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Patrick’s Payroll Services, Inc. v. Commissioner (T.C. Memo. 2020-47)

On April 14, 2020, the Tax Court issued a Memorandum Opinion in the case of Patrick’s Payroll Services, Inc. v. Commissioner (T.C. Memo. 2020-47). The issue properly before the court in Patrick’s Payroll Services, Inc. was whether the petitioner is barred from challenging its underlying liabilities at trial.

The petitioner was an employee leasing company providing payroll services in 2010 and 2011 with one client, a private security company for whom the owner of the petitioner worked as a security guard. The petitioner, however, treated the security company’s workers “as its own” in all respects, except for one minor respect, with which the IRS took issue – it failed to file the required Federal employment tax returns (Form 940 and Form 941) and, likewise, did not pay over any Federal employment taxes.

Like any good payroll company would do, the petitioner pleaded ignorance of the “requirement” to file the employment tax returns, failed to introduce any “evidence,” and doggedly refused to interact with the IRS, who in petitioner’s mind was the bad guy in all of this nonsense.

The petitioner was sent a Letter 950-D (30-day letter) proposing employment tax liabilities, as well as penalties under IRC § 6651(a) (failure to file); IRC § 6651(a)(2) (failure to pay); and IRC § 6656 (failure to deposit). The 30-day letter also informed petitioner of its right to a CDP hearing. Either the petitioner was adamant about not engaging with the IRS, or the president of the company was too busy moonlighting as a rent-a-cop and hoping for some “real action” as he patrolled the aisle of the local K-Mart eager to bust the heads of some young thundercats, but in any event the petitioner did not answer the letter or submit a request for a hearing. Having received no communication, the IRS closed the case and assessed the penalties, for which supervisory approval had been timely obtained pursuant to IRC § 6751(b).*

*Author’s Note: A disproportionately large number of cases that have come out so far in 2020 turn on the IRS’s failure to obtain prior written supervisory approval of a penalty when required by the Code. The irony of ironies in this case is that supervisory approval is not required under IRC § 6751(b)(2) for the failure to file and failure to pay penalties. Nonetheless, it was good form, for the RA to make a habit of doing so. Though her identity remains anonymous in the Patrick’s Payroll Services case, had she not obtained approval in the case of the IRC § 6656 penalty, the Tax Court has demonstrated a nasty little habit of naming names and pointing the judicial finger. Supervisory approval screwups are not like Cheers. The last thing you want as a numbskull RA is everyone knowing your name. So, I say to you, anonymous lady RA within the radius of Monroe, Michigan, well done, madam. Well done.

The CDP Proceeding

Apparently the line in petitioner’s sand was levying their accounts, because when the IRS sent the notice of intent to levy, again apprising the petitioner of its right to request a CDP hearing, it did so by timely filing a Form 12153 (Request for CDP or Equivalent Hearing). The petitioner requested CNC status and disputed the underlying basis of the penalties in a rather novel manner.

The petitioner explained that it did not actually exist or operate until September 2010, and was not, therefore, responsible for any prior filings or payments. The IRS asked more than once (read: four times, that the court mentions) for the petitioner to provide documentation to support its CNC status request, but COPS was running a marathon, and the petitioner couldn’t break away to compile its requisite financials (assuming it had any to begin with).

At the CDP hearing, the petitioner’s representative conceded that the petitioner owed “some tax,” but he argued that the IRS’s “apportionment” of tax was all wrong, because the petitioner had been “defunct” since October 2011 and had no assets. The Tax Court opinion notes that the petitioner’s representative “was not able to offer details about the purported apportionment” argument, which is, I think, Judge Urda’s polite way of saying that the representative was coloring outside of the lines of his “knowledge” of the liability his client was facing.

Once more, the IRS urged (if not beseeched) the petitioner to provide documentation to support the CNC status request within 2 weeks. The documentation that was sent comprised of two documents that the petitioner was sure would carry the day for them: an unfiled, unsigned, and (likely) unreliable 2011 Form 1120 draft and a document (itself not a bank statement) stating that the petitioner’s bank account was opened in September 2010 and closed in October 2011.

Unimpressed by the “evidence” presented by the petitioner, but giving petitioner another month to give it something, literally anything, that could establish a picture (even a finger painting) of the financial status of the petitioner, the IRS finally closed the case and issued a notice of determination which sustained the levy and rejected the proposal for collection alternative. Importantly, the notice stated that the petitioner had “failed to offer any response to the IRS transcripts and audit workpapers regarding its underlying liabilities.”

Jurisdiction of Incapacitated Petitioner

Though the section title might suggest I am poking fun at the idiocy of the petitioner (I am, but that’s hardly the point), the Tax Court recognized that the petitioner was a corporation in 2010 and 2011, but it dissolved by 2013 at the latest. If a petitioner lacks capacity, the Tax Court has previously found that it is obligated to dismiss the case for lack of jurisdiction. Brannon’s of Shawnee, Inc. v. Commissioner, 71 T.C. 108, 111 (1978); Central Motorplex, Inc. v. Commissioner, T.C. Memo. 2013-286.

The corporation’s capacity is determined by the law of the state where it was organized, here Michigan, which permits dissolved corporations to wind up its affairs-including pursuing litigation. Thus, the Tax Court gifts the petitioner jurisdiction to even hear the case, though this donative spirit proved short-lived.

Underlying Liabilities, Statutory Interpretation, and a Loser Argument

The Tax Court begins by noting that the petitioner challenged its 2010 and 2011 underlying liabilities in the CDP hearing (regarding the levy) and again in its petition. Underlying liabilities in this context includes tax deficiency, any penalties and additions to tax, and statutory interest. See Katz v. Commissioner, 115 T.C. 329, 339 (2000).

Next the Tax Court observes that the petitioner does not dispute that it received the initial 30-day letter offering a CDP hearing, nor does the petitioner deny that it did not timely request the conference. Instead, the petitioner argues that Treas. Reg. § 310.6330-1(e)(3) is invalid and argues that a prior opportunity for a conference with the Office of Appeals does not constitute an “opportunity to dispute such tax liability” within the meaning of IRC § 6330(c)(2)(B) and, therefore, ipso facto, should not preclude its liability challenge.

We don’t have the transcript of the trial to know whether Counsel did a spit-take when the petitioner argued this, but I have to believe he was a bit more relaxed as the same representative who made an “apportionment” argument was now questioning a tremendously long and utterly consistent Tax Court precedent, which the Tax Court was only so happy to use pretty much the entire 12th page of the 16-page opinion to reprint. A sample of the cases cited include those from the Tax Court itself and the Fourth, Seventh, Eighth, and Tenth Circuits. See, e.g., Lewis v. Commissioner, 128 T.C. 48, 60-61 (2007); Bletsas v. Commissioner, T.C. Memo. 2018-128, *8-*9, aff’d, 784 F. App’x 835 (2d Cir. 2019); Thompson v. Commissioner, T.C. Memo. 2012-87; Our Country Home Enters., Inc. v. Commissioner, 855 F.3d 773, 783-791 (7th Cir. 2017); Keller Tank Servs. II, Inc. v. Commissioner, 854 F.3d 1178, 1195-1200 (10th Cir. 2017); Iames v. Commissioner, 850 F.3d 160, 164-165 (4th Cir. 2017); Hassell Family Chiropractic, DC, PC v. Commissioner, 368 F. App’x 695, 696 (8th Cir. 2010), aff’g T.C. Memo. 2009-127.

With regard to the petitioner’s argument, the attorney for the petitioner at least “acknowledged that this court’s precedent on point resolves this case.” However, and proving that you can’t always control your clients, the attorney was obligated to raise the argument “to preserve [petitioner’s] legal theory for further review.”

It is an odd strategy to concede in your opening statement that when your client loses, an appeal will be forthcoming. If that wasn’t enough, the Tax Court spreads the joy even further, when, in footnote 6, the Tax Court (perhaps straight-faced, but likely not) suggests that the petitioner pay the liability and give refund litigation a shot in Federal District Court.

Somewhere, west of East Lansing, a Michigan District Court judge is sitting in his or her chambers, practicing breathing exercises, and just waiting for the appeal/refund claim in this case to land on his or her desk, all the while wishing he had a little voodoo doll of Judge Urda to needle.

Original opinion: (T.C. Memo. 2020-47) Patrick’s Payroll Services, Inc. v. Commissioner

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