# T.C. Memo. ,2011-155 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A8c309a710f1d2684 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text T.C. Memo. ,2011-155 UNITED STATES TAX COURT CUSTOM SI'AIRS & TRIM, LTD., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 9204-09L. Filed,July 5, 2011. P filed a petition for review pursuant to secs. 6320 and 6330, I.R.C., in response to R's determination that the lien and levy actions were appropriate. Held: P exercised ordinary business care and prudence in providing for payment of its tax liability. R' s determin tion to impose a failure to deposit penalty and failure to pay addition to tax and to proceed with collection actions is reversed. Rebecca L. Cordes (an officer) , for petitioner. John F. Drisdoll, for respondent. SERVED JUL - 5 2011 - 2 MEMORANDUM FINDINGS OF FACT AND OPINION WHERRY, Judge: This case is before the Court on a petition for review of a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 determination) . (notice of Petitioner, Custom Stairs & Trim, Ltd., Inc. (Custom Stairs) , through- its vice président, Rebecca L. Cordes (Ms. Cordes), seeks review of respondent's determination to impose a penalty and an addition to tax and to proceed with a proposed levy and to keep in place a filed lien. These collection actions stem from a penalty under section 6656 and an addition to tax under section 6651(a) (2) relating to Custom Stairs' .unpaid employment taxes reported on Form 941, Employer' s Quarterly Federal Tax Return, for the second quarter of 2008. The IRS imposed the penalties and the additions to tax on Custom Stairs for 15 consecutive quarters beginninég in 2005; only one of these quarters is in dispute. The is'sue for decision is whether the section 6656 (a) failure to deposit penalty of $3,124.79 and the section 6651(a) (2) failure to pay addition, to tax of $224.50 should be abated because Custom Stairs' failure to IUnless 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. - 3 make the deposits was due to reasonable cause.2 As a result of the penalties, pius interest and collection costs, less payments made, Custom Stalrs' balance due as of April 3, 2010, was $1,575.26.3 FINDINGS OF FACT Some of the facts have been stipulated. The stipulations, with accompanying exhibits, are incorporated herein by this reference. At the time the petition was filed, Custom Stairs had its principal business address in Pensacola, Florida. During the period at issue in 2008, Ms. Cordes was vice president of Custom Stairs, a company in the business of building circular wooden stairicases. Custom Stairs timely filed Form 941- for the period 2Respondent's administrative file focuses almost exclusively on the sec. 6656(a) penalty. The petition indicates in par. 5: "I disagree that there was a neglect or refusal to pay" and "I disagree that I did not establish reasonable cause to abate penalties". See also Ms. Cordes' Dec. 10, 2008, letter to Susan Shaw, the revenue officer assigned to-this case, "requesting reductions of penalties". Similarly, in the attachment to Form 12153, Request for a Collection Due Process.or Equivalent Hearing, under "Lien Withdrawal" item 3 Custom Stairs refers to "penalties". 3The balance due, as of Apr. 6, 2010, per respondent's records (Form 43 0, Certificate of Assessments, Payments, and Other Specified Matters) was $1,595.26. This amount was derived by adding the see. 6656(a) penalty of $3,124.79 and the sec. 6651(a) (2) additlon to tax of $244.50, respectively, to assessed interest through Sept. 29, 2008, of $180.97 plus "collection costs" of $45, less Custom Stairs' payment against the charges of $2,000. - 4 - ending June 30, 2008, with a reported tax liability of $28, 900.40. Custom Stairs has beene in business since December 1985 fabricating stairways for residential properties along the Gulf Coast.. Its troubles began in Seßtember 2004 when Hurricane Ivan, the 10th -most intense Atlantic hurricane ever recorded, 4 struck the Gulf Coast, severely damaging Custom Stairs' place of a business andr severely affecting manysof its customers. Inr2005 through 2008 as Custom Stairs felt the effects of the hurricane, collapse of the housinge bubble, ands economic , o recession, it began laying of f employees, , eliminating vacations and paid holidays, and.cutting employee benefits. In 2008 Custom Stairs also contacted a real estate broker and listed its office property with t-he hope of using the proceeds to pay of f the company' s debts . Custom Stairs has a history of timely filing its Forms 941 and making deposits of the tax assessed. hurricane However, fèÍlowing -the it also has a history of failing to pay tlie full amount and having to pay penalties and interest. Because of the hurricane, Custom Stairs fell behind with its employment taxes in early 2005 and was thereafter consistelitly in arrears. FcÌr most 4This Court takes judicial notice of the severity of Hurricane Ivan. - 5 - of these calenda:: quarters Custom Stairs actually paid over to the Internal Revenue Service (IRS) amounts that would have fully satisfied its liability for the current quarter; but the IRS applied its payments to prior arrearages, leaving all or portions of each successive quarter's required deposits underpaid.5 In short, following the hurricane Custom Stairs never asked for, nor did it receive, any penalty relief or a clean penalty-free start until it sought relief in the 2008- quarter at issue here. Below is a table showing Custom Stairs' history with respect to the Federal tax deposit penalty ands failure to pay addition to tax for the quarters ended March 31, 2005 through 2009. Penalties, Additions to Tax., Interest Assessments, and Payments Federal Tax Deposit Penalty Failure To Pay Addition --- --- $1,301.01 Quarter Ended Date of Ashessment Mar. 31, 2005 Jun. 27, 2005 $1,301.01 Jun. 30, 2005 Oct. 10, 2005 1,412.09 . $49.68 $41.15 1,502.92 Sep. 30, 2005 Dec. 26, 2005 2,394.06 109.58 74.10 2,577.74 Dec. 31, 2005 Apr. 03, 2006 2,091.85 --- --- 2,091.85 Mar. 31, 2006 Jun. 26, 2006 1,647.09 --- --- 1,647.09 Jun. 30, 2006 Sep. 18, 2006 11,989.23 - -__ 212.70 2,001.92 Sep. 30, 2006 Jan. 01, 2007 1,735.37 38.80 32.41 1,806.58 Interest Payments sCustom Stairs co'uld have entirely avoided liability for additions and/or penalties in all but 5 of the 16 quarters for which they were itssessed by allocat'ing differently the tax payments that it made. With .such designations, the payments that Custoin Stairs is stipulated to haee made would have timely paid its employment tatxes for 11 of the 16 delinquent quarters, and Custom Stairs would thereby have avoided the great majority of the $27, 000 in penalties and additions that were assessed against it . - 6 Deci. 31, 2006* Apr. 02, 2007 1,710.-42 --- - 1,710.42 Mar. 31, 2007 May 28, 2007. 324.25 --- --- 324.25 Jun. 30, 2007 Sep. 03, 2007 3778.97 0.40 0.30 . 819.67 Sep. 30, 2007 Dec. 31, 2007 1,519.92 44.46 33.45 1,597.83 Dec. 31, 2007 Apr. 07, 2008 1,845.56 '72.57 556.51 'l,974.64 Mar. 31, 2008 Jun. 16, 2008 72,860.65 56.84 838.85 92,938.10 Jun." 30, 2008 Sep. 29, 2008 1°3,169.79 224.50 180.97 2,000.00 Sep. 30, 2008 Dec. 15, 2008 831.67 2 --- -- 831.67 Dec. 31, 2008 None --- --- Mar. 31, 2009 May Total 25, 2009 605.03 26,216.96 Net total assessed 27,286.55 Less paymerits 25,733.02 Amount remairiing 1, 553 . 51 596.83 - --"2.32 607.35 472.76 25,733.04 A statutory notice of intent to levy was issued on Oct. 23, 2006. 2This interest was assessed on Nov. 20, 2006. 3An additional $2 was assessed on Oct. 8, 2007, but was "cleared" after payment was received. Resolution, of the apparent $38 overpayment- is not explained in the record. *Of the $92.19 failure to pay addition to tax originally assessed, $19.62 as well as $5.25 of the $64.03 originally assessed interest was abated on Apr. 14, 2008 . sAn additional $2.27 of interest was abated and refunded on May 26, 2008. 'After the $2.27 of interest abated and refunded on May 26, 2008. 'An additional $110 .17 Federal tax deposit penalty was assessed on July 21, 2008, .which was abated on July 21, 2008, after payment was received A statutory notice of intent to levy was issued on Sept. 1, 2008. aAn additional $18.14 of interest was assessed on July 21, 2008, and abated on Oct. 6, 2008. "After $18.24 was refunded. °$2,729.64 was initially assessed,on Sept. 29, 2008, and an additional $395.15 Federal tax deposit penalty was assessed on Nov. 3, 2008. This also includes $45 of collection costs charged to Custom Stairs . An intent to levy collection due process notice levy notice was issued on Nov. 20, 2008. "This $2.32 was assessed on Aug. 31, 2009. A statutory notice of intent to levy was issued on June 29, 2009. "The apparent $21.75 discrepancy. is not explained ,in .the record For the tax period ended Jurie 30, 2008, Custom Stairs was required .to make employment tax deposits on April 9, April 16 April 23, Appil 30, May 7, May 14, May 21,. May 28, June 4, June 11, June 18, and June 25. During this period the IRS - 7 treated no-payments of Customistairs as tax deposits for the quarter ended June 30:, 2008; t-he. afirst payment -that, the IRS treated as-a deposit -for thisaquarterswas received by respondent on July. 3, 2008. By the -time Custom Stairs timely filed Form 941 for the tax period ended Juneu30,. 2008,, Custom Stairs had-made $7 p113 . 94 of payments that the «IRS treated as deposits on the $28, 90.0 . 40 ,due . , As ref lected in the preceding table, on September 29, 2008, a $2,329.64.penalty,under section 6656, Failure to Make, Deposit of Taxes, was assessed against, Custom Stairs for ,the second quarter of 2008 at issue, .and an additional $395 .15 was assessed ,on. November 3, 2008 . • However, Custom Stairs had in fact made paymentsitotaling $29,4,81.65--i.e: more than the liability for ,the quarter ended June .310, 2008--before the due date for the Formr941. Custom Stairs÷had notadesignatedathem for that current'quarter, however, and the IRS allocated-them.instea:d to theapriorsMarch 31, 2008, quarter, which was sinearrears:and for whichapenalties had already been assessed. BecausesofaCustom Stairs' -nonallocation and timing of its payments within the.June»30, 2008, quarter, penalties and "additions were eventually assessed ,against it Efor both those squarters . On July 30, 2008 4m a an internalarevenue officers whose pseudonym .is -Susan Shaw (Of f icer -Shaw) , visited Custom Stairs aftereshe was notified -that there had been a substantial -drop in - 8 its Form 941 Federal tax deposit levels. She explained that the main purpose is "to try to gets early intekvention with businesses that are falling behind in their payroll tax deposits." Officer Shaw met with Ms. Cordes and explained that the most important thing was for Custom-Stairs to get and stay current. She directed that Custom Stairs pay current taxes first'. Ms. Cordeå explained to Officer Shaw, that'the hurricane and .economic downturn had severely affected their construction-basëd business. Officer Shaw-left a handwritten-Form 9297, Summary-of Taxpayer Contact, which, under the heading "Information/Documents required", stated: "Provide 'current-profit &' loss", "accounts receivable listing", "balance sheet/asset,listing", "bank statements & canceled checks 4/1/2008-7/1/2008", bank signature card", "copy of the "copy-of 1120 for 2007", and "provide personal financial statements". Officer Shaw explained that these documents were needed so that respondent ^could compile a collection plan, determine whether the finances would support- an installment agreement, or determine whether respondent could direct Custom Stairs to get a loan to pay the full amo'unte - On August 1, 2008, Ms. Cordes called Officer Shaw and 4, - explained that she believed that Custom Stairs would be-able tb pay all past due tax liabilities within 8 weeks. Officer Shaw agreed to the proposal and apparently suspended any additional investigation and financia-1 review until October 1, 2008. 'On - -. 9 September 29, 2038, Officer Shaw noted that Custom Stairs had met its current tax Liabilities and that it had made about $15,000 in deposits against past due amounts over the past 8 weeks. She noted that the balance "due [approximately $16,000] will be resolved in a short time" but if the past due amounts were not paid in full by october 31, 2008, she would have to secure the bank records and documentation requestedo at the initial meeting. Officer Shaw communicat'ed thernew deadline to Custom Stairs and stated that if the remaining liabilities, were not paid, Custom Stairs would have to provide sthe recôrds requested or a lien would be filed and a levy might be initiated. Officer Shaw also noted that "TP [laxpayer] appears to be making swift progress, in a construction/real estate related business, during a very poor economic time." On October 30, 2008, Officer Shaw noted that Custom Stairs was up to date on current liabilities and had a balance of $11,434 on past due liabilities. She noted that Custom Stairs was "not pyramidLng" and that they- appeared "to be earnestly resolving delinquency, despite this being a construction related business, during a very poor economic cycle for home construction." officer Shaw decided to delay following up with Ms. Cordes until November 17, 2008, and communicated that extension to Ms. Cordes. A liability tremained on November 20, 2008; and because Custom Stairs had failed to make the deposits - - 10 -- it promised and bring itself current by that date, a lien was filed. On November 20, 2008, Custom Stairs was sent a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing (CDP levy notice), showing $9,919.27 still owed for the quarter ended - June 30, 20 08 . On December 2, 2008 , Custom Stairs . was mailed a Notice of Federal Tax Lien Filing and Your Right to a Hearing. Custom Stairs, on December 11, 2008, timely, filed a Form 12153, Request for a Collection Due Process =or Equivalent Hearing. Under the heading,'"Offer in. Compromise" Custom-Stairs requested a "reduced penalty, under the present economic conditions"; and under the,heading, "Lien Withdrawal" Custom Stairs stated that the lien was, filed prematurely because Custom Stairs had been keeping current while slowly making up the past due li·abilities. It also stated that as of .December 4, -2008, all of the past due amounts (except penalties) had been paid. By letter dated February 18, 2009, Peter Salinger, the settlement officer of the Tampa Appeals «Office (Settlements Officer Salinger) assigned to the case, informed Custom Stairs that a telephone conference was scheduled for March 18, 2009 Ms. Cordes responded to the letter on March 2, 2009, explaining that she helieved- that the lien was unreasonable. She again explained that because the underlying taxes had been paid and the - 11 - only balance for that period was a penalty that she claimed should be abated for reasonable cause, the lien was unnecessary. During the t.elephone hearing conducted on March 18, 2009, Ms. Cordes explained to Settlement Officer Salinger that she did not feel that she had to submit the ~requested documentation because she had been making payments on the -delinquent tax liability. Settlement Officer Salinger explained that under his analysis Custom Stairs did not hive reasonable cause for the abategent of the penalty. 'Custom Stairs did not submit any of the documentation- requested," and no collection alternatives were offered. When Settlement Officër. Salinger asked Ms. Cordes how she wished to resolve the liability, she informed him that she did not know beccuse she did not have the money sto pay it. On March 26, 2009, Appeals Team Manager, Clifford Whitely, mailed Custom Sttirs a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (determination letter-). The letter explained that "the Notice of Intent to Levy should not be withdrawn" and "the Notice of Federal Tax Lien will not be withdrawn". "It stated that the lien was reasonable urder the circumstances and that ,all of the legal and procedural requirements had been met., Custom Stairs timely filed a petition with this.Court on April 16, 2009, for review of the Appeals Office's actions and the determination letter. Custom Stairs cléimed that because it could not- pay the tax - 12 - liability there was reasonable cause for the failure to pay and therefore the penalties should be abated. Custom Stairs concluded that since the penalty was simproper, there was no underlying tax liability to,warrant a lien against its, property and thus the lien was unnecessary and unreasonable. On February 5, 2010, respondent filed a motion for summary judginent,sand on March 10, 2010, Custom Stairs timely filed a response. By order dated April 13, 2010, this. Court denied respondent's motion. 'It did so because it determined that e "Whether petitioner's failure to- pay taxes was due to reasonable cause is a material issue of fact". Summary judgment is .4 appropriate only :where "the spleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter sof law." Rule 121(b). A trial was held on-May 24, 2010, in Mobile, Alabama. OPINION Section 6320(a) and (b) provides that a taxpayer shall be notified.in writing by the Commissioner of the filing of sa notice of Federal.tax lien.and provided with an opportunity for am administrative hearing. An administrative hearing under section 6320 is conducted in accordance with the procedural requirements of section 6330. Sec. 6320(c). - 13 - Section 6331(a) authorizes the Commissioner to levy upon property or property rights of a taxpayer liable for taxes who fails to pay thoge taxes within 10 days after a notice and demand for payment is made. Section 6331(d) :provides that the levy authorized in section 6331(a) may be made with respect to unpaid tax liability on]y if the Commissioner has given written notice to the taxpayer 30 days before the levy. Section 6330(a) requites the Commissioner-to send a written notice to the taxpayer of the amount of the unpaid tax and of the taxpayer's right to a section 6330 hearing at least 30 days before the levy is begun. If an administrative hearing is requested in a lien or levy case,ithe hearing is to be conducted by the Appeals Office. Secs. 46320(b) (1), 6330(b) (1). At the hearing, the Appeals officer conducting it must-verify that the requirements of any applicable law or administrative procedure have been met. 6320(c), 6330(c) 1). Secs. The taxpayer may raise any relevant issue with regard to the Commissioner's intended collection activities, including spousa] defenses, challenges to the appropriateness of the proposed ¯levy, and alternative means of collection. 6330(c) (2) (A); see also Sego v. Commissioner, 4114 T.C. (2000); Gdza v. Commissioner, -114 T.C. 176, Sec. 604, 609 Ì80 (2000). Taxpayers are expected to provide all relevant information requested by AppEalS, including financial StatementS, fOr its - 14 consideration of the facts and issues involved in the hearing. Secs. 301.6320-1(e) (1), 301.6330-1(e) (1)-, Proced. & Admin. Regs. If a taxpayer' s underlying liability is properly sat issue, the Court reviews' any determination regarding the underlying liability de novo. Sego v. Commissioner, supra at -610; Goza v. Commissioner, supra at 181-182. We review any, other administrative determination regarding the proposed collection action for abuse of discretion. Sego v. Commissioner, supra at 610; Goza;v. Commissioner, supra.at 181-182. If raised at a hearing by the taxpayer, a taxpayer' s underlying liability is properly at issue if the taxpayer "did not receive any statutory notice of deficiency for such tax liability or 'did not otherwise have an opportunity :to dispute such tax liability." . Sec. 6330 (c) (2) (B) . , A taxpayer generally is treated as not having had an opportunity to dispute a liability that, is self -reported as due on a return. v. Commissioner, 122 T.C. 1,. 9 (2004) . receive a notice of deficiency. Montgomery Custom Stairs did not Respondent has not shown, indicated, or alleged that Custom Stairs had an opportunity- to dispute the tax liability, and the penalty was related to a liability that was self-reported as due on the return. Consequently, the underlying liability is properly at sed . 6330 (c) (2) (B) . issue. See - 15 - Under section 6656(a) if a taxpayer fails to make a required deposit on the dEte prescribed for that deposit, a penalty equal to the applicable percentage of the amount of the underpayment, determined pursuant to section 6656(b), shall be imposed. Section 6656(a) Elso provîdes that the penalty shall not be imposed if "it is shown that such failure is due to reasonable cause and not due to willful neglect". Likewise section 6651(a) (2) imposes an addition to tax of 0.5 percent per month up to an aggregate total maximum of 25 percent for failure to timely pay tax. This acidition to tax'is also not to be applied if the failure to pay.w s due to reasonable cause and not willful negleat. Caselaw and legislative history indicate that the.primary purpose of these penalties is to ensure compliance. United States v 101-247, at 1403 Boyle, 469 U.S. 241, 245 (1989). (1985); H. Rept. The Commissïoner's policy statement explains that the "Penalties are used to enhance voluntary compliance. * * * Penalties provide the Service with an important tool * * * because they enhEnce voluntary compliance by taxpayers." Internal Revenue Manual (IRM) Exhibit 20~.1.1-1, Penalty Policy Statement 20-1 (Dec. 11, 2009)-. it is uncontested that Custom Stairs failed to make the' requi ed 2008 second quarter deposit payments by the dates they - were due. 16 - We must decide whether, that failure was due to - reasonable cause and not willful neglect. Custom Stairs during the,years 2005 through June 2008 was consistently in arrears,.so that the numerous undesignated a paymentstit made were frequently applied to pay past, due liabilities. Final payments satisfying thertotal tax amounts due under the returns as filed were made shortly after sthe lien was filed, ,leaving unpaid only a portion cof the- 2008 second quarter penalties that had been.assessed. Custom Stairs casserts that it had not fully recovered from the damage caused in 200.4 by Hurricane Ivan when it begans to feel the effects of the economic recession in 2008. Custom Stairs responded byelaying off employees, eliminating vacations ånd paid holidays, and curtailing employee benefits. It even unsuccessfully attempted to sell the real property in which it conductedsits business,- in an effort to remain current with its taxes and pay off its debts. Custom Stairs did not make the Federal tax deposits because there was "not enough to pay.the. taxes" and meet its other crucial operating expenses. Mrs. Condes explained that "I have made conscious decisions to pay perhaps a vendor,* *,i but when I've made a decision to not pay a tax payment on time'versus a vendor, it was simply to continue to stay ,in business." Custom Stairs claims that its inability to timely pay the taxes on - 17 - account of the ll.ngering effects of Hurricane Ivan-and the economic recession,.in the acontext of this case, constitutes reasonable cause eRespondent asserts that the mere inability to pay coupled with the payment of other creditors rather -than the Treasury, is never reasonable cause for abatement of, the failure to deposit, penalty. However, a majority of the Courts of Appeals that have decided this issue have determined "that financial hardship can, under certain circumstances, justify failure to pay-and deposit employment taxes' . F.3d 1035,- 1038 United States, Dia'mond Pla'ting Co; v. United States, 390 :7th Cif. 2004) (citing Van Camp & Benn'ion v. 251 FT3d 862; 868 ~(9th Cir. 2001), East