T.C. Memo. 2010-81

UNITED STATES TAX COURT

MCNAIR EYE CENTER, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18262-08L. Filed April 19, 2010.

James R. McNair (an officer), for petitioner.

William F. Castor, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: Pursuant to section 6330(d), petitioner

seeks review of respondent’s determination to proceed with a

proposed levy. All section references are to the Internal

Revenue Code, as amended.
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1The record does not reveal whether or when petitioner filed

its Form 941, Employer’s Quarterly Federal Tax Return, for the

last taxable quarter of 2004.

FINDINGS OF FACT 

The parties have stipulated some facts, which we incorporate

herein. When it petitioned the Court, petitioner was located in

Arkansas. During the periods at issue, Dr. James R. McNair was

petitioner’s only corporate officer.

In late 2004 Dr. McNair hired a certified public accountant

(C.P.A.) as petitioner’s administrator, bookkeeper, and

accountant. The C.P.A.’s duties included filing petitioner’s

Forms 941, Employer’s Quarterly Federal Tax Return, and remitting

the related tax. The C.P.A. failed to do so, which Dr. McNair

first discovered in early 2006 when the C.P.A. left petitioner’s

employment. As a result, petitioner’s Forms 941 for the three

taxable quarters ending March 31, June 30, and September 30,

2005, were filed late on February 3, 2006.1 Petitioner did,

however, timely file its Form 941 for its taxable quarter ending

December 31, 2005. For each of its 2005 taxable quarters

(including the last quarter), petitioner failed to pay all of the

tax reported on its Form 941 and failed to make all required

Federal tax deposits.

At various dates in March and April 2006 respondent assessed

the taxes that petitioner had reported on its quarterly Forms 941

for 2005. For each taxable quarter, respondent assessed
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2The record is unclear as to when or whether respondent

assessed petitioner’s employment tax for the last taxable quarter

of 2004.

additions to tax under section 6651(a)(2) for failure to pay tax

and penalties under section 6656 for failure to make required

deposits. For the first three taxable quarters of 2005,

respondent also assessed additions to tax under section

6651(a)(1) for filing Forms 941 late. On June 13, 2007,

petitioner paid the trust fund portion of its assessed Federal

employment tax; petitioner has not paid the nontrust fund

portion, additions to tax, penalties, or accrued interest. 

On October 29, 2007, respondent sent petitioner Letter 1058,

Final Notice of Intent to Levy and Notice of Your Right to a

Hearing, with respect to unpaid assessed amounts for taxable

quarters ended December 31, 2004, through December 31, 2005.2 In

response, petitioner timely submitted Form 12153, Request for a

Collection Due Process or Equivalent Hearing (CDP hearing), with

respect to all of the quarters listed in the notice. Petitioner

requested an installment agreement or offer-in-compromise as a

collection alternative. On April 22, 2008, the settlement

officer conducted the CDP hearing by telephone with petitioner’s

representative.

On June 18, 2008, respondent’s Office of Appeals (Appeals)

issued a Notice of Determination Concerning Collection Action(s)

Under Section 6320 and/or 6330 covering petitioner’s 2005 taxable
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3For reasons that are unclear from the record, the

settlement officer apparently determined that Appeals would not

consider petitioner’s taxable quarter ending Dec. 31, 2004, as

part of the collection due process (CDP) hearing. See infra note

4.

4As an exception to this general rule, the CDP notice and

pre-levy CDP hearing are not required if the Secretary issues a

levy to collect Federal employment taxes and the taxpayer subject

to the levy had previously requested a CDP hearing with respect

to unpaid employment taxes arising in the 2-year period before

the beginning of the taxable period with respect to which the

employment tax levy is served. Sec. 6330(f)(3), (h). It is

unclear whether this provision might have been implicated in the

settlement officer’s determination that petitioner was not

entitled to a CDP hearing with respect to the last quarter of

2004. See supra note 3. In this proceeding, petitioner has

raised no issue regarding this matter. In any event, because the

determination notice upon which this proceeding is predicated

does not cover petitioner’s yearend 2004 taxable quarter, we lack

jurisdiction in this proceeding with respect to this matter. See

sec. 6330(d)(1).

quarters.3 In this determination notice, the settlement officer

denied petitioner’s request to abate additions to tax and

penalties, concluding that petitioner had failed to show

reasonable cause. The settlement officer also concluded that

petitioner did not qualify for a collection alternative, partly

because petitioner had failed to provide financial information

relating to Dr. McNair.

OPINION

Section 6330 generally requires the Secretary to furnish a

person notice and opportunity for a hearing before making a levy

on the person’s property.4 At the hearing, the person may raise

any relevant issue relating to the unpaid tax or proposed levy,
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including spousal defenses, challenges to the appropriateness of

the collection action, and offers of collection alternatives. 

Sec. 6330(c)(2)(A). The person may challenge the existence or

amount of the underlying tax liability for any period only if the

person did not receive a notice of deficiency or did not

otherwise have an opportunity to dispute the liability. Sec.

6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604 (2000). Once

Appeals issues a notice of determination, the person may seek

judicial review in this Court. Sec. 6330(d)(1); Pension

Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat.

1019. 

Respondent concedes that petitioner is entitled in this

collection proceeding to challenge its underlying liability for

the additions to tax and penalties. See Katz v. Commissioner,

115 T.C. 329, 339 (2000). We review petitioner’s challenge to

its liability de novo. Sego v. Commissioner, supra at 610.

Section 6651(a)(1) Additions to Tax

Section 6651(a)(1) imposes an addition to tax for failure to

file a Federal income tax return by its due date, determined with

regard to any extension of time for filing previously granted.

The addition equals 5 percent of the net amount due for each

month that the return is late, not to exceed 25 percent. Sec.

6651(a)(1), (b)(1). It is undisputed that for each of the first
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three taxable quarters of 2005 petitioner failed to timely file

Form 941. 

 The addition to tax under section 6651(a)(1) shall not

apply if it is shown that the failure to timely file is due to

reasonable cause and not due to willful neglect. Sec.

6651(a)(1). A delay is due to reasonable cause if “the taxpayer

exercised ordinary business care and prudence and was

nevertheless unable to file the return within the prescribed

time”. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Petitioner

bears the burden of proving that its failure to timely file was

due to reasonable cause and not to willful neglect. See Higbee

v. Commissioner, 116 T.C. 438, 446 (2001).

Petitioner maintains that it had reasonable cause for late

filing because it relied on the C.P.A. to file the Forms 941 on

time. Failure to timely file is not excused by a taxpayer’s

reliance on an agent, and such reliance is not reasonable cause

for a late filing under section 6651(a)(1). United States v.

Boyle, 469 U.S. 241, 252 (1985). 

At trial Dr. McNair acknowledged that he “never paid any

attention” to whether the C.P.A. actually paid petitioner’s

employment taxes and that he never discussed it with the C.P.A.

because “The subject never came up.” Dr. McNair also

acknowledged that petitioner had a history of failing to file and

pay employment taxes in 2 prior years. Particularly in the light
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of this history, petitioner’s failure to adequately oversee the

C.P.A.’s performance of his duties indicates a lack of ordinary

business care and prudence, especially considering that the

C.P.A. had been recently hired. See generally Diamond Plating

Co. v. United States, 390 F.3d 1035, 1039 (7th Cir. 2004). 

Petitioner has not established reasonable cause for its failure

to file. We sustain the additions to tax under section

6651(a)(1). 

Section 6651(a)(2) Additions to Tax

Section 6651(a)(2) imposes an addition to tax for failing to

pay taxes shown on a return on or before the date prescribed

(taking into account any extension of time for payment), unless

it is shown that the failure is due to reasonable cause and not

due to willful neglect. It is undisputed that petitioner failed

to timely pay the taxes shown on its Forms 941 for all its 2005

taxable quarters. 

The regulations provide:

A failure to pay will be considered to be due to

reasonable cause to the extent that the taxpayer has

made a satisfactory showing that he exercised ordinary

business care and prudence in providing for payment of

his tax liability and was nevertheless either unable to

pay the tax or would suffer an undue hardship (as

described in § 1.6161-1(b) of this chapter) if he paid

on the due date. In determining whether the taxpayer

was unable to pay the tax in spite of the exercise of

ordinary business care and prudence in providing for

payment of his tax liability, consideration will be

given to all the facts and circumstances of the

taxpayer’s financial situation * * * [Sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.]
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The employer may be held to a heightened standard when trust fund

taxes are at issue. Sec. 301.6651-1(c)(2), Proced. & Admin.

Regs. 

Although Dr. McNair testified that petitioner was having

financial difficulties in 2005, the record does not provide a

clear picture of petitioner’s financial circumstances. 

Particularly taking into account the heightened standard that

applies to nonpayment of trust fund taxes, petitioner has not

satisfactorily shown that it exercised ordinary business care and

prudence but nevertheless was unable to pay its taxes or would

have suffered undue hardship if it had paid the taxes when due. 

We sustain the additions to tax under section 6651(a)(2).

Section 6656 Penalty

Section 6656(a) imposes a penalty for failing to timely make

a required deposit of taxes in an authorized Government

depository unless the failure was due to reasonable cause and not

willful neglect. Charlotte’s Office Boutique, Inc. v.

Commissioner, 121 T.C. 89, 109 (2003), affd. 425 F.3d 1203 (9th

Cir. 2005). It is undisputed that petitioner failed to timely

make all its required deposits for the taxable quarters at issue. 

Petitioner has not established reasonable cause for this failure. 

We sustain the section 6656 penalties.
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Collection Alternatives

On brief, without elaboration, respondent states that he

“concedes that respondent’s Settlement Officer abused his

discretion in determining that petitioner was not eligible for a

reasonable collection alternative to respondent’s proposed levy

action because petitioner did not submit a Form 433-A, Collection

Information Statement, for Dr. James McNair.” We are left in

doubt as to the intended import of this concession, especially in

the light of the concluding statement of respondent’s brief

urging that respondent’s determination be sustained. At trial

Dr. McNair testified that he believed his representatives had

provided the settlement officer all information requested. The

administrative record, as stipulated by the parties, is

inconclusive and possibly incomplete in this regard. In the

light of this circumstance and respondent’s concession, we shall

remand this matter to Appeals to give petitioner an opportunity,

if it wishes, to propose a new collection alternative. 

To reflect the foregoing,

An appropriate order

will be issued.