McLaine v. Commissioner

JOHN J. MCLAINE, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 15932–07L. Filed March 13, 2012.

In 1999 P exercised nonqualified stock options (NQOs) pre-
viously issued to him by E, his recent employer, and simulta-
neously sold the option stock, receiving from E the sale pro-
ceeds, less the exercise price, undiminished by withheld
income taxes. P reported the gain but did not pay the balance
shown as due on his return. R issued a notice of intent to levy
to collect the balance, interest, and additions to tax for fail-
ures to pay tax and estimated tax. P had a collection due
process hearing, and R’s Appeals Office determined to proceed
with collection. P challenges the determination primarily on

228

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 (228) McLAINE v. COMMISSIONER 229

the ground that he is entitled to a credit under I.R.C. sec. 31
for payment by a successor to E in a later year of the tax due
on his 1999 option gain.
1. Held: P is not entitled to a credit under I.R.C. sec. 31 for
any payment after 1999 by E or a successor of E of the taxes
associated with P’s 1999 NQO exercise because no payment
was made by E or a successor to E of the nonwithheld taxes
related to the 1999 exercise.
2. Held, further, the Appeals officer did not abuse his discre-
tion by refusing to consider collection alternatives.
3. Held, further, P is not entitled to any abatement of
interest.
4. Held, further, P is liable for the additions to tax assessed
under I.R.C. secs. 6651(a)(2) and 6654.
5. Held, further, Appeals’ determination to proceed with
collection of the assessments against P for 1999 is sustained.

James R. Walker and Christopher D. Freeman, for peti-
tioner.
Frederick Lockhart and Sarah Barkley, for respondent.

COLVIN, Chief Judge: This case is before us to review a
Notice of Determination Concerning Collection Action(s)
under Section 6320 and/or 6330 (notice) issued by respond-
ent’s Appeals Office. The notice concerns petitioner’s 1999
Federal income tax, and it sustains an Appeals officer’s
determination that respondent may proceed by levy to collect
that tax. We review the notice pursuant to section
6330(d)(1). 1
The events giving rise to the notice begin with petitioner’s
exercise in 1999 of nonqualified stock options (NQOs) awarded
to him by a previous employer. Petitioner realized gross
income on the exercise of the NQOs, which he and his then
wife reported on their 1999 joint Federal income tax return
(1999 return). On that return petitioner reported no Federal
income tax withheld and a substantial amount of unpaid tax
due, which, along with additions to tax and interest,
respondent now seeks to collect.

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. We
round all dollar amounts to the nearest dollar.

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The issues for decision are:
(1) whether respondent’s Appeals Office erred in not giving
petitioner credit for a third-party payment of his 1999
income tax liability. We hold that respondent did not err;
(2) whether respondent’s refusal to provide collection alter-
natives as described in section 6330(c)(2)(A)(iii) was an abuse
of discretion. We hold that it was not;
(3) whether petitioner is entitled to partial abatement of
assessed interest. We hold that he is not;
(4) whether petitioner is liable for the additions to tax for
failure to pay tax under section 6651(a)(2) and for failure to
pay estimated taxes under section 6654. We hold that he is;
and
(5) whether Appeals’ determination to proceed with collec-
tion of the assessments against P for 1999 is sustained. We
hold that it is.

FINDINGS OF FACT

Introduction
Some of the facts have been stipulated and are so found.
Petitioner resided in Colorado when he filed the petition.
Judge Halpern, who was the trial Judge in this case, fully
agrees with these findings of fact.
Personal History
Petitioner was born in 1949. He has a bachelor’s degree in
business from the University of Scranton and a master’s
degree in business administration from DePaul University.
He married Tammy McLaine in 1997, and they were divorced
in 2004. We refer to her herein as petitioner’s former spouse.
Employment by Excel
During the early to mid-1990s, Excel Communications, Inc.
(Excel), was a privately held company in the business of
selling and reselling telephone services. Initially, petitioner
worked as a consultant to Excel. In 1994 he was hired as an
employee by Excel and became a senior vice president and its
chief financial officer (CFO).
After it hired petitioner, Excel experienced rapid growth.
Its sales grew from $1.5 million in 1993 to more than $1 bil-

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 (228) McLAINE v. COMMISSIONER 231

lion in 1996, and its workforce grew from 20 to over 6,000
employees.
In 1996 petitioner was part of the management team that
took Excel public.
In 1997 Excel acquired Telco, a Virginia-based long-dis-
tance telecommunications company. Also in 1997, after the
Telco acquisition, petitioner was promoted to president and
chief operating officer of Excel, but he continued as its CFO.
In April 1998, on account of a disagreement as to the future
of Excel, petitioner left its employment.
Throughout his employment by Excel, petitioner’s ever-
increasing roles and responsibilities, coupled with his lack of
personal time, resulted in his operating in a highly stressful
and volatile business environment.
Exercise of NQOs
During the time petitioner was employed by Excel, it
awarded him NQOs pursuant to its stock option plan (plan).
Petitioner became entitled to exercise those options when he
left Excel. The plan required that an optionee who exercises
an option ‘‘shall, upon notification of the amount due * * *
pay to the Company * * * amounts necessary to satisfy
applicable federal, state and local tax withholding require-
ments.’’
Teleglobe, Inc. (Teleglobe), a subsidiary of Bell Canada
Enterprises (BCE), acquired Excel in 1998. As a result, peti-
tioner’s Excel NQOs became exercisable in Teleglobe stock.
Petitioner exercised some of those options in December 1998
and the balance in January 1999. With respect to the options
exercised in 1999 (together, 1999 exercise), petitioner elected
an alternative under the plan that required Excel/Teleglobe
to immediately sell the option shares and remit to him the
excess of the proceeds of sale over the exercise price (option
proceeds or spread amount). Petitioner received $8,367,951
as a result of the 1999 exercise and that election.
Paine Webber, the brokerage firm appointed to administer
the plan, facilitated the 1999 exercise. Petitioner received
from Paine Webber Forms 1099–B, Proceeds From Broker
and Barter Exchange Transactions, listing the gross proceeds
from the 1999 exercise. Those forms were the source for the
amounts petitioner and his former spouse reported on the

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1999 return. Excel/Teleglobe mailed a Form 1099–MISC, Mis-
cellaneous Income, to petitioner at a post office box in Colo-
rado, reporting $8,384,044 of miscellaneous income. Peti-
tioner did not receive that form.
When petitioner received the option proceeds, he knew that
no taxes had been withheld. Petitioner received no notifica-
tion from Excel/Teleglobe of any tax amounts due to it from
him as a result of the 1999 exercise, nor has he reimbursed
it any amount for taxes it paid with respect to that exercise.
Disposition of the Option Proceeds
Petitioner returned most of the proceeds from the 1999
exercise and stock sales to Paine Webber for investment in
high technology stocks, including WorldCom. He invested the
remainder in limited liability companies, including a home
construction company, an online auction house, and a ven-
ture capital firm. All of those investments either failed or
resulted in substantial losses with the result that petitioner
was left with only a small fraction of his option proceeds by
October 20, 2000, the filing date of his 1999 return. Between
April 15 and October 20, 2002, he tried to raise funds suffi-
cient to pay his 1999 tax liability by attempting, unsuccess-
fully, to borrow against or to sell his Colorado and Florida
homes.
The 1999 Return
Petitioner reported the option proceeds on Schedule D,
Capital Gains and Losses, of the 1999 return.
Petitioner and his former spouse reported total taxable
income of $8,347,585, tax due of $3,276,333, no amount of
income tax withholding, total payments (with the request for
extension of time to file) of $1,600,000, and an amount owed
of $1,676,333, which was not remitted with the return. They
had obtained an automatic four-month extension of time to
file and an additional two-month extension, to October 15,
2000. They filed the 1999 return on October 20, 2000.
At the time petitioner and his former spouse filed the 1999
return, neither Excel nor Teleglobe had remitted any tax to
the Internal Revenue Service (IRS) on petitioner’s behalf for
1999. Petitioner was uncertain, at that time, whether that
was the case.

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Respondent’s Assessments for 1999
Respondent’s account transcript, Form 4340, Certificate of
Assessments, Payments and Other Specified Matters, for
petitioner’s 1999 taxable year shows petitioner’s $1,600,000
tax payment to have been made, in part, on July 17, 2001
($1,500,000), and in part on October 22, 2001 (the balance of
$100,000, as an application of an overpayment for 2000),
rather than on April 15, 2000, with the request for extension
of the return filing date.
On the basis of information provided in the 1999 return
and the nonpayment of the reported amount due, on
December 18, 2000, respondent assessed the $3,276,333
reported income tax liability and additions to tax of (1)
$101,872 for failure to pay estimated taxes and (2) $147,435
for failure to pay tax timely. On November 21, 2005,
respondent assessed an additional failure-to-pay addition to
tax of $442,648.
Relief From Joint Liability for Petitioner’s Former Spouse
Petitioner and his former spouse were divorced in 2004.
Thereafter, she requested and received relief from joint
liability with respect to the 1999 return. As a result, on
March 10, 2008, respondent reversed the assessed debit bal-
ance of $2,084,961 in petitioner’s and her joint account with
respondent and transferred it to petitioner’s separate account
with respondent.
The Collection Due Process Hearing
On June 26, 2006, respondent sent petitioner a Letter
1058A, Final Notice of Intent To Levy and Notice of Your
Right to a Hearing, with respect to petitioner’s 1999 Federal
income tax, seeking $2,265,589 as the ‘‘Unpaid Amount from
Prior Notices’’ and $924,141 in additional interest, for a total
of $3,189,730. In response, petitioner submitted a Form
12153, Request for a Collection Due Process Hearing,
requesting consideration of collection alternatives, including
an offer-in-compromise and a partial payment installment
agreement.
In March 2007 Appeals Officer Michael Jeka conducted a
face-to-face hearing with petitioner’s counsel, followed by
additional phone conferences and correspondence. Petitioner

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argued at the hearing and in subsequent correspondence
with Mr. Jeka that his 1999 tax liability had been assessed
against and paid by Excel or Teleglobe and that he was enti-
tled to a credit for that third-party payment (or for with-
holding without payment) of his 1999 tax liability. Mr. Jeka
and petitioner’s counsel also discussed (1) the possibility of
respondent’s accepting an offer-in-compromise from peti-
tioner or the execution of an installment agreement to the
extent of petitioner’s tax liability and (2) petitioner’s defense,
based on alcoholism, against the imposition of additions to
tax.
Mr. Jeka was unable to confirm from respondent’s com-
puter records that Excel had withheld taxes from the pay-
ments associated with the 1999 exercise or that either Excel
or Teleglobe had subsequently paid those taxes. Mr. Jeka
declined to consider any collection alternatives (an offer-in-
compromise or an installment agreement) because petitioner
had not submitted either an offer-in-compromise or sup-
porting financial information after obtaining repeated exten-
sions of time to do so, and he rejected petitioner’s alcoholism
defense to the assessed additions to tax on the basis of his
reading of applicable caselaw.
Subsequently, in June 2007 respondent mailed to peti-
tioner the notice sustaining the proposed collection action.
Petitioner’s Alcoholism
Petitioner has had a problem with excessive consumption
of alcohol at times. Petitioner stopped drinking in 1993 but
resumed in 1997.
Petitioner’s drinking gradually increased after he left
Excel’s employment in 1998, and, in particular, from 1999 to
2001 when his investments turned sour. By 2000 he recog-
nized that he had a drinking problem. Nevertheless, his
drinking continued to increase so that by mid-2001 he was
drinking throughout the day, including during breaks at
business meetings and late at night, or throughout the night,
by himself. As a result, he began to have trouble managing
his personal affairs such as timely payment of bills and mort-
gage obligations. Despite those problems he was asked to and
did take over the management of a venture capital firm in
September 2001.

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Subsequently, petitioner tried to stop drinking for a time
with intermittent success. Petitioner checked himself into the
Betty Ford Center (Center) in Rancho Mirage, California, in
the summer of 2002. He was admitted with a diagnosis of
alcohol dependence. Notes from his physical examination
indicate his general appearance as: ‘‘Bright and alert male in
no distress’’. His mental status is noted: ‘‘Affect is normal.
Orientation is normal. Memory is normal.’’ He was dis-
charged in October 2002, and he no longer drinks alcohol.
The Excel Employment Tax Audit and Appeal
Respondent conducted an employment tax audit of Excel
and its subsidiaries (without distinction, Excel or, sometimes,
Excel group) for 1998 and 1999. In relevant part, the exam-
ining agent’s proposed adjustments concerned Excel’s treat-
ment of the option proceeds and the proceeds from NQOs
exercised by two other Excel executives (NQO exercise issue).
The agent took the position that all three individuals should
have been treated as employees receiving wages as a result
of their exercises of their respective NQOs, with the
result that a member of the Excel group was liable for
income, Federal Insurance Contributions Act (FICA), and Fed-
eral Unemployment Tax Act tax withholding payments that
it had not made in connection with the NQO exercises. The
agent’s report for an Excel subsidiary, Excel Management
Service, Inc. (Excel Management Service), for 1999, reflected
a proposed adjustment for additional FICA taxes of $463,193
and additional income tax withholding of $4,211,453. The
basis for those proposed adjustments was the agent’s re-
characterization—from nonemployee compensation to
employee wages—of all of the option proceeds received by the
three executives.
Subsequently, Excel, represented by Ernst & Young L.L.P.,
protested to the IRS Appeals Office the agent’s proposed
adjustments. The Appeals officer stated his findings and rec-
ommendations in his Appeals Transmittal and Case Memo,
plus attachments, dated September 1, 2005. They were to
reduce the agent’s proposed imposition of employment taxes
so as to impose only the Medicare portion of the FICA taxes
on the option proceeds received by the three executives. With

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respect to those proceeds, the Appeals officer stated as fol-
lows:
The payments to the * * * three workers were in the nature of stock
options * * * [The issue] is * * * whether the exercise of nonqualified
stock options caused these executives to have compensation subject to
employment taxes. Each of the workers changed their status into inde-
pendent contractors; the taxpayer claims that at the time the options were
exercised they were not corporate officers but independent contractors.
Robinson and Hamrick filed returns and paid all the related income taxes.
McClaine [sic McLaine] was the Chief Financial Officer and filed for both
years but he has an outstanding balance for 1999.
I propose government concede backup withholding and FICA but leave the
medical [sic] wages [i.e., the proposed adjustment for failure to withhold
and pay Medicare taxes] in-place.

Later in his writeup of the NQO exercise issue, the Appeals
officer made the following additional comments:
Dan Robinson has filed his 1998 and 1999 returns reporting the income
as something other than wages. John McClaine [sic] has filed his 1998 and
1999 returns but has an unpaid balance for 1999. Jerry Hamrick has filed
his 1998 return reporting the income as something other than wages.
All three earned wages in each of the years in excess of the FICA limits
and two paid the income taxes corresponding to the option income. The
taxpayer proposed that the option wages be applied to the Hospital Insur-
ance portion of the employment taxes[.]
The taxes as proposed by Compliance with respect to McClaine [sic] will
be left unchanged.

Previously, on May 12, 2005, the CFO of Excel Management
Service executed, on behalf of that corporation, a Form 2504,
Agreement to Assessment and Collection of Additional Tax
and Acceptance of Overassessment (Excise or Employment
Tax), in which the corporation agreed to the immediate
assessment and collection of only the 1999 Medicare taxes,
totaling $282,024 ($70,506 per quarter), attributable to the
option proceeds received by the three executives.
On September 23, 2005, respondent made four assessments
of $70,506, one for each quarter of calendar year 1999. No
other tax assessments appear on the 1999 employment tax
transcripts (Forms 4340) for Excel Management Service.
Those transcripts also indicate that the four assessments,
plus the assessed interest thereon, remained unpaid as of
May 12, 2009.

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Teleglobe and VarTec Bankruptcies and Arbitration
In April 2002 Teleglobe sold Excel and certain other
subsidiaries to VarTec Telecom, Inc. (VarTec).
In December 2003, VarTec filed claims against Teleglobe
(which had previously filed for bankruptcy) for obligations of
the Excel group (allegedly arising before VarTec’s acquisition
of the Excel group), including a claim for the Excel group’s
potential liability for employment taxes occasioned by the
1999 exercise. At the time of the trial in this case, VarTec’s
legal representatives did not know whether anyone had paid
those taxes to the Commissioner.
In December 2002 VarTec had sued BCE (Teleglobe’s
parent) concerning claims against Teleglobe, which included
VarTec’s potential liability for Excel’s failure to withhold
taxes occasioned by the 1999 exercise. That suit ultimately
resulted in either an arbitration award or a mediation award
to VarTec. The arbitrator rendered his decision in October
2004. Subsequently, the parties settled their dispute
(although the terms of the settlement are not clear from the
record).
In November 2004 VarTec and its subsidiaries, including
the Excel group, filed for bankruptcy protection in the U.S.
Bankruptcy Court for the Northern District of Texas (VarTec
bankruptcy).
The Commissioner’s Proofs of Claim
In the Teleglobe bankruptcy the Commissioner filed a proof
of claim in June 2004 in the amount of $17,374,212 against
one of the Teleglobe entities. The Commissioner’s proof of
claim included two ‘‘WT–FICA’’ claims for 1999 of $1,742,070
and $7,030,569, both listed as ‘‘pending assessment’’.
In the VarTec bankruptcy, the Commissioner also filed
three proofs of claim against Excel Management Service, in
November 2004 and in August and October 2005, respec-
tively. The first, in the amount of $14,187,441, included a
‘‘WT–FICA’’ claim for 1999 of $7,030,569, listed as an
‘‘unassessed liability’’. The second, in the amount of
$622,448, amended the first claim and included ‘‘WT–FICA’’
claims of $70,506 for each quarter of 1999 ($282,024, in total,
for 1999). Those amounts were agreed upon at the conclusion
of Excel’s appeal of its employment tax audit; they were

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assessed on September 23, 2005, but were listed in the
second proof of claim as ‘‘unassessed’’ liabilities. The third
proof of claim, stating a claim of $622,449, included ‘‘WT–
FICA’’ claims of $35,253 for each quarter of 1999, which were
also listed as ‘‘unassessed’’ liabilities.
The $17,374,212 proof of claim filed in the Teleglobe bank-
ruptcy was ‘‘disallowed and expunged’’ by the Delaware
Bankruptcy Court in June 2005.

OPINION

I. The Parties’ Arguments
A. Constructive Withholding
Petitioner contends that VarTec paid the taxes associated
with the 1999 exercise in 2004 or 2005. He offers as proof
that the Commissioner voluntarily reduced his proof of claim
in the VarTec bankruptcy. He points out that, by way of the
August 2005 amended proof of claim against Excel Manage-
ment Service, the Commissioner reduced the claim in his
original November 2004 proof of claim from $14,187,441,
including a ‘‘WT–FICA’’ claim for 1999 of $7,030,569, to a
claim of $622,448, including only $282,024 of ‘‘WT–FICA’’
claims for 1999. Petitioner argues: ‘‘The IRS’ voluntary reduc-
tions in its proofs of claim against Excel is corroborative of
Petitioner’s assertion that his 1999 income tax liability was
ultimately paid, subsequent to the VarTec/Teleglobe arbitra-
tion, but also pursuant to the IRS audit of Excel.’’
Petitioner supports that argument by arguing that the
Appeals officer who handled Excel’s appeal in connection
with the NQO exercise issue sustained the agent’s audit
adjustment with respect to petitioner. He bases that argu-
ment on the Appeals officer’s statement that the agent’s pro-
posed adjustment ‘‘with respect to * * * [petitioner] will be
left unchanged.’’ Presumably, the thrust of that argument is
to demonstrate that respondent never intended to waive his
claim against Excel and its successor corporations for the
taxes associated with the option proceeds.
Necessarily conceding that any payment by VarTec of an
amount that should have been (but admittedly was not) with-
held from the option proceeds could not constitute an actual
withholding from those proceeds, petitioner argues that,

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 (228) McLAINE v. COMMISSIONER 239

nonetheless, he is entitled to a section 31 credit ‘‘for income
tax constructively withheld.’’ He further argues that, as a
result, ‘‘no penalties or additions to tax are applicable to
* * * [him].’’ Petitioner bases his theory of constructive with-
holding on our report in Whalen v. Commissioner, T.C.
Memo. 2009–37.
As to whether VarTec did, in fact, pay the taxes associated
with the 1999 exercise, respondent argues:
Rather than evidencing payment of an employer income tax withholding
liability attributable to petitioner’s stock options exercise, * * * [the
VarTec] proofs of claim and amended proofs of claim corroborate the
Appeals Office settlement of the proposed adjustments to Excel’s 1999-year
employment tax liability, which settlement included a concession of the
income tax withholding liability previously proposed by the Service’s exam-
ination function. The settlement was for an additional employment tax
liability in the amount of $70,506.00 for each calendar quarter of 1999, or
$282,024.00 total, for the year. The executed agreement to assessment of
additional employment tax reflects precisely this, as do the assessments
shown on the Form 941 transcripts for Excel Management.

B. Scope and Standard of Review
The parties dispute the scope and standard of review
applicable in this case. 2 However, we decline to resolve the
scope and standard of review issues they raise because we
find that no payment was made by Excel or a successor cor-
poration, in 2004 or 2005, of the nonwithheld taxes related
to the 1999 exercise. In addition, we find that there is
insufficient evidence to establish that any such payment
occurred, whether or not we apply the de novo standard
adopted by this Court in Robinette v. Commissioner, 123 T.C.
85 (2004), rev’d, 439 F.3d 455 (8th Cir. 2006). Under these
circumstances, we need not resolve the parties’ dispute as to
the scope and standard of review. See Kohn v. Commissioner,
T.C. Memo. 2009–117, aff’d, 377 Fed. Appx. 578 (8th Cir.
2010).

2 The Form 4340 also shows subsequent credits for 1996, 1997, and 2006 overpayments total-

ing $364,761 and a 2006 payment of $123,788. The parties agree that the additions to tax issues
are subject to a de novo scope and standard of review.

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II. Respondent’s Right To Collect Petitioner’s 1999 Unpaid
Tax Liability
A. The Payment Issue
1. Burden of Proof
Even though petitioner has argued for de novo review of
the factual issue of whether a third party, in effect, paid his
underlying 1999 tax liability (payment issue), he has not
invoked section 7491(a) to argue that respondent bears the
burden of proof with respect to that issue. We will assume,
without deciding, that de novo review is proper and base our
resolution of the payment issue upon a preponderance of all
of the evidence in the record. Therefore, assignment of the
burden of proof is unnecessary. See, e.g., Estate of Bongard
v. Commissioner, 124 T.C. 95, 111 (2005).
2. Discussion
As noted supra, petitioner’s argument that VarTec paid the
withholding taxes associated with the 1999 exercise is essen-
tially premised on the fact that the $7,030,569 ‘‘WT–FICA’’
claim for 1999 against Excel Management Service that was
included in the Commissioner’s November 2004 proof of
claim filed in the VarTec bankruptcy was reduced to a
$282,024 claim in his August 2005 amended proof of claim
filed in that bankruptcy. We agree, however, with respondent
that the reduction in the proof of claim amount is more likely
corroborative of a decision by the Commissioner to adopt the
Appeals officer’s settlement of the Excel audit as reflected on
the Form 2504 (wherein the Commissioner sought only the
Medicare taxes associated with all of the 1999 option exer-
cises) than it is of VarTec’s payment of the taxes that Excel
should have withheld from petitioner in connection with the
1999 exercise.
We also dispute petitioner’s characterization of the Appeals
officer’s statement in his recommended settlement of the
Excel audit that the taxes proposed by the agent with respect
to petitioner ‘‘will be left unchanged’’. As noted above, peti-
tioner apparently reads into that statement an intent to con-
tinue to pursue Excel (and its successor corporations) for the
taxes associated with the 1999 exercise. Whatever the
Appeals officer’s intent when he included that statement in

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his recommendations for resolving the NQO exercise issue for
1998 and 1999, the Form 2504 executed by the parties and
later reflected in the actual assessments against the Excel
group reflect the Commissioner’s decision not to pursue
Excel (or any successor corporation) for failure to withhold
income taxes on the 1999 exercise.
We find no merit in (1) petitioner’s reliance on respondent’s
Form 4340 for petitioner and his former wife jointly, which
shows a March 10, 2008, reversal of the existing $2,084,961
debit balance, as proof that ‘‘[p]etitioner has no outstanding
tax liability for * * * 1999’’ and (2) his rejection, as
improper, of respondent’s transfer of that debit balance to
petitioner, individually. As noted supra, respondent made
that reversal and transfer incident to granting petitioner’s
former wife relief from the outstanding 1999 joint tax
liability arising from the 1999 exercise. We agree with
respondent that the reversal and transfer of the outstanding
assessed balance from petitioner and his former wife jointly
to petitioner individually was in accordance with IRS proce-
dures, see Internal Revenue Manual pts. 3.17.243.13.2 (Jan.
1, 2008), 8.20.2.5 (Oct. 16, 2007), and did not indicate that
petitioner has no outstanding liability for 1999.
The Forms 4340 for both petitioner’s and the Excel group’s
1999 taxable year reflect no assessment or payment of with-
holding taxes attributable to petitioner’s income from the
1999 exercise. Petitioner cites a 2007 Treasury Inspector
General for Tax Administration report, which, he states,
‘‘describes the IRS’s difficulty in ‘cross posting’ tax payments
to all affected ‘payee’ accounts’’. Notwithstanding the exist-
ence of that report, it is well established that a Form 4340
or a computer printout of a taxpayer’s transcript of account,
absent a showing of irregularity, provides sufficient
verification of the taxpayer’s outstanding liability to satisfy
the requirements of section 6330(c)(1) (requirement that the
Appeals officer conducting a collection due process (CDP)
hearing obtain verification ‘‘that the requirements of any
applicable law or administrative procedure had been met’’).
See, e.g., Davis v. Commissioner, 115 T.C. 35, 40–41 (2000);
Roberts v. Commissioner, T.C. Memo. 2004–100; Tornichio v.
Commissioner, T.C. Memo. 2002–291. Petitioner has not
demonstrated any irregularity in the preparation of the fore-
going transcripts, and we see no reason to depart from that

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principle in this case. See Davis v. Commissioner, 115 T.C.
at 41; Tornichio v. Commissioner, T.C. Memo. 2002–291.
3. Conclusion
No third-party payment of the nonwithheld taxes was
made related to the 1999 exercise.
B. Section 31 Credit Issue
On the assumption that VarTec paid the nonwithheld
taxes in 2004 or 2005, petitioner contends (and respondent
disagrees) that he is entitled to a credit under section 31 and
section 1.31–1(a), Income Tax Regs. The parties also dispute
the effect of Whalen v. Commissioner, T.C. Memo. 2009–37,
where, in dicta, we suggested that an employer’s actual pay-
ment to the IRS of the tax that the employer should have
withheld ‘‘could plausibly be characterized as withholding tax
under chapter 24 with a corresponding section 31 credit
being allowed to a proper recipient for an appropriate year.’’
(Emphasis added.) Whalen was a deficiency case, not a collec-
tion case. Ms. Whalen contended that she was entitled to a
credit against a deficiency for 2004 of taxes that should have
been withheld in 2001 but were not paid until 2004. She lost
that argument.
Petitioner is not entitled to a credit under section 31
because, as we have found above, no third-party payment
was made. We may one day be presented with a case in
which the IRS proposes to collect a party’s liability that has
been paid by another person. For now, however, the better
course is ‘‘to observe the wise limitations on our function and
to confine ourselves to deciding only what is necessary to the
disposition of the immediate case.’’ Whitehouse v. Ill. Cent.
R.R., 349 U.S. 366, 372–373 (1955); accord Ashwander v.
TVA, 297 U.S. 288, 345–346 (1936) (Brandeis, J., concurring);
Liverpool, N.Y. & Phila. S.S. Co. v. Emigration Comm’rs, 113
U.S. 33, 39 (1885). Our silence on the issue should not be
construed as our agreement with either party’s argument.
C. The Appeals Officer’s Refusal To Consider Collection
Alternatives
In the cover letter to his Form 12153 requesting a CDP
hearing, petitioner asked respondent to consider collection

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 (228) McLAINE v. COMMISSIONER 243

alternatives, including an offer-in-compromise based upon
doubt as to collectibility and an installment agreement.
Moreover, he and Mr. Jeka addressed those matters during
and after the CDP hearing. Petitioner failed, however, to
submit the financial information that Mr. Jeka requested;
nor did he submit an offer-in-compromise before the expira-
tion of repeated deadlines that Mr. Jeka extended to him for
doing both. As a result, petitioner and Mr. Jeka agreed to
neither an offer-in-compromise nor an installment agree-
ment.
In his petition, petitioner claims that Mr. Jeka’s failure to
provide collection alternatives was an abuse of discretion. He
does not, however, raise the issue in his briefs. Therefore, we
consider petitioner to have abandoned that claim. E.g.,
Money v. Commissioner, 89 T.C. 46, 48 (1987); see Rule
151(e)(4) and (5) (requiring that a party’s brief state the
points and arguments on which he relies). Moreover, even if
petitioner had raised the collection alternatives issue in his
briefs, his failure to submit an offer-in-compromise or
requested financial information to Mr. Jeka would cause us
to sustain Mr. Jeka’s determination not to offer collection
alternatives. Under the circumstances, Mr. Jeka’s action did
not represent an abuse of discretion. See Kendricks v.
Commissioner, 124 T.C. 69, 79 (2005); Orum v. Commis-
sioner, 123 T.C. 1, 13 (2004), aff’d, 412 F.3d 819 (7th Cir.
2005).
D. Conclusion
Mr. Jeka properly sustained collection with respect to peti-
tioner’s 1999 unpaid tax liability.
III. Petitioner’s Entitlement to an Abatement of Assessed
Interest
A. Introduction
Petitioner asks for the abatement of interest both on
account of Mr. Jeka’s conduct and because the IRS did not
timely credit his $1,600,000 payment.
B. Application of Section 6404(e)(1)(B)
Petitioner argues for the first time in his opening brief that
assessed interest from June 13, 2007 (the date on which the

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 244 138 UNITED STATES TAX COURT REPORTS (228)

Appeals Office issued the notice of determination), 3 must be
abated pursuant to section 6404(e)(1)(B) (abatement of
interest attributable to an ‘‘erroneous or dilatory’’ perform-
ance of ‘‘a ministerial or managerial act’’ by an IRS officer or
employee).
We conclude that petitioner is precluded from raising an
issue under section 6404(e)(1)(B) because he did not raise it
in his petition, at his hearing before Mr. Jeka, in his pretrial
memorandum, or at trial. See Rule 331(b)(4); Behling v.
Commissioner, 118 T.C. 572, 579 (2002); Brecht v. Commis-
sioner, T.C. Memo. 2008–213. Further, the evidence does not
support petitioner’s allegations that Mr. Jeka was erroneous
or dilatory in his actions or that Mr. Jeka ‘‘showed institu-
tional bias at every turn’’. Therefore, petitioner is not enti-
tled to an abatement of interest pursuant to section
6404(e)(1)(B).
C. Whether Respondent Timely Credited Petitioner’s Tax
Payments for 1999
1. Discussion
Petitioner argues that he paid $1,600,000 in discharge of
his 1999 income tax liability on April 15, 2000, with the
filing of his request for an extension of time to file the 1999
return. Respondent’s Form 4340 for petitioner for
1999 reflects a $1,500,000 payment on July 17, 2001, and a
$100,000 payment on October 22, 2001. Petitioner seeks an
abatement of the interest on (1) $1,500,000, attributable to
the period from April 15, 2000, to July 17, 2001, and (2)
$100,000, attributable to the period from April 15, 2000, to
October 22, 2001.
It is a longstanding position of this Court that a Form
4340 or a computer printout of a taxpayer’s transcript of
account, absent a showing of irregularity, provides sufficient
verification of the taxpayer’s outstanding liability to satisfy
the requirement of section 6330(c)(1) that the Appeals officer
conducting a CDP hearing obtain verification ‘‘that the
requirements of any applicable law or administrative proce-
dure had been met.’’ See, e.g., Davis v. Commissioner, 115
T.C. at 35–36; Roberts v. Commissioner, T.C. Memo. 2004–
3 It is not clear why petitioner selected that date as the date from which no additional interest

should run.

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 (228) McLAINE v. COMMISSIONER 245

100; Tornichio v. Commissioner, T.C. Memo. 2002–291. In
the light of petitioner’s failure to demonstrate any irregu-
larity in the preparation of the foregoing transcripts, we see
no reason to depart from that principle in this case. See
Davis v. Commissioner, 115 T.C. at 41; Tornichio v. Commis-
sioner, T.C. Memo. 2002–291. Petitioner offers only the 1999
return as evidence of his April 15, 2000, payment of
$1,600,000. That is insufficient to overcome the contrary evi-
dence provided by the Form 4340 for 1999. A tax return
signed under penalty of perjury does not establish the truth
of the facts stated therein. E.g., Wilkinson v. Commissioner,
71 T.C. 633, 639 (1979).
2. Conclusion
Petitioner is not entitled to any interest abatement based
upon payment of $1,600,000 of his 1999 tax liability on April
15, 2000.
D. Conclusion
Petitioner is not entitled to any interest abatement for
1999.
IV. The Additions to Tax
A. Section 6651(a)(2) Addition to Tax for Failure To Make
Timely Payment of Tax Due
1. Introduction
Respondent assessed $147,435 and $442,648, on December
18, 2000, and November 21, 2005, respectively, as additions
to tax under section 6651(a)(2) for petitioner’s failure to
timely pay his 1999 income tax liability. Respondent bears
the burden of production with respect to those additions. See
sec. 7491(c). In order to carry that burden, respondent must
produce sufficient evidence to establish that it is appropriate
to impose the additions. See Higbee v. Commissioner, 116
T.C. 438, 446–447 (2001). Once respondent has done so, the
burden of proof is on petitioner to show that the additions
are improper. See id. at 447. As discussed supra in section
III.C.1. of this report, the Form 4340 for petitioner’s 1999
taxable year supports a finding that petitioner made no pay-
ments of income tax owed for 1999 until July 17 and October

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 246 138 UNITED STATES TAX COURT REPORTS (228)

22, 2001, and that those payments, totaling $1,600,000, were
his only payments in discharge of his total, reported, 1999
income tax liability of $3,276,333. Therefore, respondent has
satisfied his burden of production under section 7491(c).
Section 6651(a)(2) imposes an addition to tax of up to 25%
of the tax shown on a return for failure to make timely pay-
ment thereof, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. Petitioner
argues that there was reasonable cause for his failure to
timely pay his 1999 tax liability: (1) undue financial hard-
ship, (2) his alcoholism, and (3) retroactive application of sec-
tion 31(a) credits. We have already decided that petitioner is
not entitled to any section 31(a) credits as an offset to his
income tax underpayment for 1999. Therefore, we will con-
sider only the first two grounds for petitioner’s claim of
reasonable cause.
2. Undue Hardship
Petitioner alleges undue hardship on the ground that he
(1) ‘‘lacked the ability to ascertain the amount, or existence
of his outstanding 1999 income tax liability, despite his good
faith attempts to do so’’, and (2) ‘‘paid as much of the 1999
income tax liability as he could, attempting to satisfy his
obligations, despite the fact that this payment placed him in
a very difficult financial situation.’’ Neither of those alleged
circumstances supports petitioner’s claim of reasonable cause
for the late payment, in part, and nonpayment, in part, of his
1999 income tax liability.
Before the April 15, 2000, due date of his return, petitioner
knew that he had received the option proceeds unreduced by
any tax payments, either withheld by Excel or remitted by
him. The plan required Excel to notify the optionee of the
‘‘amount due’’ on exercise, including ‘‘amounts necessary to
satisfy applicable * * * tax withholding requirements.’’
Excel’s alleged failure to fulfill that requirement does not
excuse petitioner’s failure to pay all of the income tax that
he knew was due with respect to his 1999 taxable income,
which included the spread amount that petitioner reported
as short-term capital gain. See McWhorter v. Commissioner,
T.C. Memo. 2008–263 (employer’s failure to withhold taxes
that should have been withheld does not excuse an

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 (228) McLAINE v. COMMISSIONER 247

employee’s failure to file a return or pay taxes nor relieve
him of the additions to tax under section 6651(a)). Nor does
petitioner’s ‘‘very difficult financial situation’’ constitute
reasonable cause for his failure to timely pay his 1999
income tax liability. Petitioner argues that he feared the
necessity of twice paying that liability, once to respondent
and once, as reimbursement, to Excel. But, as discussed
supra, by obtaining proof of payment from petitioner, Excel,
pursuant to section 3402(d), either could have avoided
liability for the same tax or, if it had in fact paid it, obtained
a refund thereof. Moreover, petitioner’s illiquidity as of April
15, 2000, was a problem of his own making. After his exer-
cise of the 1999 NQOs, petitioner had the funds necessary to
pay the taxes associated with his income from the 1999 exer-
cise. The fact that he lost most of those funds by investing
them in high technology stocks and ventures that ultimately
failed (and did not retain sufficient funds to pay his 1999
tax) does not provide a basis for his claim of reasonable cause
for his nonpayment or late payment of tax. See section
301.6651–1(c)(1), Proced. & Admin. Regs., which, in relevant
part, provides as follows:
A failure to pay will be considered to be due to reasonable cause to the
extent that the taxpayer has made a satisfactory showing that he 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 * * * if he paid on the due date. * * * [A] taxpayer
who invests funds in speculative or illiquid assets has not exercised ordi-
nary business care and prudence in providing for the payment of his tax
liability unless, at the time of the investment, the remainder of the tax-
payer’s assets and estimated income will be sufficient to pay his tax or it
can be reasonably foreseen that the speculative or illiquid investment
* * * can be utilized (by sale or as security for a loan) to realize sufficient
funds to satisfy the tax liability. * * *

3. Petitioner’s Alcoholism
In defense of his position that his alcoholism constituted
reasonable cause for his failure to timely pay his 1999 tax
liability, petitioner argues that he was essentially incapaci-
tated by his drinking problem on the April 15, 2000, due date
of the 1999 return. That argument is seriously undercut,
however, by his argument of undue financial hardship. In
connection with the latter argument, petitioner testified that,
between the April 15, 2000, due date and the October 20,

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2000, filing date of the 1999 joint return, he was well aware
of his outstanding tax liability for 1999 and that he took a
number of steps (attempting to borrow against and, then, to
sell his two homes) to raise the funds necessary to discharge
that liability. Those actions are hardly the actions of a man
incapacitated by alcoholism.
Moreover, although petitioner testified that in 2000 he rec-
ognized that his drinking was ‘‘getting problematic’’, it was
not until 2001 that he began drinking throughout the day
and, sometimes, night. Even during the 2001–02 period, how-
ever, he was able to continue his consulting business, and
upon his admittance to the Center on September 5, 2002,
Center personnel noted that he was a ‘‘bright and alert male
in no distress’’ and that his ‘‘affect’’, ‘‘orientation’’, and
‘‘memory’’ were all normal. 4
Because petitioner was not incapacitated by alcoholism on
the due date of the 1999 joint return or thereafter, that
condition does not constitute reasonable cause for his failure
to timely pay the income taxes shown on that return. See,
e.g., Hazel v. Commissioner, T.C. Memo. 2008–134; Jones v.
Commissioner, T.C. Memo. 2006–176; Harbour v. Commis-
sioner, T.C. Memo. 1991–532; Gardner v. Commissioner, T.C.
Memo. 1982–542.
4. Conclusion
Petitioner has not shown that his failure to timely pay the
tax liability shown on the 1999 return was due to reasonable
cause and not due to willful neglect. Therefore, Mr. Jeka
properly sustained collection with respect to the additions to
tax under section 6651(a)(2). 5

4 Petitioner has neither alleged nor shown a causal relationship between his having operated

in a highly stressful and volatile business environment throughout his employment by Excel and
his failure to timely pay his 1999 tax liability.
5 Because we have sustained, supra, respondent’s crediting of petitioner’s $1,500,000 payment

in partial discharge of his 1999 income tax liability as of July 17, 2001, rather than as of April
15, 2000, as alleged by petitioner, we also reject petitioner’s additional argument that his sec.
6651(a)(2) addition must be reduced to reflect the earlier payment.

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 (228) McLAINE v. COMMISSIONER 249

B. The Section 6654 Addition to Tax for Failure To Make
Timely Estimated Tax Payments
1. Discussion
Respondent assessed an addition to tax of $101,872 under
section 6654 for petitioner’s failure to timely pay estimated
tax. Petitioner argues that imposition of the section 6654(a)
addition to tax for underpayment (or, in this case, non-
payment) of estimated tax for 1999 ‘‘would be against equity
and good conscience’’ within the meaning of section
6654(e)(3)(A). 6
Because (1) respondent’s Form 4340 for petitioner for 1999
shows no payments of tax for 1999 until July 17 and October
22, 2001, and (2) petitioner showed a substantial tax liability
on his prior year (1998) return (facts establishing that peti-
tioner had a ‘‘required annual payment’’ for 1999 within the
meaning of section 6654(d)(1)(B)), we find that respondent
has satisfied his burden of production under section 7491(c).
The burden of proof is on petitioner to show that he is cov-
ered by one of the relief provisions of section 6654, which, in
this case, means section 6654(e)(3)(A) (section 6654 contains
no provision relating to reasonable cause and lack of willful
neglect).
Petitioner makes the same arguments (undue hardship,
alcoholism) that he made in alleging reasonable cause under
section 6651(a)(2). For the reasons given for rejecting those
arguments as they related to respondent’s additions to tax
under that provision, we reject them as justification for
reversing respondent’s imposition of the addition to tax
under section 6654(a). The evidence of undue hardship and
alcoholism does not support a finding that imposition of the
section 6654(a) addition to tax herein ‘‘would be against
equity and good conscience’’ within the meaning of section
6654(e)(3)(A).

6 Here, again, we reject petitioner’s additional argument that respondent failed to take into

account petitioner’s alleged payment of $1,500,000 on April 15, 2000, the return due date. We
reject that argument, not only for the reasons stated supra note 5 with respect to respondent’s
imposition of the addition to tax under sec. 6651(a)(2), but also because April 15, 2000, was not
within any period during which an estimated tax payment for 1999 was due. Rather, it con-
stituted the termination date for the running of interest from each of the four estimated pay-
ment dates for 1999. See sec. 6654(b)(2).

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2. Conclusion
Mr. Jeka properly sustained collection with respect to the
addition to tax under section 6654(a).
Decision will be entered for respondent.
Reviewed by the Court.
COHEN, FOLEY, VASQUEZ, GALE, THORNTON, MARVEL,
GOEKE, WHERRY, KROUPA, GUSTAFSON, PARIS, and MORRI-
SON, JJ., agree with this opinion of the Court.

HALPERN, J., concurring: I concur with the results reached
by the majority with respect to all of the issues. I write sepa-
rately, however, to express my disagreement with the major-
ity’s failure to hold, in deciding the section 31 credit issue,
that, even if VarTec, in a later year, paid the nonwithheld
taxes associated with the 1999 exercise, petitioner, as a
matter of law, would not be entitled to a section 31(a) credit
for that payment.
I. Introduction
Petitioner’s sole argument is that he is entitled to a section
31(a) credit against his 1999 tax liability for VarTec’s 2004
or 2005 payment of nonwithheld taxes associated with the
1999 exercise. Respondent argues that (1) VarTec did not
make the alleged payment, and (2) as a matter of law, any
such payment would not entitle petitioner to a section 31(a)
credit. The majority holds that petitioner’s argument fails
because a preponderance of the evidence does not support the
existence of such a payment. I would also hold that peti-
tioner’s argument fails because, as respondent argues, any
such payment would not, as a matter of law, entitle him to
a section 31(a) credit. Moreover, I would make the latter
holding the principal holding in the case. The majority would
postpone addressing the legal issue until we are ‘‘presented
with a case in which the IRS proposes to collect a party’s
liability that has been paid by another person.’’ 1 See op. Ct.
1 The above-quoted language implies that an employer’s payment of nonwithheld taxes attrib-

utable to a prior year may constitute a payment of the employee’s tax liability. As discussed
infra, such a payment discharges the employer’s, not the employee’s, tax obligation. See infra
sec. II.B. and C.

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p. 242. It further cautions: ‘‘Our silence on the [legal] issue
should not be construed as our agreement with either party’s
argument.’’ See id. p. 242. The majority leaves open the
possibility that, on the basis of our decision in Whalen v.
Commissioner, T.C. Memo. 2009–37, employees will be
encouraged to argue (as did petitioner) that an employee
whose employer failed to withhold taxes during a particular
taxable year is entitled to a section 31(a) credit for the
employer’s payment in a subsequent taxable year of the non-
withheld taxes. 2
The majority notes that ‘‘Whalen was a deficiency case, not
a collection case’’, thus implying that the case is somehow
distinguishable and, therefore, that the majority’s postpone-
ment in deciding the legal issue would not encourage
employees to advance an argument similar to that advanced
by petitioner. I would submit that an employer’s payment of
a prior year’s nonwithheld taxes either is or is not creditable
by the employee under section 31(a), regardless of the con-
text in which that issue arises.
For the reasons set forth below, I believe the law is clear
that an employer’s (or former employer’s) payment to the
Internal Revenue Service (IRS) of taxes that should have
been, but were not, withheld in a prior year does not entitle
the employee to a section 31(a) credit for that payment.
Under those circumstances we have a duty not to mislead
taxpayers by perpetuating a case, Whalen, that may very
well encourage needless litigation. Therefore, we should hold,
in the alternative, that, as a matter of law, the VarTec pay-
2 The majority seems to not share this concern, describing as obiter dictum our suggestion in

Whalen v. Commissioner, T.C. Memo. 2009–37, that an employer’s subsequent-year payment to
the Internal Revenue Service (IRS) of taxes that should have been withheld in a prior year
‘‘could plausibly be characterized as withholding’’ eligible for the sec. 31(a) credit. See op. Ct.
p. 242. In Whalen, we went on to state, however, that the employer’s delinquent payment in
2004 of the amount it failed to withhold in 2001 could not properly be credited to the taxpayer
employee for 2004 because ‘‘the tax is considered withheld [by the employer] for * * * [the tax-
payer’s] 2001 income tax.’’ ‘‘Therefore,’’ we added, ‘‘[the taxpayer] is properly denied the use of
the section 31 credit to determine an overpayment for 2004.’’ In other words, in addition to the
earlier statement that it was ‘‘plausible’’ to characterize the employer’s 2004 payment as with-
holding for 2001, we denied the taxpayer a 2004 sec. 31 credit because we considered the pay-
ment as withheld for 2001. We went beyond (1) granting that one could plausibly argue for con-
structive withholding to (2) adopting constructive withholding for 2001 as the reason we denied
the taxpayer a withholding credit for 2004. It is difficult to dismiss our reasoned analysis of
why the taxpayer lost as merely ‘‘something said in passing’’; i.e., ‘‘obiter dictum’’. Black’s Law
Dictionary 1177 (9th ed. 1999) (‘‘Latin ‘something said in passing’ * * * ‘Often shortened to dic-
tum’ ’’). Petitioner did not unreasonably attach more weight to it than that.

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 252 138 UNITED STATES TAX COURT REPORTS (228)

ment alleged by petitioner, even if proven, would not entitle
him to a section 31(a) credit therefor. 3
II. Section 31 Credit Issue
A. Background
Section 3402(a) requires the withholding of income tax on
wages. Section 3401(a) defines ‘‘wages’’ generally as ‘‘remu-
neration * * * for services performed by an employee for his
employer’’. The medium in which the remuneration is paid is
immaterial and may include stock. Sec. 31.3401(a)–1(a)(4),
Employment Tax Regs. Moreover, remuneration for services
constitutes wages even though paid after the recipient’s
employment relationship with the employer has ended. Otte
v. United States, 419 U.S. 43, 49–50 (1974) (‘‘a continuing
employment relationship is not a prerequisite for a pay-
ment’s qualification as ‘wages.’ ’’); sec. 31.3401(a)–1(a)(5),
Employment Tax Regs. (to the same effect as Otte and relied
on by the U.S. Supreme Court therein). The option proceeds
constituted wages subject to withholding of income tax, even
though petitioner received them after having left Excel’s
employ. Petitioner concedes that ‘‘neither Excel or Paine
Webber withheld taxes on his behalf in 1999.’’ Nevertheless,
he argues that VarTec’s alleged 2004 or 2005 payment of
those nonwithheld taxes entitles him to a corresponding
credit for 1999 under section 31(a) and section 1.31–1(a),
Income Tax Regs. Petitioner is mistaken.

3 The fact that this case can be disposed of on the basis of our finding no payment would not

make a holding with respect to sec. 31(a) creditability dictum. The U.S. Supreme Court an-
nounced the pertinent principle over 100 years ago in Union Pac. R.R. v. Mason City & Fort
Dodge R.R., 199 U.S. 160, 166 (1905):
Whenever a question fairly arises in the course of a trial, and there is a distinct decision of
that question, the ruling of the court in respect thereto can, in no just sense, be called mere
dictum. Railroad Companies v. Schutte, 103 U.S. 118, in which this court said (p. 143):
‘‘It cannot be said that a case is not authority on one point because, although that point was
properly presented and decided in the regular course of the consideration of the cause, some-
thing else was found in the end which disposed of the whole matter. Here the precise question
was properly presented, fully argued, and elaborately considered in the opinion. The decision
on this question was as much a part of the judgment of the court as was that on any other
of the several matters on which the case as a whole depended.’’

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 (228) McLAINE v. COMMISSIONER 253

B. Section 3403 Imposes an Independent Liability Upon
Employers for Failure To Withhold Taxes.
In its entirety, section 3403 provides: ‘‘The employer shall
be liable for the payment of the tax required to be deducted
and withheld under this chapter [chapter 24, sections 3401–
3406], and shall not be liable to any person for the amount
of any such payment.’’
Section 31.3403–1, Employment Tax Regs., which imple-
ments section 3403, emphasizes that employers ‘‘required to
deduct and withhold * * * tax under section 3402’’ are liable,
under section 3403, ‘‘for the payment of such tax whether or
not it is collected from the employee by the employer.’’ Thus,
the employer’s tax liability under section 3403 is independent
of the employee’s liability under sections 1 and 61(a)(1) to
pay tax on the same wages. See Whalen v. Commissioner,
T.C. Memo. 2009–37. The employer’s section 3403 liability for
nonwithheld taxes can be abated, however, if the employer
shows that the employee paid the taxes in question. Sec.
3402(d). 4
There is no equivalent general abatement or credit provi-
sion applicable to employees. 5 Thus, an employee’s liability
for income taxes is not subject to abatement or credit under
section 31(a) merely because the employee proves that the
employer paid the tax he had previously failed to withhold.
See sec. 3403. 6 There is an exception, however, in the limited
circumstances wherein the employer pays the employee’s
4 In pertinent part, sec. 3402(d) provides:
If the employer, in violation of the provisions of this chapter, fails to deduct and withhold the
tax under this chapter, and thereafter the tax against which such tax may be credited is paid,
the tax so required to be deducted and withheld shall not be collected from the employer * * *.
Sec. 3402(d) would appear to represent congressional anticipation of our concern in Whalen
v. Commissioner, T.C. Memo. 2009–37, wherein we observed: ‘‘To conclude that withholding tax
is a separate tax invites the possibility of an employee’s income being taxed twice.’’ There is,
of course, only one tax, but there are two separate and independent collection mechanisms: from
the employer pursuant to sec. 3402 or sec. 3403 and from the employee on the basis of, gen-
erally, secs. 1, 61(a)(1), 6151(a), and 6155.
5 A limited exception to that observation, inapplicable herein, is provided by sec. 4999(c) with

respect to an employer’s excess golden parachute payments to an employee. The effect of that
provision is to require the employer to treat its payment of the 20% excise tax applicable to
such payments as additional income tax withholding. That treatment assures the employee of
a sec. 31(a) credit for the employer’s payment and, in effect, prohibits the Commissioner from
looking to him for payment of that tax with respect to the same excess parachute payment.
6 As a practical matter, sec. 3402(d) may discourage the Commissioner from pursuing the em-

ployee for taxes previously collected from the employer because that provision would permit the
employer to recoup its payment to the extent it can show that the same tax amount was col-
lected from the employee.

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 254 138 UNITED STATES TAX COURT REPORTS (228)

taxes that the employer did not timely withhold and the
employee reimburses him under the correction and settle-
ment procedures adopted by the regulations under section
6205 (discussed infra section II.C. of this concurring opinion).
Absent satisfaction of that exception, employer payments of
nonwithheld taxes under section 3403 do not constitute pay-
ments of taxes that have ‘‘actually been withheld at the
source’’ as required by section 1.31–1(a), Income Tax Regs.
Therefore, such payments are not creditable by the employee
under section 31(a) (discussed infra section II.D. of this
concurring opinion).
C. Section 6205(a)(1) and the Regulations Governing
Corrections of Prior Underwithholdings
In relevant part, section 6205(a)(1) provides:
If less than the correct amount of tax imposed by section * * * 3402 is
paid with respect to any payment of wages or compensation, proper adjust-
ments, with respect to both the tax and the amount to be deducted, shall
be made, without interest, in such manner and at such times as the Sec-
retary may by regulations prescribe.

The fact that an employer may make ‘‘proper adjustments,
with respect to both the tax and the amount to be deducted
[from employee wages]’’ on an interest-free basis incentivizes
employers to make voluntary corrections of employment tax
returns reflecting underwithholdings.
The regulations under section 6205(a)(1) permit an
employer to correct an underwithholding of income tax (on
an interest-free basis) on a supplemental return filed as late
as ‘‘the last day on which the return is required to be filed
for the return period in which the error was acertained.’’ Sec.
31.6205–1(c)(2)(i), Employment Tax Regs. 7 Moreover, audit
adjustments resulting from employment tax audits alleging
income tax underwithholding may be paid, interest free, by
the employer after the conclusion of the audit and appeals
process, provided the payment is accompanied by a signed
Form 2504, Agreement to Assessment and Collection of Addi-
7 Except as otherwise noted, the sec. 6205 regulations cited throughout this concurring opinion

were in effect in 1999 and during the period of the Excel audit and appeal and the Teleglobe
and VarTec bankruptcies. The regulations are superseded by regulations finalized on July 1,
2008, T.D. 9405, 2008–32 I.R.B. 293, which apply to ‘‘any error acertained on or after January
1, 2009’’, id. The 2008 regulations do not change, in any material respect, the prior regulations
cited herein.

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 (228) McLAINE v. COMMISSIONER 255

tional Tax and Acceptance of Overassessment, and is made
before the employer receives a notice and demand for pay-
ment. Sec. 31.6205–1(a)(6)(i), Employment Tax Regs. (as
amended in 2001); Rev. Rul. 2009–39, Situation 9, 2009–52
I.R.B. 951, 956 (obsoleting Rev. Rul. 75–464, Situation 2,
1975–2 C.B. 474, 475, to the same effect).
When the employer corrects an underwithholding of
income tax and pays amounts pursuant to section 3403, the
section 6205 regulations restrict the situations in which the
employer is entitled to employee reimbursements. In general,
an employer is permitted to collect income tax withholding
shortfalls from its employees if it collects the underwithheld
amount within the same calendar year as the underwith-
holding ‘‘by deducting such amount from remuneration of the
employee, if any, under * * * [the employer’s] control
[whether or not the remuneration constitutes wages].’’ Sec.
31.6205–1(c)(4), Employment Tax Regs. Undercollections in a
calendar year not so corrected are ‘‘a matter for settlement
between the employee and the employer within such cal-
endar year.’’ Id. I interpret that last provision to cover situa-
tions in which the employer is unable to deduct the requisite
amount from employee remuneration before yearend; e.g.,
because the employee is entitled to too little or to no addi-
tional remuneration from the employer before then. It is not
clear whether ‘‘settlement’’ before yearend means actual pay-
ment before yearend by the employee or execution before
yearend of a binding obligation to pay after yearend; e.g.,
where the employee has insufficient funds to pay by yearend.
Moreover, it is not clear whether such a binding obligation
must be in the form of a debt instrument either bearing
arm’s-length interest, or, if no (or too little) interest is pro-
vided for, governed by the interest imputation rules of sec-
tion 7872. There is no need to opine on those issues because
none of the circumstances described in section 31.6205–
1(c)(4), Employment Tax Regs., is present in this case. 8
8 It is only during the limited period in which an employer may seek reimbursement from an

employee for the amount of the former’s underwithholding corrections that a failure to do so
will result in debt forgiveness income to the employee under sec. 61(a)(12). Employer underwith-
holding corrections after the expiration of that period, because they do not give rise to a right
of reimbursement from the employee, do not discharge any debt that could result in debt forgive-
ness income to the employee. Moreover, because all underwithholding corrections by an em-
ployer pursuant to sec. 3403 discharge the employer’s, rather than the employee’s, tax obliga-
tion, Old Colony Trust v. Commissioner, 279 U.S. 716 (1929) (payment by an employer of an
Continued

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 256 138 UNITED STATES TAX COURT REPORTS (228)

D. Application of the Section 31(a) Credit
Section 31(a)(1) provides to every employee a credit against
the employee’s income tax obligation with respect to his or
her wages for ‘‘[t]he amount withheld as tax under chapter
24 [sections 3401–3406]’’. Section 1.31–1(a), Income Tax
Regs., limits the credit to ‘‘[t]he tax deducted and withheld
at the source upon wages under chapter 24 of the Internal
Revenue Code’’. That regulation further provides: ‘‘If the tax
has actually been withheld at the source, credit or refund
shall be made to the recipient of the income even though
such tax has not been paid over to the Government by the
employer.’’
It is clear from that language that an employee’s right to
a section 31(a) credit for employer income tax withholding is
dependent on a finding that the tax has ‘‘actually been with-
held’’ by the employer. The requisite actual withholding
would occur only if the employer (1) withholds the required
amounts from its wage payments to the employee pursuant
to section 3402 or (2) corrects its failure to withhold the
required amount, pursuant to section 6205 and the regula-
tions thereunder, and recoups (or ‘‘settles’’) from the
employee its payment of the underwithholding during the
calendar year in which the underwithholding occurred as
permitted by section 31.6205–1(c)(4), Employment Tax Regs.
Only under those circumstances, not present herein, is it
reasonable to conclude that there has been actual with-
holding by the employer (i.e., ‘‘at the source’’). Therefore, any
assumed 2004 or 2005 payment of taxes that should have
been withheld from the proceeds of petitioner’s 1999 option
exercises does not constitute an ‘‘amount withheld as tax
under chapter 24’’ under section 31(a); likewise, it does not
constitute ‘‘tax deducted and withheld at the source’’ as
required by section 1.31–1(a), Income Tax Regs. 9
Permitting an employee to automatically claim a section
31(a) credit for any employer payment of tax pursuant to sec-
employee’s income tax obligation in consideration of the employee’s services performed on behalf
of the employer constitutes income to the employee), is inapplicable thereto.
9 I recognize that conclusion is inconsistent with our observation in Whalen v. Commissioner,

T.C. Memo. 2009–37, that such a payment ‘‘could plausibly be characterized as withholding tax
under chapter 24 with a corresponding section 31 credit being allowed to a proper recipient for
an appropriate year.’’ But it is the argument of this section II.D. that the payment in Whalen
could not have been creditable under sec. 31(a) for any year.

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 (228) McLAINE v. COMMISSIONER 257

tion 3403 would benefit equally employees who paid taxes on
their wage income (whether or not withheld and reported on
a Form W–2, Wage and Tax Statement) and employees, such
as petitioner, who never paid taxes on that income, thereby
unjustly enriching the latter. Moreover, such a result would
open the door to unwarranted tax planning arrangements
designed to frustrate the Commissioner’s right to collect
interest and additions to tax or penalties on late payments
or underpayments of tax pursuant to sections 6601,
6651(a)(2), and 6654. For example, employees who have pur-
posely underpaid their taxes on wage income and had their
returns audited and been assessed significant deficiencies
and interest (not unlike petitioner) would have the proce-
dural ability to persuade their employers (or former
employers) to voluntarily and retroactively pay those payroll
taxes under the interest-free adjustment procedures of sec-
tion 31.6205–1(c), Employment Tax Regs., by agreeing to
reimburse the employer (or former employer) in full, thus
enabling the employees to use the section 31(a) credit to
effectively erase their liability for interest and, perhaps,
additions to tax and penalties with respect to the defi-
ciencies. 10 Where the employer has made a payment under
section 3403 in a year after the year of underwithholding,
the Commissioner should be permitted to collect the appro-
priate interest and additions to tax from the employee even
though the Commissioner may be required to refund the tax
amount to the employer pursuant to section 3402(d).
Petitioner’s arguments to the contrary are not persuasive.
His basic argument, that so-called constructive withholding
satisfies the requirements of section 31(a) and that, under
Whalen v. Commissioner, T.C. Memo. 2009–37, VarTec’s 2004
or 2005 payment of nonwithheld taxes in bankruptcy con-
stituted a constructive withholding of those taxes flies in the
face of the specific requirement in section 1.31–1(a), Income
Tax Regs., that availability of the credit be limited to tax
that ‘‘has actually been withheld at the source’’. It is also
inconsistent with the U.S. Supreme Court’s description of
10 By treating VarTec’s assumed 2004 or 2005 payment in partial discharge of the Commis-

sioner’s proof of claim in the VarTec bankruptcy as withholding tax associated with petitioner’s
1999 exercise (i.e., as ‘‘tax actually * * * withheld at the source’’), that payment would nec-
essarily be deemed to have been made on the original due date of the 1999 return, April 15,
2000. See sec. 6513(b)(1); Baral v. United States, 528 U.S. 431, 435–437 (2000).

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 258 138 UNITED STATES TAX COURT REPORTS (228)

withholding in Begier v. IRS, 496 U.S. 53 (1990), which peti-
tioner cites as supportive of his position. In Begier, a case in
which a trustee in bankruptcy unsuccessfully disputed the
defendant’s right to retain the debtor’s prepetition payments
to it of withheld taxes, the Court stated, in pertinent part:
Section 3402(a)(1) requires that ‘‘every employer making payment of wages
shall deduct and withhold upon such wages [the employee’s federal income
tax].’’ (Emphasis added.) Withholding thus occurs at the time of payment
to the employee of his net wages. * * * The common meaning of ‘‘with-
holding’’ supports our interpretation. See Webster’s Third New Inter-
national Dictionary 2627 (1981) (defining ‘‘withholding’’ to mean ‘‘the act
or procedure of deducting a tax payment from income at the source’’)
(emphasis added). [Id. at 60–61.]

III. Conclusion
Assuming that Excel or VarTec paid all or a portion of
petitioner’s outstanding, self-assessed liability with respect to
his income from the 1999 exercise, he would not be entitled
to a credit under section 31(a)(1) for that payment, and we
should say so. 11
HOLMES, J., agrees with this concurring opinion.

f

11 And finally, borrowing from Judge Holmes’ baseball analogy in Stromme v. Commissioner,

138 T.C. 213, 227 (2012) (Holmes, J., concurring), if an umpire calls a pitch a ball, and if the
catcher complains that the pitch was in fact over the plate, it would not be improper for the
umpire to point out to the catcher that, even if the pitch crossed the corner of the plate, it was
below the batter’s knees and, still, a ball.

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