T.C. Mem o. 2 01 3- 20 7

UNITED STAT ES TAX COURT

JAM ES R. DIXON, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

SHARON C. DIXON, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt Doc ke t No s. 9 96 2- 05 L, 99 65 -0 5L. Fil edSep te m be r 3, 2 01 3.

Ju anF. Vasque z, Jr ., andRen es haN. Fou nt ai n, fo r pe ti ti on ers . W . Lanc e St od gh il l an d Der ek B. Mat ta , for

res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HOLMES, Ju dg e: The Co de im po se s an ob li ga ti on on em pl oyers t o withh ol d apo rti on of t he wage s t ha t the y pa y to em pl oyees. Itgi ve s t ax pa y ers a- 2 -

[* 2] cred itag ai ns t the ir i nc om e ta x fo r th e am ou ntof m on ey withh el d- -ev enif t he ir
em pl oyer ne ve r pa y s tha t m on ey to th e IRS . The Di xo ns say the y sh ou ldge t the cred itbe cau se Try co withh el d $ 60 2,1 19 fro m th ei r wag es in 19 92 -9 5. Bu t Tryco’s pa y ro ll reco rd s ar e lo ng go ne , andth e Co m m is si on er s ay s t he Dix on s ca n’t h av e th e cre di t b ecau se th ey

have n’t s ho wn t ha t Tryco wit hh el d a nyth in g. FINDINGS OF FACT Sh aro n Di xo n was st art le d wh enth e IRS sei zedhe r ba nkacco un ts . She kn ew th atsh e an d h er h us ba ndha d t ax tro ub le s, b utth ou gh t al l the ir p ers on al in co m e-t ax pro bl em s wer e in th e p as t af te r th ey bo rro weda ha lf- m il li on do ll ars ag ai ns t the ir h om e an d s en t i t t o t he go ve rn m en t. Bu t i ns te adof s en di ng th e cas h di rect ly to the IRS, the Dix on s s en t the ir m on ey ona de to urth ro ug h aco rp or at io n whi ch th ey

own ed . They ha d t he co rp or at io n re po rt t o the IRS tha t the m on ey sh ou ldbe cred it edas a dd it io na l wi th ho ld in g o n i nc om e th e Dix on s h adearn ed y ears be fo re. The Dix on s’ cor

po rat io n was Try co , andth ey ha d fo un de d i t i n 1 99 0. Try co was in th e te m

p b us in es s i n b ot h t he Hou st on an d Dal la s m etro po li ta n a reas , andit s job was t o ro un d up wo rk ers form ajorne wsp ap ers , gro cery chai ns , andde pa rtment st or es . For a s l on g a s Tryco was in bu si ne ss , Jam es was i ts CEO andSh aro n was it s p res id en t. Try co was agre atsu cces s atfir stan d a t i ts pe akpro vi de d t ho us an ds- 3 -

[* 3] of tem po rary em

pl oyees e achy ear. Onth e ad vi ce o f th ei r fi nanc ia l ad vi se r th e Dix on s drew reg ul ar s al ari es an d t he n d is tri bu te d v ari ab le am ou nt s t o t he m se lv es as bo nu se s. Th ey

als o o ccas io na ll y

to oklo an s fr om

th e co m pany, inc lu di ng ne arl y $4 50 ,00 0 tha t the y

bo rro wedfro m

Try co to pa y

forth ei r ho us e. The ir s al ari es were p ai d fr om a st an da rdpa yro ll acco un t, an d t he y ha d t he
us ua l i nc om e ta x wi th he ldfro m th ei r ch eck s i n t he same way as m il li on s o f ot he r Am eri can s h av e h addo ne to th em forde cad es . Butth ei r bo nu se s wer e an ot he r m at te r--t ho se ch eck s wer e wri tt enon a ge ne ral -fu ndacco un t b y ha nd . Accor di ng to James, th e b on us ch eck s co ns is te d o f ne t p ay aft er Sh aro n re vi ewedIRS t ax sc he du le s an d c al cu la te d h ow m uc h t ax sh ou ldbe withh el d. Th ey us edth is m or e cu m be rs om e syst em

to m ai nt ai n p riv acy; th e Dix on s d id n’t wan t o th er p eo pl e in th e co m pa ny kn owi ng ho w su cces sf ul Try co was andho w m

uc h t he y were p ay in g th em se lv es in bo nu se s. Th e g en eral m an ag er tha t the y hi redaft er Try co ’s bu si ne ss st art edbo om in g- -an d t ha t m an ag er’s wif e, who als o wo rk edat Tryco-- were t he
on ly oth er p eo pl e who kn ew ab ou t the se bo nu se s. The Dix on s’ tax pro bl em s b eg anlat e in 19 92 . Try co st op pe d fi li ng it s qu art erl y tax returns in th e fo urthqu art er o f th aty ear, an d t he n m ad e n on fil in g a ba d h ab it --the co m

pa ny fail edto fil e returns an d fa il edto pa y ov er t o t he IRS ei th er withh el d e m

pl oyee in co m e ta xe s o r em pl oym en t t ax es forth e fo urth qu art er o f- 4 -

[* 4] 19 92 th ro ug h 1 99 5. Th e Dix on s b la m e th ei r ge ne ral m an ag er-- who m th ey ha d pu t i n c ha rg e o f th e co m

pa ny’ s fi sc al affai rs to free th em se lv es up to foc us on sa le s- -fo r th is de fau lt . Butwe ha ve to no te th atth e Dix on s t he m se lv es als o fa il ed to fil e returns or p ay

th ei r in di vi du al in co m e ta xe s dur in g m uc h o f th is ti m e. Altho ug h t he y

weren ’t fil in g t he ir r eturns , th e Dix on s cr ed ib ly test ifi ed --an d we th eref or e fi nd --tha t the y

weren ’t aware u nt il 19 97 th atTry co wasn ’t fil in g returns or m ak in g p aym en ts eit he r. They dis co ve redth is when bo th were cri m in al ly pro se cu te d fo r fai lu re t o fi le th ei r in di vi du al in co m e-t ax returns . They hi redLarry

Cam pa gn a, a s en io r an d v ery rep ut ab le Texa s t ax att orne y , to rep res en t Ja m es in hi s cr im in al -ta x c as e an d t o t ak e th e le adin pl an ni ng th ei r de fen se . (Sh aro n was rep res en te d b y an ot he r atto rn ey .) Cam

pa gn a h adov er twen ty y ears of
ex pe rie nc e in tax an d t ax co nt ro ve rs y an d h adha nd le d h un dr ed s o f cas es de al in g with wi th ho ld in g t ax es , andwe fin d t ha t the Dix on s wer e certa in ly j us ti fie d i n lo ok in g t o h im

an d h is firm

foradvi ce an d a ss is ta nc e. Cam pa gn a h ire d a n a cco un ti ng firm to he lp rev ie w Try co ’s reco rd s an d fig ur e o ut , am on g o th er thi ng s, h ow m uc h m on ey

ha d a ctua ll y

be enwithh el d fr om th e Dix on s’ payche ck s. Itwas thi s re vi ew th atrev eal edTry co ’s fai lu re t o re m it
an y withh el d t ax es . The Di xo ns th entu rn edth e rec or ds ov er t o t he go ve rn m en t s o th atanag reem en t co ul d b e rea ch edin th e cri m in al -ta x c as es . By 19 99 bo th si de s- 5 -

[* 5] in th e cri m in al cas es ag reedth atTry co ha d wi th he ldth e fo ll owi ng am ou nt s 1 fro m th e Dix on s’ sal ary an d b on us ch eck s, ev enth ou gh th e co rp or at io n h adn’t 2 actua ll y pa idov er the withh el d am ou nt s:

Year Sh aro n Ja m es 19 92 $1 3,0 32 .69 $1 3,0 32 .69 19 93 49 ,77 8.7 0 49 ,77 8.7 1 19 94 12 3,0 13 .06 12 3,0 13 .06 19 95 69 ,62 3.2 3 69 ,62 3.2 4 Tota l 25 5,4 47 .68 25 5,4 47 .70 Dis tri ctco urts us e ta x l os se s t o c al cu la te th e ap pr op ria te sen te nc e u nd er fed eral sen te nc in g g ui de li ne s. So th is ag reem en t o n t he am ou nt s Tryco h ad
Becaus e th e Dix on s re si de in a co m m un it y -p ro pe rty sta te , th ey are ea ch 1 en ti tl edto cla im

on e-h al f of

James’s withh ol di ng s an d o ne -h al f of Sh aro n’s withh ol di ng s. See sec . 1.3 1- 1( a), In co m e Tax Reg s. (Un le ss ot he rwis e n ot ed , all se ct io n re fere nc es are t o t he Int ern al Rev enue Co de in effe ctforth e y ears at i ss ue ; an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e.) As we ex pl ai n i n m or e d et ai l b el ow, em pl oyers m us t g en eral ly deduc t an d 2 withh ol d p ayro ll tax es --i nc lu di ng in co m e ta x, So ci al Secu rity tax , andMed ic are ta x- -fro m th ei r em pl oyees’ pa y ch eck s. Th e in co m e ta x wi th he ldis a cred itag ai ns t th e in co m e ta x o wedby the tax pa y er. The So ci al Secu rit y an d M ed ic are t ax es ha ve two po rti on s- -o ne pa idby the em pl oyer an d o ne pa idby the em pl oyee; t he em pl oyer pa y s i ts po rti on an d wi th ho ld s t he em pl oyee’s. Em

pl oyers m us t fi le Fo rm 94 1, Em pl oyer’s Quarte rly Fede ral Tax R eturn, t o re po rt t ho se tax es . If th ey fai l t o fi le Fo rm

94 1 o r pay

ov er the tax es on ti m e, th ey are s ub ject t o p en al ti es (u nl es s t he y

ge t an ex te ns io n a ndpa y th e as so ci at edfee) , andin te res t ac cru es on th e u np ai d b al an ce.- 6 -

[* 6] withh el d h el pe d t he Dix on s wh enitcam e ti m e to co m pu te th atlo ss , lea di ng to
anag reem en t b etweenth em an d t he ir p ro se cu to rs th atth e g ov ern m en t h adsu ffer ed a cri m in al -ta x l os s o f $3 0,7 99 .29 fro m Sh aro n a nd$3 0,2 22 .49 fro m James. And th e co nc lu si on of t he Dix on s’ acco un ta ntan d l awy er an d t he ass is ta ntU.S. att orne y worki ng th e cas e th atth e Dix on s’ withh ol di ng ex ceed ed(orne arl y equa le d) th ei r ta x l iabi li ty for 1 99 2- 19 94 ledto a pl ea d eal forfai lu re t o fi le on ly for the 19 95 tax y ear. Co urts typic al ly ord er cr im in al -ta x d efen da nt s t o p ay res ti tu ti on as p artof th ei r se nt en ces , andth e Dix on s b orro wedalm os t a h al f-m il li on do ll ars in 19 99 ag ai ns t the equi ty in the ir h ou se (th ey were ab le to do so be cau se Try co ha d n ev er pu t a l ie n o n i t fo r th e m on ey th atth e Dix on s h adbo rro wedfro m th e co m pa ny to bu y itin th e fi rs t p la ce), co nt rib ut edth atm on ey to Try co , andha d Tryco p ay itov er to th e IRS as “ pa ym en t o f [Fo rm ] 94 1 t ax es of t he co rp or at io n * * * to be ap pl ie d to th e wit hh el d i nc om e ta xe s” of J am es an d S ha ro n fo r eac h qua rte r of th e 1 99 2 th ro ug h 1 99 5 t ax y ears . Thei r in te ntwas c le ar-- as Cam pa gn a te st ifi ed , “ Mr. an d Mrs . Dix on bo rro wedth e m on ey an d c on tri bu te d i t t o t he co rp or at io n.” In a
m ot io n s eek in g asen te nc e o f pr ob at io n, the y cal le d t he se pa ym en ts “ ex tra or di na ry res ti tu ti on ,” th ou gh th e actua l cr im in al jud gm en ts di d n ot . The to ta l am ou ntth atTry co pa idequa ll edwhatth e Dix on s an d t he pr os ecu to rs ag reedha d a ctua ll y be enwithh el d fr om

th ei r pa y ch eck s (b utth atTry co- 7 -

[* 7] ha d n otpa idov er atth e ti m e), p lu s t he en ti re am ou ntof t he st atut or il y cal cu la te d t ax lo ss . The capi ta l co nt rib ut io n t o Tryco was ne ces sa ry be cau se th e co rp or at io n- -th ou gh in ex is te nc e--wa s n o l on ge r do in g m uc h b us in es s. Ev erythi ng was do ne th is way --an d n otsi m pl y with t he Dix on s’ payin g the ir f ul l t ax li ab il it y di rect ly--bec au se Cam

pa gn a rec omm en de d i t; if t he y ha dn ’t, Cam

pa gn a th ou gh t, Try co wou ldst il l h av e b eenli ab le forth e wit hh ol di ng tax es an d C am pa gn a d id n’t
wan t t o h av e th e ta x p ai d t wice : ha d M r. an d M rs . Dix on rem it te d t he in co m e ta xe s d ire ct ly for the ir acco un t, the n t he 94 1 l iabi li ty for Try co wou ldno t h av e b eenreduc ed by the pa ym en t, an d t he Gov ern m en t wo ul d h av e b een ask in g fo r a do ub le co ll ect io n o f th e sa m e m on ey on th e in co m e ta x s id e an d t he em pl oym en t t ax si de
. Inth e fi rs t h al f of

20 00 , th e acc ou nt an ts pre pa redFo rm s 1 04 0 fo r th e Dix on s’ m is si ng tax y ears . They fig ur edou t tha t the Dix on s o wed$3 0,2 02 m or e in tax es th anwhatha d a lre ady be enpa idvi a th e Dix on s’ firs t capi ta l-c on tri bu ti on fo ll owe d- by-Try co ’s-p aym en t ex erci se th e p rev io us y ear. Th e Dix on s d eci de d t o se ndm or e m on ey

to Try co , andin June 20 00 Try co ag ai n p ai d the m on ey ov er t o th e IRS an d d es ig na te d i t as paym en t o f wit hh el d t ax es forth e Dix on s. (It a ls o 3
as ke d t he IRS t o re al lo cat e so m e o f th e fu nd s fr om th e fi rs t p aym en t t o d iff

eren t W e d is cu ss th e eff

ectof t hi s l at er p aym en t an d d es ig na ti on in th e o th er 3 Opi ni on in th es e cas es whi ch we fil e to day . See Dix on v. Co m m is si on er, 1 41 T.C.

__(Sep t. 3 , 20 13 ).- 8 -

[* 8] qu art ers .) All th is was t o m ak e th e ta xe s p ai d t hr ou gh Try co foreach of t he Dix on s m at ch th ei r actua l t ax li ab il it y foreachof t he y ears in qu es ti on . The acco un ta nt s p rep aredFo rm s W-2c, C orrect edW ag e an d Tax Sta te m en t, fo r th e Dix on s as well as F orm s 1 04 0 re fle ct in g the se ad jus te d wi th ho ld in g am ou nt s as fol lo ws (we’ve rou nd edto th e n eare stdo ll ar):

199 2 199 3 1994 1995 J ames Sha ron J ames Sha ron J ames Sha ron J ames Sha ron T ryco $16, 601 $16, 779 $25, 766 $19, 469 $30, 867 $23, 627 $36, 214 $35, 412 11/ 99 pa ym ent 1 ,110 1, 258 31 ,755 39, 902 68, 404 70, 078 87, 779 66 ,895 05/ 00 pa ym ent n/a n/a n/a n/a n/a n/a 15, 101 15 ,101 T ryco bon us n/a n/a
- 0-
- 0-
- 0-
- 0-
- 0-
- 0- Dixc o bon us - 0-
- 0-
- 0-
- 0-
- 0-
- 0-
- 0-
- 0-

1 All oca ti on fr om sp ous e 7 ,856 8, 026 30 ,016 29, 091 63, 818 66, 601 52, 566 63 ,409 All oca ti on to spo use - 8,02 6 - 7,85 6 - 29,0 91 - 30,0 16 - 66,6 01 - 63,8 18 - 63,4 09 - 52,5 66 T ota l 17 ,541 18, 207 58 ,446 58, 446 96, 488 96, 488 128, 251 128 ,251 Dix co wa s a not hercorpor at ion th atth e Di xons owne d an d op er at ed duri ng thi s t ime. We 1 inc lud e Di xco her e be cau se the ac cou nta nts in cl ude d i t o n t he F orms 104 0. Thi s was all do ne sep arat el y fro m th e cri m in al pro ceed in gs , whi ch ha d b een res ol ve d b y

pl ea ag reem en ts in whi ch eachof t he Dix on s p le ad edgu il ty to o ne co un t o f m is de m ean orfai lu re t o fi le a 19 95 return. Ca m pa gn a p et it io ne d t he co urt- 9 -

[* 9] fo r a d own wardde pa rtu re fro m th e se nt en ci ng gu id el in es ba se d o n s ev eral fact or s, i nc lu di ng th e Dix on s’ wil li ng ne ss to co nt rib ut e m on ey to Try co to en su re th atth ei r in co m e ta xe s wer e p ai d, ev enth ou gh “ th e b ul k o f Mr. Di xo n’s t ax es wou ldha ve be ende em edpa idwhen withh el d.” The Co urt d en ie d t he m ot io n, an d th e Dix on s wer e se nt en cedto fou r y ears of p ro ba ti on with s ix m on th s o f ho us e arre st . The p le a ag reem en ts cle arl y in di cat edth atth e res ol ut io n o f th e cri m in al
cas es di d n otrel ie ve th e Dix on s o f th ei r ci vi l t ax li ab il it y . The Di xo ns , ho wev er, th ou gh t tha t b y

fil in g t he ir i nd iv idua l t ax returns an d d ire ct in g Tryco t o p ay withh ol di ng tax es sp eci fic al ly for the ir a cco un t, the y ha d t ak encare of t he ir in di vi du al in co m e-t ax pro bl em an d m ad e atlea sta sm al l p aym en t t owa rdTry co ’s
en orm ou s re m ai ni ng em

pl oym en t an d wi th ho ld in g- ta x l iabi li ty of ne arl y $2 3
m il li on . The Co m m is si on er d is ag reed . He sen t the Dix on s a n ot ic e o f in te ntto lev y . The no ti ce s ta te d t ha t the co up le owedm or e th an$8 00 ,00 0 i n u np ai d t ax es , pe na lt ie s, an d i nt eres t fo r th e 1 99 2- 95 , 20 00 , and20 02 tax y ears . The Di xo ns as ke d fo r a co ll ect io n due pro ces s (C DP) h eari ng an d wer e v ery su rp ris edwhen 4
A tax pa y er wh o g et s a l ie n o r le vy no ti ce fr om th e IRS canreque sta CDP 4 he ari ng with t he IRS Offi ce o f App eal s. See sec s. 6 32 0, 6 33 0. Th e App eal s of fic er wi ll th enho lda co nf eren ce wi th th e ta xp ay er an d d et erm in e whe th er t o pr oc eedwith c ol le ct io n. Se e se c. 63 30 (c).- 10 -

[* 10 ] th ei r ba nkin fo rm edth em th atSh aro n’s ac co un ts ha d a lre ady be enlev ie d up on . The Ap pe al s o ffi cer wh o c on ta ct edth e Dix on s t o l etth em kn ow t ha t h e h ad
rece iv edth ei r CDP re qu es t t ol d t he m th atth e le vy onSh aro n’s ac co un t was to co ll ectunpa id19 92 -9 5 t ax es th atwere the subjec t o f th e h eari ng . This was irr eg ul ar, b utth ey

go t al l tha t s tra ig ht en edou t. The Dix on s t he n h adth ei r CDP h eari ng , andth e App eal s o ffi cer a t fi rs t ag reedth atth ey

no lo ng er o wedtax for19 92 -9 5. Fo r a s ho rt t im e, th e IRS
reco rd edTry co ’s paym en ts as the Dix on s i nt en de d: ForJames’s 19 93 tax y ear, fo r ex am pl e, th e IRS cred it edm or e th an$5 8,0 00 as awithh ol di ng cred it , andth e m or e th an$6 2,0 00 in in te res t b etweenth e d at e o f th e cre di t an d t he return’s
or ig in al du e d at e o f Apr il 15 , 19 94 , was ab at ed
. Butth enot he rs at t he App eal s 5 Offi ce b eg anqu es ti on in g t he effe ctof Tryco’s d es ig na ti onin 19 99 of i ts pa ym en t fo r th e Dix on s’ 19 92 -9 5 t ax bi ll . After s ev eral ex ch an ge s, the Co m m is si on er fin al ly iss ue d n ew no ti ces of d et erm in at io n i n wh ic h h e uph el d the lev y in ful l fo r
W e d is cu ss itm or e in th e o th er Op in io n i n t hi s ca se th atwe are al so fil in g 5 to da y , bu t i t i s u se fu l t o h ig hl ig htth atth e Co de tre at s an y am ou ntforwhi ch a ta xp ay er i s cr ed it edun de r se ct io n 3 1 a s p ai d o n t he ori gi na l due da te of t he return, no t wh enitis actua ll y

m ad e. See s ec. 3 1( a)(2 ). Thu s, the effe ctof the Dix on s’ po si ti onis th atTry co ’s lat e p aym en t o f th e wit hh ol di ng tax wou ldno t o nl y sat is fy th ei r ta x d eb t, b utals o c an cel th e p orti on of t ha t d eb t tha t co ns is te d o f co m po un de d i nt eres t. Campag nates ti fie d t ha t “ I do n’t thi nkth atI was c on cern ed ab ou t the in te res t.” We are n otso su re, b utne edm ak e n o fi nd in g o n t hi s p oi nt .- 11 -

[* 11 ] al l s ix of t he tax y ears at i ss ue . The Ap pe al s o ffi cer r eas on edth atth e Dix on s co ul d b e cre di te d o nl y with t he withh ol di ng th atTry co ha d n ot edonth ei r or ig in al W -2 Fo rm s t ha t the Dix on s h adatt ach edto th ei r 19 93 an d 1 99 4 t ax returns . “ Fo rm s W-2 were no t s ub m it te d wi th th e 1 99 2 and19 95 in co m e ta x returns * * *; th eref

or e th e wit hh ol di ng cla im edon th es e returns wil l n otbe al lo wed .” Sh e d is al lo wedth e ex trawithh ol di ng on th e Dix on s’ Form s W-2c be cau se “ th e p aym en ts were n otwithh el d a t the so ur ce an d, * * * can no t b e de si gn at edto th e wit hh ol di ng of asp eci fic em pl oyee.” Sh e n ot edth e ab se nc e o f
an y ad di ti on al pa yro ll reco rd s t ha t m ig htha ve supp orte d t he Dix on s’ cla im s t o ad di ti on al withh ol di ng , andad op te d the rep ort o f th e IRS Exam in at io n Di vi si on th at“ du e to th e u na va il ab il it y of c om pl et e actua l p ay

ro ll reco rd s m ai nt ai ne d b y Try co , th e Servi ce co m

pu te d t he in co m e ta x wi th ho ld in g a s a s ta nd ardpe rcen ta ge of to ta l wag es pa iddu rin g e achqu art erl y pe rio d, as pro vi de d i n Tre as ury Reg ul at io n 3 1.3 40 2( g) -1 (a)( 2) (ii ).” The Dix on s l at er wai ve d t he ir c ha ll en ge to th e IRS’s co ll ect io n o f th ei r 20 00 an d 2 00 2 t ax de bt s, an d o nl y 19 92 -9 5 re m ai n a t is su e. The Dix on s l iv edin Texa s wh enth ey fil edth ei r pe ti ti on s. We con so li da te d th e cas es an d t rie d t he m

in Hou st on .- 12 -

[* 12 ] OPINION I. Ju ris di ct io n Bec au se th es e cas es ari se ou t o f a n ot ic e o f de te rm in at io n fr om a CDP he ari ng , itis cle ar tha t we h av e juri sd ic ti on to rev ie w th e App eal s o ffi cer’s de te rm in at io n. Se c. 63 30 (d )(1 ). The Dix on s cl ai m

th atth ey are en ti tl edto a cred itun de r se ct io n 3 1 b ecau se Try co actua ll y

withh el d $ 60 2,1 19 fro m th ei r wag es in 19 92 -9 5. Try co ’s withh ol di ng ob li ga ti on s ar en ’t bef or e u s h ere- -th e Dix on s’ in co m e ta xe s ar e. Bu t be cau se sec ti on 31 all ows tax pay ers to cla im as acred iton th ei r ta x re tu rn s t he
m on ey th atwas wi th he ldby em pl oyers, we n eedto fig ur e o utwhethe r an d h ow m uc h Tryco wit hh el d fr om th e Dix on s’ paychec ks . Thatm ean s t ha t we n eedto lo okto cert ai n fa ct s ar is in g fr om Try co ’s withh ol di ng tax es . Loo ki ng to y ears or ta xe s o ve r whi ch we do no t h av e juri sd ic ti on to m ak e a d et erm in at io n abo uta y ear an d t ax ov er wh ic h we d o h av e juri sd ic ti on is , ho wev er, n ot hi ng ne w. It is th e sa m e th in g we d o wh enwe co ns id er an ov erp aym en t i n a no th er y ear a s p artof a de fic ie nc y

pro ceed in g, o r whe n we f in d c ert ai n fa ct s fo r on e y ear b ecau se th ey affe ctan ot he r y ear. Se e se c. 62 14 (b ); F rei je v. Co m m is si on er, 1 25 T.C. 14 , 25 -2 6 (2 00 5)
.- 13 -

[* 13 ] II. Sta nd ardof r ev ie w Sect io n 6 33 0( c)(2 )(B) all ows a ta xp ay er t o c ha ll en ge th e ex is te nc e o r am ou ntof h is un de rlyin g t ax li ab il it y at aCDP h eari ng if h e n ei th er re cei ve d a
no ti ce o f de fic ie nc y

no r ha d apri orop po rtu ni ty to d is pu te it . The u nd erl y in g t ax li ab il it y is “ th e am ou ntunpa idaft er ap pl ic at io n o f cre di ts to whi ch pe ti ti on er i s en ti tl ed .” See Lan dry

v. Co m m is si on er, 1 16 T.C. 60 , 62 (20 01 ). The Di xo ns di dn ’t recei ve a no ti ce o f de fic ie nc y an d d id n’t h av e a ch an ce t o d is pu te th ei r ta x li ab il it y be fo re the ir C DP he ari ng , so th ey were ri gh t t o ra is e itat t he ir C DP he ari ng . W e rev ie w det erm in at io ns ab ou t the un de rlyin g l iabi li ty de no vo . See Seg o v . Comm is si on er, 1 14 T.C. 60 4, 6 09 -1 0 (2 00 0)
. III. Actu al withh ol di ng A. How wi th ho ld in g u su al ly w orks Und er s ect io n 3 40 2, an em pl oyer m us t wi th ho ldest im at edin co m e ta x fr om it s emplo y ees ’ wag es th ro ug ho utth e y ear andpa y itdi rect ly to the go ve rn m en t. The go ve rn m en t g et s t he m on ey it ’s du e whi le tax pa y ers do n’t h av e to co m e up with l arg e su m s o f m on ey all at o nc e. An em

pl oyee us ua ll y

tel ls hi s emplo y er o n a Fo rm W -4 ho w m an y

ex em pt io ns he an ti ci pa te s, an d t he em pl oyer us es th at in fo rm at io n t o wi th ho lda sp eci fic am ou ntfro m each pa y ch eck . The em

pl oyer th enrem it s t he withh el d fu nd s fo r al l i ts em pl oyees t o t he go ve rn m en t o n a- 14 -

[* 14 ] qu art erl y

ba si s b y fil in g aFo rm

94 1. Se e g en eral ly IRS Pub li cat io n 1 5 (Ci rcu la r E), Em

pl oyer’s Tax Gu id e. At the en d o f th e y ear, t he em pl oyer rev ie ws i ts reco rd s an d d et erm in es ho w m uc h o f th e wit hh el d m on ey is att rib ut ab le to eachin di vi du al em pl oyee. It the n rep orts th is in fo rm at io n t o t he em pl oyees o n s ep arat e Fo rm s W-2 an d t o t he IRS th ro ug h aco m

bi ne d F orm

W -3 , Trans m it ta l o f W ag e an d Tax Sta te m en ts . If th e em pl oyer m ak es a rep orti ng mis ta ke , itcanis su e a Fo rm W -2 c, whi ch ale rts th e em pl oyee an d t he IRS an d re po rts th e co rrec t i nf orm at io n. Se e IRS Gene ral In st ru ct io ns forFo rm s W-2 an d W-3, at4-5 (20 12 ). 6 The em pl oyee us es th e W-2 (o r th e W-2c) as ev id en ce o f ho w m uc h m on ey was withh el d fr om

hi s i nc om e an d s ub tra ct s t ha t am ou ntas acred itag ai ns t h is
ov eral l t ax li ab il ity . Sec. 3 1( a). As fa r as th e em pl oyee is co nc ern ed , itdo es n’t
m at te r whe th er o r no t the em pl oyer actua ll y

ful fil le d i ts du ty to turn o ve r th e withh el d m on ey

to th e g ov ern m en t; th at ’s bet weenth e g ov ern m en t an d t he
em pl oyer. See s ec. 1 .31 -1 (a), In co m e Tax Reg s. Th is rul e m ak es sen se --m os t em pl oyees h av e n o c on tro l o ve r wha t the ir e m pl oyer do es with the m on ey th atitis
supp os edto ho ldin tru stan d p ay to th e g ov ern m en t.
W e h av e n o re as on to th in k t ha t the ab se nc e fro m th e rec or d o f in st ru ct io ns 6 fo r th es e fo rm s fo r th e y ears at i ss ue wou ldch an ge th is ge ne ral ba ck gr ou nd
.- 15 -

[* 15 ] B. Wha t h ap pe ne d h ere The tan gl e in th es e cas es be ga n wh enne ithe r th e Dix on s n orTry co fil ed ti m el y tax returns forth e y ears at i ss ue . This cau se d c on fu si on ab ou t h ow m uc h withh ol di ng th ere a ctua ll y was. Th in gs go t m or e co m pl ic at edby T ry co ’s reco rd s’ ge tt in g l os t s om ewh ere b etweenth e cri m in al cas es an d the CDP h eari ng , whi ch
m ad e itim

po ss ib le to ex am in e Try co ’s bo ok s t o g etanaccu rat e acc ou nt in g. We do ha ve Fo rm s W-2 Tryco is su edforth e y ears 19 93 an d 1 99 4, b utth ey do no t ap pe ar t o re fle ctan y

of t he bo nu se s t ha t Tryco p ai d t o t he Dix on s o r an y am ou nt s withh el d fr om

th os e b on us es . The pro bl em

of h ow m

uc h wi th ho ld in g t he re was is di ffer en t fr om th e qu es ti on s o f ho w m

uc h t he re s ho ul d h av e b een an d wh ethe r th e Dix on s an d Tryco
can fix an y

un de rp aym en t years l at er the way th ey tri edto . To so lv e th e p ro bl em of ho w m uc h wi th ho ld in g the re ac tu al ly w as , we tu rnfir stto th e b es t ev id en ce ru le . This is a ru le of e vi de nc e th atrequi res , with l im it edex cep ti on s, p ro du ct io n of anori gi na l d oc um en t t o p ro ve it s co nt en ts . Fed . R. Evi d. 1 00 2. Othe r ev id en ce of it s co nt en ts is adm is si bl e if all ori gi na ls have be enlo stor d es tro y ed(un le ss in ba d fa it h) or i f no ori gi na l ca n b e o bt ai ne d t hr ou gh jud ic ia l p ro ces s. Fed . R. Evi d. 10 04 . Whe th er tha t o th er ev id en ce co rrec tl y refl ect s t he co nt en ts of t he m is si ng do cu m en t i s a que st io n o f fac t. Fed . R. Evi d. 1 00 8.- 16 -

[* 16 ] W e fi ndth atth e rec or ds in th es e cas es , with afew ex cep ti on s, h av e al l b een lo st . Neit he r pa rty was ab le to pro ve who lo stth e rec or ds or h ow t he y di sap- 7 pe ared , andso we wil l n otdraw adv ers e in fere nc es ag ai ns t ei th er p arty . W e d o ha ve sev eral co m

pu te r-g en erat edpa yro ll ch eck s an d h an dwr it te n b on us ch eck s to ge th er wi th th e ch eckstub s, an d d oc um en ts fro m th e cri m in al cas es sh owi ng th e cal cu la ti on s fo r th e ta x l os s. We fin d t ha t the ch eck s, b ot h p ayro ll an d b on us ch eck s, s ho w th atin co m e ta xe s wer e reg ul arl y withh el d fr om

th e Dix on s’
co m pe ns at io n fo r al l fo ury ears . 8 The Co m m is si on er cl ai m s t ha t the fin al tax -lo ss fig ur e was jus t a co m pr om is e, an d t ha t we s ho ul d g iv e itli tt le weig htin trying to fig ur e o utho w m uc h Tryco ac tu al ly w it hh el d fr om th e Dix on s’ pay. Bu t tho ug h we a gr ee tha t the fin al tax -lo ss nu m

be r m ay well ha ve be ena co m

pr om is e, we fi ndth atth ere i s no th in g t o s ug ge stth atth e Dix on s an d t he ir p ro se cu ti onco m pr om is edon th e
The Di xo ns cla im

th atdurin g t he cri m in al cas es th ey ha nd edov er al l the 7 or ig in al reco rd s t o t he go ve rn m en t, wh ic h t he n l os t the m . The Co m m is si on er do es n’t d ire ct ly dis pu te th is , bu t h e cl ai m s t ha t an ex pe rie nc edatt orne y li ke Cam pa gn a wou ldne ve r ha ve tu rn edov er s uc h i m po rta ntdo cu m en ts witho ut m ak in g c op ie s. The C omm is si on er d oe s n otass ertinth es e cas es th atif t he am ou nt s wer e 8 withh el d, the cred it s s ho ul d s ti ll be di sa ll owe d o n o th er g ro un ds . Cf. May v. Co m m is si on er, 1 37 T.C. 14 7, 1 53 (20 11 ), aff’d, 1 11 A.F.T.R. 2d(RIA) 2 01 3- 11 26 (6 th Cir . 20 13 ).- 17 -

[* 17 ] am ou ntTry co ha d wi th he ld . Whe n atax pa y er i s ch arg edwith fa il ur e to fil e,

“ th e ta x l os s s ha ll be tre at edas e qu al to 20 % of t he gro ss in co m e (2 5% i f th e ta xp ay er i s a c or

po rat io n) less an

y tax wi th he ld

or othe rw is e p ai d , un le ss a m or e accu rat e d et erm in at io n o f th e ta x l os s ca n b e m ad e.” U.S. Sen te nc in g Gu id el in es Man ua l s ec. 2 T1.1 (c)( 2) (20 02 ) (em ph as is ad de d) . If th ere i s an y fig ur e to be ad jus te d i n t hi s eq ua ti on , th eref or e, itwou ldbe th e “ gr os s i nc om e” ra th er tha n t he pr ov ab le withh el d t ax es . W e rec og ni ze tha t the co m pu ta ti on of t he tax lo ss es in th e Dix on s’ cri m in al cas es are n otbi nd in g i n the civ il cas e--t he pa rti es sp eci fic al ly ag reedto th at . Butwe fin d the tes ti m on y be fo re u s ab ou t h ow o ne co m po ne ntof th os e ta x l os se s- -th e am ou nt s ac tu al ly w it hh el d dur in g t he tax y ears at i ss ue in th e cri m in al cas es --was arri ve d a t t o b e cre di bl e. W e sp eci fic al ly findth atth e am ou nt s l is te d i n t he tax -lo ss co m pu ta ti on as a ctua ll y

withh el d wer e co m

pi le d fro m th e th en -s ti ll -ex ta ntbo ok s an d re co rd s o f Try co . W e th us fin d i t m or e li ke ly th anno t tha t Sh aro n a ndJames eac h h adactua l i nc om e-t ax withh ol di ng s as ou tl in edsupr a p . 5 o f th is op in io n: $1 3,0 33 for19 92 , $4 9,7 79 for19 93 , $1 23 ,01 3 fo r 19 94 , and$6 9,6 23 for19 95 , fora gr an d t ot al of $ 51 0,8 96 be twee n b oth Dix on s. Th ey

winonth is po in t.