T.C. Memo. 2015-108
UNITED STATES TAX COURT
EPITOME SYSTEMS, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4177-13L, 24939-13. Filed June 11, 2015.
Donald E. Baldauf (an officer), for petitioner.
Laura A. Price and Lauren B. Epstein, for respondent.
MEMORANDUM OPINION
NEGA, Judge: These cases were consolidated for purposes of trial,
briefing, and opinion. Petitioner commenced the case at docket No. 4177-13L in
response to a Notice of Determination Concerning Collection Action(s) under
Section 6320 and/or 6330 (notice of determination) upholding collection actions
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[*2] regarding an employment tax deficiency of $1,073 for tax year 2006.1
Petitioner commenced the case at docket No. 24939-13 in response to a notice of
deficiency respondent sent to petitioner on September 10, 2013, in which
respondent determined deficiencies in and additions to tax on petitioner’s Federal
income tax in the following amounts:
Additions to tax1
TYE June 30 Deficiency Sec. 6651(a)(1) Sec. 6655(a)
2009 $7,978 $1,795 $214
2010 36,144 8,132 227
2011 58,214 13,098 828
2012 31,079 6,993 565
1
Respondent also determined an addition to tax under sec. 6651(a)(2) for
each year at issue in an amount to be computed at a later date.
The issues for consideration in the case at docket No. 4177-13L are (1)
whether petitioner underreported wages paid to its only employee, Donald
Baldauf, and (2) whether the settlement officer abused her discretion in upholding
the collection action for petitioner’s employment tax liability for tax year 2006.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are rounded to
the nearest dollar.
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[*3] The issues for consideration in the case at docket No. 24939-13 are whether
petitioner (1) failed to report net taxable income of $51,910 and $135,626 for tax
years ending (TYE) June 30, 2009 and 2010, respectively, (2) failed to report
gross receipts of $192,215 and $122,637 for TYE June 30, 2011 and 2012,
respectively, and (3) is liable for the additions to tax pursuant to sections
6651(a)(1) and (2) and 6655(a) for TYE June 30, 2009 through 2012.
Background
The facts have been deemed established for purposes of these cases under
Rule 91(f). At the time the petitions were filed, petitioner was a C corporation2
with its principal place of business in Bradenton, Florida.
I. Docket No. 4177-13L
The notice of determination underlying petitioner’s case at docket No.
4177-13L was mailed on January 25, 2013. Mr. Baldauf was petitioner’s only
employee during tax year 2006. Petitioner filed Forms 941, Employer’s Quarterly
2
Petitioner in its petition at docket No. 24939-13 contends that it is an S
corporation. An eligible small business corporation may elect to be treated as an S
corporation under sec. 1362(a) by, inter alia, filing a completed Form 2553,
Election by a Small Business Corporation, with the Internal Revenue Service.
Sec. 1362(a); sec. 1.1362-6(a)(2)(i), Income Tax Regs. Respondent does not have
any records indicating that petitioner has ever made the requisite election to be
treated as an S corporation, nor did petitioner offer any evidence corroborating its
assertion that it is an S corporation.
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[*4] Federal Tax Return, for each quarter of 2006, reporting total taxable wages
paid to Mr. Baldauf of $49,000. Petitioner made employment tax deposits of
$12,985 for tax year 2006.
Petitioner filed a Form W-2, Wage and Tax Statement, for wages paid to
Mr. Baldauf during tax year 2006. The 2006 Form W-2 reported that petitioner
paid Mr. Baldauf $51,000 during tax year 2006. The 2006 Form W-2 thus
reported an amount paid to Mr. Baldauf that was $2,000 more than the total of the
amounts reported on the 2006 Forms 941. On March 1, 2010, respondent assessed
petitioner an additional $530 in employment tax for the period ending December
31, 2006.
Petitioner timely submitted Form 12153, Request for a Collection Due
Process or Equivalent Hearing, following receipt of a Letter LT-11, Notice of
Intent to Levy and Notice of Your Right to a Hearing. Settlement Officer Denise
Williams (SO Williams) scheduled a collection due process (CDP) hearing for
November 20, 2012, and requested various documentation from petitioner in
advance of the hearing, including (1) Form 433-B, Collection Information
Statement for Businesses, (2) Forms 941 for December 31, 2007, through
September 30, 2012, (3) Forms 940, Employer’s Annual Federal Unemployment
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[*5] (FUTA) Tax Return, for 2007 through 2011, and (4) proof of deposits for
2007 through September 30, 2012.
A telephone CDP hearing was held on November 27, 2012, between SO
Williams and Mr. Baldauf. Petitioner did not provide the requested
documentation in advance of the hearing. During the hearing Mr. Baldauf raised
frivolous arguments, claiming that the Constitution does not require him to pay
taxes. Mr. Baldauf stated that he disagreed with the additional tax and desired to
take his case to the Tax Court. Petitioner did not offer any collection alternatives,
and SO Williams upheld the proposed levy.
II. Docket No. 24939-13
The notice of deficiency underlying petitioner’s case at docket No. 24939-
13 was mailed to petitioner on September 10, 2013. During the years at issue Mr.
Baldauf was petitioner’s only employee and sole shareholder. In the process of
auditing Mr. Baldauf’s 2009 personal income tax return to which he had
attached a Schedule C, Profit or Loss From Business, relating to petitioner’s
business, respondent learned that petitioner was a subchapter C corporation that
had not filed Forms 1120, U.S. Corporation Income Tax Return, for TYE June 30,
2008 through 2012, nor had it paid taxes for those tax years. Respondent
conducted a bank deposits analysis of petitioner’s bank records in order to
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[*6] reconstruct its income. During the years at issue petitioner maintained
accounts at First America Bank.
Revenue Agent Joseph Castellano (RA Castellano) audited petitioner’s bank
records for the tax years at issue in order to reconstruct petitioner’s income.
Petitioner provided respondent with some books and records relating to 2009 but
did not provide books and records for any other years. RA Castellano cross-
referenced the 2009 books and records with the expenses that were reported on the
Schedule C attached to Mr. Baldauf’s 2009 Federal income tax return and
determined that the Schedule C expenses were substantiated through the provided
books and records. Except for the calendar year 2009 expenses, RA Castellano
did not allow as deductible expenses the expenditures appearing on petitioner’s
bank account records because petitioner did not provide any documentation for the
business nature of those expenses.
Respondent prepared substitutes for returns (SFRs) for petitioner for TYE
June 30, 2009 through 2012. For petitioner’s TYE June 30, 2009 and 2010,
respondent transferred allowable expenses from the Schedule C attached to Mr.
Baldauf’s 2009 tax return to the Forms 1120 for those periods. Because Mr.
Baldauf’s 2009 Schedule C reported expenses on a calendar year basis, respondent
allocated half of the expenses to petitioner’s Form 1120 for TYE June 30, 2009,
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[*7] and half to TYE June 30, 2010. Mr. Baldauf has not filed a Federal income
tax return since 2009, and accordingly, there were no Schedules C from Mr.
Baldauf relating to petitioner’s TYE June 30, 2011 or 2012, that would have
allowed respondent to determine expenses allocable to those tax years. Petitioner
has not provided respondent with documentation concerning expenses for those
tax years.
Discussion
I. Docket No. 4177-13L
A. Overview of CDP Hearing Requirements
Under section 6331(a), the Commissioner is authorized to levy upon the
property or property rights of a taxpayer who fails to make payment for taxes due
within 10 days after notice and demand for payment. At least 30 days before a
levy is made, the Commissioner must notify the taxpayer in writing of the
opportunity to appeal the proposed levy at a CDP hearing held by the Office of
Appeals (Appeals). See sec. 6330(a)(1), (b)(1). At the hearing the taxpayer may
raise any relevant issue as to the propriety of the proposed levy, such as spousal
defenses, challenges to the collection action, and offers of collection alternatives.
Sec. 6330(c)(2)(A); see also Sego v. Commissioner, 114 T.C. 604, 609 (2000).
The taxpayer may also challenge the existence or amount of the underlying tax
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[*8] liability if he or she did not receive a notice of deficiency or did not otherwise
have an opportunity to dispute the liability. Sec. 6330(c)(2)(B). The Appeals
officer must make a determination about whether to uphold the proposed levy,
taking into consideration (1) verification that the requirements of any applicable
law or administrative procedure have been met, (2) relevant issues raised at the
hearing, and (3) whether any proposed collection action balances the need for the
efficient collection of taxes with the taxpayer’s legitimate concern that any
collection action be no more intrusive than necessary. Sec. 6330(c)(1), (2), and
(3)(A), (B), and (C).
A taxpayer may petition the Court under section 6330(d) to review Appeals’
determination. Where the validity of the tax liability is properly at issue, we
review the tax liability de novo. Sego v. Commissioner, 114 T.C. at 610; Goza v.
Commissioner, 114 T.C. 176, 181-182 (2000). The Court reviews other
administrative determinations of Appeals for abuse of discretion. Craig v.
Commissioner, 119 T.C. 252, 260 (2002) (citing Sego v. Commissioner, 114 T.C.
at 610). An abuse of discretion occurs when Appeals’ determination is arbitrary,
capricious, or without sound basis in fact or law. See Murphy v. Commissioner,
125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Freije v.
Commissioner, 125 T.C. 14, 23 (2005).
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[*9] Respondent concedes that the underlying liability is at issue in the case at
docket No. 4177-13L. Accordingly, we review de novo whether petitioner is
liable for the deficiency in its employment taxes. See Sego v. Commissioner, 114
T.C. at 610. After reviewing de novo the underlying liability, we review the other
determinations of Appeals for abuse of discretion. See Craig v. Commissioner,
119 T.C. at 260.
B. Burden of Proof
In general, the Commissioner’s determination as to a taxpayer’s tax liability
is presumed correct, and the taxpayer bears the burden of proving otherwise. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
C. Employer Withholding Requirements
The Internal Revenue Code requires employers to pay employment taxes
imposed on employers and to withhold from employees’ wages certain taxes
imposed on employees. See secs. 3111, 3301, 3101, 3102. Section 3402 requires
employers to withhold from employees’ wages the amounts of Federal income tax
owed by those employees. Section 3501 requires employers to deposit the
amounts withheld under section 3402 with the Treasury of the United States.
Section 3403 imposes liability on employers who fail to withhold required
amounts of tax owed by employees.
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[*10] D. Application and Analysis
The employment tax liability at issue in the case at docket No. 4177-13L
arises from a $2,000 discrepancy between amounts reported on petitioner’s Forms
941 for tax year 2006 and Mr. Baldauf’s Form 1040, U.S. Individual Income Tax
Return, for tax year 2006. Petitioner argued in its petition that the discrepancy
resulted from a “computer glitch” that resulted in the application of a December
2006 payment to January 2007. Respondent disputes this allegation, claiming that
respondent’s records for the first three quarters of 2007 show matching amounts
between petitioner’s quarterly deposits and its 2007 Forms 941.
At trial Mr. Baldauf testified that he erred in allocating a paycheck from
petitioner to himself when there were insufficient funds for petitioner to pay him.
Accordingly, Mr. Baldauf claims that he did not receive $2,000 from
petitioner in the form of one paycheck, thus accounting for the discrepancy
between amounts reported on his Federal income tax return and petitioner’s 2006
Forms 941. Petitioner did not offer into evidence any documentary evidence of
this mistake, such as its own bank records or those of Mr. Baldauf. Instead
petitioner offered only the testimony of Mr. Baldauf, petitioner’s sole employee
and shareholder. Petitioner thus offered two differing explanations as to the
$2,000 discrepancy. In sum, petitioner has not met its burden of proof to show
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[*11] that respondent’s determination regarding its 2006 employment tax liability
is incorrect.
E. Appeals’ Determination
We proceed to determine whether SO Williams abused her discretion in
upholding the levy action against petitioner. Petitioner did not provide the
requested financial information before the CDP hearing. Nor did it offer any
collection alternatives. Mr. Baldauf, as petitioner’s representative in the CDP
hearing, raised frivolous arguments. SO Williams’ decision to uphold the
proposed levy was not an abuse of discretion in the light of petitioner’s failure to
provide the requested financial information. See, e.g., Cavazos v. Commissioner,
T.C. Memo. 2008-257; Prater v. Commissioner, T.C. Memo. 2007-241. Further,
SO Williams’ determination was not an abuse of discretion considering that
petitioner did not raise any relevant issues or appropriate defenses to the collection
action, nor did it offer any collection alternatives. See Kendricks v.
Commissioner, 124 T.C. 69, 79 (2005) (“Since there was no offer in compromise
before Appeals, there was no abuse of discretion in Appeals’ failing to consider an
offer in compromise.”). SO Williams followed the requirements of section
6330(c), and her decision to uphold the levy action was not an abuse of discretion.
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[*12] II. Docket No. 24939-13
A. Burden of Proof
In general, the Commissioner’s determination as to a taxpayer’s tax liability
is presumed correct, and the taxpayer bears the burden of proving otherwise. See
Rule 142(a); Welch v. Helvering, 290 U.S. at 115. In cases involving unreported
income, the presumption of correctness attaches if the notice of deficiency is
supported by a minimal evidentiary foundation linking the taxpayer to the income-
producing activity. Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir.
1993), aff’g T.C. Memo. 1991-636. As discussed infra, we find respondent
provided such a foundation here so that petitioner bears the burden of proof as to
its income tax liability. Petitioner has not asserted, nor do we find, that the burden
of proof has shifted to respondent pursuant to section 7491(a). Petitioner also
bears the burden of proving that it is not liable for any addition to tax or penalty.
See NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006).
B. Deficiency
Gross income includes all income from whatever source derived, including
gross income derived from a business. Sec. 61(a)(2). Taxpayers must keep such
records as are sufficient to establish gross income and deductions. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs. If a taxpayer fails to maintain the required
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[*13] records, the Commissioner may determine the taxpayer’s income by any
method that clearly reflects income. See sec. 446(b); Petzoldt v. Commissioner,
92 T.C. 661, 693 (1989). Pursuant to section 6020(b), the Commissioner is
authorized to prepare an SFR for any taxpayer who fails to file a tax return.
Bank deposits are prima facie evidence of income, and the Commissioner
does not need to prove a likely source of such income. Tokarski v. Commissioner,
87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651, 656-657
(1975), aff’d, 566 F.2d 2 (6th Cir. 1977). The use of the bank deposits method has
long been sanctioned by the courts. Estate of Mason v. Commissioner, 64 T.C. at
656. The bank deposits method assumes that all money deposited into a
taxpayer’s account during a given period constitutes taxable income. Price v.
United States, 335 F.2d 671, 677 (5th Cir. 1964). When the bank deposits method
is used, “the Government must take into account any non-taxable source or
deductible expense of which it has knowledge”. Id. The taxpayer bears the
burden of proving that bank deposits come from non-taxable sources. Clayton v.
Commissioner, 102 T.C. 632 (1994).
Petitioner failed to file tax returns for TYE June 30, 2009 through 2012.
Additionally, petitioner did not provide respondent with records of deductible
expenses incurred outside of calendar year 2009. Respondent’s use of the bank
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[*14] deposits method to reconstruct petitioner’s income was reasonable. RA
Castellano examined the bank accounts that petitioner used for the tax years at
issue and transferred expenses from Mr. Baldauf’s 2009 Schedule C to the SFRs
for petitioner’s TYE June 30, 2009 and June 30, 2010. Petitioner has not provided
the Court with any books and records that would show that the deposits into its
bank accounts were not taxable income, nor has it provided the Court with
evidence of deductible expenses exceeding that respondent already allowed.
Accordingly, petitioner has not shown that respondent’s determinations with
regard to its tax liabilities were in error.
C. Additions to Tax
We proceed to consider whether petitioner is liable for additions to tax
under sections 6651(a)(1) and (2) and 6655(a) for failure to (1) timely file returns
for the years at issue, (2) timely pay the tax due for those tax years, and (3) pay
estimated income tax during the years at issue. Section 6651(a)(1) provides for an
addition to tax for failure to timely file, unless it is shown that the failure is due to
reasonable cause and not due to willful neglect. Similarly, section 6651(a)(2)
provides for an addition to tax for failure to timely pay the amount shown as tax
on any return, unless it is shown that the failure is due to reasonable cause and not
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[*15] due to willful neglect. Section 6655(a) imposes an addition to tax for
corporations that fail to make estimated tax payments.
Petitioner did not file income tax returns for the tax years at issue, nor did it
offer any reasonable cause for failing to do so. Accordingly, petitioner is liable for
the addition to tax under section 6651(a)(1) for its TYE June 30, 2009 through
2012.
Respondent prepared SFRs for the tax years at issue in accordance with his
authority under section 6020(b), and petitioner did not pay the amounts shown as
due. See sec. 6651(g)(2); Cabirac v. Commissioner, 120 T.C. 163, 170-173
(2003). The returns respondent prepared met the requirements for SFRs under
section 6020(b). See Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), aff’d,
521 F.3d 1289 (10th Cir. 2008). Petitioner has not offered any arguments alleging
reasonable cause for failure to pay the amounts shown as due on the returns and so
is liable for the additions to tax under section 6651(a)(2).
Next, we consider whether petitioner is liable for the addition to tax under
section 6655(a) for failure to make estimated tax payments. Since petitioner failed
to file a tax return for TYE June 30, 2008, the required annual payment of
estimated tax, as it relates to this case, equals 100% of petitioner’s tax for TYE
June 30, 2009 through 2012. See sec. 6655(d)(1)(B)(i). Petitioner made no
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[*16] payments of estimated tax for any of the tax years at issue. Accordingly, we
hold that petitioner is liable for the section 6655(a) addition to tax for failure to
make estimated tax payments.
In reaching our holding, we have considered all arguments made, and, to the
extent not mentioned above, we conclude they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decisions will be entered
for respondent.