T.C. Memo. 2011-155
UNITED STATES TAX COURT
CUSTOM STAIRS & TRIM, LTD., INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9204-09L. Filed July 5, 2011.
P filed a petition for review pursuant to secs. 6320
and 6330, I.R.C., in response to R’s determination that
the lien and levy actions were appropriate.
Held: P exercised ordinary business care and
prudence in providing for payment of its tax liability.
R’s determination to impose a failure to deposit
penalty and a failure to pay addition to tax and to
proceed with collection actions is reversed.
Rebecca L. Cordes (an officer), for petitioner.
John F. Driscoll, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for review of a Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 (notice of
determination).1 Petitioner, Custom Stairs & Trim, Ltd., Inc.
(Custom Stairs), through its vice president, Rebecca L. Cordes
(Ms. Cordes), seeks review of respondent’s determination to
impose a penalty and an addition to tax and to proceed with a
proposed levy and to keep in place a filed lien.
These collection actions stem from a penalty under section
6656 and an addition to tax under section 6651(a)(2) relating to
Custom Stairs’ unpaid employment taxes reported on Form 941,
Employer’s Quarterly Federal Tax Return, for the second quarter
of 2008. The IRS imposed the penalties and the additions to tax
on Custom Stairs for 15 consecutive quarters beginning in 2005;
only one of these quarters is in dispute. The issue for decision
is whether the section 6656(a) failure to deposit penalty of
$3,124.79 and the section 6651(a)(2) failure to pay addition to
tax of $224.50 should be abated because Custom Stairs’ failure to
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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make the deposits was due to reasonable cause.2 As a result of
the penalties, plus interest and collection costs, less payments
made, Custom Stairs’ balance due as of April 3, 2010, was
$1,575.26.3
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulations,
with accompanying exhibits, are incorporated herein by this
reference. At the time the petition was filed, Custom Stairs had
its principal business address in Pensacola, Florida. During the
period at issue in 2008, Ms. Cordes was vice president of Custom
Stairs, a company in the business of building circular wooden
staircases. Custom Stairs timely filed Form 941 for the period
2
Respondent’s administrative file focuses almost exclusively
on the sec. 6656(a) penalty. The petition indicates in par. 5:
“I disagree that there was a neglect or refusal to pay” and “I
disagree that I did not establish reasonable cause to abate
penalties”. See also Ms. Cordes’ Dec. 10, 2008, letter to Susan
Shaw, the revenue officer assigned to this case, “requesting
reductions of penalties”. Similarly, in the attachment to Form
12153, Request for a Collection Due Process or Equivalent
Hearing, under “Lien Withdrawal” item 3 Custom Stairs refers to
“penalties”.
3
The balance due, as of Apr. 6, 2010, per respondent’s
records (Form 4330, Certificate of Assessments, Payments, and
Other Specified Matters) was $1,595.26. This amount was derived
by adding the sec. 6656(a) penalty of $3,124.79 and the sec.
6651(a)(2) addition to tax of $244.50, respectively, to assessed
interest through Sept. 29, 2008, of $180.97 plus “collection
costs” of $45, less Custom Stairs’ payment against the charges of
$2,000.
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ending June 30, 2008, with a reported tax liability of
$28,900.40.
Custom Stairs has been in business since December 1985
fabricating stairways for residential properties along the Gulf
Coast. Its troubles began in September 2004 when Hurricane Ivan,
the 10th most intense Atlantic hurricane ever recorded,4 struck
the Gulf Coast, severely damaging Custom Stairs’ place of
business and severely affecting many of its customers.
In 2005 through 2008 as Custom Stairs felt the effects of
the hurricane, collapse of the housing bubble, and economic
recession, it began laying off employees, eliminating vacations
and paid holidays, and cutting employee benefits. In 2008 Custom
Stairs also contacted a real estate broker and listed its office
property with the hope of using the proceeds to pay off the
company’s debts.
Custom Stairs has a history of timely filing its Forms 941
and making deposits of the tax assessed. However, following the
hurricane, it also has a history of failing to pay the full
amount and having to pay penalties and interest. Because of the
hurricane, Custom Stairs fell behind with its employment taxes in
early 2005 and was thereafter consistently in arrears. For most
4
This Court takes judicial notice of the severity of
Hurricane Ivan.
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of these calendar quarters Custom Stairs actually paid over to
the Internal Revenue Service (IRS) amounts that would have fully
satisfied its liability for the current quarter; but the IRS
applied its payments to prior arrearages, leaving all or portions
of each successive quarter’s required deposits underpaid.5 In
short, following the hurricane Custom Stairs never asked for, nor
did it receive, any penalty relief or a clean penalty-free start
until it sought relief in the 2008 quarter at issue here. Below
is a table showing Custom Stairs’ history with respect to the
Federal tax deposit penalty and failure to pay addition to tax
for the quarters ended March 31, 2005 through 2009.
Penalties, Additions to Tax, Interest Assessments, and Payments
Federal Tax Failure
Date of Deposit To Pay
Quarter Ended Assessment Penalty Addition Interest Payments
Mar. 31, 2005 Jun. 27, 2005 $1,301.01 --- --- $1,301.01
Jun. 30, 2005 Oct. 10, 2005 1,412.09 $49.68 $41.15 1,502.92
Sep. 30, 2005 Dec. 26, 2005 2,394.06 109.58 74.10 2,577.74
Dec. 31, 2005 Apr. 03, 2006 2,091.85 --- --- 2,091.85
Mar. 31, 2006 Jun. 26, 2006 1,647.09 --- --- 1,647.09
1 2
Jun. 30, 2006 Sep. 18, 2006 1,989.23 --- 12.70 2,001.92
Sep. 30, 2006 Jan. 01, 2007 1,735.37 38.80 32.41 1,806.58
5
Custom Stairs could have entirely avoided liability for
additions and/or penalties in all but 5 of the 16 quarters for
which they were assessed by allocating differently the tax
payments that it made. With such designations, the payments that
Custom Stairs is stipulated to have made would have timely paid
its employment taxes for 11 of the 16 delinquent quarters, and
Custom Stairs would thereby have avoided the great majority of
the $27,000 in penalties and additions that were assessed against
it.
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Dec. 31, 2006 Apr. 02, 2007 1,710.42 --- --- 1,710.42
Mar. 31, 2007 May 28, 2007 324.25 --- --- 324.25
3
Jun. 30, 2007 Sep. 03, 2007 778.97 0.40 0.30 819.67
Sep. 30, 2007 Dec. 31, 2007 1,519.92 44.46 33.45 1,597.83
4 5 6
Dec. 31, 2007 Apr. 07, 2008 1,845.56 72.57 56.51 1,974.64
7 8 9
Mar. 31, 2008 Jun. 16, 2008 2,860.65 56.84 38.85 2,938.10
10
Jun. 30, 2008 Sep. 29, 2008 3,169.79 224.50 180.97 2,000.00
Sep. 30, 2008 Dec. 15, 2008 831.67 --- --- 831.67
Dec. 31, 2008 None --- --- --- ---
11
Mar. 31, 2009 May 25, 2009 605.03 --- 2.32 607.35
Total 26,216.96 596.83 472.76 25,733.04
Net total assessed 27,286.55
Less payments 25,733.02
12
Amount remaining 1,553.51
1
A statutory notice of intent to levy was issued on Oct. 23, 2006.
2
This interest was assessed on Nov. 20, 2006.
3
An additional $2 was assessed on Oct. 8, 2007, but was “cleared” after
payment was received. Resolution of the apparent $38 overpayment is not
explained in the record.
4
Of the $92.19 failure to pay addition to tax originally assessed,
$19.62 as well as $5.25 of the $64.03 originally assessed interest was abated
on Apr. 14, 2008.
5
An additional $2.27 of interest was abated and refunded on May 26,
2008.
6
After the $2.27 of interest abated and refunded on May 26, 2008.
7
An additional $110.17 Federal tax deposit penalty was assessed on
July 21, 2008, which was abated on July 21, 2008, after payment was received.
A statutory notice of intent to levy was issued on Sept. 1, 2008.
8
An additional $18.14 of interest was assessed on July 21, 2008, and
abated on Oct. 6, 2008.
9
After $18.24 was refunded.
10
$2,729.64 was initially assessed on Sept. 29, 2008, and an additional
$395.15 Federal tax deposit penalty was assessed on Nov. 3, 2008. This also
includes $45 of collection costs charged to Custom Stairs. An intent to levy
collection due process notice levy notice was issued on Nov. 20, 2008.
11
This $2.32 was assessed on Aug. 31, 2009. A statutory notice of
intent to levy was issued on June 29, 2009.
12
The apparent $21.75 discrepancy is not explained in the record.
For the tax period ended June 30, 2008, Custom Stairs was
required to make employment tax deposits on April 9, April 16,
April 23, April 30, May 7, May 14, May 21, May 28, June 4,
June 11, June 18, and June 25. During this period the IRS
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treated no payments of Custom Stairs as tax deposits for the
quarter ended June 30, 2008; the first payment that the IRS
treated as a deposit for this quarter was received by respondent
on July 3, 2008. By the time Custom Stairs timely filed Form 941
for the tax period ended June 30, 2008, Custom Stairs had made
$7,113.94 of payments that the IRS treated as deposits on the
$28,900.40 due. As reflected in the preceding table, on
September 29, 2008, a $2,729.64 penalty under section 6656,
Failure to Make Deposit of Taxes, was assessed against Custom
Stairs for the second quarter of 2008, at issue, and an
additional $395.15 was assessed on November 3, 2008.
However, Custom Stairs had in fact made payments totaling
$29,481.65--i.e., more than the liability for the quarter ended
June 30, 2008--before the due date for the Form 941. Custom
Stairs had not designated them for that current quarter, however,
and the IRS allocated them instead to the prior March 31, 2008,
quarter, which was in arrears and for which penalties had already
been assessed. Because of Custom Stairs’ nonallocation and
timing of its payments within the June 30, 2008, quarter,
penalties and additions were eventually assessed against it for
both those quarters.
On July 30, 2008, an internal revenue officer, whose
pseudonym is Susan Shaw (Officer Shaw), visited Custom Stairs
after she was notified that there had been a substantial drop in
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its Form 941 Federal tax deposit levels. She explained that the
main purpose is “to try to get early intervention with businesses
that are falling behind in their payroll tax deposits.” Officer
Shaw met with Ms. Cordes and explained that the most important
thing was for Custom Stairs to get and stay current. She
directed that Custom Stairs pay current taxes first. Ms. Cordes
explained to Officer Shaw that the hurricane and economic
downturn had severely affected their construction-based business.
Officer Shaw left a handwritten Form 9297, Summary of
Taxpayer Contact, which, under the heading “Information/Documents
required”, stated: “Provide current profit & loss”, “accounts
receivable listing”, “balance sheet/asset listing”, “bank
statements & canceled checks 4/1/2008-7/1/2008”, “copy of the
bank signature card”, “copy of 1120 for 2007”, and “provide
personal financial statements”. Officer Shaw explained that
these documents were needed so that respondent could compile a
collection plan, determine whether the finances would support an
installment agreement, or determine whether respondent could
direct Custom Stairs to get a loan to pay the full amount.
On August 1, 2008, Ms. Cordes called Officer Shaw and
explained that she believed that Custom Stairs would be able to
pay all past due tax liabilities within 8 weeks. Officer Shaw
agreed to the proposal and apparently suspended any additional
investigation and financial review until October 1, 2008. On
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September 29, 2008, Officer Shaw noted that Custom Stairs had met
its current tax liabilities and that it had made about $15,000 in
deposits against past due amounts over the past 8 weeks. She
noted that the balance “due [approximately $16,000] will be
resolved in a short time” but if the past due amounts were not
paid in full by October 31, 2008, she would have to secure the
bank records and documentation requested at the initial meeting.
Officer Shaw communicated the new deadline to Custom Stairs and
stated that if the remaining liabilities were not paid, Custom
Stairs would have to provide the records requested or a lien
would be filed and a levy might be initiated. Officer Shaw also
noted that “TP [taxpayer] appears to be making swift progress, in
a construction/real estate related business, during a very poor
economic time.”
On October 30, 2008, Officer Shaw noted that Custom Stairs
was up to date on current liabilities and had a balance of
$11,434 on past due liabilities. She noted that Custom Stairs
was “not pyramiding” and that they appeared “to be earnestly
resolving delinquency, despite this being a construction related
business, during a very poor economic cycle for home
construction.” Officer Shaw decided to delay following up with
Ms. Cordes until November 17, 2008, and communicated that
extension to Ms. Cordes. A liability remained on November 20,
2008; and because Custom Stairs had failed to make the deposits
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it promised and bring itself current by that date, a lien was
filed.
On November 20, 2008, Custom Stairs was sent a Final Notice,
Notice of Intent to Levy and Notice of Your Right to a Hearing
(CDP levy notice), showing $9,919.27 still owed for the quarter
ended June 30, 2008. On December 2, 2008, Custom Stairs was
mailed a Notice of Federal Tax Lien Filing and Your Right to a
Hearing. Custom Stairs, on December 11, 2008, timely filed a
Form 12153, Request for a Collection Due Process or Equivalent
Hearing. Under the heading “Offer in Compromise” Custom Stairs
requested a “reduced penalty, under the present economic
conditions”; and under the heading “Lien Withdrawal” Custom
Stairs stated that the lien was filed prematurely because Custom
Stairs had been keeping current while slowly making up the past
due liabilities. It also stated that as of December 4, 2008, all
of the past due amounts (except penalties) had been paid.
By letter dated February 18, 2009, Peter Salinger, the
settlement officer of the Tampa Appeals Office (Settlement
Officer Salinger) assigned to the case, informed Custom Stairs
that a telephone conference was scheduled for March 18, 2009.
Ms. Cordes responded to the letter on March 2, 2009, explaining
that she believed that the lien was unreasonable. She again
explained that because the underlying taxes had been paid and the
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only balance for that period was a penalty that she claimed
should be abated for reasonable cause, the lien was unnecessary.
During the telephone hearing conducted on March 18, 2009,
Ms. Cordes explained to Settlement Officer Salinger that she did
not feel that she had to submit the requested documentation
because she had been making payments on the delinquent tax
liability. Settlement Officer Salinger explained that under his
analysis Custom Stairs did not have reasonable cause for the
abatement of the penalty. Custom Stairs did not submit any of
the documentation requested, and no collection alternatives were
offered. When Settlement Officer Salinger asked Ms. Cordes how
she wished to resolve the liability, she informed him that she
did not know because she did not have the money to pay it.
On March 26, 2009, Appeals Team Manager, Clifford Whitely,
mailed Custom Stairs a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330
(determination letter). The letter explained that “the Notice of
Intent to Levy should not be withdrawn” and “the Notice of
Federal Tax Lien will not be withdrawn”. It stated that the lien
was reasonable under the circumstances and that all of the legal
and procedural requirements had been met. Custom Stairs timely
filed a petition with this Court on April 16, 2009, for review of
the Appeals Office’s actions and the determination letter.
Custom Stairs claimed that because it could not pay the tax
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liability there was reasonable cause for the failure to pay and
therefore the penalties should be abated. Custom Stairs
concluded that since the penalty was improper, there was no
underlying tax liability to warrant a lien against its property
and thus the lien was unnecessary and unreasonable.
On February 5, 2010, respondent filed a motion for summary
judgment, and on March 10, 2010, Custom Stairs timely filed a
response. By order dated April 13, 2010, this Court denied
respondent’s motion. It did so because it determined that
“Whether petitioner’s failure to pay taxes was due to reasonable
cause is a material issue of fact”. Summary judgment is
appropriate only where “the pleadings, answers to
interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law.” Rule 121(b). A
trial was held on May 24, 2010, in Mobile, Alabama.
OPINION
Section 6320(a) and (b) provides that a taxpayer shall be
notified in writing by the Commissioner of the filing of a notice
of Federal tax lien and provided with an opportunity for an
administrative hearing. An administrative hearing under section
6320 is conducted in accordance with the procedural requirements
of section 6330. Sec. 6320(c).
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Section 6331(a) authorizes the Commissioner to levy upon
property or property rights of a taxpayer liable for taxes who
fails to pay those taxes within 10 days after a notice and demand
for payment is made. Section 6331(d) provides that the levy
authorized in section 6331(a) may be made with respect to unpaid
tax liability only if the Commissioner has given written notice
to the taxpayer 30 days before the levy. Section 6330(a)
requires the Commissioner to send a written notice to the
taxpayer of the amount of the unpaid tax and of the taxpayer’s
right to a section 6330 hearing at least 30 days before the levy
is begun.
If an administrative hearing is requested in a lien or levy
case, the hearing is to be conducted by the Appeals Office.
Secs. 6320(b)(1), 6330(b)(1). At the hearing, the Appeals
officer conducting it must verify that the requirements of any
applicable law or administrative procedure have been met. Secs.
6320(c), 6330(c)(1). The taxpayer may raise any relevant issue
with regard to the Commissioner’s intended collection activities,
including spousal defenses, challenges to the appropriateness of
the proposed levy, and alternative means of collection. Sec.
6330(c)(2)(A); see also Sego v. Commissioner, 114 T.C. 604, 609
(2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000).
Taxpayers are expected to provide all relevant information
requested by Appeals, including financial statements, for its
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consideration of the facts and issues involved in the hearing.
Secs. 301.6320-1(e)(1), 301.6330-1(e)(1), Proced. & Admin. Regs.
If a taxpayer’s underlying liability is properly at issue,
the Court reviews any determination regarding the underlying
liability de novo. Sego v. Commissioner, supra at 610; Goza v.
Commissioner, supra at 181-182. We review any other
administrative determination regarding the proposed collection
action for abuse of discretion. Sego v. Commissioner, supra at
610; Goza v. Commissioner, supra at 181-182.
If raised at a hearing by the taxpayer, a taxpayer’s
underlying liability is properly at issue if the taxpayer “did
not receive any statutory notice of deficiency for such tax
liability or did not otherwise have an opportunity to dispute
such tax liability.” Sec. 6330(c)(2)(B). A taxpayer generally
is treated as not having had an opportunity to dispute a
liability that is self-reported as due on a return. Montgomery
v. Commissioner, 122 T.C. 1, 9 (2004). Custom Stairs did not
receive a notice of deficiency. Respondent has not shown,
indicated, or alleged that Custom Stairs had an opportunity to
dispute the tax liability, and the penalty was related to a
liability that was self-reported as due on the return.
Consequently, the underlying liability is properly at issue. See
sec. 6330(c)(2)(B).
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Under section 6656(a) if a taxpayer fails to make a required
deposit on the date prescribed for that deposit, a penalty equal
to the applicable percentage of the amount of the underpayment,
determined pursuant to section 6656(b), shall be imposed.
Section 6656(a) also provides that the penalty shall not be
imposed if “it is shown that such failure is due to reasonable
cause and not due to willful neglect”. Likewise section
6651(a)(2) imposes an addition to tax of 0.5 percent per month up
to an aggregate total maximum of 25 percent for failure to timely
pay tax. This addition to tax is also not to be applied if the
failure to pay was due to reasonable cause and not willful
neglect.
Caselaw and legislative history indicate that the primary
purpose of these penalties is to ensure compliance. United
States v. Boyle, 469 U.S. 241, 245 (1985); H. Rept. 101-247, at
1403 (1989). The Commissioner’s policy statement explains that
the “Penalties are used to enhance voluntary compliance. * * *
Penalties provide the Service with an important tool * * *
because they enhance voluntary compliance by taxpayers.”
Internal Revenue Manual (IRM) Exhibit 20.1.1-1, Penalty Policy
Statement 20-1 (Dec. 11, 2009).
It is uncontested that Custom Stairs failed to make the
required 2008 second quarter deposit payments by the dates they
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were due. We must decide whether that failure was due to
reasonable cause and not willful neglect.
Custom Stairs during the years 2005 through June 2008 was
consistently in arrears, so that the numerous undesignated
payments it made were frequently applied to pay past due
liabilities. Final payments satisfying the total tax amounts due
under the returns as filed were made shortly after the lien was
filed, leaving unpaid only a portion of the 2008 second quarter
penalties that had been assessed.
Custom Stairs asserts that it had not fully recovered from
the damage caused in 2004 by Hurricane Ivan when it began to feel
the effects of the economic recession in 2008. Custom Stairs
responded by laying off employees, eliminating vacations and paid
holidays, and curtailing employee benefits. It even
unsuccessfully attempted to sell the real property in which it
conducted its business, in an effort to remain current with its
taxes and pay off its debts.
Custom Stairs did not make the Federal tax deposits because
there was “not enough to pay the taxes” and meet its other
crucial operating expenses. Mrs. Cordes explained that “I have
made conscious decisions to pay perhaps a vendor * * * but when
I’ve made a decision to not pay a tax payment on time versus a
vendor, it was simply to continue to stay in business.” Custom
Stairs claims that its inability to timely pay the taxes on
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account of the lingering effects of Hurricane Ivan and the
economic recession, in the context of this case, constitutes
reasonable cause.
Respondent asserts that the mere inability to pay, coupled
with the payment of other creditors rather than the Treasury, is
never reasonable cause for abatement of the failure to deposit
penalty. However, a majority of the Courts of Appeals that have
decided this issue have determined “that financial hardship can,
under certain circumstances, justify failure to pay and deposit
employment taxes”. Diamond Plating Co. v. United States, 390
F.3d 1035, 1038 (7th Cir. 2004) (citing Van Camp & Bennion v.
United States, 251 F.3d 862, 868 (9th Cir. 2001), East Wind
Indus., Inc. v. United States, 196 F.3d 499, 507-508 (3d Cir.
1999), and Fran Corp. v. United States, 164 F.3d 814, 819 (2d
Cir. 1999)). But see Brewery, Inc. v. United States, 33 F.3d
589, 592 (6th Cir. 1994). IRM Exhibit 20.1.1-3 specifically
states, under the table heading “General Penalty Relief”, that
inability to pay is “Rarely Allowed on Employment Tax Deposits”,
implying that in certain rare circumstances, it is allowed.
Respondent notes that this is not a first-time offense and
that Custom Stairs has been continually delinquent in making
employment tax deposits as reflected in the table supra.6 In
6
But see supra note 5, explaining that, had Custom Stairs
designated its payments differently, it would have been
(continued...)
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respondent’s opinion, these facts negate any reasonable cause
defense. Regulations promulgated under section 6656 do not
address “reasonable cause” except as to first-time depositors.
See sec. 301.6656-1, Proced. & Admin. Regs. We will therefore
look to the analogous late-payment additions to tax under section
6651(a)(2) although we recognize it is not a “penalty” provision
per se.7
Reasonable cause will be found if the taxpayer “exercised
ordinary business care and prudence in providing for payment of
his tax liability and was nevertheless either unable to pay the
tax or would suffer an undue hardship”. Sec. 301.6651-1(c)(1),
Proced. & Admin. Regs. In determining whether the taxpayer
exercised ordinary business care and prudence, “consideration
will be given to all the facts and circumstances of the
taxpayer’s financial situation, including the amount and nature
of the taxpayer’s expenditures in light of the income”. Id. The
primary factors in determining whether a taxpayer exercised
6
(...continued)
delinquent in only 5 of the 16 quarters.
7
We have found the sec. 6656 penalty and attendant
reasonable cause exception similar to the sec. 6651(a)(2)
addition to tax before, even referring to sec. 6656 as an
addition to tax. See Charlotte’s Office Boutique, Inc. v.
Commissioner, 121 T.C. 89, 109 (2003), supplemented by T.C. Memo.
2004-43, affd. 425 F.3d 1203 (9th Cir. 2005). We also note that
the definition of “employment tax” does not exclude penalties.
See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268
(2001).
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ordinary business care cited by the Courts of Appeals that allow
a reasonable cause defense for the inability to make employment
tax deposits are: (1) The taxpayer’s favoring other creditors
over the Government, (2) a history of failing to make deposits,
(3) the taxpayer’s financial decisions, and (4) the taxpayer’s
willingness to decrease expenses and personnel. Staff It, Inc.
v. United States, 482 F.3d 792 (5th Cir. 2007); Diamond Plating
Co. v. United States, supra at 1038; Van Camp & Bennion v. United
States, supra at 868; East Wind Indus., Inc. v. United States,
supra at 508-509; Fran Corp. v. United States, supra at 819-820.
We begin by recognizing that Custom Stairs has, with great
effort and tenacity, eventually paid off all of the liability
shown on the June 2008 quarterly Form 941 tax return.
Nevertheless, Trust Fund Business Master File tax payments are a
particularly sensitive item for the Commissioner. The Government
depends on the employer, as its agent and fiduciary, to timely
collect and timely pay over these taxes from third-party
employees and to make certain matching payments itself. The
Government must give the employees credit for the withheld
amounts even when they are withheld and not paid over.
Penalties therefore serve an important deterrence function,
and the taxpayer bears a heavy burden when seeking to avoid a
failure to pay or deposit penalty. That said, here the deterrent
goal has been served with over $27,286.55 of penalties assessed
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and $25,733.04 collected. Moreover, it cannot be said that,
during the time relevant to its liabilities for the quarter ended
June 30, 2008, Custom Stairs held onto the taxes it had withheld
from its employees rather than paying them over. On the
contrary, during the period for making deposits of those taxes,
Custom Stairs paid over to the IRS amounts greater than the
employment taxes it owed for that period (including trust funds).
Only because there were arrearages from prior quarters--for which
Custom Stairs has fully paid penalties that are not in dispute--
did the IRS characterize the payments made by Custom Stairs as
pertaining to a prior quarter.
In applying the four factors discussed above and other facts
particular to Custom Stairs, we find that Custom Stairs’ failure
to make the deposits, in the context of the cascading penalties
encountered here, was due in significant part to Hurricane Ivan,
the 2008 economic collapse, and the practical fact of the
cascading penalties themselves. Quarter after quarter current
funds were used to pay then-assessed penalties for the prior
quarter at the cost of not making all timely deposits for the
current quarter. Given the unique and compelling facts present
here, we conclude the failure to timely deposit and pay was due
to reasonable cause.
Custom Stairs has favored other creditors over the
Government and has a record of 15 consecutive quarterly instances
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since 2005 where a penalty was assessed for failure to timely
make required deposits. Despite these facts, we find that Custom
Stairs has exercised ordinary business care in its financial
decisions and its willingness to decrease expenses and personnel
in order to pay tax, interest, and penalties. Custom Stairs
failed to allocate to its own advantage the payments that it
made, and the IRS cannot be criticized for making its own
allocation to prior quarters; but during the relevant time
period, Custom Stairs’ lapse was its failure to have paid in
prior quarters and its failure to allocate, not any current
failure to pay over to the IRS the tax it had withheld from its
employees.
Respondent essentially argues that if Custom Stairs cannot
afford to make its tax payment timely it should go out of
business. However, “Both the economy and the federal fisc are
negatively impacted by such an approach--the amount of money
flowing into the economy and the fisc is reduced as a result of
increased unemployment, idle buildings and plants, and decreased
sales of goods and services.” East Wind Indus., Inc. v. United
States, supra at 509. Custom Stairs paid to the IRS the money
withheld from its employees, and the IRS allocated those payments
toward previous liabilities and penalties. Surprisingly, at
substantial sacrifice by its owners who provided personal funds,
even credit card charges, it has managed to stay in business. As
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to every other quarter it has both made the required late
deposits and paid the resulting penalties and interest in full.
The details of Custom Stairs’ efforts are elaborated on by Ms.
Cordes’ March 2, 2009, letter to Mr. Salinger and the National
Taxpayer Advocate’s memorandum attached to Custom Stairs’ Appeals
Office correspondence.
Even respondent’s Officer Shaw noted that Custom Stairs
“appears to be making swift progress, in a construction/real
estate related business, during a very poor economic time.”
Custom Stairs was providing for the payment of its taxes and
making swift progress on its past due taxes during a bad economy.
One month later Officer Shaw noted that Custom Stairs was “not
pyramiding” by staying current with new tax liabilities and that
it appeared “to be earnestly resolving delinquency, despite this
being a construction related business, during a very poor
economic cycle for home construction.” Officer Shaw had informed
Custom Stairs that its primary goal was to stay current while
making up the delinquent payments, and it had done just that.
Custom Stairs has exercised ordinary business care and
prudence in cutting benefits and payroll, selectively and
prudently paying business expenses, and attempting to sell its
real property to provide for the timely payment of its tax
liability. Therefore we find that the reasonable cause necessary
to negate, in accordance with their terms, the application of the
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section 6651(a)(2) addition to tax and the section 6656 penalty
is present in this instance.
The Court has considered all of respondents’ contentions,
arguments, requests, and statements. To the extent not discussed
herein, the Court concludes that they are meritless, moot, or
irrelevant.
To reflect the foregoing,
Decision will be entered
for petitioner.8
8
We note that because we have found that the penalties must
be abated, petitioner may be entitled to a refund. However, this
Court does not have jurisdiction under sec. 6330 to order a
refund. Greene-Thapedi v. Commissioner, 126 T.C. 1, 21 (2006).