DocketNumber: Docket No. 3867-15L
Citation Numbers: 2017 T.C. Memo. 133, 114 T.C.M. 26, 2017 Tax Ct. Memo LEXIS 133
Judges: NEGA
Filed Date: 7/5/2017
Status: Non-Precedential
Modified Date: 11/21/2020
Decision will be entered for respondent.
NEGA,
*135 After concessions by the parties,3 the only issues remaining for decision are whether petitioner is liable for the additions to tax under
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated*134 herein by this reference. Petitioner, Xibitmax, LLC, is a limited liability company organized and having its principal place of business in Minnesota.
Bruce Powell founded petitioner in 2005. He has always been its sole shareholder and officer. Petitioner operates nationally in the business of designing and constructing trade show displays. The nationwide scope of petitioner's business requires Mr. Powell to travel frequently to various conventions and trade shows where he supervises and coordinates the installation of his designs and displays.
In late 2005, owing to this frequent travel, Mr. Powell sought to hire an additional employee to manage petitioner's day-to-day front office operations. On *136 the recommendation of his colleagues within the community, Mr. Powell hired a full-time office administrator who had ably performed with other similarly sized businesses in the area. She was initially tasked with maintaining petitioner's accounts payable and receivable and tracking basic job costs. As time progressed, however, Mr. Powell recognized he would soon need to begin addressing petitioner's payroll and the associated employment and trust fund taxes. Mr. Powell assigned these duties*135 to the office administrator, believing she was wholly capable of managing these new responsibilities, without giving regard to the fact that she--like Mr. Powell--had no experience in these fields. Mr. Powell did not establish any controls or other means for monitoring her performance.
In late 2008 the office administrator assumed part-time status, working only one or two days a week. Although her attendance had become sporadic, Mr. Powell believed she was keeping up with all of her job assignments. Faced with unfavorable market conditions and difficulties sustaining cashflow in the first quarter of 2009, Mr. Powell directed the office administrator to "defer payment" of petitioner's employment and trust fund taxes until later that year, which she did.
In late 2009 Mr. Powell directed the office administrator to resume payment of petitioner's employment and trust fund taxes; she did not. Although Mr. Powell had, by this time, assumed some of the administrator's office duties--in the light of *137 her waning attendance--and had full access to and often reviewed petitioner's books and only checking account, it eluded his attention that petitioner was continually failing to pay its employment*136 and trust fund taxes. Throughout this period petitioner continued to pay its suppliers, vendors, and creditors while continuing to withhold employment taxes from its employees.
In 2011 petitioner discharged the office administrator. Mr. Powell hired temporary staffers to address the backlog in her work, and he transferred administration of petitioner's payroll to an outside agency. The temporary staffers brought to Mr. Powell's attention their discovery of petitioner's continued tax noncompliance. Despite this discovery, Mr. Powell directed the staffers to focus on other issues and declined to address petitioner's tax noncompliance.
It was not until 2013, when respondent contacted petitioner's outside payroll agency and requested petitioner's delinquent filings, that petitioner made an effort to come into full compliance with its tax filing, but not its tax payment, obligations. On January 24, 2014, petitioner filed Form 941 returns for its first and second quarters of 2011. On August 5, 2014, petitioner filed its remaining Form 941 returns for all quarters of 2009 and 2010 and its Form 940 for year 2010. As petitioner filed these returns, respondent assessed the tax there reported and*137 applied additions to tax and penalties under
On July 29, 2014, respondent sent a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under
In response to each of these letters, petitioner filed a timely Form 12153, Request for a Collection Due Process or Equivalent Hearing. In its request petitioner sought only abatement of the assessed penalties and additions to tax. On December 5, 2014, a settlement officer (SO) with respondent's Appeals Office conducted a face-to-face collection due process (CDP) hearing with petitioner's representative. The SO determined petitioner was ineligible for the requested relief, as petitioner*138 was unable to show its failures were grounded in reasonable cause. On January 12, 2015, the Appeals Office issued petitioner a notice of determination sustaining the collection actions, additions to tax, and penalties.
When the underlying tax liability was properly at issue in the CDP hearing, we review the Commissioner's determination de novo.
*140 Petitioner concedes it failed to file timely and failed to pay and deposit the required employment and trust fund taxes. Petitioner maintains its failures were due to reasonable cause and believes the assessed penalties and additions to tax are inappropriate. Petitioner bears the burden of proving reasonable cause and establishing that the penalties or additions to tax are inappropriate.
*141 Petitioner concedes*140 it failed to file timely returns for all periods at issue. Petitioner argues, however, it had reasonable cause as it had relied on its employee for the timely preparation and filing of Forms 941 and 940.
Mr. Powell, as petitioner's sole owner and officer, was aware of petitioner's employment and trust fund tax filing obligations but was unfamiliar with the process and procedure. Despite his own unfamiliarity, he tasked an administrative employee with the duty of preparing and filing petitioner's tax returns. This employee did not hold herself out as having any credentials, experience, or training in the preparation, filing, or payment of employment and trust fund tax returns. Mr. Powell, however, believed she would be up to the task despite her lack of know-how and experience. Petitioner did not supervise or monitor the quality of the employee's work and had no system in place to do so.
The employee worked part time--"once or twice a week"--during the periods in issue. Although the employee was often the only worker managing petitioner's front-office affairs, petitioner was not concerned with her irregular attendance and continued to believe she would be capable of executing her collective*141 duties, not just the management of petitioner's employment and trust fund tax filings but also the administration of nearly every other aspect of its day-to-day front office operations.
*142 Petitioner was by no means disabled from ensuring it was meeting its statutory duties. It was not rendered incapable of filing by a series of factors largely beyond its control.
Petitioner concedes it failed to, and has yet to, fully pay its employment and trust fund tax liabilities for the periods at issue. As before, petitioner's reasonable cause argument takes the shape of reliance on its employee. And as before, reliance on an undersupervised, underqualified, part-time employee is insufficient to establish ordinary business care and prudence.
Mr. Powell testified that, on at least one occasion, he directed his employee not to remit--to "defer"--payment of petitioner's employment and trust fund taxes. This was done in early 2009 while petitioner was facing cashflow problems during a national economic recession. Later that year, however, he instructed his employee to resume making timely payments on petitioner's tax obligations, but the payments never resumed.
During all periods at issue petitioner*143 continued to withhold employment taxes from the paychecks of its employees and continued to pay its vendors and creditors. Although he had access to, and would frequently review, petitioner's only bank account, Mr. Powell never noticed, or chose to overlook, the fact that *144 petitioner's employment and trust fund tax payments were not being drawn from its account.
When petitioner's noncompliance was brought to its attention in 2011, petitioner declined to take any remedial actions. Petitioner took no action until 2014. To date petitioner has failed to fully pay the principal balances for the periods at issue.
To the extent that petitioner attempts to present hardship or inability to pay as reasonable cause, petitioner fails to meet its burden of proof. Petitioner offered only the uncorroborated testimony of its sole officer and shareholder as to the nature of petitioner's financial status during the periods at issue. Although Mr. Powell credibly testified that petitioner suffered during the economic downturn of the periods at issue, this does not alone establish reasonable cause.
During the periods at issue petitioner was able to continue operations, market its services to clients, and*144 pay its vendors, creditors, and employees. Petitioner's failure to comply with its employment and trust fund tax obligations resulted from a choice to focus on business matters rather than tax compliance. There was no ordinary and prudent care or consideration taken by petitioner to ensure it complied with its known Federal tax obligations. We sustain the additions to tax under
In the light of our holdings above, and recognizing the concessions between the parties, we sustain the notice of determination and the related collection actions. We have considered all the other arguments*145 made by the parties, and to the extent not discussed above, find those arguments to be irrelevant, moot, or without merit.
*146 To reflect the foregoing,
1. All section references are to the Internal Revenue Code in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.↩
2. We use the term "employment and trust fund tax" to refer to taxes under the
3. Petitioner concedes that it did not seek a collection alternative or challenge the lien or the proposed levy as defective or on procedural grounds and does not seek to do either as part of this case. Respondent concedes that petitioner was not previously afforded an opportunity to dispute the penalties and additions to tax for the periods at issue and may do so as part of this case.↩