Ken Ryan v. Comm'r ( 2010 )

T.C. Summary Opinion 2010-18
UNITED STATES TAX COURT
KEN RYAN, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 28897-08S. Filed February 23, 2010.
Jennifer A. Gellner, for petitioner.
Robert V. Boeshaar, for respondent.
KROUPA, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
1
All section references are to the Internal Revenue Code
(Code), and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
- 2 -
and this opinion shall not be treated as precedent for any other
case.
This collection review matter is before the Court in
response to a Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 pertaining to a $3,4632
failure to deposit payroll taxes penalty under section 6656(a)
and a $5 failure to pay payroll taxes penalty assessed against
petitioner for the quarter ending on December 31, 2006 (quarter
at issue). We must determine whether petitioner is liable for
those penalties. We hold that it is not.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and their accompanying exhibits are
incorporated by this reference. Petitioner’s principal place of
business was Alaska at the time it filed the petition.
Petitioner Ken Ryan, Inc. (KRI) is an S corporation
providing online language training. KRI is solely owned and
operated by Ken Ryan (Mr. Ryan). Mr. Ryan maintained the
company’s financial records and controlled its corporate accounts
in 2006. KRI relied on Barry Fowler (Mr. Fowler), a certified
public accountant, to provide tax services and perform payroll
preparation services. KRI and Mr. Ryan had worked with Mr.
2
All amounts are rounded to the nearest dollar.
- 3 -
Fowler for many years, and Mr. Fowler was familiar with KRI’s
operations and payroll history.
KRI made semi-weekly Federal payroll tax deposits before
2006. Most of KRI’s payroll tax deposits were for Mr. Ryan,
KRI’s only full-time employee. Mr. Ryan determined that he had
accumulated sufficient funds for his living expenses and did not
require regular paychecks throughout the year. Mr. Ryan
consulted with Mr. Fowler to determine whether KRI could issue
him an annual paycheck at the end of the year to eliminate the
expense of processing unnecessary payrolls.
Mr. Fowler researched whether an annual paycheck is allowed.
He specifically looked at the tax payroll preparation tables in
Internal Revenue Service (IRS) Publication 15 (Circular E),
Employer’s Tax Guide, and he found no language prohibiting the
use of an annual payroll. Mr. Fowler concluded that KRI could
use an annual payroll. Mr. Fowler’s only cautionary note was
that Mr. Ryan needed to receive a reasonable salary from KRI.
Mr. Fowler advised Mr. Ryan that during the year he could
transfer cash from the KRI corporate account (KRI account) into
Mr. Ryan’s individual investment account (individual account) as
an advance payment for his services. Mr. Fowler advised KRI that
the transfer of funds would not constitute wages at the time of
transfer provided Mr. Ryan was obligated to repay the advances.
- 4 -
KRI therefore did not need to deposit employment taxes until the
end of the year.
Mr. Ryan followed Mr. Fowler’s advice. Mr. Ryan transferred
funds totaling $176,000 from the KRI account to his individual
account at various times throughout 2006. Mr. Ryan performed
services for KRI and satisfied his repayment obligation with an
accounting done at the end of 2006. KRI credited the advances
made to Mr. Ryan with the compensation due to Mr. Ryan for his
services, resulting in a net payment of zero. KRI filed a Form
941, Employer’s Quarterly Federal Tax Return, for the quarter at
issue, reporting employment taxes of $72 for October, $145 for
November, and $80,948 for December.
Respondent selected KRI’s Form 941 for the quarter at issue
for audit. Respondent requested additional information regarding
how and when payrolls were made during the quarter at issue. KRI
provided respondent with no documentation as to specific dates
when funds were transferred from KRI to Mr. Ryan. Respondent
determined that KRI failed to deposit and failed to pay payroll
taxes on transfers from KRI’s account to Mr. Ryan’s individual
account during the quarter at issue. KRI subsequently made the
required deposits, but respondent assessed the failure to deposit
and failure to pay penalties against KRI that are at issue. Mr.
Fowler requested a collection due process (CDP) hearing on behalf
of KRI.
- 5 -
Mr. Fowler failed to answer his phone for the scheduled
telephone CDP hearing with Appeals officer Linda Cochran (AO
Cochran) because of a misunderstanding as to the time zone in
which the telephone hearing would occur. Mr. Fowler and AO
Cochran eventually discussed the case. AO Cochran reviewed the
materials Mr. Fowler submitted to AO Cochran to explain why no
penalties should apply and determined not to abate either
penalty. KRI timely filed a petition contesting AO Cochran’s
determination not to abate the payroll tax penalty assessments.
Discussion
We are asked to decide whether petitioner with only one
employee is liable for failure to deposit and failure to pay
payroll taxes in this collection review matter. The Court in
collection review matters will review an Appeals office
determination de novo where the underlying tax liability is at
issue. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). A
taxpayer’s underlying tax liability may be at issue if he or she
did not receive a deficiency notice for such tax liability or did
not otherwise have an opportunity to dispute such tax liability.
Sec. 6330(c)(2)(B). Respondent concedes that KRI has not had the
opportunity to challenge the tax liability. Thus, the Court will
review de novo AO Cochran’s determination that KRI is liable for
the payroll tax penalties.
- 6 -
Failure to deposit and failure to pay penalties do not apply
if a taxpayer can show that the failure was due to reasonable
cause and not willful neglect. Sec. 6656(a); Charlotte’s Office
Boutique, Inc. v. Commissioner, 121 T.C. 89, 109 (2003), affd.
425 F.3d 1203 (9th Cir. 2005). A taxpayer establishes reasonable
cause by showing that ordinary care and prudence were exercised.
See sec. 301.6651-1(c)(1) and (2), Proced. & Admin. Regs. The
failure to timely deposit is due to willful neglect if it
resulted from a conscious decision or from reckless indifference.
See United States v. Boyle, 469 U.S. 241, 245 (1985). The
taxpayer has the burden of proving reasonable cause and the
absence of willful neglect. Rule 142(a); Higbee v. Commissioner,
116 T.C. 438, 447 (2001).
Petitioner contends that the failure to deposit and failure
to pay penalties should be abated because it acted with
reasonable cause and not willful neglect in reliance upon the
advice of Mr. Fowler. A taxpayer’s reliance on a tax advisor’s
guidance regarding substantive legal issues may constitute
reasonable cause even when such advice may be mistaken. See
United States v. Boyle, supra at 250-251; McMahan v.
Commissioner, 114 F.3d 366 (2d Cir. 1997), affg. T.C. Memo. 1995-
547. The tax advisor must be competent on the specific matter,
and the taxpayer must supply that advisor with all relevant
information. See Lehrer v. Commissioner, T.C. Memo. 2006-156. A
- 7 -
taxpayer generally must prove each of these elements to show his
or her reliance on a professional tax advisor was reasonable.
Bowen v. Commissioner, T.C. Memo. 2001-47. We now analyze the
facts and circumstances to determine whether KRI’s reliance
constituted reasonable cause.
Mr. Ryan is KRI’s only full-time employee. Mr. Ryan does
not have a background in finance or tax, and he is not an
attorney. KRI showed that it provided Mr. Fowler necessary and
accurate information to render tax advice. Mr. Fowler had
advised KRI and Mr. Ryan for many years and was familiar with
KRI’s operations and payroll history. Mr. Fowler performed
research on the permissibility of annual payroll and employment
tax. Mr. Fowler advised KRI that it could have an annual
payroll. Mr. Fowler also told KRI that the transfer of funds
from the KRI account to Mr. Ryan’s individual account did not
constitute wages at the time of transfer provided Mr. Ryan had an
obligation to repay the advance. KRI and Mr. Ryan followed Mr.
Fowler’s guidance from the time the legal question arose and
through the IRS administrative process. We agree with KRI that
it was not required to seek a second opinion in this situation.
See United States v. Boyle, supra at 251.
Respondent argues that it was unreasonable for KRI to rely
on Mr. Fowler’s advice because Mr. Fowler did not base his
opinion on any specific Code provision and indeed the advice was
- 8 -
wrong. KRI may have been ill advised. That is not the standard
for a reasonable cause determination, however. We find that KRI
exercised the requisite ordinary business care and prudence in
seeking the advice of Mr. Fowler even if his advice was wrong.
Taking into consideration the complexity of the issue and all the
facts and circumstances, we find that KRI acted with reasonable
cause and not willful neglect when it relied on the advice of Mr.
Fowler. Accordingly, we do not sustain AO Cochran’s
determination regarding the payroll tax penalties.
We have considered all arguments made in reaching our
decision, and, to the extent not mentioned, we conclude that they
are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for petitioner.