T.C. Summary Opinion 2006-153
UNITED STATES TAX COURT
REGINA FELTON, PC, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14333-05S. Filed September 18, 2006.
Regina Felton (an officer), for petitioner.
Diana Hinton, for respondent.
ARMEN, 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 The decision to be entered
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001
and 2002, the taxable years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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is not reviewable by any other court, and this opinion should not
be cited as authority.
Respondent determined deficiencies in petitioner’s Federal
income tax for the years 2001 and 2002 in the amounts of
$7,017.50 and $4,962.65, respectively. Respondent also
determined an addition to petitioner’s Federal income tax for
2002 under section 6651(a)(1).2 Petitioner timely filed a
petition with the Court. The issues for decision are whether
petitioner is a qualified personal service corporation subject to
a flat tax rate and whether petitioner is liable for the
additions to tax under section 6651(a)(1).
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ oral
stipulations at trial and accompanying exhibits.
At the time the petition was filed, petitioner’s principal
place of business was Brooklyn, New York.
Regina Felton (Ms. Felton) is an attorney who has been
engaged in the practice of law since 1978. In 1987, Ms. Felton
2
The notice of deficiency determined an addition to tax
for 2002 under sec. 6651(a)(1) of $1,414.36. However, this
appears to comprise $1,116.60 allocable to sec. 6651(a)(1),
failure to file, and $297.76 allocable to sec. 6651(a)(2),
failure to pay. Because the sec. 6651(a)(2) addition was not
determined in the notice of deficiency and is not properly before
the Court, we decide only the issue of the addition to tax
imposed under sec. 6651(a)(1).
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incorporated petitioner as a New York professional corporation.3
Since petitioner’s incorporation, Ms. Felton has been its sole
shareholder, holding 100 percent of the corporation’s shares. At
all relevant times, the sole activity engaged in by petitioner
was the rendering of legal services. Since 1989, Ms. Felton has
been petitioner’s sole practitioner providing those services.
Petitioner employs a minimal secretarial and/or clerical staff.
Since 1987, petitioner’s certified public accountant,
Raymond Saylor (Mr. Saylor), has prepared petitioner’s corporate
income tax returns. For the years in issue, Mr. Saylor
calculated petitioner’s tax based on the graduated tax rate for
corporations under section 11(b)(1).4 In addition, Mr. Saylor
prepared a Form 7004, Application for Automatic Extension of Time
to File Corporation Income Tax Return (extension request), for
petitioner’s calendar year 2002 income tax return and delivered
3
Attorneys are not permitted to incorporate as traditional
corporations under New York State law. See N.Y. Jud. Law sec.
495(1) (McKinney 2006); see also In re Co-operative Law Co., 92
N.E. 15 (N.Y. 1910). Rather, to incorporate a law firm, the
professional corporation provisions must be followed. See N.Y.
Bus. Corp. Law sec. 1503 (McKinney 2006).
4
Sec. 11(b)(1) imposes a tax on the taxable income of
every corporation as follows:
(A) 15 percent of so much of the taxable income as does
not exceed $50,000,
(B) 25 percent of so much of the taxable income as
exceeds $50,000 but does not exceed $75,000,
(C) 34 percent of so much of the taxable income as
exceeds $75,000 but does not exceed $10,000,000, and
(D) 35 percent of so much of the taxable income as
exceeds $10,000,000.
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it to Ms. Felton, instructing her to sign it and mail it to the
Internal Revenue Service. The IRS never received it.
Petitioner filed its Form 1120, U.S. Corporation Income Tax
Return, for the calendar year 2002 on January 13, 2004.
In the notice of deficiency, respondent determined that
Regina Felton, PC is a qualified personal service corporation
subject to a special flat income tax rate of 35 percent.
Petitioner filed a petition with the Court challenging
respondent’s determination, stating:
I operate a law office as a sole practitioner. For the
years 2001 and 2002, it is alleged my taxes were
calculated improperly. The Revenue Agent advised that
pursuant to IRC 448(d)(2), IRC 11 and 3121(d), the
company should pay a “flat tax” of 35%. My accountant
disagrees. The recalculation of the tax under the flat
tax causes a substantial increase in tax on diminimus
[sic] gross income.
Discussion
For the reasons discussed below, we agree with respondent
and decide that petitioner is a qualified personal service
corporation under section 448(d)(2) and is therefore responsible
for the income tax deficiencies determined by respondent for the
calendar years 2001 and 2002. We also decide that petitioner is
liable for the section 6651(a)(1) addition to tax determined by
respondent for the late filing of its 2002 return.
A. Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving those
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determinations wrong.5 Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Petitioner did not meet this burden and, in
fact, “[p]etitioner has not established the factual allegations
in its petition which are material and essential.” Wichita
Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),
affd. 162 F.2d 513 (10th Cir. 1947). Petitioner offered no
persuasive evidence to support its claims and refute respondent’s
determination. See Wood Corp. v. Commissioner, 22 B.T.A. 1182
(1931) (requiring some evidentiary showing because “[t]he
adequate presentation of pertinent facts is the burden assumed by
the petitioner * * *. * * * [and a] decision favorable to its
contentions can not rest on assumption or speculation. It must
rest on facts.”), affd. 63 F.2d 1023 (6th Cir. 1933).
Petitioner’s self-serving assertions are insufficient. See
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (stating “we are
not required to accept the self-serving testimony of petitioner *
* * as gospel.”). Petitioner failed to meet its burden of proof,
and, consequently, the Court must side with respondent.
5
The burden of proof may, under certain circumstances,
shift to the Commissioner under sec. 7491(a) if the taxpayer
introduces credible evidence with respect to any factual issue
relevant to ascertaining the taxpayer’s income tax liability.
See Higbee v. Commissioner, 116 T.C. 438, 441 (2001). The burden
of proof is not shifted to respondent in this case, because,
inter alia, petitioner neither alleged that sec. 7491(a) is
applicable nor introduced any credible evidence with respect to
any factual issue relevant to ascertaining its income tax
liability. See id.
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B. Qualified Personal Service Corporation
Respondent contends that petitioner is not eligible for the
graduated income tax rates under section 11(b)(1) because it is a
qualified personal corporation pursuant to section 448(a)(2) and
is instead subject to a flat 35-percent tax rate under section
11(b)(2). In support of this contention, respondent argues that
Ms. Felton, petitioner’s sole shareholder, is an employee of the
corporation. Petitioner, however, contends that Ms. Felton does
not “consider herself” to be petitioner’s employee, and therefore
petitioner is not a qualified personal service corporation under
section 448(d)(2). We agree with respondent.
Section 11(b)(1) generally imposes a tax on the income of a
corporation at a graduated rate. However, qualified personal
service corporations are taxed at a flat 35-percent tax rate.
Sec. 11(b)(2).
Section 448(d)(2) defines a “qualified personal service
corporation” as any corporation:
(A) substantially all of the activities of which
involve the performance of services in the fields of
health, law, engineering, architecture, accounting,
actuarial science, performing arts, or consulting, and
(B) substantially all of the stock of which (by
value) is held directly * * * by--
(i) employees performing services for such
corporation in connection with the activities
involving a field referred to in subparagraph (A),
(ii) retired employees who had performed such
services for such corporation,
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(iii) the estate of any individual described
in clause (i) or (ii), or
(iv) any other person who acquired such stock
by reason of the death of an individual described
in clause (i) or (ii) * * * .
To be a qualified personal service corporation, a
corporation must satisfy two tests under the regulations: the
function test and the ownership test. Sec. 1.448-1T(e)(3), (4),
and (5), Temporary Income Tax Regs., 52 Fed. Reg. 22768 (June 16,
1987), as amended by T.D. 8329, 56 Fed. Reg. 485 (Jan. 7, 1997),
and T.D. 8514, 58 Fed. Reg. 68299 (Dec. 27, 1993). There is no
dispute here that the function test was satisfied because
petitioner’s sole activity was the performance of services in the
field of law.6 See sec. 1.448-1T(e)(4), Temporary Income Tax
Regs., 52 Fed. Reg. 22768 (June 16, 1987), as amended by T.D.
8329, 56 Fed. Reg. 485 (Jan. 7, 1997), and T.D. 8514, 58 Fed.
Reg. 68299 (Dec. 27, 1993). Instead, at the center of this
dispute is whether petitioner satisfied the ownership test.
The ownership test requires that substantially all of the
corporation’s stock is held directly by employees performing the
corporation’s services, here, in the field of law. Sec.
448(d)(2)(B)(i); sec. 1.448-1T(e)(5)(i)(A), Temporary Income Tax
6
The function test requires that 95 percent or more of
corporate employees’ time be spent on providing services in one
of the enumerated fields, which include law. See sec. 1.448-
1T(e)(4), Temporary Income Tax Regs., 52 Fed. Reg. 22768 (June
16, 1987), as amended by T.D. 8329, 56 Fed. Reg. 485 (Jan. 7,
1997), and T.D. 8514, 58 Fed. Reg. 68299 (Dec. 27, 1993).
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Regs., supra. Petitioner contends that it did not satisfy the
ownership test because all of its stock was held by a
nonemployee, Ms. Felton. That said, petitioner has done nothing
to convince us that Ms. Felton is anything other than an
employee.
Section 448(d)(2) does not adequately define the term
“employee”,7 but as a general rule, when Congress has used the
term without defining it, we have concluded that Congress
intended to describe the conventional relationship as understood
by common law. See, e.g., Nationwide Mut. Ins. Co. v. Darden,
503 U.S. 318, 322-323 (1992). Likewise, both the Court and the
Commissioner have adopted common-law rules to distinguish
employees from independent contractors. See Weber v.
Commissioner, 103 T.C. 378, 387 (1994), affd. 60 F.3d 1104 (4th
Cir. 1995); Rev. Rul. 87-41, 1987-1 C.B. 296; see also Nationwide
Mut. Ins. Co. v. Darden, supra at 324. The primary feature in
this analysis is control over the manner and means by which an
employee performs his or her services. See Rev. Rul. 87-41,
supra; see also Clackamas Gastroenterology Associates, P.C. v.
Wells, 538 U.S. 440, 448 (2003) (describing the element of
control as the “principal guidepost”); Ron Lykins, Inc. v.
Commissioner, T.C. Memo. 2006-35.
7
Sec. 1.448-1T(e)(5)(ii), Temporary Income Tax Regs.,
supra, does contain a definition of employee, but it does not
appear to be helpful in these circumstances.
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As the sole stockholder and owner of petitioner, Ms. Felton
controlled the business and controlled which clients to
represent. She also had control over how that representation was
undertaken. Indeed, it was Ms. Felton, petitioner’s only
attorney, that performed all of petitioner’s legal services.
Common experience under these facts tells us that petitioner and
Ms. Felton were one and the same for purposes of control.
In addition, it is important to note that some Internal
Revenue Code provisions include the officers of a corporation in
their definition of employee. See, e.g., sec. 3121(d) (providing
that an officer of a corporation is an employee for employment
tax purposes). When asked, Ms. Felton testified that she does
not “call herself an officer”. The Court, however, takes
judicial notice of the fact that the New York Department of
State, Division of Corporations’ Web site lists Regina Felton as
petitioner’s “Chairman or Chief Executive Officer”. See
http://appsext5.dos.state.ny.us/corp_public/; see also Fed. R.
Evid. 201. Petitioner was asked by the Court to provide a copy
of its original application for incorporation. Petitioner did
not do so. Under New York State law, certificates of
incorporation for professional corporations must list the names
of the corporation’s shareholders, officers, and directors. N.Y.
Bus. Corp. Law sec. 1503 (McKinney 2006). “The rule is well
established that the failure of a party to introduce evidence
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within his possession and which, if true, would be favorable to
him, gives rise to the presumption that if produced it would be
unfavorable.” Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. at 1165. Under Wichita Terminal, the assumption must be
that the incorporation documents would contradict Ms. Felton’s
testimony.
Balanced against Ms. Felton’s unsupported assertions, see
Tokarski v. Commissioner, 87 T.C. at 77, are the facts in this
case establishing that Ms. Felton is the corporate petitioner’s
sole shareholder. She is the sole attorney performing all of the
petitioner law firm’s legal services. Ms. Felton is also
presumed to be the sole officer and/or director of the
corporation.8 It is the opinion of the Court that Ms. Felton is
petitioner’s employee for the purpose of the instant analysis.
Therefore, because all of petitioner’s stock was held
directly by its employee, Ms. Felton, petitioner also satisfied
8
“When all of the issued and outstanding stock of the
corporation is owned by one person, such person may hold all or
any combination of offices.” N.Y. Bus. Corp. Law sec. 715
(McKinney 2006). Aside from Ms. Felton’s being listed with the
New York Secretary of State as petitioner’s chairman or chief
executive officer, New York State law requires that all officers
and directors of a professional service corporation be authorized
to engage in the practice of the profession “which such
corporation is authorized to practice” and is either a
shareholder or “engaged in the practice of his profession in such
corporation.” N.Y. Bus. Corp. Law sec. 1508 (McKinney 2006).
Ms. Felton is petitioner’s sole shareholder, and she testified
that she is the only attorney who performed legal services for
petitioner. None of the clerical or secretarial staff employed
by petitioner is authorized under New York State law to be an
officer or director of the corporation.
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the ownership test. See sec. 448(d)(2)(B)(i); sec. 1.448-
1T(e)(5)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 22768
(June 16, 1987), as amended by T.D. 8329, 56 Fed. Reg. 485 (Jan.
7, 1997), and T.D. 8514, 58 Fed. Reg. 68299 (Dec. 27, 1993).
Accordingly, we hold that petitioner is a qualified personal
service corporation under section 448(d)(2) and is subject to the
flat 35-percent tax rate for the years in issue.
C. Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a return by its due date. Sec. 6651(a)(1). The addition
equals 5 percent for each month or fraction thereof that the
return is late, not to exceed 25 percent. Id. Respondent bears
the burden of production with respect to the addition to tax.
See sec. 7491(c); see also, e.g., Swain v. Commissioner, 118 T.C.
358, 363 (2002); Higbee v. Commissioner, 116 T.C. 438 (2001).
Respondent has met his burden.
In the absence of an extension, the last date for petitioner
to file its calendar year 2002 return was March 17, 2003. Secs.
6072(b), 7503. Ms. Felton claims to have filed an extension
request, but petitioner has been unable to produce any evidence
that such a request was sent to the IRS. Instead of a retained
copy, Ms. Felton proffered a “simulated” copy of the extension
request filled out on or about March 7, 2006, to demonstrate what
petitioner’s extension request would have looked like had one
been submitted in 2003.
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Assuming, arguendo, that petitioner had timely submitted an
extension request, an extension would have given petitioner until
September 15, 2003, to file its 2002 return. Sec. 6081(a); sec.
1.6081-3, Income Tax Regs. Petitioner’s 2002 return was not
filed, however, until January 13, 2004. The return was still
late. The only bearing an extension would have had on the
instant case would be in the calculation of the addition to tax.
Because we are unpersuaded that a request for an extension of
time to file the return was properly sought, we need not consider
a recalculation of the addition to tax under section 6651(a).
“A failure to file a tax return on the date prescribed leads
to a mandatory penalty unless the taxpayer shows that such
failure was due to reasonable cause and not due to willful
neglect.” McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.
1997). A showing of reasonable cause requires taxpayers to
demonstrate they exercised “ordinary business care and prudence”
but were nevertheless unable to file the return within the
prescribed time. United States v. Boyle, 469 U.S. 241 (1975);
sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
In its posttrial memorandum, petitioner contends that the
late filing of its return is attributable to the December 23,
2002, death of Ms. Felton’s mother after a long illness.
A taxpayer may have reasonable cause for failure to timely
file a return where the taxpayer or a member of the taxpayer’s
family experiences an illness or incapacity that prevents the
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taxpayer from filing his or her return. See, e.g., Hobson v.
Commissioner, T.C. Memo. 1996-272 (reasonable cause was found
where taxpayers cared for a seriously ill child and an invalid
parent and taxpayer husband’s job forced taxpayers to live apart
for part of the year); Tabbi v. Commissioner, T.C. Memo. 1995-463
(reasonable cause was found where taxpayers’ son had heart
surgery and taxpayers spent 4 months continuously in the hospital
with him, and taxpayers filed their return 2 months after their
son’s death). In contrast, a taxpayer generally does not have
reasonable cause for his or her failure to timely file a return
where the taxpayer’s illness does not prevent the taxpayer from
filing his or her return. See, e.g., Watts v. Commissioner, T.C.
Memo. 1999-416 (reasonable cause was not found where, although
taxpayer’s mother and daughter were both ill and taxpayer
frequently took them to see doctors, taxpayer also performed
extensive architectural services in taxpayer’s business); Wright
v. Commissioner, T.C. Memo. 1998-224 (reasonable cause was not
found where the taxpayer had capacity to attend to matters other
than filing tax returns despite his mother’s traumatic
disappearance and death and the taxpayer’s failure to file
returns continued beyond the duration of these events), affd.
without published opinion 173 F.3d 848 (2d Cir. 1999).
Although the Court sympathizes with Ms. Felton for the loss
of her mother, petitioner clearly filed its return beyond the
duration of the illness and incapacity, and, in the instant case,
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petitioner provided no information demonstrating the extent to
which Ms. Felton’s family loss prevented the corporation from
filing its return. See Tokarski v. Commissioner, 87 T.C. at 77.
On the basis of the record before us, we therefore conclude that
petitioner did not demonstrate that its failure to timely file a
return was due to reasonable cause and not willful neglect. See
sec. 301.6651-1(c), Proced. & Admin. Regs.; sec. 1.6161-1(b),
Income Tax Regs. Accordingly, petitioner is liable for the
addition to tax under section 6651(a)(1) for 2002.
Conclusion
We have considered all of the other arguments made by
petitioner, and, to the extent that we have not specifically
addressed them, we conclude that they are without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect our disposition of the disputed issues,
Decision will be entered
for respondent as to the
deficiencies in tax and the
addition to tax under section
6651(a)(1) for 2002 in the
amount of $1,116.60.