Bell Capital Management, Inc. v. Commissioner (T.C. Memo. 2021-74)

On June 14, 2021, the Tax Court issued a Memorandum Opinion in the case of Bell Capital Management, Inc.v. Commissioner (T.C. Memo. 2021-74). The primary issues presented in Bell Capital Management, Inc. were whether (1) petitioner is collaterally estopped from denying that it was responsible for paying the employment taxes; (2) whether the IRS properly determined that Ron H. Bell should be legally classified as petitioner’s employee for all tax periods in issue; (3) whether petitioner is liable for the employment taxes; (4) whether petitioner is liable for fraud penalties; and (5) whether the periods of limitations for assessing and collecting the employment taxes and penalties have expired.

Background to Bell Capital Management, Inc. v. Commissioner – Bad Mr. Bell

When the petition was filed, the petitioner’s principal place of business was in Georgia. The Tax Court took judicial notice of the facts found in Foxworthy, Inc. v. Commission, T.C. Memo. 2009-203, aff’d 494 F. App’x 964 (11th Cir. 2012).

It’s generally not a good thing when, before the opinion even gets rolling, the Tax Court “takes judicial notice” of another Tax Court case…especially when that case did not turn out well for the parties involve not named the IRS.

As detailed in Foxworthy, petitioner Bell Capital Management, Inc., was incorporated in 1984 by Ron H. Bell, who at all relevant times owned 100% of the stock and was its sole director. Foxworthy, T.C Memo. 2009-203 at *2. The petitioner provided investment services to individual clients and their financial planners in exchange for quarterly fees. Id. at *3. From 1991 through 1995, petitioner paid Mr. Bell wages of $761,978, $978,772, $691,006, $589,760, and $630,760, respectively. Id. Sometime around 1996, petitioner changed Mr. Bell’s compensation structure. Petitioner began leasing Mr. Bell’s services through “offshore employee leasing transactions” (OEL transactions).

The petitioner entered into a “Contract for Personnel Services” with Nationwide Executive Staff Leasing (NESL) to lease Mr. Bell’s services for a period from December 1996 to November 2001. The contract was signed by the president of NESL and the petitioner’s vice president. Pursuant to the contract, NESL agreed to lease Mr. Bell’s services to petitioner on substantially a full-time basis. Petitioner agreed to furnish space on its premises for Mr. Bell’s use while he performed personnel services. Petitioner also provided an automobile for business use and health, medical, and dental insurance fringe benefits, at petitioner’s sole and exclusive cost.

Beginning in December 2000, the petitioner signed a similar contract with International Leasing Services, Inc. (ILS). The contract provided petitioner with the nonexclusive rights to the personnel services of Mr. Bell as an economist, financial planner, financier, business planner, investment counselor, wealth manager, author, lecturer, and educator. During the tenure of petitioner’s above-mentioned contracts, NESL and ILS each entered into personnel leasing contracts with certain companies (the “leasing companies”). In turn, Mr. Bell entered into his own contracts with the leasing companies.

After the implementation of the OEL transactions, Mr. Bell remained at the helm of the petitioner’s operations. From 1996 through 2001, Mr. Bell signed the petitioner’s Forms 1120S, U.S. Income Tax Return for an S Corporation, in his capacity as president, as well as the petitioner’s state corporate annual registration.  Indeed, in August 1999, the SEC accepted an offer of settlement in an administrative proceeding instituted against petitioner and Mr. Bell, in which the petitioner admitted that Mr. Bell was petitioner’s president and sole shareholder.

The Crux of the Issue

For all the periods in issue, the petitioner filed Forms 941 (Employer’s Quarterly Federal Tax Return) and Forms 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return). None of the amounts reported therein relates to Mr. Bell. The petitioner did not deposit or pay any Social Security or Medicare taxes, or income tax withholding on any payments made to or for the benefit of Mr. Bell for any of the periods in issue.

The Foxworthy Ruling and the Passing of Bad Mr. Bell

In 2009 the Tax Court ruled, among other things, that the OEL transactions employed in the instant case lacked economic substance. Id. at *15. The Tax Court found that during the years in issue Mr. Bell continued to perform the same services for petitioner as he had in the past and that he constructively received the money petitioner transferred as part of the OEL transactions. Id. at *16-*18. It found that the amounts paid by the petitioner, net of fees charged by the leasing companies, were deposited into various accounts owned and operated by entities with ties to Mr. Bell or his associates. Id. at *17. The Tax Court further held that Mr. Bell entered into the leasing contracts to conceal the money being transferred from petitioner to himself. Id. at *22. Accordingly, the Tax Court held that Mr. Bell fraudulently underpaid his Federal income tax for the years in issue. Id. at *23.

Mr. Bell passed away in 2012. As part of the administration of Mr. Bell’s estate, ownership of 100% of petitioner’s stock was transferred to Mr. Bell’s wife. The IRS’s now alleges that petitioner fraudulently failed to pay employment taxes with respect to the OEL payments made for Mr. Bell’s benefit.

Collateral Estoppel

The first question in issue is whether petitioner is collaterally estopped from denying that it was responsible for paying the employment taxes. Relying on the doctrine of collateral estoppel, or issue preclusion, the IRS contends that as a result of our findings in Foxworthy, the petitioner may not contest its responsibility to pay the amounts of those items that are taxes here in issue.

The doctrine of issue preclusion, or collateral estoppel, provides that, once an issue of fact or law is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation. Monahan v. Commissioner, 109 T.C. 235, 240 (1997) (citing Montana v. United States, 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, n.5 (1979))).

For this doctrine to apply, five factors must be present:[1]

1. the issue to be decided in the second case must be identical in all respects to the issue decided in the first case;
2. a court of competent jurisdiction must have rendered a final judgment in the first case;
3. a party may invoke the doctrine only against parties to the first case or those in privity with them;
4. the parties must have actually litigated the issue and the resolution of the issue must have been essential to the prior decision; and
5. the controlling facts and legal principles must remain unchanged.

The IRS is invoking this doctrine against the petitioner, who was in privity with Mr. Bell by virtue of his being its sole shareholder and president. See Hi-Q Personnel, Inc. v. Commissioner, 132 T.C. 279, 292 (2009) (finding where individual was president and sole shareholder who committed fraud through his business, there was privity between the two; in the business case collateral estoppel precluded relitigation of employment tax issues decided in individual’s case); Levitt v. Commissioner, T.C. Memo. 1995-464, *18 (“A sole or controlling stockholder can be in privity with his * * * closely held corporation.”), aff’d without published opinion, 101 F.3d 691 (3d Cir. 1996).

In Foxworthy, a consolidated case in which Mr. Bell was a petitioner, we decided that Foxworthy, Inc., was Mr. Bell’s alter ego; that the OEL transactions lacked economic substance; that the money petitioner transferred as part of the OEL transactions was never part of any valid deferred compensation plan and instead was constructively received by Mr. Bell at the time of transfer by petitioner; and that Mr. Bell implemented the plan to fraudulently underpay tax. Foxworthy, T.C Memo. 2009-203, *16-*23. The instant case involves the exact same OEL transaction, and so the controlling facts are the same. The legal principles regarding deferred compensation and fraud also remain the same. These issues were actually litigated, and their resolution was essential to our prior decision. The petitioner is therefore precluded from denying that the OEL transactions lacked economic substance. The petitioner is similarly precluded from denying that Mr. Bell arranged for the OEL transactions so as to fraudulently underreport and underpay tax.

However, as the petitioner contends, the determination of worker classification, employment tax liability, and petitioner’s withholding requirements or intent as to the transaction were not essential to the Tax Court’s decision in Foxworthy. Although the Tax Court referred to the payments made for Mr. Bell’s benefits as “wages”, see, e.g., id. at *27, the Tax Court did not address whether Mr. Bell met the definition of an “employee.” Therefore, there is no collateral estoppel with respect to worker classification or employment tax liability.

Bad Mr. Bell was an Employee

The IRS contends that Mr. Bell was petitioner’s employee pursuant to, among other statutes, IRC § 3121(d). IRC § 3121(d) describes individuals who are considered employees regardless of their status under the common law. Individuals described in those paragraphs are commonly referred to as “statutory” employees. Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 126 (2002), aff’d, 93 F. App’x 473 (3d Cir. 2004). One such category of statutory employees consists of officers of corporations. IRC § 3121(d)(1). Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation. Treas. Reg. § 31.3121(d)-1(b). A director of a corporation in his capacity as such is not an employee of the corporation. Id.

The petitioner admits that Mr. Bell was an officer. Petitioner’s tax returns, annual State filings, and SEC documents from the periods in issue all identify Mr. Bell as petitioner’s president. Petitioner also admits that Mr. Bell continued to render the same services to petitioner during the periods in issue. The provisions in petitioner’s leasing contracts with NESL and ILS describe services provided by Mr. Bell which are indisputably not “minor.” Finally, Mr. Bell indirectly received remuneration from the petitioner, a fact which the petitioner is collaterally estopped from challenging. Accordingly, Mr. Bell was the petitioner’s employee during the periods in issue, and petitioner is liable for the employment taxes and related withholding.

Statute of Limitations

The Tax Court found that for each period in issue, the petitioner’s withholding form and Forms 941 and 940 were false or fraudulent returns because its officers intentionally omitted payments made for Mr. Bell’s benefit with the specific purpose to evade tax believed to be owing.

In the case of the filing of a false or fraudulent return with intent to evade tax, the tax may be assessed at any time. IRC § 6501(c)(1); see Neely v. Commissioner, 116 T.C. 79, 85 (2001). If the return is fraudulent in any respect, it deprives the taxpayer of the bar of the period of limitations for that year. Lowy v. Commissioner, 288 F.2d 517, 519-520 (2d Cir. 1961), aff’g T.C. Memo. 1960-32. Thus, where fraud is alleged and proven, the IRS is free to determine a deficiency with respect to all items for the particular taxable year without regard to the period of limitations. Colestock v. Commissioner, 102 T.C. 380, 385 (1994).

Fraud is intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing. See McGee v. Commissioner, 61 T.C. 249, 256 (1973), aff’d, 519 F.2d 1121 (5th Cir. 1975). The IRS has the burden of proving fraud by clear and convincing evidence. IRC § 7454(a); Tax Court Rule 142(b). The IRS’s burden of proof under IRC § 6501(c)(1) is the same as that imposed by IRC § 6663. See Pennybaker v. Commissioner, T.C. Memo. 1994-303. To satisfy the burden of proof, the IRS must show that (1) an underpayment exists and (2) the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990). The Commissioner must meet this burden through affirmative evidence because fraud is never presumed. Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989); see also Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

As explained above, the Tax Court sustained the IRS’s determination that there exist underpayments of employment taxes and withholding. When deciding intent, in the case of a corporate petitioner the Tax Court looks to the fraudulent intent of individuals acting in their capacity as corporate officers. See Benes v. Commissioner, 42 T.C. 358, 382 (1964) (“Where fraud is alleged against a corporate taxpayer, the requisite proof of fraudulent intent is to be found in the acts of its officers, inasmuch as the corporation, being an artificial person created by law, can have no separate intent of its own apart from those who direct its affairs.”), aff’d, 355 F.2d 929 (6th Cir. 1966), overruled on another issue by Truesdell v. Commissioner, 89 T.C. 1280 (1987). Corporate fraud necessarily depends upon the fraudulent intent of the corporate officer. Federbush v. Commissioner, 34 T.C. 740, 749 (1960), aff’d, 325 F.2d 1 (2d Cir. 1963).

Holding

The petitioner failed to identify any facts or evidence it could present at trial to disprove that its officers entered into the leasing contracts with full awareness and design of the overall OEL transactions. The petitioner merely denies that Mr. Bell was the lone decision maker for petitioner and states that Mr. Bell was not the sole officer. Even viewed in the light most favorable to the petitioner, these two facts are insufficient to establish that the petitioner’s role in the OEL transactions is genuinely in dispute for trial.

The IRS has shown by clear and convincing evidence that the petitioner intentionally understated its employment tax and withholding obligations with the specific purpose to evade Mr. Bell’s taxes. Because the Tax Court sustained the taxes that the IRS determined, the Tax Court concluded that the entire underpayment is attributable to fraud. Accordingly, the usual three-year period of limitations of IRC § 6501(a) does not apply, and the IRS’s determinations were, therefore, timely. See IRC § 6501(c)(1); Neely, 116 T.C. at 85.

(T.C. Memo. 2021-74) Bell Capital Management, Inc. v. Commissioner

Footnote:

[1] See Griswold v. Cty. of Hillsborough, 598 F.3d 1289 (11th Cir. 2010); Monahan, 109 T.C. at 240.

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