# UNITED STATES TAX COURT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac3178344b9ae8e70 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac3178344b9ae8e70. Public record. Not legal advice.