On October 25, 2021, the Tax Court issued a Memorandum Opinion in the case of Morris v. Commissioner (T.C. Memo. 2021-120). The primary issue presented in Morris was whether the petitioner’s or liable for penalties for failure to timely file (IRC § 6651(a)(1)), failure to timely pay (IRC § 6651(a)(2)), and failure to pay estimated tax (IRC § 6654).
Held: Yes. Yes, they were.
Background to Morris v. Commissioner
Mr. Morris was a successful businessman, but his businesses became a bit too big for his britches. In 2013, Mr. Morris expanded his packaging business into the manufacture of converted packaging and formed Morris Converting. Morris Converting expanded very, very rapidly and at the time of trial had about 175 employees.
The petitioners’ returns for the years at issue (2015 and 2016) were prepared by their long-time CPA, Dennis. Once Morris Converting had grown too big for Dennis’ skillset (after the 2018 return, apparently), the petitioners employed a new CPA firm. The record is a bit sparse, but it appears that although Dennis prepared the petitioners’ returns, he did not actually get around to filing them.
In particular the petitioners failed to timely file return for 2014 and had not filed a return by 2016 when the audit of their 2013 and 2014 returns began. Apparently, Dennis had some concern about filing the 2015 return during the audit and “duplicating errors” from the 2014 return to the 2015 return—a particular hang-up being the whole “signing under penalty of perjury” language.
Although the petitioners timely requested extensions to file their 2015 and 2016 returns, they did not file them by the extended due dates, nor did they make a payment of tax with the extension request for the 2015 return. They did not make any estimated tax payments during the years at issue, nor did they have any (meaningful) tax withheld from their paychecks during 2015 or 2016, despite having ordinary income of over $2.2 million and $3 million during the respective years.
During the course of the audit the IRS requested, but did not timely receive, returns from the petitioners. Consequently, the IRS prepared substitutes for returns pursuant to IRC § 6020(b). Thereafter, the petitioners submitted the untimely returns reporting a total tax of $600,000 for 2015 and $1,700,000 for 2016. In May 2018, the IRS issued a notice of deficiency for 2015 and 2016 that determined deficiencies on the basis of the substitutes for returns (in approximately the amounts self-reported by the petitioners).
Failure to Timely File or Pay under IRC § 6651(a)
IRC § 6651(a)(1) and IRC § 6651(a)(2) impose additions to tax (penalties) for failure to file a return and failure to pay the amount shown as tax on a return, respectively, on or before the date prescribed unless the taxpayer proves that such failures are due to reasonable cause and not due to willful neglect. Willful neglect is defined as a “conscious, intentional failure or reckless indifference.” Reasonable cause for a failure to file exists where the taxpayers exercised ordinary care and prudence but were nevertheless unable to file the return by the due date.
Reasonable cause exists for a failure to pay where the taxpayer exercised ordinary business care and prudence in providing for payment but was nevertheless either unable to pay the tax or would have suffered undue hardship if he had paid it. A substitute for return prepared pursuant to IRC § 6020(b) is treated as the taxpayer’s return for purposes of the IRC § 6651(a)(2) addition to tax for failure to pay. Whether reasonable cause exists is a question of fact answered on the basis of the individual circumstances of each case.
Good-faith reliance on professional advice may constitute reasonable cause. However, taxpayers have the burden of filing a return and paying tax owed, and they cannot delegate that duty to an agent or accountant. The Supreme Court has stated that “one does not have to be a tax expert to know that…taxes must be paid when they are due.”
Failure to Timely File
Taxpayers may demonstrate reasonable cause for failing to file a return timely through their good-faith, reasonable reliance on the advice of an independent, competent tax professional that no return was required to be filed. However, reliance on such advice does not “sanction an abdication of responsibility for the timely filing of a return admittedly due.” The Code provides an unambiguous deadline, and “no special training or effort” is required to ascertain, determine, or freakin’ figure out that that a return has not been filed by its due date.
The petitioners were, apparently, not advised that they were not required to file a return. Instead, Dennis advised the petitioners to delay filing until the audits for prior years were completed. The Tax Court was not pleased with Dennis’ advice, observing that “[a]llowing such a basis for reasonable cause would make timely filing optional for any taxpayer under audit,” which, apparently, was somewhat of a button for Judge Goeke and the Tax Court.
Ultimately, the Tax Court found that the petitioners were aware that they had a duty to file a return timely and consciously failed to file. Because it is “well settled” that taxpayers must file timely returns “using the best information available to them and may file amended returns if necessary,” the Tax Court found the petitioners liable for the failure to file penalty…on account of, you know, their failure to file.
A Quick Note on Self-Serving Testimony
In Tax Court, self-serving testimony is about as useful as a sno-cone is to an Inuit.
The petitioners argued that Dennis advised that filing while an audit for earlier years was ongoing could subject them to perjury charges, which they argue involved a question of law. They also argued that they lacked the education and experience to prepare and file their returns themselves because of complicated issues relating to their businesses. Although this may be the case, and it may have even supported a reasonable cause defense (it wouldn’t have, as the Tax Court later tells us), the petitioners’ argument was wholly uncorroborated.
Dennis did not testify at trial, nor did the petitioners introduce any evidence into the record—aside from Mr. Morris’ testimony—that would have otherwise supported the underlying fact that Dennis had provided such advice. The Tax Court does not make it a habit to accept uncorroborated, self-serving testimony, and it did not do so in Morris.
Editor’s Note: Also, if you’re going to offer only self-serving testimony to defend a multi-million-dollar tax liability and related penalties, at the very least be specific as hell. The Tax Court notes that Mr. Morris is testimony about Dennis’ “advice” was “vague and nonspecific.” Consequently, the Tax Court was not moved by the observation that Dennis “brought up” perjury. “Bringing” something “up” is not quite the same as providing unequivocal advice that the petitioners would rot in prison if they filed their returns timely. We’re just saying…
Failure to Pay
Not only were the petitioners required to file income tax returns reporting the millions of dollars of income they received, but they also had to “pay” tax on such income. Failure to do so is a no-no under IRC § 6651(a)(2). The petitioners argued that they “believed” that they would not owe tax for 2015 and 2016 because of the millions of dollars that they spent to start Morris Converting. In a curious strategy, they did not “technically” address “why” they “failed to pay” in 2016. The Tax Court once again chides the petitioners for their uncorroborated and testimony, but it was bothered by one fact in particular:
The petitioners did not have Federal income tax withheld from their wages or pay tax on the substantial amounts of income from their S corporations unrelated to the business expansion of Morris Converting. It is unreasonable for petitioners to have believed that they would not owe tax on this income, and [Dennis’] alleged advice does not explain why petitioners did not have tax withheld from their wages or pay tax on the S corporation income.
According to the Tax Court, this was all but anathema to the ideas of “ordinary business care and prudence,” and the petitioners, therefore, were likewise liable for the failure to pay penalties for both years pursuant to IRC § 6651(a)(2). The Tax Court’s analysis of the petitioners’ failure to pay estimated taxes is brief, and it could have been even briefer has the Tax Court simply drawn a big arrow to the IRC § 6651(a)(2) analysis.
Consequently, the petitioners were liable for the IRC § 6654 failure to make estimated tax payments penalty—even if they had reasonable cause (which they didn’t), because there is no general exception for reasonable cause or absence of willful neglect for the IRC § 6654 penalty.
- See Treas. Reg. § 301.6651-1(c). ↑
- United States v. Boyle, 469 U.S. 241, 245 (1985). ↑
- Id. at 246. ↑
- Treas. Reg. § 301.6551-1(c)(1). ↑
- IRC § 6651(g)(2); Winslow v. Commissioner, 139 T.C. 270, 275 (2012). ↑
- Boyle, 469 U.S. at 249 n.8. ↑
- Id. at 250-51. ↑
- Id. at 249-52. ↑
- Id. at 251. ↑
- Id. at 250-51. ↑
- United States v. Kroll, 547 F.2d 393, 397 (7th Cir. 1977); see also Fleming v. United States, 648 F.2d 1122, 1125-26 (7th Cir. 1981). ↑
- Boyle, 469 U.S. at 252. ↑
- Estate of Vriniotis v. Commissioner, 79 T.C. 298, 311 (1982). ↑
- See, e.g., Shea v. Commissioner, 112 T.C. 183, 189 (1999). ↑
- Grosshandler v. Commissioner, 75 T.C. 1, 21 (1980). ↑
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