Staff IT, Inc. v. United States

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
March 22, 2007
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 06-20292
_____________________

STAFF IT, INC., A TEXAS CORPORATION

Plaintiff-Appellant
v.

UNITED STATES OF AMERICA,
Defendant-Appellee

----------------------
Appeal from the
United States District Court
for the Southern District of Texas
----------------------
Before GARWOOD, WIENER, and CLEMENT, Circuit Judges.

WIENER, Circuit Judge:

Plaintiff-Appellant Staff IT, Inc. (“S.I.”) failed to file,

pay, and deposit payroll taxes during the course of three tax

quarters. The Internal Revenue Service (“IRS”) initiated

collection proceedings against S.I., seeking the unpaid taxes,

interest on them, and penalties for S.I.’s failure timely to

file, pay, and deposit such taxes. After the IRS Office of

Appeals administratively sustained a proposed levy, S.I. filed a

complaint in the district court, contending that, because of

financial hardship, it should be excused from paying the

penalties. The district court ruled against S.I., which then

appealed to us.
 On appeal, the government relies on Brewery, Inc. v. United

States1 in arguing that financial hardship can never be a

justification for the abatement of employment tax penalties. In

diametric opposition, S.I. relies on caselaw from the Second,2

Third,3 Seventh,4 and Ninth Circuits5 in arguing that financial

hardship may justify the abatement of employment tax penalties,

insisting that it does so under the facts and circumstances

present here.

Like the district court, we need not decide today whether

financial hardship may ever justify the abatement of employment

tax penalties. Instead, we hold that S.I. is not entitled to an

abatement of penalties even when we assume arguendo that, under

some circumstances, penalties for failure to file, pay, and

deposit payroll taxes could be abated for financial hardship.

I. FACTS AND PROCEEDINGS

1
33 F.3d 589 (6th Cir. 1994).
2
Fran Corp. v. United States, 164 F.3d 814 (2d Cir. 1999).
3
E. Wind Indus., Inc. v. United States, 196 F.3d 499 (3d Cir.
1999).
4
Diamond Plating Co. v. United States, 390 F.3d 1035 (7th
Cir. 2004).
5
Van Camp & Bennion v. United States, 251 F.3d 862 (9th Cir.
2001).

2
 S.I. is an accrual-basis taxpayer operating out of Houston,

Texas. It was incorporated in 1996 as a personnel staffing

company specializing in providing computer programmers and other

technical personnel (“contractors”) to outside businesses

(“clients”). Typically, clients would engage S.I. to fill

vacancies in their computer programmer or other technical

positions.

Contractors hired by S.I. would be placed on S.I.’s payroll,

but would work under the designated client’s direction. Each pay

period, S.I. would pay the contractors their net compensation

after withholding such items as income and social security taxes.

S.I. would invoice the client for the contractors’ services,

including a surcharge for S.I. Clients would usually pay S.I.

within thirty to ninety days after being invoiced.

Based on its invoicing practice, S.I. had to carry its costs

between the time it paid its contractors and the time it received

payment from its clients. This practice required substantial

working capital to cover the resulting time gap. Some of this

required capital came from S.I.’s officer-stockholders who

invested in or made loans to S.I., but S.I. still had to borrow a

significant portion of its working capital from financial

institutions.

As a relatively small business with no “hard” assets, such

3
as land, buildings, equipment, or manufacturing facilities, S.I.

was not able to borrow capital from traditional banks. Other

than a few computers, desks, and chairs, S.I.’s only assets were

its accounts receivable, which mainline banks ordinarily deem to

be insufficient collateral. Thus, S.I.’s only source of working

capital was financing companies (“factors” or “factoring

companies”).

In the factoring process, a business sells its accounts

receivables to a finance company at a discount. Then, as the

business collects its receivables, it repays the factor. (In

some cases, clients pay the factor directly.)

In 2001, S.I. obtained financing through Prinvest Capital

Corp. (“Prinvest”), a factoring company. Under the factoring

agreement, Prinvest would advance S.I. approximately seventy to

eighty percent of the revenue expected from a S.I. client, and

S.I. would instruct the client to pay Prinvest directly. Then,

when Prinvest received payment from the client, Prinvest would

deduct its charges and forward the remainder to S.I. By mid-

2001, S.I.’s annual billings had grown to approximately

$16,000,000.00, and Prinvest was financing approximately one-

third of S.I.’s receivables.

S.I. employed more than two hundred contractors, had accrued

monthly revenues of almost $1,600,000.00, and had a monthly cash

4
flow of over $2,000,000.00. S.I.’s payroll taxes were almost

$3,000,000.00 in 2000 and almost $2,000,000.00 from January to

September 2001. Until the last tax quarter of 2001, S.I. timely

filed, paid, and deposited its payroll taxes.

Beginning in May 2001, S.I. began to experience a series of

financial set backs. During the months of May, June, and July

2001, S.I.’s largest client, Compaq Computer, laid off a

significant portion of its workforce, including 55 of its 106

S.I. contractors. As a result, S.I. lost $400,000.00 in revenue.

During the same period, Enron and Dynegy, smaller S.I. clients,

laid off 12 S.I. contractors.

In June 2001, as a response to the Compaq lay-offs, Prinvest

refused to finance any more of S.I.’s receivables, eventually

declaring bankruptcy in August of that year. This left S.I. with

no financing source. S.I. began negotiations with another

potential lender to replace Prinvest and obtained an informal

financing agreement in September. This eventually fell through,

however, during the period of financial uncertainty that followed

the September 11, 2001 terrorist attacks.

In October 2001, Prinvest demanded a substantial loan

repayment from S.I., threatening to contact S.I.’s clients

directly and call in all S.I.’s receivables if the repayment were

not made. Rick McMinn, a S.I. officer and 40% stockholder,

5
together with S.I.’s other two officer-stockholders, personally

guaranteed Prinvest’s loan to S.I. McMinn used his home as

collateral in borrowing $300,000.00, which he then loaned to S.I.

on the same terms that the bank had loaned that money to him.

S.I. used those funds to pay the $300,000.00 to Prinvest.

S.I. cut some minor expenses during this period. Some of

these expenses were not eliminated, however, but were merely

deferred until the following month.

S.I. continued to place contractors at Enron and Compaq in

October 2001, despite announcements that these two clients would

indefinitely suspend invoice payments. S.I. cut other “G & A”

costs —— a catch-all category of expenses —— including some

advertising and recruiting expenses, but did not issue a broad

directive to cut expenses. S.I. paid $100,000.00 to creditors

other than Prinvest in October while increasing its marketing

efforts by shifting two staff employees from the recruiting of

contractors to the selling of S.I.’s services (i.e., marketing).

The marketing efforts were part of S.I.’s plan to overcome its

financial difficulties by “growing” the business and catching-up.

Enron continued to weaken in November and December of 2001,

eventually filing for bankruptcy protection. S.I. lost

approximately $450,000.00 in receivables as a result, but did not

file a claim in the bankruptcy proceeding because of the

6
attendant expenses and fees and the likelihood of an unfavorable

result.

S.I. failed to make payroll tax deposits in November and

December 2001. During these months, S.I. delayed payments to

some third-party creditors and on some debts, but did not reduce

(1) the number of contractors on its payroll, (2) the number of

its employees, or (3) salaries (not even the salaries of its

three officer-stockholders at $240,000 per annum each). Neither

did S.I. issue a broad directive to reduce expenses. At that

time, S.I. was anticipating a growth in business from its

increased marketing efforts, which S.I. hoped would enable it to

pay its past-due fourth quarter 2001 payroll taxes, as well as to

make timely deposits of its 2002 payroll taxes.

S.I. continued to spend on marketing, advertising, and

operating expenses. It also continued to provide monthly vehicle

allowances for those of its employees who had to drive to

clients’ places of business, and to take clients to Houston

Astros games, including paying for season parking. During the

time in question, S.I. spent $3,500.00 on a Christmas party,

expended additional funds for promotional items, such as drink

koozies and rulers, and paid $800.00 for Christmas hams for its

contractors. S.I. also continued to entertain clients by

treating them to meals. S.I. justified these expenses as part of

7
its advertising and client-relations efforts.

By early 2002, S.I.’s anticipated business increase had

failed to materialize and its existing business declined. S.I.

had still not obtained a new factor to replace Prinvest, and

Global Crossing, another S.I. client, filed for bankruptcy. S.I.

did attempt to cut some costs, but negative cash flow outpaced

these savings.

In February 2002, S.I. scaled back some of its debt

payments, reduced rent payments, and cut payments to third-party

creditors; yet it continued to pay its employees and contractors,

and its operating expenses in full. S.I. made no layoffs and did

not reduce salaries. In the absence of a factor, McMinn loaned

S.I. another $50,000.00. S.I. did not make any payroll tax

deposits in January or February of 2002, continuing to believe

that the downturn was temporary and to hope that once it secured

a new factor, it would be able to pay the IRS.

Early in 2002, S.I. finally secured a new factor. Now

accepting the need to reduce expenses, S.I. laid off some

employees and contractors and otherwise cut salaries and costs.

S.I. reduced the salaries of its three officer-stockholders by

57% from 2001 levels —— down from $240,000.00 to $104,000.00.

S.I. reduced other employees’ salaries by 22% from 2001 levels

and cut the monthly vehicle allowances and client meals that it

8
had funded. S.I. also reduced advertising by 18% from 2001

levels.

S.I.’s newly secured factor would not advance funds without

first obtaining a lien on S.I.’s receivables. As Prinvest still

maintained a lien on S.I.’s receivables, S.I. paid Prinvest more

than $200,000.00 to release its lien on S.I.’s receivables.

Although S.I. continued to pay its operating expenses, it made no

payroll tax deposits in March, April, or May of 2002. It did not

start to make significant payroll tax deposits until June.

Even then, S.I. did not pay its back payroll taxes to the

IRS. During the last six months of 2002, however, S.I. paid most

of its payroll taxes as they accrued, with the exception of

December. In that month, S.I.’s new factor retained invoiced

payments, causing S.I. to fall short on its deposit of payroll

taxes. S.I. met its wage, interest, and operating cost

obligations, but by the end of the year, it owed its attorneys

and others more than $200,000.00.

In mid-October 2003, the IRS sent S.I. a notice of intent to

levy on the company’s assets to collect payroll taxes, interest,

and penalties for the three tax quarters ending December 31,

2001, March 31, 2002, and September 30, 2002. The penalties at

issue were: (1) late-filing penalties for the fourth quarter of

2001 and the first quarter of 2002, pursuant to 26 U.S.C. §

9
6651(a)(1); (2) late-payment penalties for the fourth quarter of

2001 and the first quarter of 2002, pursuant to 26 U.S.C. §

6651(a)(2); and (3) late-deposit penalties for all three quarters

at issue, pursuant to 26 U.S.C. § 6656.

On November 7, 2003, the IRS sent S.I. a Notice of Federal

Tax Lien Filing in connection with the company’s unpaid payroll

taxes (excluding penalties and interest) for the same quarters.

In these notices, the IRS advised S.I. of its right to seek a

Collection Due-Process (“CDP”) hearing under 26 U.S.C. §§ 6320

and 6330.

S.I. requested a CDP hearing with respect to both the

proposed levy and the notice of tax lien, challenging the

penalties against it but not the underlying tax liabilities or

interest. It requested abatement of the penalties for the

quarters ending December 31, 2001 and March 31, 2002 on the

ground that the company had reasonable cause for late filings,

late deposits, and late payments. S.I. requested abatement of

the penalties for the quarter ending September 30, 2002 on the

ground that the company had timely filed returns and deposited

and paid the taxes when due for that quarter.

S.I. met with an IRS Appeals Officer on February 17, 2004,

regarding its request for abatement of penalties. The Appeals

Officer issued a notice of determination denying S.I.’s requests

10
for penalty abatement and an installment plan, but gave S.I.

until May 10, 2004 to satisfy its current compliance

requirements. The Appeals Officer concluded that S.I. had not

shown reasonable cause for failing to file timely returns or to

make timely deposits and payments. He observed that, even though

S.I. obviously faced financial difficulties during the period at

issue, the company had continued to furnish contractors to

clients despite learning that the clients would not be making

timely payments. The Appeals Officer also noted that S.I. had

continued to pay its corporate officers, who were not essential

creditors.

In June 2004, S.I. filed suit in the district court, seeking

review of the notice of determination. There, S.I. asserted that

its financial hardship in 2001 and 2002 constituted reasonable

cause for its failure timely to file, to pay, and to deposit

payroll taxes. In December, the government filed a motion for

summary judgment, asserting, inter alia, that financial hardship

can never constitute reasonable cause for the abatement of

payroll tax penalties.

In its written ruling, the district court acknowledged the

existence of a split in authority on the standards governing

financial difficulty/reasonable cause cases. The court observed

that (1) the Sixth Circuit had held that financial difficulties

11
can never constitute reasonable cause to excuse penalties for a

taxpayer’s failure to satisfy its payroll tax obligations; but

(2) several other courts of appeals had rejected the Sixth

Circuit’s bright-line rule and had held that all facts and

circumstances of the taxpayer’s financial situations must be

assessed to determine whether the taxpayer has demonstrated

reasonable cause that would entitle it to an abatement.

Rather than decide which standard to apply, the district

court concluded that under either standard, the government was

entitled to summary judgment because S.I. had not shown that its

failure to satisfy its payroll tax obligations resulted from

reasonable cause. S.I. timely filed a notice of appeal.

II. LAW AND ANALYSIS

A. Standard of Review

We review grants of summary judgment de novo, applying the

same standard as the district court.6 Summary judgment is

appropriate when there is no genuine issue of material fact and

the moving party is entitled to judgment as a matter of law.7 In

collection due process cases in which the underlying tax

liabilities are at issue, we review the underlying tax liability

6
Abarca v. Metro. Transit Auth., 404 F.3d 938, 940 (5th Cir.
2005).
7
Dallas Fire Fighters Ass’n v. City of Dallas, 150 F.3d 438,
440 (5th Cir. 1998).

12
de novo and other administrative decisions for an abuse of

discretion.8 Determination of the presence of the elements

required to prove reasonable cause for failure to satisfy payroll

tax obligations is a question of law, but determination whether

those elements are present in a given situation is a question of

fact.9

B. Merits

The Internal Revenue Code (“IRC”) requires employers to

deduct and withhold income and social security taxes from its

employees’ salaries and wages.10 These taxes must be held by the

employer in a special trust fund for the benefit of the

government.11 An employer is liable for the payment of the taxes

required to be withheld and is required to report the amounts of

withheld taxes on its payroll tax returns.12 These returns and

payments of payroll taxes are due each calendar quarter.13 An

employer is required to deposit the employment and income taxes

withheld in an approved bank at various intervals during a

8
Jones v. Commissioner, 338 F.3d 463, 466 (5th Cir. 2003).
9
United States v. Boyle, 469 U.S. 241, 249 n.8 (1985).
10
26 U.S.C. §§ 3102(a), 3402(a).
11
Id. § 7501.
12
Id. § 3403.
13
Id. § 6011(a).

13
calendar quarter, depending on how much is withheld.14

The IRS imposes mandatory penalties for failure to (1) file

payroll tax returns, (2) pay payroll taxes, and (3) deposit

payroll taxes in a government-authorized depository, unless the

taxpayer can demonstrate that such failure was occasioned by

“reasonable cause and not due to willful neglect.”15 Thus, to

obtain abatement of employment tax penalties imposed under §§

6651 and 6656, the taxpayer must bear the heavy burden of proving

that (1) the failure did not result from “willful neglect;” and

(2) the failure was occasioned by “reasonable cause.”16 Neither

“willful neglect” nor “reasonable cause” are defined in the IRC.

In United States v. Boyle, the Supreme Court defined

“willful neglect,” as used in § 6651(a)(1), as “a conscious,

intentional failure or reckless indifference.”17 Stated

differently, the taxpayer must show that the failure to file a

return was the result “neither of carelessness, reckless

14
Id. § 6302; 26 C.F.R. § 301.6302-1.
15
26 U.S.C. §§ 6651(a)(1), (a)(2), 6656(a).
16
Boyle, 469 U.S. at 245.
17
Id. The analysis in Boyle only concerned failure-to-file
penalties under § 6651(a)(1) and not failure-to-pay or failure-to-
deposit penalties under §§ 6651(a)(2) and 6656, respectively. The
language concerning the relevant standard is identical in all three
provisions. Thus, we find no reason to treat the language in §
6651(a)(1) differently from that in §§ 6651(a)(2) and 6656. E.
Wind, 196 F.3d at 504 n.5.

14
indifference, nor intentional failure.”18

There is no jurisprudential definition of “reasonable

cause;” however, the Treasury Regulations shed some light on its

meaning.

1. Failure to File

For failure-to-file situations under § 6651(a), the Treasury

Regulations explain:

If the taxpayer exercised ordinary business care and
prudence and was nevertheless unable to file the return
within the prescribed time, then the delay is due to
reasonable cause.19

2. Failure to Pay

For failure-to-pay situations under § 6651(a)(2), the

Treasury Regulations explain:

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 (as
described in § 1.6161-1(b) of this chapter) if he paid
on the due date. In determining whether the taxpayer
was unable to pay the tax in spite of the exercise of
ordinary business care and prudence in providing for
payment of his tax liability, consideration will be
given to all the facts and circumstances of the
taxpayer’s financial situation, including the amount
and nature of the taxpayer’s expenditures in light of
the income (or other amounts) he could, at the time of
such expenditures, reasonably expect to receive prior

18
Boyle, 469 U.S. at 246 n.4.
19
26 C.F.R. § 301.6651-1(c)(1).

15
 to the date prescribed for the payment of the tax.
Thus, for example, a taxpayer who incurs lavish or
extravagant living expenses in an amount such that the
remainder of his assets and anticipated income will be
insufficient to pay his tax, has not exercised ordinary
business care and prudence in providing for the payment
of his tax liability. Further, a taxpayer who invests
funds in speculative or illiquid assets has not
exercised ordinary business care and prudence in
providing for the payment of his tax liability unless,
at the time of the investment, the remainder of the
taxpayer’s assets and estimated income will be
sufficient to pay his tax or it can be reasonably
foreseen that the speculative or illiquid investment
made by the taxpayer can be utilized (by sale or as
security for a loan) to realize sufficient funds to
satisfy the tax liability. A taxpayer will be
considered to have exercised ordinary business care and
prudence if he made reasonable efforts to conserve
sufficient assets in marketable form to satisfy his tax
liability and nevertheless was unable to pay all or a
portion of the tax when it became due.20

In addition to the nature of the taxpayer’s actions, the nature

of the tax at issue must be considered.21 The Treasury

Regulations expressly state that “[i]n determining if the

taxpayer exercised ordinary reasonable care and prudence in

providing for the payment of his tax liability, consideration

will be given to the nature of the tax which the taxpayer has

failed to pay.”22

20
Id. § 301.6651-1(c)(1) (emphasis added). “Undue hardship”
is “more than inconvenience to the taxpayer. It must appear that
substantial financial loss . . . will result to the taxpayer for
making payment on the due date . . . .” Id. § 1.6161(b).
21
Id. § 301.6651-1(c)(2).
22
Id.

16
 3. Failure to Deposit

For failure-to-deposit situations under § 6656, the Treasury

Regulations neither define nor explain “reasonable cause,” but

they do explain that the IRS will generally waive the requisite

penalty if a taxpayer’s failure to deposit was “inadvertent,”23

requiring that determination of inadvertence must be “based on

all the facts and circumstances.”24

4. Bright-Line Rule or Multi-Factor Test

The first issue on appeal here is whether financial

difficulty may ever be a “reasonable cause” for failure to file,

pay, or deposit payroll taxes. The government urges us to join

the Sixth Circuit and adopt a bright-line rule that financial

difficulty may never constitute reasonable cause.25 In the Sixth

Circuit’s Brewery case, a taxpayer brought a refund action to

recover penalties assessed for its failure to pay and to deposit

23
Id. § 301.6656-1(a)(1)(i).
24
Id. § 301.6656-1(a)(2). It is unclear whether the
“inadvertent” standard set forth for § 6656 penalties is identical
to the “ordinary business care” standards set forth for §§
6651(a)(1) and (2) penalties. We need not, however, decide this
issue. Whether we determined the “inadvertent” standard was
different from or identical to the “ordinary business care”
standard, we would still conclude that S.I. lacked reasonable cause
in satisfying its payroll tax obligations. Thus, for purposes of
this opinion, we will assume that the standards are the same.
25
Brewery, 33 F.3d at 592-93.

17
payroll taxes.26 The taxpayer insisted that it had exercised

ordinary business care and prudence, but was still not able to

satisfy its payroll tax obligations because of financial

difficulties.27 The taxpayer argued that the tax penalties

should be abated, as its failure to pay was for reasonable

cause.28 On appeal, the Sixth Circuit concluded that, as payroll

taxes are held by the employer in trust for the government and

are for the exclusive use of the government, an employer’s

failure to pay and to deposit the taxes may never, as a matter of

law, be excused because of the employer’s financial

difficulties.29 Otherwise, reasoned the Sixth Circuit, a

taxpayer would be “permitted to self-execute a government loan”

or “make the government ‘an unwilling partner in a floundering

business.’”30 The government requests that we adopt the Sixth

Circuit’s per se rule for the same reasons espoused in Brewery.

In opposition, S.I. urges us to adopt the facts-and-

circumstances test (“multi-factor test”) employed by the Second,

26
Id. at 591.
27
Id. at 591-92.
28
Id.
29
Id. at 593.
30
Id. (citing C.J. Rogers, Inc. v. United States, No. 89-
70209, 1990 WL 255586 (E.D. Mich. Sept. 17, 1990), and quoting
Collins v. United States, 848 F.2d 740, 742 (6th Cir. 1988)).

18
Third, Seventh, and Ninth Circuits. Each of these circuits has

rejected Brewery’s holding, concluding that the Brewery approach

would disregard the clear language and purpose of the applicable

statutes and regulations, which require a fact-intensive

analysis.

We acknowledge the existence of the circuit split on this

issue, but need not —— and therefore do not —— resolve this issue

today. This is because, under either the bright-line rule or the

multi-factor test, S.I.’s claim for abatement of penalties fails.

Thus, for purposes of this appeal, we assume without granting

that the multi-factor test applies and proceed to analyze S.I.’s

claim accordingly.

5. S.I.’s Claim Under the Multi-Factor Test

A taxpayer has a heavy burden in establishing that it had

reasonable cause not to file, pay, or deposit payroll taxes.31

In fact, this burden is so weighty that, to our knowledge, only

one appellate opinion has ever concluded that a taxpayer’s

failure to pay payroll taxes in a timely fashion was the result

of reasonable cause and not willful neglect.32

Here, S.I. argues that Compaq’s cutbacks, Enron’s and Global

31
Boyle, 469 U.S. at 245.
32
E. Wind, 196 F.3d at 508-13. In East Wind, the taxpayer had
only failed to pay, not file or deposit, the payroll taxes in a
timely fashion. Id.

19
Crossing’s collapses, S.I.’s loss of its financing arrangement

with Prinvest, and the problems rampant throughout the financial

sector of the national economy following the attacks of September

11, combined to frustrate S.I.’s ability to file, to pay, and to

deposit its payroll taxes timely. We do not dispute that S.I.

suffered financial difficulties. We do dispute, however, S.I.’s

insistence that these difficulties and, more importantly, S.I.’s

response to them, constituted reasonable cause for S.I.’s failure

to satisfy timely its payroll tax obligations.

As for the penalties for failure to file, we cannot accept

that S.I.’s financial difficulties prevented it from filing its

payroll tax returns on time. Although S.I.’s financial

difficulties may well have affected its ability to pay and to

deposit, they certainly had no discernible effect on its ability

to file. In fact, S.I. offers no legitimate reason for its

failure to file, attempting instead to conflate the failure to

file penalties with S.I.’s rationale for failing to pay and to

deposit its payroll taxes in a timely manner. It is axiomatic,

however, that these imposts penalize different failures and

cannot be viewed through the same lens simply because a taxpayer

fails to discharge all three duties fully and timely. S.I.’s

case is not one in which a taxpayer’s financial difficulties

prevented it from filing its tax returns, regardless of any

20
inability to pay or to deposit —— if such a case even exists. As

S.I. has offered no legitimate reason for its failure to file

payroll tax returns timely, it is not entitled to abatement of

penalties for its failure to file.

As for penalties for failure to pay and failure to deposit,

the jurisprudence reflects that the primary factors in

determining whether a taxpayer exercised ordinary business care

are (1) the taxpayer’s favoring of other creditors over the

government, which weighs against a finding of reasonable cause,

and (2) the taxpayer’s willingness to decrease expenses and

personnel, which weighs in favor of a finding of reasonable

cause.33

Despite all its financial troubles in late 2001 and early

2002, S.I. continued to pay virtually all its creditors, its

33
E.g., Fran Corp., 164 F.3d at 820. When S.I. initially
faced its financial difficulties, it made the business decision to
“grow” the company, rather than cut its expenses. We are keenly
aware that courts should not attempt to judge a company’s business
decisions with the illumination of hindsight. Rather, courts
should afford a company’s business decisions a range of discretion.
Here, we will neither second-guess S.I.’s decision to “grow” nor
nitpick the expenses that it classified as advertising, marketing,
and client-relations efforts, by labeling them as extravagant or
lavish. We neither penalize S.I. for its unsuccessful attempt to
“grow” its business nor credit its decisions to cut its expenses,
which it did extensively only after its attempt to “grow”
floundered. Instead, our decision is based solely on S.I.’s
conscious, knowing decision to satisfy essentially all of its
obligations ahead of its payroll tax obligations.

21
employees, its contractors, its officer-stockholders, and its

operating expenses in preference to its payroll tax obligations.

S.I. relegated its obligations to the government to those owed to

its other creditors and even those owed to its own officer-

shareholders. The logical consequence of S.I.’s actions is the

imposition of tax penalties. To conclude otherwise would be to

sanction S.I.’s unilateral, self-execution of a government loan.

We conclude that, like its non-entitlement to abatement of its

penalties for failure to file, S.I. is not entitled to an

abatement of its failure-to-pay or its failure-to-deposit

penalties.34

III. CONCLUSION

Based on the applicable law and our extensive review of the

parties’ briefs and the record on appeal, we hold that S.I.

failed to exercise ordinary business care and prudence in the

timely discharge of its payroll tax obligations. S.I.’s failure

to do so was not the result of a reasonable cause. Therefore,

even when we assume arguendo that the multi-factor test is the

appropriate one, we conclude that S.I. is not entitled to an

abatement of its payroll tax penalties. Accordingly, we affirm

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Having concluded that S.I.’s failure to satisfy its payroll
tax obligations was without reasonable cause, we need not determine
whether it resulted from willful neglect.

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the summary judgment of the district court in favor of the

government.

AFFIRMED.

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