Comensoli v. Commissioner

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 11a0296n.06
No. 10-1145
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
PETER M. COMENSOLI,
FILED
May 05, 2011
LEONARD GREEN, Clerk
Petitioner-Appellant,
v. On Appeal from the
United States Tax Court
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
/
Before: GUY, COOK, and STRANCH, Circuit Judges.
RALPH B. GUY, JR., Circuit Judge. Petitioner Peter M. Comensoli appeals from
the decision of the Tax Court upholding the levy and federal tax lien assessed against
Comensoli personally for unpaid employment taxes, including penalties and interest, owed
by Paradym Group, LLC, for the fourth quarter of 2005. There is no dispute that Paradym
was a single-member entity and did not make an affirmative election to be treated as a
corporation separate from its owner under the applicable “check-the-box” regulations. Nor
did Comensoli contest the fact or amount of the debt. The only disputed issue was whether
the owner of Paradym was Comensoli, or a corporation that was, in turn, owned by
Comensoli. Finding no clear error, we affirm the decision of the Tax Court.
I.
No. 10-1145 2
The Internal Revenue Service (IRS) determined Paradym’s employment tax liability,
including penalties and interest, to be $42,016.62, and sent Comensoli a Notice of Intent to
Levy in April 2007, and a Notice of Federal Tax Lien Filing in June 2007. Comensoli
requested and received collection-due-process hearings under 26 U.S.C. §§ 6330 and 6320.
The IRS issued a Notice of Determination upholding the levy on September 18, 2007, and
a Notice of Determination upholding the lien on January 11, 2008. Those determinations
rejected Comensoli’s contention that he was not the sole owner of Paradym. Comensoli filed
separate petitions contesting the determinations, which were consolidated for trial. Trial was
held on February 3, 2009, and the Tax Court issued its decision in favor of the Commissioner
on October 26, 2009. This appeal followed.
II.
We review the Tax Court’s legal conclusions de novo and its factual findings for clear
error. Zack v. Comm’r, 291 F.3d 407, 412 (6th Cir. 2002); Ekman v. Comm’r, 184 F.3d 522,
524 (6th Cir. 1999). “A finding is clearly erroneous when, although there is evidence to
support it, a review of the entire record leaves the reviewing court with the definite and firm
conviction that a mistake has been made.” Gross v. Comm’r, 272 F.3d 333, 343 (6th Cir.
2001); see also Holmes v. Comm’r, 184 F.3d 536, 543 (6th Cir. 1999). “Where there are two
permissible views of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). Further, we give
considerable deference to the Tax Court’s “first-hand assessment of the credibility of
witnesses.” Kosinski v. Comm’r, 541 F.3d 671, 680 (6th Cir. 2008); see also Indmar Prods.
No. 10-1145 3
Co. v. Comm’r, 444 F.3d 771, 778 (6th Cir. 2006).
Paradym Group, LLC, admittedly a one-member limited liability company, did not file
a Form 8832, Entity Classification Election, electing to be treated as a separate entity for
federal tax purposes under the check-the-box regulations, Treas. Reg. § 301.7701-3(a) (26
C.F.R., 2005 ed.). As a result, Paradym was “disregarded” as an entity separate from its
owner and deemed to be a sole proprietorship for all federal tax purposes, Treas. Reg. §§
301.7701-2(a), (c)(2), and 301.7701-3(b)(ii). By not electing treatment as a separate entity,
Paradym’s owner avoided double taxation. See Littriello v. United States, 484 F.3d 372, 375-
76 (6th Cir. 2007) (upholding the validity of these regulations). As noted, the only disputed
issue was whether Comensoli or a corporation owned by him was the owner of Paradym.1
A. Facts
The stipulated facts and evidence admitted at trial included Paradym’s “Articles of
Organization,” filed with the State of Michigan on December 20, 2004, which identified
Paradym as a “temporary and contract labor agency.” This organizing document was signed
and filed by Comensoli as Paradym’s “Organizer.” Both the 2006 and 2007 Limited Liability
Company Annual Statements for Paradym were signed by Comensoli in the box for
“authorized member, manager or agent.” On the 2006 Annual Statement, dated December
4, 2005, Comensoli wrote in his title as “Managing Member,” while on the 2007 Annual
Statement, dated January 12, 2007, Comensoli wrote in his title as “Owner.” No other person
1
Although these regulations have been amended to provide that a single-owner entity is no longer
disregarded for employment tax purposes only, they are inapplicable here because the amended provisions
apply to wages paid after January 1, 2009, Treas. Reg. § 301.7701-2(a), (c)(iv) and (e)(5) (26 C.F.R., 2009
ed).
No. 10-1145 4
or entity was identified in these documents as an owner, member, or manager of Paradym.
Federal employment taxes were paid by Paradym for the first three quarters of 2005.
The returns for the first two quarters were signed by Comensoli as Paradym’s “President.”
The third and fourth quarter returns were also prepared with a signature block for Comensoli
to sign as “President,” but both signature blocks were left blank. All four quarterly returns
automatically listed A. Adonu Idahosa, CPA, PLC, and the firm Symphony Financial
Services, Inc., in the section for “paid preparers,” although none of these returns were
prepared or signed by Idahosa. Comensoli and Idahosa, friends and long-time business
associates, divided office space between themselves, Symphony, and Paradym. Comensoli
testified that he reported his income and expenses from Symphony on Schedule C of his
personal tax return.
Symphony was initially incorporated as TCF Leasing, Inc., by Comensoli and several
family members in 1992, and later filed a certificate of assumed name to do business as Allen
Associates. In 2000, after selling the name to TCF Bank, TCF Leasing filed an amendment
changing its name to Symphony Financial Services, Inc., and renewed the certificate of
assumed name to do business as Allen Associates. In April 2007, another amendment was
filed changing the corporation’s name from Symphony to Back Porch Workout, Inc. (Back
Porch, f/k/a Symphony). All of these filings were signed by Comensoli on behalf of the
corporation. Comensoli testified that he is the sole shareholder of Back Porch.
Comensoli, who had a degree in accounting and almost five years of experience
working as an IRS Revenue Agent, testified that he did not know that the fourth quarter
No. 10-1145 5
employment taxes had not been paid until collection action was taken against him personally
in January 2007. At trial, Comensoli claimed that although deposits had been made with the
IRS by Paradym for the fourth quarter of 2005, the deposits were returned because Paradym
had contracted with a payroll processing company that also made deposits on behalf of
Paradym. As a result, Comensoli did not know about the deficiency when he took a personal
loan of $35,000 to $40,000 from Paradym to invest in a restaurant franchise in early 2006.
Judy Cherrington, the payroll manager for Paradym, confirmed at trial that this transaction
was booked as a loan to Comensoli.
Comensoli testified that Back Porch—as Symphony—paid the filing fee associated
with organizing Paradym in December 2004, but offered no evidence substantiating that
claim. Comensoli did offer one check written by him from Allen Associates—the registered
assumed name for the corporation—to Paradym for $3,600 and dated June 22, 2006. This,
Comensoli testified, was a contribution of working capital by the corporation. Although he
claimed that other contributions were also made, this was the only check produced. No
accounting records were offered to corroborate that this (or other payments) were
contributions to Paradym’s capital account.
When interviewed by a Revenue Agent in April 2007, Comensoli denied that he was
the owner of Paradym, claimed that he had not known about the tax liability, and explained
that he had been unable to attend to his business or personal matters for nearly two years
following the death of his son from cancer in March 2005. He added that Cherrington was
getting the records together, which were “very incomplete,” and said that he would be filing
No. 10-1145 6
returns to establish Back Porch’s ownership of Paradym. In fact, at trial, Comensoli
explained that he had reported income from the corporation on his individual return until
2007, when he “chose to start using it as a[n] ownership vehicle” for the tax year 2005.
Comensoli provided the IRS with a preliminary draft of a partnership income tax
return for Paradym for 2005 (Form 1065), which was prepared in June 2007. Attached to the
Form 1065 was a Schedule K-1 listing Back Porch as the 100% member manager of Paradym
and reflecting a pass-through loss of $25,968.00 for the year 2005. Also, a second K-1 listed
“Anyone” as a 0% LLC member manager. Idahosa explained that this second K-1 was
created because the tax preparation software would not let him print the return with only one
“partner.” This return was admitted into evidence, as were corporate income tax returns for
Back Porch for 2005 and 2006 (Form 1120). The corporation’s tax return for 2005, also
prepared in June 2007, showed a loss from Paradym of $25,968.00 and had the K-1 attached
that listed Back Porch as the 100% LLC member-manager of Paradym. Idahosa signed both
of these returns as the tax preparer using the name Symphony Financial Services, while
Comensoli signed only Paradym’s partnership return. Comensoli testified that it was
Idahosa’s error that caused a partnership return to be prepared for the LLC.
Finally, at trial, Comensoli produced for the first time what purported to be a copy of
an “Operating Agreement for Paradym Group, LLC,” “made effective as of December 7,
2004, by and among PARADYM GROUP, LLC a Michigan Limited Liability Company (the
‘Company’), and SYMPHONY FINANCIAL SERVICES, INC., which shall hereafter
collectively be referred to as the ‘Member.’” This document is signed but not dated by
No. 10-1145 7
Comensoli for Paradym and for Symphony, as Paradym’s member. (Above the signature is
“PARADYM GROUP, LLC, a Michigan Limited Liability Company,” and below the
signature is “Symphony Financial Services, Inc. Its: Member.”) Comensoli testified that he
found this copy in a file while looking for records in response to the Commissioner’s trial
subpoenas. No original or other corroboration was offered. When asked why then
Paradym’s filings with the State of Michigan did not identify Symphony (now Back Porch)
as Paradym’s owner or member, Comensoli attributed his earlier representations that he was
Paradym’s “member” or “owner” to mistake and grief-stricken inattention caused by his
son’s death in March 2005.
B. Analysis
On the dispositive question, the Tax Court determined as a factual matter that
Comensoli was the sole member of Paradym Group, LLC, explaining that:
Petitioner’s argument that Back Porch Workout owned Paradym is not
credible. Petitioner formed Paradym, and he has not offered any evidence to
indicate that he transferred any of his membership units in Paradym since it
was formed. Since its inception, petitioner has held himself out as owner of
Paradym.
Although petitioner offered a Form 1065, U.S. Return of Partnership
Income, for Paradym for tax year 2005, that document is not credible. . . . Not
only was the Form 1065 created in 2007 after respondent had begun collection
proceedings, but petitioner testified that the second Schedule K-1 was
fabricated because it was the only way to process a partnership return for
Paradym using petitioner’s and Mr. Idahosa’s tax return preparation software.
The Tax Court concluded that: “Paradym is disregarded pursuant to section 301.7701-
3(b)(1)(ii), Proced. & Admin. Regs.” and “Respondent is authorized to collect Paradym’s
unpaid tax from petitioner by means of the lien and levy.”
No. 10-1145 8
Claiming that the Tax Court’s finding is clearly erroneous, Comensoli points to
several minor factual errors in the Memorandum Opinion; asserts that too much weight was
afforded to the titles and designations used in Paradym’s filings with the State of Michigan;
and faults the decision for disregarding both the Operating Agreement identifying Paradym’s
member as Symphony and the check written to Paradym by Allen Associates (a/k/a
Symphony). The factual errors included (1) misidentifying the family members who
incorporated TCF Leasing as his wife and children, instead of his wife and parents; (2)
stating that Comensoli “repeatedly” changed the name of TCF Leasing, when it was changed
only twice (to Symphony and then to Back Porch); and (3) referring to Back Porch as an
LLC, when there was no dispute that Back Porch was a corporation. None of these errors
are material to the Tax Court’s decision, however.
Comensoli also asserts that the Tax Court misapprehended the issue by characterizing
his argument to be that he was not the sole member of Paradym. On the contrary, it is clear
that the Tax Court correctly understood the question to be whether Paradym, a single-
member LLC, was owned by Comensoli as the Commissioner contended, or was owned by
the corporation Back Porch (f/k/a Symphony) as Comensoli claimed. Further, Comensoli’s
argument that the Tax Court improperly relied on the failure to file the Form 8832 to suggest
that Comensoli was the owner of Paradym also misses the mark. The record is clear that the
Tax Court relied on the failure of Paradym to make the election to establish that Paradym is
a disregarded entity whose owner, whomever that might prove to be, would be liable as the
employer.
No. 10-1145 9
Finally, Comensoli argues that the Tax Court clearly erred (1) by affording improper
weight to the titles and designations he used on Paradym’s filings with the State of Michigan,
and to Idahosa’s mistakes in preparing the partnership return for Paradym; and (2) by giving
no weight to either the belatedly produced Operating Agreement, or the purported capital
contribution from Allen Associates. Comensoli argues that under Michigan law an
“organizer” of an LLC can be, but does not have to be, a member of the LLC. Be that as it
may, the fact that Comensoli personally identified himself as Paradym’s “organizer” was
relevant. Comensoli’s undisputed self-identification as Paradym’s “managing member” and
“owner” in the Annual Reports filed with the State for 2005 and 2006 is evidence that he
held himself out as Paradym’s sole member until collection action was taken against him
personally.
Nor was it improper to consider the irregularity and questionable nature of the tax
returns that Idahosa prepared at Comensoli’s behest for Paradym and Back Porch Workout
in June 2007. The judge was in a position to assess the credibility of the witnesses, including
whether Comensoli’s state of mind following the death of his son in March 2005 had any
bearing on his representation that he was Paradym’s owner. Although the decision did not
state the reasons for discounting the check to Paradym or the copy of the Operating
Agreement, there can be no question that this evidence was necessarily discounted as proof
of Paradym’s ownership. The check was admitted into evidence, but there was no showing
of how it was treated on Paradym’s books or other corroboration of any kind that it was a
capital contribution by the corporation. Further, the copy of the Operating Agreement, while
No. 10-1145 10
probably the most direct evidence that Paradym was organized with Symphony as its single
member, was unauthenticated, undated, and uncorroborated even though it was purportedly
signed by Comensoli. We cannot conclude that it was clear error to disregard this
questionable evidence. Conti v. Comm’r, 39 F.3d 658, 664 (6th Cir. 1994) (recognizing that
the Tax Court may disregard even uncontradicted testimony when it finds that it is lacking
in credibility, or is improbable, unreasonable or questionable).
Giving appropriate deference to the fact-finder’s credibility determinations, there is
scant evidence to support Comensoli’s claim that Paradym was indeed organized and owned
by the corporation Symphony (n/k/a Back Porch). Although there was evidence to the
contrary, mostly through Comensoli’s own testimony, the fact-finder’s choice between
permissible views of the evidence cannot be clearly erroneous and we are not left with a
definite and firm conviction that a mistake has been made.
AFFIRMED.