Friendship Creative Printers Inc. v. Commissioner
T.C. Memo. 2021-19

On February 22, 2021, the Tax Court issued a Memorandum Opinion in the case of Friendship Creative Printers Inc. v. Commissioner (T.C. Memo. 2021-19). The primary issue presented in Friendship Creative was whether the IRS abused its discretion in sustaining a proposed levy action in collection of over $200,000, arising out of the petitioner’s employment tax liabilities and associated penalties.

Background to Friendship Creative Printers Inc. v. Commissioner

In 2013, the petitioner did not timely file Forms 941, timely pay its employment taxes, or timely make the required deposits towards its employment taxes. The petitioner did, however, make partial payments and deposits throughout 2013 towards its employment tax liabilities for the 2013 quarters.  On February 10, 2016, pursuant to substitute-for-return procedures, the IRS made assessments of employment taxes, IRC § 6651(a) additions to tax, and IRC § 6656 penalties for the 2013 quarters as a result of the petitioner’s untimely filings, payments, and deposits. On May 12, 2016, the petitioner filed Forms 941 for the 2013 quarters, showing amounts greater than those initially assessed by the IRS, which in turn, subsequently made additional assessments of the petitioner’s employment taxes, additions to tax, and penalties to the extent that the amounts reported on the untimely Forms 941 exceeded the IRS’s initial assessment. The petitioner requested a CDP hearing but failed to provide sufficient information to the settlement officer.

Deemed Conceded Issues

The petitioner contended that it made sufficient–but untimely–payments and deposits toward its employment tax liabilities for the 2013 quarters that it reported on the untimely Forms 941. The petitioner, however, failed to assert any assignment of error with respect to the 2016 and 2017 quarters; thus, the IRS’s determinations of IRC § 6651(a)(2) additions to tax and IRC § 6656 penalties for those quarters are deemed conceded. See Rule 331(b)(4); Perkins v. Commissioner, 129 T.C. 58, 67 (2007) (deeming as conceded the portion of the taxpayer’s underlying liability that he failed to address but had reported as due on his return and had yet to pay).

Belief of Full Payment is Challenge to Underlying Liability

Because the petitioner believes that it fully paid its employment tax liabilities for all quarters in 2013, its failure to mention the IRC § 6651(a) additions to tax and the IRC § 6656 penalties can be construed as an implied challenge to its underlying liability. See Patrick’s Payroll Servs., Inc. v. Commissioner, T.C. Memo. 2020-47, at *10-*11 (citing Katz v. Commissioner, 115 T.C. 329, 339 (2000)) (reiterating that the term “underlying tax liability” comprises “the tax deficiency, any penalties and additions to tax, and statutory interest”). Consequently, the Tax Court reviewed the underlying liability as it relates to 2013.

Reviewing Underlying Liability

In reviewing the IRS’s determination, including challenges to the underlying liability, the Tax Court considers only issues that the taxpayer properly raised during the CDP hearing. LG Kendrick, LLC v. Commissioner, T.C. Memo. 2016-22, at *13, aff’d, 684 F. App’x 744 (10th Cir. 2017); Treas. Reg. § 301.6330-1(f)(2), Q&A-F3; see also Giamelli v. Commissioner, 129 T.C. at 114-115. The taxpayer does not properly raise an issue during the hearing if it fails to present “any evidence with respect to that issue after being given a reasonable opportunity” to do so. Id.

Failure to Pay and Make Timely Deposit

IRC § 6651(a) imposes additions to tax for failure to file a timely tax return and for failure to timely pay the amount of tax shown on the return, unless the taxpayer establishes that the failure was due to reasonable cause and not willful neglect. IRC § 6651(a)(1) and (2); Lloyd v. Commissioner, T.C. Memo. 2020-92, at *18-*19. IRC § 6656 similarly imposes a penalty for failure to make a timely deposit, unless the taxpayer establishes that the failure was due to reasonable cause and not willful neglect. IRC § 6656(a); Charlotte’s Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 109 (2003), supplemented by T.C. Memo. 2004-43, aff’d, 425 F.3d 1203 (9th Cir. 2005).  In the present case, the record establishes (and the petitioner concedes) that the petitioner did, in fact, fail to timely file the returns, timely pay its employment taxes, and timely make the required deposits.  So, yeah, there’s that.

The Outstanding Balance

The petitioner claimed that it had paid all employment taxes, and it was, therefore, not liable for any additions to tax. Unfortunately, the additions to tax it already been assessed. As such, the IRS applied the petitioner’s partial payment and deposits against not only the assessed employment taxes but also the assessed IRC § 6651(a) additions to tax, IRC § 6656 penalties, and interest, resulting in the petitioner’s having an outstanding balance for each of the 2013 quarters. See Rev. Proc. 2002-26, § 3.02 (authorizing the IRS, in the absence of a specific written directive, to apply partial payments of a liability against additional taxes, penalties, and interest that have been assessed against a taxpayer).

(T.C. Memo. 2021-19) Friendship Creative Partners, Inc. v. Commissioner

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