Amicus Curiae Brief — Staff IT, Inc. v. United States (No. 07-221)

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: | SEP 26 2007

No. 07-221

aR eeiieaesseraeee dees

| SUPREME COURT. U.S

IN THE

Supreme Court of the United States

STAFF IT, INC.,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF AMERICAN PAYROLL ASSOCIATION

AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

Scott Mezistrano Anne G. Batter*

American Payroll *Counsel of Record

Association Dean R. Morley

1601 18th Street, NW Thomas M. Cryan, Jr.

Suite 1 Baker & McKenzie

Washington, DC 20009 815 Connecticut Avenue, NW

(202) 452-7063

LE RC AA ER EA EE ACA ANN

WiLSON-EPES PRINTING CO, INC. — (202) 789-0096 — WASHINGTON, D. C. 20002

ee

rm

QUESTION PRESENTED

Whether federal courts should consider

ali facts and circumstances outlined in

Treasury Regulations when determining if

“reasonable cause” exists to _ justify

abatement of penalties for an employer's

failure to pay payroll taxes under 26 U.S.C.

§ 6651(a)(2), or its failure to deposit payroll

taxes under 26 U.S.C. § 6656(a).

TABLE OF CONTENTS

Page

QUESTION PRESENTED...............ccccsscecsessceceeees ii

TABLE OF CONTENTS .................-seccceeeeees iaaiiecoi iii

TABLE, OF AUTHOR ee scccccneceseesessenesersesoseves iv, v

INTEREST OF THE AMICUS CURIAE.............. 1

STATEMENT OF THE CASE .....0........cccesseseseees 2

SUMMARY OF ARGUMENT ...............::::ceeeeeeees 3

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I. The Fifth Circuit’s Holding is Contrary

to the Policy Underlying Tax Penalties ... 4

Il. Treasury Regulations Are Entitled to

Deference and the IRS Cannot Assert a

Position that is Contrary to Existing

Treasury Regulations in Assessing a

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IR in rcccioviisienwitnrsstatmmbenmbinenditananiias 8

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TABLE OF AUTHORITIES

CASES:

Alumax, Inc. v. Commissioner, 109 T.C. 133 (1997) ..

Am. Campaign Acad. v. Commissioner,

ig RPT IRL es er ar

Baker v. Commissioner, 122 T.C. 143 (2004)..............

Beneficial Found., Inc. v. United States,

Be es ME IED sonccscabeudisccniececehapeeneneatundsannnediniiod

Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.

eee i i ckdincasvhansnsnsiciamnndensvaseauudciennntdinnss

Cynthia L. Rowe v. Commisioner,

a iia cca de cicaslals anisialecetenciiniabedehintal

Dover Corp. v. Commissioner, 122 T.C. 324 (2004)...

Estate of McLendon v. Commissioner,

ESS Fe LOTT CBC CAE. TDD .ccccccescccescceccescccevesesess

Estate of Rapp. V. Commissioner,

ROD F.Bk BBEE CORR CUP, BBG D cece ccccccccevevccececccesseces

Nissho Iwai Am. Corp. v. Commissvoner,

Ie Pe ee iitecseisadnicseinpscabiepianinabeiniacanses

Rauenhorst v. Commissioner, 119 T.C. 157 (2002) ....

Silco, Inc. v. United States,

T7O F.Be BER Gta GRE. 19GB) nn. ccccesecccecsseceseserseresees:

Staff IT, Inc. v. United States,

SE Fe Fae Cee Gi BO wcities sncvegy rece censacsesevvercens

Swallows Holding, Ltd. v. Commissioner,

ge ik SSE EI SN arene ee TOPE eer

United States v. Staff IT, Inc.,

2006 WL 314440 (S.D. Tex. Feb. 9, 2006)...............

STATUTES:

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OS ESSERE ee ae me ee LAIN Saeed li, 4

Omnibus Budget Reconciliation Act of 1989, P-1-18 . 4

OTHER MATERIALS:

Code of Federal Regulations:

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26 C.F.R. § 601.601(d)(2)(v)(e) ............00.eeseeeeeeeee 6

Internal Revenue Manual:

BWR. $0.1.1.1.404)., BOW B...occcccscecececcesevesesecssses 4

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I I oasis saseuebaiedisabncinanuasacs i)

BO a so ws cccesncessdicoin tatovecburaddncibinecs 5

Revenue Procedure:

Rev. Proc. 89-14, 1981-1 C.B. 814 §7.01(5).......... 6

No. 07-221

IN THE

Supreme Court of the Anited States

STAFF IT, INC.,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF AMERICAN PAYROLL ASSOCIATION

AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

INTEREST OF THE AMICUS CURIAE

The American Payroll Association submits this brief

as amicus curiae in support of Petitioner in the above-

captioned matter.!

! No counsel for a party authored this brief in whole or in part, and no

person or entity, other than amicus curiae, has made a monetary

2

The American Payroll Association (“APA”) is a non-

profit association representing payroll professionals.

APA’s members include over 23,000 payroll professionals,

most of whom perform payroll-processing duties for

approximately 17,000 employers. Additionally, APA’s

membership includes representatives of large, medium,

and small payroll service providers who in turn process

payrolls for an additional 1.5 million employers

representing an aggregate total of one-third of the private

sector workforce. The employers for whom APA members

process payrolls are diverse in terms of business size,

location, and industry. As payroll specialists, APA’s

members must determine proper employment tax

withholding, prepare and file accurate information

returns and statements, correct (when necessary) such

information returns and statements, calculate and deposit

taxes, and maintain all necessary payroll records. APA is

concerned that the lower court’s narrow application of the

“reasonable cause” test for the abatement of penalties,

which conflicts with both the statute and underlying

regulations, would created undue hardship on _ its

members. Accordingly, APA has a direct stake in the

outcome of this case.

STATEMENT OF THE CASE

Petitioner Staff IT, Inc., engaged in the business of

hiring and paying technical contractors and staffing them

to outside business clients. These clients would pay

Petitioner for the services. In 2001, the dot-com crash

and the collapse of Enron triggered a severe economic

downturn, particularly in Houston, where Petitioner

encountered reduced demand for its _ contractors.

Petitioner’s financing company also declared bankruptcy.

contribution to the preparation or submission of this brief. Written

consent of the Petitioner and Respondent have been obtained and filed

with the Clerk of the Court.

3

At that time Petitioner failed for three quarters to file,

pay, and deposit payroll taxes as required by federal law.

Petitioner did not scale back expenses until early 2002

when new financing was arranged. The company

stabilized its finances by the end of 2002 and began to

assume its tax obligations. However, the IRS pursued

penalties, which are the subject of this appeal.

Petitioner presented a request to abate the penalties,

which an IRS Appeals Officer denied. Petitioner then

commenced suit in the District Court, which granted

summary judgment for the government. See United

States v. Staff IT, Inc., 2006 WL 314440 (S.D. Tex. Feb. 9,

2006). In March 2007, the United States Court of Appeals

for the Fifth Circuit affirmed. See Staff IT, Inc. v. United

States, 482 F.3d 792 (5th Cir. 2007).

SUMMARY OF ARGUMENT

The lower court in this case held that neither

“reasonable cause” nor “undue hardship” is present where

a taxpayer fails to fire employees and cease all payments

to creditors. This holding conflicts with both the statute

and underlying regulations, and it ignores’ the

Congressional intent and Internal Revenue Service

(“IRS”) policy for imposing tax penalties.

This petition involves only the failure to pay and the

failure to deposit penalties, not the failure to file penalty.

Whether or not a trier of fact determines that the conduct

of this Petitioner ultimately excludes it from abatement of

those two penalties, however, this court should grant the

petition because Petitioner is correct in arguing that the

lower court used an improperly narrow test that conflicts

with the statute. Furthermore, substantial case law

requires the IRS to follow its own regulations. The IRS

should be prohibited from advocating a position that is

directly contrary to 26 C.F.R. § 301.6651-1(c)(1).

ARGUMENT

I. THE FIFTH CIRCUITS HOLDING IS

CONTRARY TO THE POLICY UNDERLYING

TAX PENALTIES.

Sections 665l(a) and 6656(a) provide that the late

filing penalty will not be imposed where the “failure is

due to reasonable cause.” “Reasonable cause” for a failure

to pay is defined in the Treasury Regulations to include

situations where the taxpayer's payment of the tax would

result in undue financial hardship. 26 C.F.R. § 301.6651-

l(c); 26 C.F.R. § 1.6161-1(b). Guidance on the policy

behind these penalties and the reasonable cause standard

can be discerned from the IRS’s own Internal Revenue

Manual (“IRM”).

In 1987, the IRS formed a task force to study civil

penalties and to address the systemic concern that

penalties were not being imposed and_ enforced

consistently among taxpayers. That task force, in

conjunction with the overhaul of the penalty regime by

the Omnibus Budget Reconciliation Act of 1989, resulted

in the 1992 adoption of the Service's first penalty policy,

P-1-18. This policy is incorporated in the current version

of the IRM.

The IRM makes clear that the purpose of penalties is

to support and encourage voluntary compliance. See IRM

20.1.1.2.1. According to the IRM, each case should be

resolved in a manner that promotes’ voluntary

compliance. IRM 20.1.1.1.4(4), Step 8. See also IRM

20.1.1.2.1(1) (penalties exist to encourage voluntary

compliance); IRM 20.1.1.2.1(5) (penalties advance the

mission of the Service when they encourage voluntary

compliance). Voluntary compliance is achieved when a

taxpayer makes a_ good faith effort to meet the

5

requirements of the law. IRM 20.1.1.2.1(6). The IRM

acknowledges that taxpayers sometimes take sufficient

action to meet their obligations, but as a consequence of

factors beyond their control, are unable to do so. Critical

to the reasonable cause determination is whether “the

taxpayer exercises ordinary care and prudence but, due to

circumstances beyond the taxpayer’s control, the taxpayer

was unable to timely meet the tax obligation.” IRM

20.1.1.3.1.2(2)d.

Imposing penalties where the taxpayer’s failure to pay

was caused by financial distress is contrary to the IRS’s

own internal policy. Imposing penalties where the

taxpayer is already facing severe financial hardship will

do nothing to further voluntary compliance. We

understand that whether the taxpayer's financial

condition affected the failure to pay the taxes is a

question of the fact, but courts should be able to consider

this factor in determining whether reasonable cause

exists. The Fifth Circuit’s narrow interpretation of the

statute prevents courts from considering this factor.

Il. TREASURY REGULATIONS ARE ENTITLED TO

DEFERENCE AND THE IRS CANNOT ASSERT A

POSITION THAT IS CONTRARY TO EXISTING

TREASURY REGULATIONS IN ASSESSING A

PENALTY

As previously noted, “reasonable cause” for a failure to

pay is defined in the Treasury Regulations to include

situations where the taxpayer's payment of the tax would

result in undue financial hardship. 26 C.F.R. § 301.6651-

l(c); 26 C.F.R. § 1.6161-1(b). Courts are not permitted to

simply disregard a long-standing Treasury Regulation

when interpreting a statute. In Chevron U.S.A., Inc. v.

Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), the

Court stated that when reviewing an agency's regulatory

implementation of a statute, we look first to whether

6

Congress has directly spoken to the precise question at

issue. Id. at 842. If congressional intent is clear, the

courts inquiry should end, and the court should apply the

unambiguously expressed intent of Congress. Id. at 842-

843. However, if congressional intent is not clear, the

question is whether the regulation is based on a

permissible construction of the statute. Jd. See also

Cynthia L. Rowe v. Commissioner, 128 T.C. 13 (2007)

(Treasury Regulations have the force and effect of law

unless unreasonable under the statute); Swallows

Holding, Ltd. v. Commissioner, 126 T.C. 96 (2006) (same).

To include “financial hardship” as a consideration for

determining “reasonable cause” is a _ reasonable

interpretation of the statute. The Fifth Circuit should not

be permitted to remove the impact of financial hardship

from consideration of what constitutes reasonable cause

for a delay in the payment and filing of taxes.

In addition, the IRS’s own policy is to allow taxpayers

to rely on _ published guidance. See 26. C.F.R.

§ 601.601(d)(2)(v)(e) (“Taxpayers generally may rely upon

Revenue Rulings published in the Bulletin in determining

the tax treatment of their own transactions and need not

request specific rulings applying the principles of a

published Revenue Ruling to the facts of their particular

cases [where] the facts and circumstances. are

substantially the same.”); Rev. Proc. 89-14, 1989-i C.B.

814, § 7.01(5) (same). The courts agree that taxpayers are

entitled to rely on IRS published guidance. See Baker v.

Commissioner, 122 T.C. 143, 164 n.21 (2004) (confirming

that “the public has a right to rely on positions taken by

the Commissioner” in revenue rulings) (citing Alumax,

Inc. v. Commissioner, 109 T.C. 133, 163 n.12 (1997); Am.

Campaign Acad. v. Commissioner, 92 T.C. 1053, 1070

(1989); Nissho Iwai Am. Corp. v. Commissioner, 89 T.C.

765, 778 (1987)). See also Rauenhorst v. Commissioner,

119 T.C. 157, 182-83 (2002) (“[T]axpayers should be

entitled to rely on revenue rulings in structuring their

7

transactions, and they should not be faced with the

daunting prospect of the Commissioner’s disavowing his

rulings in subsequent litigation.”).

In fact, the courts require the IRS to follow its own

rulings. Rauenhorst v. Commissioner, 119 T.C. 157, 170-

71 and n. 10 (2002) (Commissioner is bound by his

revenue rulings); Dover Corp. v. Commissioner, 122 T.C.

324, 350 (2004) (following Rauenhorst); Estate of

McLendon v. Commissioner, 135 F.3d 1017, 1024 (5th Cir.

1998) (“[T]he Commissioner will be held to his published

rulings....”); Estate of Rapp v. Commissioner, 140 F.3d

1211, 1216-17 (9th Cir. 1988) (“[R]levenue rulings...may

limit the IRS’s ability to assert a position that is contrary

to that asserted in the ruling if the ruling is published, to

the extent that the ruling addresses a similar issue.”);

Silco, Inc. v. United States, 779 F.2d 282, 287 (5th Cir.

1986) (requiring the IRS to follow revenue rulings);

Beneficial Found., Inc. v. United States, 8 Cl. Ct. 639, 645

n.7 (1985) (“[Revenue] rulings can provide no guidance to

taxpayers if the Service and the courts fail to give them

effect in litigation.”).

The rationale behind limiting the IRS's ability to

disregard revenue rulings is even stronger with respect to

Treasury Regulations, which have received notice and

comment from the public and have been published in the

Federal Register. The IRS cannot disregard reliance on

26 C.F.R. § 301.6651-1(c) and 26 C.F.R. § 1.6161-1(b) and

develop its own narrow interpretation of “reasonable

cause.” If the IRS seeks to change the regulatory

definition, the change should be promulgated through

new regulations.

8

CONCLUSION

For the foregoing reasons, Amicus respectfully

requests that this Court grant the petition for writ of

certiorari.

Respectfully submitted,

Anne G. Batter*

Dean R. Morley

Thomas M. Cryan, Jr.

Baker & McKenzie

815 Connecticut Avenue, NW

Washington, DC 20006

(202) 452-7063

Scott Mezistrano

American Payroll Association

1601 18th Street, NW

Suite 1

Washington, DC 20009

(202) 232-6888

*Counsel of Record

September 20, 2007