UNITED STATES TAX COURT

138 T.C. No. 10

UNITED STATES TAX COURT

JOHN J. MCLAINE, Petitioner v.

COMMISSIONER OF INTER1 AL REVENUE, Respondent

Docket No. 15932-07L.

Filed March 13, 2012.

In 1999 P exercised nonqualified stock options (NQOs)

previously issued to him by E, his rdcent employer, and

simultaneously sold the option stock, receiving from E the sale

proceeds, 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 taK for failures 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 the ground that he

is entitled to a credit under I.R.C. seé. 31 for payment by a successor

to E in a later year of the tax due on his 1999 option gain.

-21. Held: P is not entitled to a credit under LR.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

discretion 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.It.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 petitioner.

Frederick Lockhart, 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

(the notice) is 541ued

by respondent's Appeals Office. The notice concerns

petitioner's 1999 Federal income tax, and it sustains an Appeals officer's

-3determination that respondent may proceed by levy to collect that tax. We review

the notice pursuant to section 6330(d)(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 exeréise of the NQOs, which he and his

then wife reported on their 1999 joint Federal income tai 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.

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 alternatives as

described in section 6330 (c)(2)(A)(iii) was an abuse of discretion. We hold that it

was not;

.

'Unless otherwise indicated, all sect on 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.

-43. 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 collection 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

Petitionér 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, Exdel Communications, Inc. (Excel), was a

privately held company in the business of selling and reselling telephone services.

Initially, petitioner worked as a consultan 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! billion in 1996, and its workforce grew

from 20 to over 6,000 employees.

In 1996 petitioner was part of the n anagement team that took Excel public.

In 1997 Excel acquired Telco, a Vifginia-based long-distance

telecommunications company. Also in 1997, after the Telco acquisition, petitioner

was promoted to president and chief oper ting officer of Excel, but he continued

as its CFO. In April 1998, on account of d 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.

-6Exercise of NOOs

During the time petitioner was employed by Excel, it awarded him NQOs

pursuant to its jtock 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 reéluirements."

Teleglobe, Inc. (Teleglobe), a subsidiary of Bell Canada Enterprises (BCE),

acquired Excel in 1998. As a result, petitioner'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 1.999

(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 1099B, Proceeds From Broker and Barter Exchange Transactions, listing the gross

proceeds from the 1999 exercise. Those orms were the source for the amounts

petitioner and his former spouse reported on the 1999 return. Excel/Teleglobe

mailed a Form 1099-MISC, Miscellaneous Income, to petitioner at a post office

box in Colorado, reporting $8,384,044 of miscellaneous income. Petitioner did

not receive that form.

When petitioner received the option proceeds, he knew that no taxes had

been withheld. Petitioner received no no ification 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 venture capital firm.

All of those investments either failed or re sulted 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 s fficient to pay his 1999 tax liability by

attempting, unsiiccessfully, to borrow against or to sell his Colorado and Florida

homes.

The 1999 Return

Petitionei. 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, tai 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 twomonth 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.

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 h ve 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 providèd 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 ánd 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 Former Spouse

Petitioner and his former spouse were divorced in 2004. Thereafter, she

requested and received relief from joint li bility with respect to the 1999 return.

As a result, on March 10, 2008, responde t reversed the assessed debit balance of

$2,084,961 in petitioner's and her joint account with respondent and transferred it

to petitioner's separate account with respqndent.

The Collection Due Process Hearing

On June 26, 2006, respondent sent etitioner a Letter 1058A, Final Notice

of Intent To Levy and Notice of Your Right to a Hearing, with respect to

- 10 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

correspondencê. Petitioner 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 entitled to a credit for that thirdparty payment (or for withholding 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 petitioner or the execution of an

installment agreement to the extent of petitioner's tax liability and (2) petitioner's

defense, basedjon alcoholism, against the imposition of additions to tax.

Mr. Jeka was unable to confirm from respondent's computer records that

Excel had withheld taxes from the payments associated with the 1999 exercise or

that either Excel or Teleglobe had subsequently paid those taxes. Mr. Jeka

declined to coiisider any collection alternatives (an offer-in-compromise or an

- 11 installment agreement) because petitione had not submitted either an offer-incompromise or supporting financial infor nation after obtaining repeated

extensions of time to do so, and he rejectéd petitioner's alcoholism defense to the

assessed additions to tax on the basis of his reading of applicable caselaw.

Subsequently, in June 2007 respon lent mailed to petitioner 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 iner ased after he left Excel's employment in

1998, and, in particular, from 1999 to 20 1 when his investments turned sour. By

2000 he recognized 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 meeti gs and late at night, or throughout the

night, by himself. As a result, he began tg have trouble managing his personal

affairs such as timely payment of bills and mortgage obligations. Despite those

problems he was asked to and did take ov r the management of a venture capital

firm in September 2001.

- 12 Subsequently, petitioner tried to stop drinking for a time with intermittent

success. Petitiqner 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: 1"Bright and alert male in no distress". His mental status is noted:

"Affect is normal. Orientation is normal. Memory is normal." He was discharged

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 examining agent's proposed adjustments concerned

Excel's treatmént 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 ßxcel group was liable for income, Federal Insurance Contributions

Act (FICA), and Federal Unemployment Tax Act tax withholding payments that it

had not made in connection with the NQO exercises. The agent's report for an

Excel subsidiaïy, Excel Management Service, Inc. (Excel Management Service),

- 13 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 recharacterization--from nonemployee

compensation to employee wages--of all pf 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 recommendations 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 respect to those proceeds, the Appeals officer stated as follows:

The payments to the * * * three wokkers 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 independent contractors; the

taxpayer claims that at the time the options were exercised they

were not corporate officers but independent contractors.

Robinson and Hamrick filed return 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.

- 14 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 Insurance 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 chief financial officer of Excel

Management Service executed, on behalf of that corporation, a Form 2504,

Agreement to Assessment and Collection of Additional Tax and Acceptance of

Overassessmerit (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.

- 15 On September 23, 2005, respondent made four assessments of $70,506, one

for each quarter of calendar year 1999. 1 o 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.

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 cl ims 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 empláyment taxes occasioned by the 1999

exercise. At the time of the trial in this case, VarTec's legal iepresentatives did

not know whether anyone had paid those taxes to the Commissioner.

In December 2002 VarTec had sue 1 BCE (Teleglobe's parent) concerning

claims against Teleglobe, which included VarTec's potential liability for Excel's

failure to withhold taxes occasióned by the 1999 exercise. That suit ultimately

resulted in either an arbitration award or a mediation award to VarTec. The

- 16 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 (the 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, respectively. The first, in the amount of $14,187,441, included a "WTFICA" 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 assessed on September 23, 2005, but were listed

in the second þroof of claim as "unassessed" liabilities. The third proof of claim,

- 17 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 fil d in the Teleglobe bankruptcy was

"disallowed and expunged" by the Dela are Bankruptcy Court in June 2005.

OPINION

I.

The Parties' Arguments

A. Constructive Withholding

.

Petitioner contends that VarTec pa d the taxes associated with the 1999

exercise in 2004 or 2005. .He offers as pr of 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 Management 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 $282,0 4 of "WT-FICA" claims for 1999.

Petitioner argues: "The IRS' voluntary reductions 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 Va Tec/Teleglobe arbitration, but also

pursuant to the IRS audit of Excel."

.

- 18 Petitione'ï· 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 argument on the

Appeals officer's statement that the agent's proposed adjustment "with respect to

* * * [petitione¼] 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) withheld from the option proceeds

could not constitute an actual withholding from those proceeds, petitioner argues

that, nonethele 541s,

he is entitled to a section 31 credit "for income tax

constructively fithheld." He further argues that, as a result, "no penalties or

additions to tax are applicable to * * * [him]." Petitioner bases his theory of

constructive withholding 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

- 19 claim corroborate the Appeals Off ce 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 th Service's examination function.

The settlement was for an addition 1 employment tax liability in the

amount of $70,506.00 for each cal ndar quarter of 1999, or

$282,024.00 total, for the year. The executed agreement to

assessment of additional employm nt tax reflects precisely this, as do

the assessments shown on the Forni 941 transcripts for Excel

Management.

B. Scope and Standard of Review

The parties dispute the scope and st ndard of review applicable in this case.2

However, we decline to resolve the scope nd standard of review issues they raise

because we find that no payment was mad by Excel or a successor corporation, in

2004 or 2005, of the nonwithheld taxes rel ted to the 1999 exercise. In addition,

we find that there is insufficient evidence tp 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 nee 1 not resolve the parties' dispute as to

the scope and standard of review. See Kohh v. Commissioner, T.C. Memo. 2009-

117, aff'd, 377 Fed. Appx. 578 (8th Cir. 20 0).

2The Form 4340 also shows subsequ nt credits for 1996, 1997, and 2006

overpayments totaling $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.

-20 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 essentially 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 clairn filed in that bankruptcy. We agree, however, with respondent that

the reduction in the proof of claim amount is more likely corroborative of a

- 21 decision by the Commissioner to adopt tl e 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 he 1999 option exercises)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 peti ioner "will be left unchanged". As

noted above, petitioner apparently reads into that statement an intent to continue to

pursue Excel (and its successor corporations) for the taxes associated with the

1999 exercise. Whatever the Appeals offi er's intent when he included that

statement in his recommendations for reso ving 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 reflee 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 rèliance 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

- 22 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, respondënt 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 procedures, see Internal

Revenue Manual pts. 3.17.243.13.2 (Jan. 1, 2008), and 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 withholding 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 existence 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 Appgals 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. 1 emo. 2004-100; Tornichio v. Commissioner, T.C. Memo. 2002-291. P titioner has not demonstrated any

irregularity in the preparation of the foregoing transcripts, and we see no reason to

depart from that principle in this case.

Davis v. Commissioner, 115 T.C. at

41; Tornichio v. Commissioner, T.C. Me o. 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 T x Regs. The parties also dispute the

effect of Whalen v. Commissioner, T.C. Mémo. 2009-37, where, in dicta, we

suggested that an employer's actual payme t 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." ( mphasis added.) Whalen was a

- 24 deficiency case, not a collection 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 confme 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 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 fmancial information that

- 25 Mr. Jeka requested; nor did he submit an öffer-in-compromise before the

expiration of repeated deadlines that Mr. Jeka extended to him for doing both. As

a result, petitioner and Mr. Jeka agreed to neither an offer-m-compromise nor an

installment agreement.

In his petition, petitioner claims tha Mr. Jeka's failure to provide collection

alternatives was an abuse of discretion. H does not, however, raise the issue in

his briefs. Therefore, we consider petitioner to have abandoned that claim. 4,

Money v. Commissioner, 89 T.C. 46, 48 (1987); see Rule 151(e)(4) and (5)

(requiring that a party's brief state the poiiits 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 cir umstances, Mr. Jeka's action did not

represent an abuse of discretion. See Kendricks v. Commissioner, 124 T.C. 69, 79

(2005); Orum v. Commissioner, 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 petitioner's 1999

unpaid tax liability.

- 26 III.

Petitionår'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 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" performance 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 pfetrial memorandum, or at trial. See Rule 331(b)(4); Behling v.

Commissioner, 118 T.C. 572, 579 (2002); Brecht v. Commissioner, 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 institutional

3It is not clear why petitioner selected that date as the date from which no

additional interest should run.

bias at every turn". Therefore, petitioner is not entitled 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 taxp yer'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 procedure had been met." See, e.g., Davis v. Commissioner, 115

T.C. at 35-36; Roberts v. Commissioner, T.C. Memo. 2004-100; Tornichio v.

- 28 Commissioner, T.C. Memo. 2002-291. In the light of petitioner's failure to

demonstrate any irregularity 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. Commissioner, 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 evidence 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. ,, 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.

- 29 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 th se 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 (20 1). 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.l. of this report, the Form 4340 for

petitioner's 1999 taxable year supports a fmding that petitioner made no payments

of income tax owed for 1999 until July 17 nd October 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 $3,2 6,333. Therefore, respondent has

satisfied his burden of production under section 7491(c).

- 30 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 payment 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 hardship, (2) his alcoholism, and (3) retroactive application of

section 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 consider 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 fmancial 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.

- 311 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 f4ilure to pay all of the income tax that he

knew was due with respect to his 1999 tax ble income, which included the spread

amount that petitioner reported as short-te

capital gain. See McWhorter v.

Commissioner, T.C. Memo. 2008-263 (employer's failure to withhold taxes that

should have been withheld does not excus(an employee's failure to file a return or

pay taxes nor relieve him of the additions t 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 exercise of the 1999 NQ s, petitioner had the funds necessary

- 32 to pay the taxes associated with his income from the 1999 exercise. 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 paymeát of tax. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.,

which, in relevant part, provides as follows:

A failur'e 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 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 * * * 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 incapacitated by his drinking problem on the April 15, 2000, due date

of the 1999 return. That argument is seriously undercut, however, by his argument

- 33 of undue financial hardship. In connection with the latter argument, petitioner

testified that, between the April 15, 2000, due date and the October 20, 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 tl e funds necessary to discharge that

liability. Those actions are hardly the acti ns of a man incapacitated by

alcoholism.

Moreover, although petitioner testified that in 2000 he recognized 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,

however, he was able to continue his cons lting business, and upon admittance to

the Center on September 5, 2002, Center p rsonnel noted that he was a "bright and

alert male in no distress" and that his "affe t", "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 condlition does not constitute reasonable

cause for his failure to timely pay the inco e taxes shown on that return. ,

. 4Petitioner has neither alleged nor sh wn a causal relationship between his

having operated in a highly stressful and v latile business environment throughout

his employment by Excel and his failure to timely pay his 1999 tax liability.

- 34 e.g.., Hazel v. Commissioner, T.C. Memo. 2008-134; Jones v. Commissioner, T.C.

Memo. 2006-176; Harbour v. Commissioner, T.C. Memo. 1991-532; Gardner v.

Commissioner, T.C. Memo. 1982-542.

4. Gonclusion

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

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,

5Because 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.

- 35 nonpayment) 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 434Ö 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 petitioner had a "required annual paynhent" for 1999 within the meaning of

section 6654(d)(1)(B)), we find that respo dent has satisfied his burden of

production under section.7491(c). The burden of proof is on petitioner to show

that he is covered 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 relate to respondent's additions to tax under

6Here, again, we reject petitioner's additional argument that respondent

failed to take into account petitioner's alle ed payment of $1,500,000 on April 15,

2000, the return due date. We reject that a ument, not only for the reasons stated

supra note 5 with respect to respondent's i position 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 v as due. Rather, it constituted the

termination date for the running of interest from each of the four estimated

payment dates for 1999. See sec. 6654(b)(2).

- 36 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 álcoholism 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).

2. Conclusion

Mr. Jeka properly sustained collection with respect to the addition to tax

under section 6654(a).

An appropriate order and

decision will be entered.

Reviewëd by the Court.

COHEN, FOLEY, VASQUEZ, GALE, THORNTON, MARVEL, GOEKE,

WHERRY, KROUPA, GUSTAFSON, PARIS, and MORRISON, L[., agree with

this opinion of the Court.

- 37 HALPERN, J., concurring: I concur with the results reached by the majority

with respect to all of the issues. I write separately, however, to express my

disagreement with the majority'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. R spondent 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 he evidence does not support the

existence of such a payment. I would also hold that petitioner'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 majo ity would postpone addressing the

legal issue until we are "presented with a case in which the IRS proposes to collect

- 38 a party's liability that has been paid by another person."1 It further cautions: "Our

silence on the [legal] issue should not be construed as our agreement with either

party's argument." 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 nonwithheld taxes.2

'The above-quoted language implies that an employer's payment of

nonwithheld taxes attributable 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.

2The mpjority 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. 23.

In Whalen v. Commissioner, T.C. Memo. 2009-37, 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 taxpayer'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 withholding for 2001, we denied the taxpayer a 2004

sec. 31 credit because we considered the payment as withheld for 2001. We went

beyond (1) granting that one could plausibly argue for constructive withholding to

(2) adopting öonstructive withholding for 2001 as the reason we denied the

taxpayer a withholding credit for 2004. It is difficult to dismiss our reasoned

(continued...)

-39The majority notes that "Whalen w s a deficiency case, not a collection

case", thus implying that the case is somehow distinguishable and, therefore, that

the majority's postponement in deciding the legal issue would not encourage

employees to advance an argument simila 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 seption 31(a), regardless of the context 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 Inte al 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

2(...continued)

analysis of why the taxpayer lost as merely "something said in passing"; i.e.,

"obiter dictum", Black's Law Dictionary 11 7 (9th ed. 1999) ("Latin 'something

said in passing' * * * 'Often shortened to di tum'"). Petitioner did not

unreasonably attach more weight to it than hat.

- 40 alternative, that, as a matter of law, the VarTec. payment 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) definés "wages" generally as "remuneration * * * 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. Moreoýer, remuneration for services constitutes wages even though paid

3The 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 announced 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, something 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 a 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."

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 payment'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 roceeds constituted wages subject to

withholding of income tax, even though p titioner 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 tax s entitles him to a corresponding credit

for 1999 under section 31(a) and section 1 31-1(a), Income Tax Regs. Petitioner is

mistaken.

B.

Section 3403 Imposes an Indepêndent Liability Upon Employers for

Failure To Withhold Taxes.

In its entirety, section 3403 provide s : "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 implements section

3403, emphasizes that employers "required to deduct and withhold * * * tax under

- 42 section 3402" áre liable, under section 3403, "for the payment of such tax whether

or not it is collécted 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 y61(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 provision applicable to

employees.5 Thus, an employee's liability for income taxes is not subject to

4In 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 \vhich 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,

generally, secs. 1, 61(a)(1), 6151(a), and 6155.

5A limited exception to that observation, inapplicable herein, is provided by

sec. 4999(c) vvith respect to an employer's excess golden parachute payments to an

(continued...)

- 43 abatement or credit under section 31(a) m rely 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 taxes that the employ r did not timely withhold and the

employee reimburses him under the correction and settlement 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 riot constitute payments 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 in_fra section II.D. of this concurring opinion).

(...continued)

employee. The effect of that provision is to require the employer to treat its

payment of the 20% excise tax applicable t 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.

6As a practical matter, sec. 3402(d) nhay discourage the Commissioner from

pursuing the employee 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 collectéd from the employee.

C.

Section 6205(a)(1) and the Regulations Governing Corrections of Prior

Underwithholdings

In relevänt 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 adjustments, 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 Secretary may by

regulatiòns 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 bàsis incentivizes employers to make voluntary corrections of

employment tàx 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 asslate 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

7Except 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 ançl the Teleglobe and VarTec bankruptcies. The regulations are

superseded by regulations finalized on July 1, 2008, T.D. 9405, 2008-32 I.R.B.

(continued...)

tax audits alleging income tax underwithh lding 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 Additional Tax and Acceptahce of Overassessment, and is made

before the employer receives a notice and emand for payment. 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 sect on 6205 regulations restrict the

situations in which the employer is entitled to employee reimbursements. In

general, an employer is permitted to collec mcome tax withholding shortfalls

from its employees if it collects the under ithheld amount within the same

calendar year as the underwithholding "by deducting such amount from

remuneration of the employee, if any, under * * * [the employer's] control

[whether or not the remuneration constitutés wages]." Sec. 31.6205-1(c)(4),

7(...continued)

042

293, which apply to "any error acertained n or after January 1, 2009", id. The

2008 regulations do not change, in any ma rial respect, the prior regulations cited

herein.

- 46 Employment Tax Regs. Undercollections in a calendar year not so corrected are

"a matter for settlement between the employee and the employer within such

calendar year.". Id. I interpret that last provision to cover situations in which the

employer is uñable to deduct the requisite amount from employee remuneration

before yearend; e.g., because the employee is entitled to too little or to no

additional remuneration from the employer before then. It is not clear whether

"settlement" before yearend means actual payment 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

provided for, governed by the interest imputation rules of section 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

8It is orily during the limited period in which an employer may seek

reimbursement from an employee for the amount of the former's underwithholding

corrections thát a failure to do so will result in debt forgiveness income to the

employee under sec. 61(a)(12). Employer underwithholding 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 forgiveness

income to the}employee. Moreover, because all underwithholding corrections by

an employer pursuant to sec. 3403 discharge the employer's, rather than the

(continued...)

D.

Application of the Section 31( ) Credit

Section 31(a)(1) provides to every einployee 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 withholdiug is dependent on a finding that the tax

has "actually been withheld" 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 regulations

thereunder, and recoups (or "settles") from the employee its payment of the

8(...continued)

employee's, tax obligation, Old Colony .Trast v. Commissioner, 279 U.S. 716

(1929)(payment by an employer of an employee's income tax obligation in

consideration of the employee's services pbrformed on behalf of the employer

constitutes income to the employee), is ina plicable thereto.

.

- 48 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 withholding 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 doës 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 section 3403 would benefit equally

employees wh(> 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, whò never paid taxes on that income, thereby unjustly enriching the

latter. Moreoyer, such a result would open the door to unwarranted tax planning

91 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.

-49arrangements designed to frustrate the Con1missioner's right to collect interest and

additions to tax or penalties on late payme!nts or underpayments of tax pursuant to

sections 6601, 6651(a)(2), and 6654. For example, employees who have

purposely underpaid their taxes on wage income and had their returns audited and

been assessed significant deficiencies and interest (not unlike petitioner) would

have the procedural ability to persuade their employers (or former employers) to

voluntarily and retroactively pay those pa roll taxes under the interest-free

adjustment procedures of section 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 t effectively erase their liability for

interest and, perhaps, additions to tax and penalties with respect to the

deficiencies 1° Where the employer has made a payment under section 3403 in a

year after the year of underwithholding, th Commissioner should be permitted to

collect the appropriate interest and additions to tax from the employee even

'°By treating VarTec's assumed 2004 or 2005 payment in partial discharge

of the Commissioner's proof of claim in the VarTec bankruptcy as withholding tax

associated with petitioner's 1999 exercise ( .e., as "tax actually * *.* withheld at

the source"), that payment would necessarily 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).

-50 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 constituted 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 withholding in Begier v. IRS, 496 U.S. 53

(1990), which petitioner 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 "withholding" supports our interpretation. See

Webster's Third New International Dictionary 2627 (1981) (defining

"withhålding" to mean "the act or procedure of deducting a tax

payment from income at the source") (emphasis added). [Id. at 60-

61.]

-51IIL

Conclusion

Assuming that Excel or VarTec paift 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.

HOLMES, J., agrees with this concurring opinion.

"And finally, borrowing from Judg Holmes' baseball analogy in Stromme

v. Commissioner, 138 T.C. _, _(slip op. at 25) (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 improp r 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.