John C. Hom & Associates, Inc. v. Commissioner

PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2015-49
UNITED STATES TAX COURT
JOHN C. HOM & ASSOCIATES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1465-13S L. Filed August 17, 2015.
John C. Hom (an officer), for petitioner.
Bryant W. H. Smith and Sarah E. Sexton, for respondent.
SUMMARY OPINION
PANUTHOS, Chief 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
1
Unless otherwise indicated, subsequent section references are to the
(continued...)
2
reviewable by any other court, and this opinion shall not be treated as precedent
for any other case.
This case is before the Court on petitioner’s request for review of
respondent’s determination to sustain a notice of Federal tax lien relating to an
assessment for penalties under section 6721(e) for intentional disregard of the
information return filing requirement.2
Background
Some of the facts have been stipulated, and they are so found. We
incorporate by reference the parties’ stipulations of fact and the accompanying
exhibits.
Petitioner is a California corporation with its principal place of business in
Marin County, California, when it filed the petition. John C. Hom (Mr. Hom) is
petitioner’s owner and president. Petitioner was incorporated in 1986. The
California Franchise Tax Board suspended the powers, rights and privileges of
1
(...continued)
Internal Revenue Code in effect for the years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
2
Petitioner attached two additional notices of determination to the petition.
These notices related to liabilities other than the sec. 6721(e) penalty. At trial,
petitioner conceded all issues other than the liability for the sec. 6721(e) penalty.
Respondent has not determined, nor made an alternative claim, that petitioner is
liable for a penalty under sec. 6721(a).
3
petitioner on March 1, 2004. The powers, rights and privileges of petitioner were
revived on April 11, 2012, before the petition in this case was filed.
During the years 2004 and 2006 petitioner was a geotechnical engineering
firm specializing in soil testing services and providing geotechnical consulting.
Mr. Hom was the only licensed engineer on petitioner’s staff. Mr. Hom performed
geotechnical investigations for various projects, such as parking lots and retaining
walls. Mr. Hom explored the subsurface conditions of proposed jobsites and
analyzed the results of fieldwork to provide recommendations for construction.
During construction, Mr. Hom inspected the site grading and observed the
installation of drainage facilities. Upon completion of construction, Mr. Hom
performed a final inspection of the construction project. In 2002 Mr. Hom
decided to become a professional poker player. Since then, he has spent more time
in poker playing activities and less time working as an engineer.
For the 2004 and 2006 years petitioner issued Forms W-2, Wage and Tax
Statement, to employees, but failed to file those forms and the Forms W-3,
Transmittal of Wage and Tax Statements, with the Social Security Administration
(SSA). Mr. Hom generally followed a procedure for issuing Forms W-2 to
employees and filing Forms W-2 and W-3 with the SSA. After mailing the forms
to the SSA, Mr. Hom would save copies of the Forms W-2 and W-3 on his
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computer. Because Mr. Hom retained copies of the 2004 and 2006 Forms W-2
and W-3 on his computer, he believed that he had completed the previous step of
filing those forms with the SSA.
Respondent assessed penalties against petitioner pursuant to section 6721(e)
for intentional disregard of the Form W-2 and W-3 filing requirement in the
amounts of $2,070.30 for 2004 and $8,018.75 for 2006. On August 2, 2011,
respondent filed a notice of Federal tax lien3 against petitioner. On September 6,
2011, petitioner submitted Form 12153, Request for a Collection Due Process or
Equivalent Hearing. On November 15, 2012, respondent’s Settlement Officer
(SO) Linda L. Cochran conducted a collection due process hearing with Mr. Hom
by telephone. Mr. Hom disputed the underlying tax liabilities but did not provide
any documents to support petitioner’s position regarding the underlying tax
liabilities. SO Cochran sustained the lien action for the section 6721(e) penalties
and issued a notice of determination on December 13, 2012. Petitioner timely
filed a petition. As indicated, at trial petitioner conceded all issues except for the
section 6721(e) penalties.
3
We note that respondent’s pretrial memorandum states that respondent filed
a Federal tax lien on August 2, 2011. We presume that respondent meant that a
“notice” of Federal tax lien was filed on August 2, 2011.
5
On December 17, 2013, respondent filed a motion for summary judgment
and a declaration of SO Cochran in support of respondent’s motion for summary
judgment. On September 10, 2014, the Court denied respondent’s motion for
summary judgment. Attached to SO Cochran’s declaration is a letter from
Revenue Officer Steve Bugos to Appeals dated April 3, 2012. In respondent’s
posttrial memorandum, respondent conceded that Revenue Officer Bugos’ letter
was a prohibited ex parte communication.4
Discussion
We have jurisdiction under section 6330(d)(1) to review respondent’s
determination that the notice of Federal tax lien was proper and that respondent
may proceed to collect by it.5 In reviewing the Commissioner’s decision to sustain
collection actions, where the validity of the underlying liability is properly at
issue, the Court reviews the Commissioner’s determination of the underlying tax
liability de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
4
In particular, respondent conceded that the statements (1) “He is difficult to
deal with.” and (2) “He is very argumentative and unwilling to listen.” were
prohibited ex parte communications.
5
The Pension Protection Act of 2006, Pub. L. No. 109-280, sec. 855, 120
Stat. at 1019, amended sec. 6330(d) and granted this Court jurisdiction over all
sec. 6330 determinations made after October 16, 2006. Perkins v. Commissioner,
129 T.C. 58, 63 n.7 (2007).
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Commissioner, 114 T.C. 176, 181-182 (2000). The Court reviews any other
administrative determination regarding proposed collection actions for abuse of
discretion. Sego v. Commissioner, 114 T.C. 610; Goza v. Commissioner, 114
T.C. 182.
At the collection hearing a taxpayer may raise any relevant issue relating to
the unpaid tax or the proposed levy, including spousal defenses, challenges to the
appropriateness of the collection actions, and offers of collection alternatives.
Sec. 6330(c)(2)(A). In addition, he may challenge the existence or amount of the
underlying tax liability, but only if he did not receive a notice of deficiency or
otherwise have an opportunity to dispute that liability. Sec. 6330(c)(2)(B).
Petitioner did not have a prior opportunity to dispute the underlying tax
liabilities because the section 6721(e) penalties that generated the underlying
liabilities are not penalties for which respondent was required to issue a notice of
deficiency.6 Therefore, petitioner was properly allowed to contest the section
6721(e) penalties for intentionally disregarding the 2004 and 2006 Form W-2 and
W-3 filing requirement. See sec. 6330(c)(2)(B); see also Montgomery v.
6
Generally sec. 6213(a) provides that no assessment of a deficiency in
respect of any tax imposed by subtit. A or B or ch. 41, 42, 43, or 44 may be made
unless a notice of deficiency is mailed to the taxpayer providing an opportunity for
review by the Tax Court. The penalty under sec. 6721(e), is found in ch. 68,
subch. B, Assessable Penalties, and thus is not subject to deficiency procedures.
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Commissioner, 122 T.C. 1, 5-10 (2004); Sego v. Commissioner, 114 T.C. 609;
Goza v. Commissioner, 114 T.C. 180-181. Accordingly, we review
respondent’s determination de novo.
I. Ex Parte Communication
Respondent has conceded that there was a prohibited ex parte
communication between Revenue Officer Bugos and Appeals. We must decide
what action, if any, the Court should take as a result of the prohibited ex parte
communication. In Drake v. Commissioner, 125 T.C. 201, 210 (2005), the case
was remanded to the Appeals Office for a new section 6330 hearing with an
independent Appeals officer who had received no communication relating to the
credibility of the taxpayer or the taxpayer’s representative. See also Indus.
Investors v. Commissioner, T.C. Memo. 2007-93; Moore v. Commissioner, T.C.
Memo. 2006-171. In Sapp v. Commissioner, T.C. Memo. 2006-104, we
concluded that the ex parte communications did not prejudice the taxpayer in part
because the taxpayer made only tax-protester arguments before Appeals.
Respondent urges us to not remand this case to the Appeals Office, noting
that Congress did not provide “‘a specific remedy for prohibited ex parte
communications’,” quoting Moore v. Commissioner, T.C. Memo. 2006-171.
Respondent urges that, because the proper level of scrutiny in this case is de novo
8
review and we have already conducted a trial on the merits, we are in a better
position to adjudicate petitioner’s challenge of the underlying tax liabilities than a
different settlement officer. If we remand the case to respondent’s Appeals Office,
the case will potentially come before us again when respondent issues a new
notice of determination. Since we have already held a trial on the merits, we
conclude that remand of this case to the Appeals Office for a new section 6330
hearing would unnecessarily burden petitioner and respondent with a second
hearing and possibly with a second trial on the merits. Since we review the matter
de novo, we will not remand this case to the Appeals Office.
II. Section 6721(e) Penalty
Section 6051(a) requires an employer to provide Forms W-2 to its
employees. Petitioner complied with this provision. Section 6051(d) permits the
Secretary to prescribe regulations requiring duplicate Forms W-2 to be filed with
the Secretary. Section 31.6051-2, Employment Tax Regs., requires an employer to
file copies of Forms W-2 and a transmittal Form W-3 with the SSA. Section
6721(a) imposes a penalty of $50 for each Form W-2 that an employer fails to file
with the SSA. When the employer intentionally disregards the filing requirement
of Form W-2 in section 31.6051-2, Employment Tax Regs., section 6721(e)
increases the penalty that would otherwise be calculated under section 6721(a) to
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the greater of $100 for each Form W-2 or 10% of the total wages required to be
reported on Form W-2.
Petitioner has the burden of proving that respondent’s determination to
assess the section 6721(e) penalties is inappropriate. See Rule 142(a)(1). While
section 7491(c) places a burden of production upon the Commissioner with
respect to an individual’s liability for a section 6721(e) penalty, section 7491(c) is
not applicable where the taxpayer is a corporation as in this case. See NT, Inc. v.
Commissioner, 126 T.C. 191, 194-195 (2006).
Section 301.6721-1(f)(2), Proced. & Admin. Regs., defines intentional
disregard as knowing or willful according to the facts and circumstances. Section
301.6721-1(f)(3), Proced. & Admin Regs., provides that the facts and
circumstances to be considered include, but are not limited to:
(i) Whether the failure to file timely * * * is part of a pattern of
conduct by the person who filed the return of repeatedly failing to file
timely * * *;
(ii) Whether correction was promptly made upon discovery of
the failure;
(iii) Whether the filer corrects a failure to file * * * within 30
days after the date of any written request from the Internal Revenue
Service to file * * *; and
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(iv) Whether the amount of the information reporting penalties
is less than the cost of complying with the requirement to file timely
***
In Gerald B. Lefcourt, P.C. v. United States, 125 F.3d 79, 83 (2d Cir. 1997), the
Court of Appeals defined “intentional disregard” in the context of section 6721(e)
as voluntary, conscious, and intentional conduct. In other words, the penalty
applies when the failure was not accidental, unconscious, or inadvertent. See id.
In American Vending Group, Inc. v. United States, 103 A.F.T.R.2d (RIA) 2009-
2181(D. Md. 2009), the District Court concluded that the taxpayer did not act with
intentional disregard and the failure to file was accidental where the Forms W-2
and W-3 were prepared but were likely misplaced on a messy desk and not filed.
In In re Flanary & Sons Trucking, Inc., 93 A.F.T.R.2d (RIA) 2004-1078 (Bankr.
E.D. Tenn. 2004), the bankruptcy court concluded that the taxpayer did not act
with intentional disregard where an officer testified that he had mailed the Forms
W-2 and W-3 and that if they had not been received by the Service, it was not
because of intentional disregard on his part. The bankruptcy court noted that
“[w]hile a taxpayer’s testimony as to the mere mailing of the return may be
insufficient as a matter of law to establish actual filing, such testimony is clearly
pertinent when ascertaining whether the taxpayer knowingly or willfully
disregarded its filing obligations.” Id. We now consider the facts and
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circumstances presented herein to decide whether petitioner intentionally
disregarded the filing obligation.
A. Pattern of Conduct
Petitioner failed to file the 2004 and 2006 Forms W-2 and W-3 with the
SSA. The failure to file these forms for two years in and of itself does not
establish a pattern of conduct.
We note that SO Cochran determined that there was a pattern of conduct
because petitioner has a mixed history in (1) failing to file Forms 940, Employer’s
Annual Federal Unemployment (FUTA) Tax Return, and Forms 941, Employer’s
Quarterly Federal Tax Return, (2) filing these forms late, or (3) both. Mr. Hom
testified, however, that petitioner may not have had employees during some of the
periods where Forms 940 or 941 were not filed. Mr. Hom was the sole engineer
on petitioner’s staff. Since 2002, Mr. Hom has spent less time working as an
engineer and more time pursing an activity as a professional poker player. There
is not sufficient evidence in the record for this Court to determine for what periods
petitioner either failed to file Forms 940 and 941 or filed these forms late. Nor is
there sufficient evidence for us to conclude whether petitioner was required to file
Forms 940 and 941 for any period where petitioner either failed to file these forms
or filed these forms late. If petitioner was required to file Forms 940 and 941 and
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failed to file them for some periods, we are not convinced that this failure would
establish a pattern of conduct that includes the failure to file the 2004 and 2006
Forms W-2 and W-3. We conclude that this factor is neutral.
B. Correction of Failure To File
There is no evidence in the record that respondent ever prompted petitioner
to correct the failure to file the 2004 and 2006 Forms W-2 and W-3. The record is
unclear on whether petitioner ever attempted to correct the failure to file. Mr.
Hom testified that he provided counsel for respondent with copies of these forms
as part of discovery in this case but did not address whether he had provided these
forms to respondent previously. We have concluded on the basis of the record that
Mr. Hom believed that petitioner had filed the 2004 and 2006 Forms W-2 and
W-3. Absent respondent’s prompting, Mr. Hom would have no reason to know
that petitioner needed to correct the failure to file. Therefore, this factor is neutral.
C. Cost of Complying Versus Amounts of Penalties
Since no payment is required with the filing of Forms W-2 and W-3, there is
no cost of complying with the provision other than the time taken to prepare the
Forms W-2 and W-3 and the cost of postage. The section 6721(e) penalties
assessed are $2,070.30 for 2004 and $8,018.75 for 2006. Any rational taxpayer
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would comply with the reporting requirement and avoid the risk of assessment of
this penalty. Therefore, this factor favors petitioner.
D. Conclusion Regarding Section 6721(e) Penalties
Mr. Hom testified convincingly that he believed that he filed the 2004 and
2006 Forms W-2 and W-3 because he had retained copies of the forms on his
computer and he was in the habit of storing the copies on his computer after the
forms were filed. In addition, there was no pattern of conduct that would indicate
that petitioner consistently failed to file Forms W-2 and W-3 since the forms were
unfiled only for 2004 and 2006. We conclude that while the evidence is
insufficient to establish actual filing, the evidence does establish that petitioner did
not intentionally disregard its filing obligation for Forms W-2 and W-3.
Therefore, petitioner is not liable for the penalty for intentional disregard of the
filing requirement under section 6721(e).
We have considered the parties’ arguments and, to the extent not discussed
herein, we conclude the arguments to be irrelevant, moot, or without merit.
To reflect the foregoing,
An appropriate decision will be
entered.