Opinion
12654-20SL
08-19-2022
LIL ORBITS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Adam B. Landy Special Trial Judge
This collection review case is before the Court on respondent's Motion for Summary Judgment, supported by two declarations and exhibits, filed April 20, 2021, pursuant to Rule 121. Respondent seeks to sustain a determination made by the Internal Revenue Service (IRS) Independent Office of Appeals (Appeals) to proceed with the proposed levy action to collect petitioner's unpaid penalty liability for late filing its subchapter S corporation income tax returns for 2014, 2015, 2016, and 2017 (the "Taxable Years at Issue"). For the reasons stated below, we will grant respondent's motion in part, and deny his motion in part.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
I. Background
The following facts are based on the parties' pleadings and motion papers, including the associated declarations and exhibits. See Rule 121(b). Petitioner had a principal place of business in Minnesota when it timely filed the petition.
Petitioner failed to timely file its income tax returns on Form 1120-S, U.S. Income Tax Return for an S Corporation, for the Taxable Years at Issue. For each of the Taxable Years at Issue, petitioner requested and was granted an extension of time to file the Form 1120-S returns from March 15th to September 15th. Petitioner filed its returns on October 26, 2015; October 17, 2017; February 27, 2018; and October 22, 2018, for the Taxable Years at Issue, respectively.
On October 31, 2018, respondent mailed to petitioner a Letter 1058, Final Notice - Notice of Intent to Levy and Notice of Your Rights to a Hearing (Levy Notice) reflecting a balance due of $1,319.22 for 2014, $7,332.13 for 2015, and $3,614.91 for 2016, with a total balance due of $12,266.26, because of penalties assessed under section 6699(a) for late filing the Form 1120-S returns. In response, petitioner timely filed Form 12153, Request for Collection Due Process or Equivalent Hearing, dated November 19, 2018, and attached a statement arguing that it is entitled to relief from the late filing penalties due to reasonable cause. Petitioner, specifically, argued that reasonable cause existed for the late filings due to the illness of its return preparer, who had been diagnosed with cancer and suffered a stroke near the time the returns for 2015 and 2016 were due. Petitioner did not request a collection alternative.
Petitioner's case was assigned to Settlement Officer F. Jimerson (SO Jimerson). SO Jimerson stated that she verified that all legal and administrative requirements for the underlying assessments and notice had been met. On April 30, 2019, SO Jimerson held a Collection Due Process (CDP) hearing with petitioner's return preparer and its Chief Financial Officer. At the hearing, petitioner's representatives reiterated its position that petitioner had reasonable cause for the failure to timely file the returns for 2015 and 2016 due to the return preparer's illness at the time the returns were due. Petitioner did concede it was liable for the penalty for 2014. To investigate petitioner's claims, SO Jimerson requested petitioner provide detailed documentation of the return preparer's illness, which petitioner provided on May 15, 2019.
On August 2, 2019, respondent mailed to petitioner a second Levy Notice reflecting a balance of $1,249.51 for 2017. In response, petitioner timely filed a second CDP hearing request, dated August 30, 2019, stating it agreed with the assessment of the late filing penalty but believed the penalty should only be for a one-month period instead of the assessed two-month period. SO Jimerson was again assigned to petitioner's case. The SO's Case Activity Record Print stated that SO Jimerson had prior involvement with petitioner for the tax type and tax years associated with the second CDP case, but she would obtain a waiver on Form 14041 from petitioner or request the case be reassigned. However, no waiver was obtained, and petitioner's case was not reassigned.
SO Jimerson held a CDP hearing on January 29, 2020, with petitioner's return preparer regarding the penalty assessed for taxable year 2017. At this second CDP hearing, petitioner's return preparer provided proof of mailing showing the 2017 Form 1120-S return envelope was postmarked on October 15, 2018, and the return was delivered to the IRS on October 19, 2018. SO Jimerson indicated that respondent's internal records reflected that the return was received on October 22, 2019. Petitioner reiterated its position that the return should be deemed filed on the date of mailing and, as the return was mailed on October 15, it was only filed one month late from the September 15th deadline, and therefore, petitioner should only be liable for the penalty for one month and not two.
On September 22, 2020, respondent issued a Notice of Determination Concerning Collection Actions under IRC Sections 6320 or 6330 of the Internal Revenue Code (Notice) for the Taxable Years at Issue. In the Notice, SO Jimerson sustained the Levy Notice on the basis that petitioner did not establish reasonable cause for the late filing of the returns. SO Jimerson also determined petitioner was not entitled to a collection alternative because no collection alternative was raised by petitioner, and there was no abuse of discretion. On October 29, 2020, petitioner timely filed a petition alleging that respondent erred in its decision to sustain the issuance of the Levy Notices as it demonstrated reasonable cause for the late filing of the Form 1120-S returns for taxable years 2015 and 2016 and the return for 2017 should only be considered to have been filed one month late, not two.
On April 20, 2021, respondent filed the above-referenced motion contending that he is entitled to summary judgment for taxable years 2014 through 2016 because there is no question of material fact that petitioner failed to demonstrate that its return preparer's illness constituted reasonable cause for the late filings. Respondent further contends he is entitled to summary judgment for taxable year 2017 as there is no question of material fact as to when the Form 1120-S return was mailed or received, and as a matter of law petitioner is liable for the penalty for two months. On March 30, 2022, a remote hearing on respondent's motion was held where the parties simply reiterated the positions argued in their papers.
II. Discussion
a. Scope of Review
The U.S. Court of Appeals for the Eighth Circuit has held that the scope of review in the CDP context is confined to the administrative record. See Robinette v. Commissioner, 439 F.3d 455, 459-462 (8th Cir. 2006), rev'g, 123 T.C. 85 (2004). Since petitioner's principal place of business was in Minnesota when the petition was filed, we apply the scope of review mandated by the Eighth Circuit, in which an appeal in this case would lie but for section 7463(b). See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
b. Summary Judgment Standard
Summary judgment serves to "expedite litigation and avoid unnecessary and expensive trials." Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judgment when there is no genuine dispute of material fact, and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in a light most favorable to the nonmoving party. Sundstrand Corp. v. Commissioner, 98 T.C. at 520. The nonmoving party may not rest upon mere allegations or denials in its pleadings and must set forth specific facts showing there is a genuine dispute for trial. Rule 121(d); see also Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
c. Hearings Under Section 6330 [Levy]
Section 6331(a) authorizes the Secretary to levy upon property and a taxpayer's rights to property if the taxpayer is liable for taxes and fails to pay those taxes within 10 days after a notice and demand for payment is made. Section 6331(d) provides that a levy authorized in section 6331(a) may be made with respect to unpaid tax only if the Secretary has given written notice to the taxpayer 30 days before the levy. Section 6330(a) requires that the written notice include the amount of the unpaid tax and information about the taxpayer's right to an administrative hearing.
d. Standard of Review
Section 6330(d)(1) grants this Court jurisdiction to review the administrative determination by Appeals. However, section 6330(d)(1) does not state the standard of review we should apply in reviewing respondent's administrative determination in this case. We are guided by our prior case law precedents. Where the validity of a taxpayer's underlying tax liability is properly at issue, we review Appeals' determination de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-82 (2000). Where the validity of the underlying tax liability is not properly at issue, we review the IRS action for abuse of discretion. Goza v. Commissioner, 114 T.C. at 182. Abuse of discretion exists when a determination is "arbitrary, capricious, or without sound basis in fact or law." Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd 469 F.3d 27 (1st Cir. 2006); Holloway v. Commissioner, T.C. Memo. 2007-175, 94 T.C.M. (CCH) 25, 28, aff'd 332 Fed.Appx. 421 (6th Cir. 2008).
e. Challenge to the Underlying Liability
A taxpayer may challenge the existence or amount of its underlying liability in a CDP proceeding only if it "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." § 6330(c)(2)(B). Petitioner did not receive a statutory notice of deficiency with respect to its tax liability for the Taxable Years at Issue and did not otherwise have an opportunity to dispute the underlying liability. Therefore, the underlying liability was properly at issue during the CDP hearings.
In CDP cases involving assessable penalties (viz., penalties not subject to deficiency procedures), we have jurisdiction to review a taxpayer's underlying liability for the penalty if it raised during the CDP hearing a proper challenge thereto. See Yari v. Commissioner, 143 T.C. 157, 162 (2014) (holding that section 6330(d)(1) "expanded the Court's review of collection actions * * * where the underlying tax liability consists of penalties not reviewable in a deficiency action"), aff'd, 669 Fed.Appx. 489 (9th Cir. 2016); Callahan v. Commissioner, 130 T.C. 44, 48 (2008).
During the CDP hearing, petitioner's representatives contended that it was not responsible for the penalties for taxable years 2015 and 2016 as it had reasonable cause for late filing due to the return preparer's illness. There is no evidence in the record that petitioner had a prior opportunity to challenge the penalty assessment. Therefore, we find that petitioner properly challenged its underlying tax liabilities for 2015 and 2016 during the CDP hearing and that this issue is properly before us. We review this issue de novo. Goza, 114 T.C. 181-182.
i. S Corporation Filing Requirement in Section 6037 and the Reasonable Cause Exception to the Section 6699 Penalty
An S corporation must file an annual tax return reporting its income on Form 1120-S. § 6037(a); Treas. Reg. § 1.6037-1(a). The deadline to file an S corporation tax return is March 15, but an S corporation can receive an automatic six-month extension if it submits a Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. §§ 6072(b), 6081(b); Treas. Reg. § 1.6081-3(a). An S corporation that does not timely file its tax return is liable for a penalty equal to $195 per shareholder for every month the tax return is late (but not to exceed 12 months), unless it is shown that such failure is due to reasonable cause. § 6699(a), (b). For an S corporation with one shareholder the maximum section 6699(a) penalty for a taxable year is $2,340.
This Court has previously noted that no Treasury Regulations have been issued discussing reasonable cause in the context of section 6699. See ATL & Sons Holdings Inc. v. Commissioner, 152 T.C. 138 (2019). Therefore, we are guided by the "regulations under the analogous provision of section 6651(a)(1)". Id. at 147. Section 6651(a)(1) provides that to demonstrate reasonable cause a taxpayer filing a late return must show that he can show reasonable cause for the failure to timely file a return if he 'exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.'" U.S. v. Boyle, 469 U.S. 241, 246 (1985); see also Treas. Reg. § 301.6651-1(c)(1). "To escape the penalty, the taxpayer bears the heavy burden of proving both (1) that the failure did not result from 'willful neglect,' and (2) that the failure was 'due to reasonable cause.'" Boyle, 469 U.S. at 245. Further, ensuring a timely filing is the responsibility of the taxpayer alone, and reliance on tax advisers, including accountants, is not a reasonable cause for late filing. Id. at 247-248.
1. Taxable Year 2014
Petitioner is precluded from challenging the liability for 2014. Petitioner did not raise a genuine issue regarding 2014 in its petition or in its objection to respondent's motion. Pursuant to Rule 331(b)(4), this issue is deemed conceded. See Poindexter v. Commissioner, 122 T.C. 280, 285-86 (2004), aff'd 132 Fed.Appx. 919 (2d Cir. 2005); see also Rule 121(d). Moreover, petitioner agreed to pay the outstanding amount for 2014 during the April 30, 2019, CDP hearing with SO Jimerson, and therefore, petitioner has conceded this issue for 2014.
2. Taxable Years 2015 and 2016
In his supplemental response to respondent's motion, petitioner contends that there is a genuine issue of material fact for trial as respondent "may assert [return preparer's] illness was not severe enough, occurred on different dates, may or may not have been the cause or a compelling reason why any one or more of the tax returns were not timely filed, and whether this circumstance was 'largely beyond taxpayer's control.'" However, respondent has conceded that petitioner's return preparer was ill during taxable years 2015 and 2016 and has not disputed any material fact related to his illness. Therefore, there is no issue of material fact, and a decision may be rendered as a matter of law.
Petitioner further contends that the late filing of the returns for 2015 and 2016 should not result in penalties assessed under section 6699(a) as the illness of the return preparer constitutes reasonable cause for the late filing of the returns. However, it is well established that reliance on a return preparer does not absolve the taxpayer from liability for ensuring the return is timely filed. See Boyle, 469 U.S. at 252. Whether the return preparer is healthy or ill does not change the taxpayer's responsibility. See Enis v. Commissioner, T.C. Memo. 2017-222 (holding that a return preparer's illness and petitioner's transition to a different return preparer did not constitute reasonable cause for the return's late filing), see also Estate of Scull v. Commissioner, T.C. Memo. 1994-211. It was petitioner's responsibility alone to ensure that the tax returns were timely filed, which it failed to do. As a result, the returns for 2015 and 2016 were filed late. It can hardly be said that petitioner exercised ordinary business care and prudence in these circumstances. Thus, as a matter of law, petitioner is liable for the penalty assessed under section 6699(a). Respondent prevails on this issue for taxable years 2015 and 2016.
3. Taxable Year 2017
Petitioner acknowledges the late filing of its 2017 Form 1120-S return, but it contends a genuine issue of material fact remains in determining whether the penalty should be imposed for one month or two months. Petitioner's return preparer provided proof of mailing showing the 2017 Form 1120-S return was postmarked October 15, 2018, and delivered to the IRS on October 19, 2018. SO Jimerson indicated that respondent's internal records reflected that the return was received on October 22, 2019. There is no genuine issue of material fact as to when the return was mailed or received, and therefore a decision may be rendered as a matter of law.
Generally, a tax return is deemed filed when it is delivered to the IRS. Emmons v. Commissioner, 92 T.C. 342, 346 (1989). However, a return may be deemed filed on the date it is mailed if the return has a postmark that falls on or before the prescribed date for filing. § 7502(a). Under section 7502(a), the date of mailing will only be considered the date of filing if the return is mailed on or before the date it is due, if it is mailed at any subsequent date, the return will be deemed filed when it is received by the IRS. Emmons, 92 T.C. at 346-47. Petitioner mailed its return for 2017 on October 15, 2018, well after the September 15, 2018, due date. As a result, section 7502(a) does not apply, and the general rule that the date of filing is the date the return was received by the IRS controls. Therefore, petitioner's return is deemed filed on October 19, 2018, when it was delivered to the IRS, and the IRS properly assessed the penalty. Consequently, respondent is entitled to judgment as a matter of law for taxable year 2017.
f. Abuse of Discretion and the Verification Requirement by SO Jimerson
In reviewing Appeals' determinations for abuse of discretion, we consider whether SO Jimerson: (1) properly verified that the requirements of applicable law or administrative procedure have been met, (2) considered any relevant issues petitioner raised, and (3) considered whether any proposed collection action balances the Government's need for the efficient collection of taxes with petitioner's legitimate concern that any collection action be no more intrusive than necessary. See § 6330(c)(3); Sego, 114 T.C. at 609.
Section 6330 requires that petitioner's CDP hearing be conducted by the IRS Independent Office of Appeals and by an impartial employee who had no prior involvement with respect to the unpaid tax specified in the Levy Notice before the first hearing under this section. See §§ 6330(b)(1), (3). The Treasury Regulations provide that prior involvement exists only when the taxpayer, the tax, and the tax period at issue in the CDP hearing also were at issue in the prior non-CDP matter, and the Appeals officer or employee actually participated in the prior matter. Treas. Reg. § 301.6330-1(d)(2), Q&A-D4.
This Court has authority to review satisfaction of the verification requirement regardless of whether the taxpayer raised that issue at the CDP hearing or in the petition. See Hoyle v. Commissioner, 131 T.C. 197, 202-03 (2008), supplemented by 136 T.C. 463 (2011). SO Jimerson failed to properly verify that all legal and procedural requirements had been met in conducting petitioner's CDP hearing. There is a genuine dispute as to whether this CDP hearing was conducted by an impartial Appeals Office employee.
In her Case Activity Record, SO Jimerson indicated that she had prior involvement with petitioner for the tax type and tax years associated with the CDP case and would obtain an appropriate waiver. However, no waiver exists in the record. Respondent asserts that SO Jimerson's statement of prior involvement was an error made in entering information into its internal database. Petitioner maintains that whether SO Jimerson had prior involvement remains a question of material fact. Taxpayers have a right to a hearing conducted by an employee or officer of IRS Appeals who was not involved with respect to the tax for the tax periods to be covered in the hearing unless the taxpayer waives the requirement. Treas. Reg. §§ 301.6330-1(d)(1), (d)(2), Q&A-D4, Q&A-D5. Construing the facts in the light most favorable to petitioner and constrained to the administrative record following Robinette, there remains a question of material fact as to SO Jimerson's prior involvement, and summary judgment cannot be granted with respect to whether SO Jimerson did not abuse her discretion during the CDP hearing.
III. Conclusion
There are no disputes of material fact and judgment may be rendered as a matter of law in respondent's favor with respect to petitioner's challenge to the underlying liability and its failure to demonstrate reasonable cause to abate or reduce the section 6699 penalties for the Taxable Years at Issue. However, there is a dispute of material fact whether SO Jimerson abused her discretion. We will therefore deny summary judgment in part and remand this case for a supplemental hearing.
Upon due consideration of respondent's motion and for cause, it is
ORDERED that respondent's Motion for Summary Judgment, filed April 20, 2021, is granted in part, insofar as it relates to petitioner's ability to challenge the underlying liability for the Taxable Years at Issue, but denied insofar as it relates to SO Jimerson not abusing her discretion during the CDP Hearing. It is further
ORDERED that, on the Court's own motion, this case is remanded to respondent's Independent Office of Appeals for the purpose of affording petitioner a supplemental administrative hearing, pursuant to I.R.C. § 6330, as to whether SO Jimerson abused her discretion in this case for the Taxable Years at Issue. It is further
ORDERED that respondent shall offer petitioner a supplemental administrative hearing at respondent's Independent Office of Appeals located closest to its principal place of business (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 30, 2022. It is further
ORDERED that the undersigned will retain jurisdiction of this case. It is further
ORDERED that on or before January 31, 2023, each party shall file with the Court a report as to the then-present status of this case.
If the parties believe a telephone conference would be helpful, please contact the undersigned's Chambers Administrator at 202-521-0835 for scheduling purposes.