conclusion that Rather’s actions do not constitute reasonable cause for
Deaton’s compliance, we reject Deaton’s argument that the district court erred by
dismissing the case under Rule 12(b)(6).
Deaton’s reliance on its outside CPA’s statements is also not a basis for relief.
The relevant paragraph in the complaint states:
Throughout this Subject Time Period, Deaton Oil also relied upon its
outside CPA to confirm that all employment taxes were being paid and
all returns were being filed. To confirm these payments and filings were
done, however, the CPA merely made inquiry to Rather each year over
the four years as to whether Rather had made timely filings and
payments. Rather assured the CPA that all filings and payments had
been timely made.
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Complaint at 6, ¶ 21.3
The information sought from the outside CPA was not advice about a
complicated matter that required expertise, but instead a factual question as to
whether Deaton’s taxes had been filed and paid. Deaton made no allegation that the
accountant provided any information to Deaton other than that the ministerial act of
filing and paying taxes had been accomplished. This is insufficient under Boyle. 469
U.S. at 251; see also Chakales v. Comm’r of Internal Revenue, 79 F.3d 726, 730 (8th
Cir. 1996) (rejecting argument of taxpayer in negligent underpayment case that advice
from his tax lawyer could excuse underpayment because “[t]he ‘advice’ . . . was little
more than a generalized statement that he could lose money on the transaction” and
there was no evidence that the lawyer “researched the tax aspects of the transaction
[or] that he investigated [the relevant investment vehicle] or the manner in which [it]
operated” (citations omitted)).
The cases Deaton relies on for this point are unhelpful. Estate of Thouron
involved a an estate that claimed to have relied on advice from its tax counsel with
respect to the application of a statute governing deferment of tax liabilities. 752 F.3d
at 312–13 (citing 26 U.S.C. § 6166). Deaton cannot claim reliance on expertise of that
sort. Van Camp & Bennion v. United States, 251 F.3d 862 (9th Cir. 2000), is also not
relevant. Like Thouron, Van Camp recognizes that reliance on expert advice might
excuse nonpayment of taxes. See id. at 868. But, as discussed, Deaton relied on a
mere factual representation that could have been readily verified or disproven, not on
expert advice. Though advice from a legal or tax professional can, in some
circumstances, provide a basis for reasonable cause, the nature of the “advice” Deaton
received from its outside CPA is not the kind envisioned by Boyle and its progeny.
3
Due to ambiguity in Deaton’s submissions on this issue, it is unclear whether
Deaton is alleging that its CPA affirmatively told it that its taxes were paid, or simply
failed to inform Deaton that its taxes were not paid. See Appellant’s Br. at 19.
However, the result would be the same in either case.
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III. Conclusion
Deaton’s own alleged facts show that it is not entitled to relief. The district
court’s 12(b)(6) dismissal was therefore appropriate; for the same reason, the district
court’s decision not to allow an amendment due to futility was sound. See Cornelia
I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir. 2008)
(“[W]hen the court denies leave on the basis of futility, it means the district court has
reached the legal conclusion that the amended complaint could not withstand a
motion to dismiss under Rule 12(b)(6) . . . .” (citation omitted)). Alternatively, we
may affirm the denial of leave to amend due to the failure to attach a proposed
amended complaint. In re 2007 Novastar Fin. Inc. Sec. Litig., 579 F.3d 878, 884 (8th
Cir. 2009). Accordingly, we affirm.
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