TAX COURT OPINION

Case: 535 Ramona Inc.
Docket Number: 6443-07L
Judge: Halpern
Opinion Type: reported
Filed: 09/14/2010
Pages: 20

135 T .C . No . 17 UNITED STATES TAX COUR T 535 RAMONA INC ., Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 6443-07L . Filed September 14, 2010 . P challenges R's right'to proceed with collection of any FUTA tax from P on the ground that, taking into account credits against the tax under sec . 3302 , I .R .C ., for actual and deemed contributions to a State employment fund, P has no outstanding liability . 1 . Held : We apply a de novo standard in reviewing P's challenge to its underlying liability for FUTA tax . 2 . Held , further , P has failed to carry its burden of proving its entitlement to any sec . 3302, I .R .C ., credit . 3 . Held , further , Appeals' determination to proceed with collection of the assessments against P for 1996 is sustained . SERVED SEP 1 4 2011? William E . Taggart, Jr . , for petitioner . Shannon Edelstone , for respondent . HALPERN, Judge : Respondent's Appeals Office (Appeals)'has determined to proceed with the collection from petitioner of Federal Unemployment Tax Act (FUTA) tax, a penalty, an addition . to tax,'and interest for 1996 .' The crux of the parties' disagreement is whether, for 1996, petitioner paid $17,553 to"the State of California . Unless otherwise stated, all section references are to th e Internal Revenue Code in effect for 1996, and all= Rule references are to the Tax Court Rules of Practice and Procedure . We round all dollar amounts to the nearest dollar . FINDINGS OF FAC T Some facts are stipulated and„are so,found .''The stipulation , of facts, with accompanying exhibits, . is incorporated herein b y this :reference . Background Petitioner was organized in California in 1996 and, during . the second quarter of 1996, began operating a restaurant, Nola, in Palo Alto, California . Petitioner had a payroll of 50 to .8 0 individuals-by the end of 1996 and had payroll expenses for the second, third, and fourth quarters of 1996 . For 1996, petitioner used a payroll service company , ExpressPay Plus (ExpressPay), to prepare its payroll . connection with that service, ExpressPay withdrew various amounts, on various dates, from petitioner's account with Wells Fargo Bank . Respondent's records reflect that, with respect to the last three quarters of 1996, he received $2,582 of FUTA tax deposits from petitioner . On or about January 31, 1997, petitioner filed with the Internal Revenue Service (IRS) a Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return, relating to Nola's 1996 payroll (the 1996 Form 940-EZ) . The .1996 Form 940-EZ reported contributions of $17,553 to the California unemployment fund, total taxable wages of $322,784, a FUTA tax-liability (0 .8 percent of $322 .,7841) of $2,582, and total FUTA tax deposits of $2,582 . The California State reporting number on the 1996 Form 940-EZ, however, was that of Avenir Restaurant Group, Inc . 'The 0 .8-percent multiplier is found on line 6 of the 1996 Form 940-EZ and represents the difference between the Federal FUTA tax rate, which for 1996 was 6 .2 percent, and the 5 .4- percent maximum rate for determining available . credits against the tax under sec . 3302 . In this case, that amount, $2,582, is the difference between 6 .2 percent of petitioner's total taxable wages of $322,784 (i .e ., $20,013) and 5 .4 percent of those wages (i .e ., $17,430) . The assumption is that the taxpayer is entitled to a credit against its 6 .2-percent FUTA tax .liability because of actual and deemed contributions (5 .4 percent of total taxable wages) made to a State unemployment fund . (Avenir), a corporation owned ' substantially . by the . same individuals who own petitioner : In November 1998, the IRS,asked California to certify that, for 1996, petitioner had paid wages for services'performed .in° California and made contributions to the California unemploymen t fund. In January 1999, the California Employment Development Department (EDD) . reported to .the IRS that it had no record--o f petitioner's paying any wages in 1996 . In March 1999, the IR S notified petitioner of .the discrepancy between the EDD report an d .the information on the 1996 Form 940-EZ . Petitioner did no t respond to the notification, and, as a result, in May 1999 , respondent assessed an additional $17,430 of 1996 FUTA,tax that ;, petitioner owed, along with_a Federal tax'deposit'penalt y $1,743 and interest of $3,730 .° Subsequently, respondent assessed additional penalties,-an addition to tax, and interest and gave petitione r credit for small overpayments of subsequent? employmen t tax liabilities . In'2004, both petitioner and the IRS made further-inquiries . In letters dated May 6, 2004(cid:127) (to the IRS), and April 4,2006 (t o petitioner), EDD reported that, with respect to petitioner fo r 1996, neither taxable wages nor contributions were reported t o .the department ; the letters further stated that petitioner' s account was "inactive for tax year 1996 ." In February 2009, EDD - 5 - advised the IRS that petitioner's unemployment insurance account with California first became active on January 1, 19 .99 . Levy Notic e On February 6, 2006, respondent issued to petitioner a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (the levy notice) with respect to the additional FUTA tax, interest, and. penalties that respondent had .assessed but that petitioner had not paid . . According to the levy notice, petitioner owed $28,343, which consisted of $16,137 of FUTA tax, $9,305 of accrued interest, and a late payment penalty of $2,902 . Request for CDP Hearin g On February 24, 2006, in response to the levy notice, petitioner timely requested a collection-due'process (CDP) hearing, contending that the "originally filed 940EZ is correctl y filed" and requesting that respondent "allow the credit and abate all penalties ." In August 2006, petitioner had a CDP hearing with respect to the levy notice (the levy hearing) . Lien Notic e On March 16, 2006,' respondent recorded a notice of Federal tax lien indicating that petitioner had an assessed, but unpaid, employment tax liability of $15,528 for 1996 (relating to the May 24, 1999, assessment) . On March 23, 2006, respondent issued to petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 (the lien notice) advising petitioner of the recorded lien for $15, 528,and 'of its right,,by April 24,- 2006„ to request,a hearing . . Petitioner did not request a hearing in response to the lien notice, and none was held . Notice of Determinatio n On, February .,20, 20,07, Appeals-issued a Notice,of Determination-Concerning Collection Action(s) Under Section 6320, and/or 6330 (the notice of determination) by which-an Appeals- officer determined . that "all .statutory .and procedural, requirements" were followed ard,that the levy notice was "appropriate based on all available information" .-- The notice .of ; .. determination sustained in full the levy notice .2.. Petitio n In response to the noticeof determination, petitioner timely-filed the petition and an amended petition . I Introductio n OPINION We, must determine whether respondent may proceed by levy 'to .F collect 'the additional FUTA tax, penalties, and interest that respondent claims petitioner owes (the disputed liability) : That, in large part, depends-on whether petitioner mad e 'The notice- of'determination states-that petitioner's only challenge to the proposed levy was petitioner's challenge to "the existence or amount of the tax liability ." It further states that petitioner was informed that it was required (and, we presume, failed) "to'provide either a State Recertification letter or copies of the state returns and the front and back of the cancelled checks to verify:, the timely or late contributions ." contributions of $17,553 for 1996 to the California unemployment fund . Before we address that question, we shall set forth some of the general rules governing our review of collection matters, set forth the relevant FUTA and California State tax provisions, summarize the parties' arguments, and address certain o f respondent's evidentiary objections . Finally, we shall state our analysis and conclusion . II . Sections 6320, 6330, and 633 1 Section 6331(a) authorizes the Secretary to levy against property and property rights when a taxpayer liable for taxes fails to pay those taxes-within 10 days after notice and demand for payment . Section .6331(d) requires the Secretary to send the taxpayer written notice of the Secretary's intent to levy, and section 6330(a) requires the Secretary .to send the taxpayer written notice of his right to a hearing before Appeals at least 30 days before any levy begins . A taxpayer receiving a notice of Federal tax lien has hearing rights similar to the hearing rights accorded to a taxpayer receiving a notice of intent to levy . See sec . 6320(c) . After the hearing, an Appeals officer must determine whether and how to proceed with collection ., taking into account, amon g other things, collection alternatives the taxpayer proposed an d whether any proposed collection action balances the need for th e efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more .intrusive-than ., necessary . See sec . 6330(c)(3) . . The taxpayer may raise . its . underlying liability at the hearing,if,it,did not' receive any statutory notice of, deficiency for the liability or did not' otherwise'havean opportunity to dispute the tax liability ;- Sec . 6330 (c) (2) (B) . Respondent concedes that petitioner was entitled to, an d did, raise its underlying liability,(i .e ., the disputed liability) at the levy hearing and-that the disputed liability is properly-before the Court .- .,With respect to the disputed liability, we review the record made here and not the . administrative record made before .. Appeals,-and weappl .y a .de novo standard of review .-' See Sego v . Commissioner, 114, T .C . 604, 610 ; . (2000) ;' Goza v . Commissioner , 114 T .C . 176, :181-182 (2000) ;,cf . Porter v . Commissioner , 132 T .,C 203, 210 (2009)(de novo standard of review for cases brought under sec .-6015(f)) . . Petitioner .bears . the burden of-proof .-See .-Rule 142(a) : 3 3Sec . 7491(a)(1), which, under certain circumstances, shifts the burden of proof ., is limited in its application to factualissues "relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B" of the Internal Revenue Code . The factual issue in this case is whether petitioner is entitled to a credit under sec . 3302 against its liability for FUTA taxes imposed by sec . 3301, which is in subtit . C . Therefore, sec . 7491(a)(1) is inapplicable . - 9 III . Relevant FUTA and California State Tax Provisions A . FUTA Provision s For 1996, section 3301(1) imposes on every employer a 6 .2- percent excise tax with respect to wages paid to its employees . Under section 3306(b), wages subject to tax include (with certain exceptions not here relevant) "all remuneration for employment" that does not exceed $7,000 for the calendar year . Section 3302 allows taxpayers credits against that tax for certain actual and deemed contributions to State unemployment funds . Section 3302(a) provides a credit for actual contributions to such funds during the taxable year (the normal credit) . Section 3302(b) provides an additional credit (the additional credit ) equal to the amount, if any, by which the contributions [the taxpayer is] required to * * * [pay] with respect to the taxable year were less than the contributions such taxpayer would have been required to pay if throughout the taxable year he had been subject under such State law to the highest rate applied thereunde r * * * [or] 5 .4 percent, whichever rate is lower . The additional credit allows employers with good experience ratings (and thus a lower State contribution rate) to avoid paying more Federal tax than those employers with bad experienc e ratings . In pertinent part, section 31 .3302(b)-2(b), Employment Tax Regs ., provides that the additional credit shall not be allowed unless the taxpayer submit s To the district director a certificate of the proper officer of each State (with respect to the law of which the additional credit is .claimed) showing for the taxpayer-- (1) The total remuneration with respect to which contributions . were required to be paid by the taxpayer unde r the State law with respect to such calendar year ; and (2),The rate of contributions applied to the taxpayer under the-State law with respect to suc h calendar year . Section 3302 (c)(1) limits the credits against the ta x imposed by section 3301 to 90 percent of that tax . In applyin g the 90-percent limit on total credits, however, the tax i s computed at a deemed rate of 6 percent rather than at the actua l 6 .2-percent rate . See sec . 3302(d)(1) . Thus, in effect, tota l credits may not exceed 5 .4 percent (90 percent x 6 percent) o f the employer's FUTA wage base . B . California Unemployment Insurance Cod e Pursuant to Cal . Unemp . Ins . Code sec . .;675°(West: 1986), an employer is subject to the California unemployment compensatio n system if, .during any day within the current or precedin g calendar year, the employer has or had "in employment one or mor e employees * * * [to whom it pays or paid wages] in excess of on e hundred dollars ($100) during any calendar quarter ." Employmen t includes "an individual's entire service" performed in California . Id . sec . 602 . Wages means "all remuneration payabl e to an employee for personal services" that does not exceed $7,000 during any calendar year . Id . secs . 926, 930 . Thus, the California wage base is identical to the Federal FUTA wage base . - 11 - The actual contribution rate for each employer generally depends on the ratio of the employer's reserve account (i .e ., the employer's unemployment insurance contributions to California) to its average base payroll, both as of a "computation date" . Id . secs . 977, 1026 . The maximum contribution rate is 5 .4 percent of wages, which equals the highest rate that may be used in determining a taxpayer's additional tax under section 3302(b) . Id . sec . 977 . IV . Arguments of the Partie s In their opening and reply briefs, the parties frame the issue regarding, alleged unpaid FUTA taxes as a dispute over whether petitioner has satisfied its burden of proving that .it did, in fact, make unemployment insurance' contributions to California of $17,553 as stated on its 1996 Form 940-EZ, thereby entitling it to the credit taken on that return . Rule 151(e) governs the content of briefs and provides that all briefs shall contain, among other things, proposed findings .of fact (with "references to the pages of the transcript or the exhibits or other sources relied upon to support th e [proposed finding]"), a concise statement of the points on whic h the party relies, and the party's argument, "which sets forth and discusses the points of law . involved and any disputed questions of fact ." At the conclusion of the trial, the Court 'specifically instructed counsel for the parties to incorporate in the - 12 - discussion (argument) section'of their briefs-cross-references to any proposed findings of fact on-which they relied . Petitioner'.s counsel has failed both to follow that instruction andto .include in,petitioner's opening brief a statement, ; concise or not, of the pointskon which petitioner relies . We have done our best to . . understand petitioner's arguments, but, particularly with 'respect to the crucial question of how.'the'evidence in .thecase supports petitioner's claim that it paid $17,553 to California, the- failures of petitioner's counsel make petitioner's arguments somewhat unclear . ' Petitioner argues that respondent's disallowance,of any, credit for the $17,553 that petitioner reported on its 1996 Form, 940-EZ as paid to the California unemployment ; fun d was apparently based on erroneous information .Respondent received from EDD . Respondent' s disallowance of $17,430 .33 of credit apparently'was .:the result of a difference in association of Federal Identification Numbers with EDD Employer Identification Numbers onthe respective records of Respondent and EDD . 4The record is not small, consisting in part of 370 pages of" trial transcript and hundreds of pages of written exhibits admitted into evidence . Petitioner's counsel further failed to' follow our briefing instructions by omitting a detailed table of contents to petitioner's approximately 24 pages of proposed" findings of fact . - 13 - EDD confirmed that it received substantial . sums of money in 1996 under * * * the EDD number under which . Petitioner reported to . Respondent that it had paid unemployment insurance to the State of California . * * * Apparently in support of,-that argument (we say apparently because, as stated, petitioner's counsel has failed to cross- reference petitioner's arguments-and proposed findings of fact), petitioner proposes a number of facts for us to find . First, ExpressPay (1) "deposited the employment taxes, and paid the related charges, associated with * * * [petitioner's 1996] payroll" and (2) "prepared the federal and California employment tax returns associated with * * * [petitioner's] 1996 payroll" . Second, ExpressPay "withdrew funds for the payroll taxes and related charges required to be deposited or paid in connection with * * * [petitioner's 1996 payroll]" . Third, most pertinently, ExpressPay "made payments in the total amount of $17,552 .98 to the State of California for unemployment insurance relating to * * * [petitioner's 1996 payroll]" . ' Respondent's argument is straightforward : Petitioner is entitled to no credit against its 1996 FUTA tax because it has failed to show that, for 1996, it made any unemployment fund contribution to California . 'Alternatively, petitioner states : "For * * * [1996], ExpressPay Plus made California unemployment insurance payments in the total amount of $17,552 .98 on behalf of Petitioner ." At trial, we reserved ruling on=respondent's objections t o four exhibits petitioner proffered . The first three relate t o petitioner's 1996 operations . They are Exhibit 20-P, akpage from petitioner's tax liability register ; Exhibit .21-P, a}tax status,- ledger report for the third and fourth quarters of 1996 ; and Exhibit, 22-P,,a year - to-date , register ( run. date 12 ./ 30/96) . The fourth~exhibit, .Exhibit 40-P, purports to be a page from .a tax liability register for Avenir (run date 12/30/96) . Respondent , objects to the four documents on various grounds, including, with respect to all of them, that they constitute inadmissible hearsay . At the conclusion of the trial, we ordered the- parties to address on brief respondent's objections to all four exhibits . Petitioner's opening brief contains a section entitled "Findings of Fact Dependent on. Contested Documents" . Petitione r supports those proposed findings with references to Exhibits 20- P and 21-P but with no reference to either Exhibit 22-P or Exhibit , 40-P . We assume, therefore, that petitioner does not rely, on th e latter two exhibits to support its arguments ; : and& .we shall no t consider them further . We shall not rule on the admissibility o f Exhibits 20-P and 21-P because, in considering-their admissibility, we have read them, and, even were we to overrul e respondent's objections, petitioner would still fail to carry. it s burden of proof . VI . Analysi s - 15 - A . Petitioner's Failure To Prove Any Unemployment Insurance Contribution to California for 1996 1 Petitioner has failed to support the findings of fact that it relies on in support of its argument that, for 1996, it made unemployment insurance contributions of $17,553 to California . In support of its proposed findings that ExpressPay deposited employment taxes on its behalf and prepared the associated tax returns, petitioner principally relies on th e testimony of its accountant, J . Kelly Monaghan, who testified about the operation of payroll services in general but conceded that he had not been involved in any way with ExpressPay and was not familiar with its business practices or day-to-day routines . Petitioner also relies on stipulations that (1) petitioner used ExpressPay's services for 1996 and (2) ExpressPay withdrew money from petitioner's account . Finally, petitioner relies on the testimony of Gregory H . St . Claire, who organized petitioner, and who testified that petitioner used ExpressPay to prepare its payroll . While none of that evidence is inconsistent with petitioner's proposed findings of fact, none of it directly supports them . And, of course, we have .the evidence of EDD reporting that, with respect to petitioner, no taxable wages an d contributions were reported to the department for 1996 and petitioner's unemployment insurance account with California first became active on January 1, 1999 . Petitioner has failed to 16 convince us that ExpressPay deposited employment taxes on its behalf and(cid:127)prepared . the . associated tax returns . While there is adequate support for petitioner's proposed finding that ExpressPay prepared petitioner's 1996 payroll and, in connection with its payroll duties, withdrew funds from wells" Fargo bank, petitioner has not convinced us that ExpressPay withdrew funds from that bank and paid $17,553 (or any lesse r amount) to California for unemployment insurance relating to petitioner's 1996 payroll . Petitioner's principal support fo r its argument that ExpressPay made unemployment insuranc e contributions to California on its behalf is Exhibit 20-P, the page from petitioner's tax liability register, and Exhibit 21-P , petitioner's tax status ledger reports for the third and fourth quarters of 1996 . At best, those documents suggest-total contributions on petitioner's behalf of $12,589 . . But they do not prove that any amount was actually paid to California for 1996 , only that the foregoing amount . may have been owed . Indeed,'the stipulated Wells Fargo bank statements, while showing that withdrawals were made from the account during .1996, do not indicate the purpose of the withdrawals, and we do not discern any connection between those withdrawals and the amount s reflected in the tax status ledger report . Again, we have before us the EDD reports, which state that petitioner reported nothing, 17 - paid nothing, and had no relationship with the department in, or for, 1996 . In short, we,are .unable to make the findings of fact that petitioner proposes in support of its argument that, for 1996, it made unemployment insurance contributions of $17,553 to California . Indeed, petitioner has failed even to propose findings of fact that would support its argument that it should receive credit for payments to California that were reported to the IRS as having been made under Avenir's State reporting number . Petitioner has failed to prove that, for 1996, it made any unemployment insurance contribution to California . B . No Credit Allowe d Section 3302(a) allows the normal credit for actual contributions to State unemployment funds . Since petitioner has failed to prove that it made any contribution to the California unemployment fund for 1996, petitioner is entitled to no normal credit . To claim the additional credit provided for in section 3302(b), petitioner must satisfy the State certification requirement imposed by section 31 .3302(b)-2(b), Employment Tax Regs . Petitioner has failed to adduce evidence (indeed, even to claim .) that the requirement has been satisfied . Petitioner is not entitled to the additional credit . 18 - Petitioner is entitled to no section 3202(a) or (b) credit in determining its FUTA liability for 1996 . Respondent did not err in assessing an additional $17,430 of 1996 FUTA tax . C . Penaltie s The levy notice listed a .late payment penalty of $2,902 . Respondent has assessed an addition to tax. under section 665,1(a)(2) for failure to pay the tax shown on a return and ,a penalty under section 6656 for-failure to make deposit-of taxes . In neither the petition nor the amended petition does petitioner assign error to any addition to tax or penalty, and petitioner does not in its briefs raise any reasonable cause defense . See secs . 6651(a)(2), 6656(a) . Respondent has shown an adequate ground for imposing the addition to tax and the penalty, and we shall sustain them . D . Jurisdiction Over the Notice of Tax Lien .The issue here is not clear . At trial, petitioner, for the first time, raised some question as to the propriety of the lien notice . Petitioner's witness, Mr . Monaghan (petitioner's accountant), who participated in the levy hearing, did not .recall that there was any discussion of the lien . As noted, petitioner did , not .request 'a hearing, pursuant to section 6320 (a) (3) (B) , regarding the lien notice, and none was held . Petitioner, in~its opening brief, proposes that we find facts consistent with-the issuance of the lien notice, but petitioner does not further - 19 - discuss the lien or raise any issue with respect to it . Respondent, . in his opening brief, argues that we have no jurisdiction over the lien notice . In response (and apparently in disagreement), petitioner argues that one of the opportunities available to taxpayers at a,CDP hearing is the right to offer collection alternatives, see sec . 6330(c)(2)(A)(iii), and that the recording of a lien is a collection alternative . Petitioner then suggests that, by recording the lien before the levy hearing, respondent has proposed a collection alternative that petitioner might have offered and that, therefore, "[i]t would be wasteful to require a second request for a CDP hearing in order to place in issue a matter that already appears to * * * be in issue . " Aside from the inconsistency of suggesting that petitioner might have offered a collection alternative (a lien against its assets) that it obviously opposes, petitioner's implicit argument that there is something that we must consider with respect to the lien notice fails because of the absence of any evidence that the lien notice (or any other collection alternative) was even discussed at the hearing and the absence of any reference to it in the notice of determination . Under those circumstances, we agree with respondent that this case is governed by Offiler v . Commissioner , 114 T .C . 492, 498 (2000), in which we held that our "jurisdiction under . section 6330(d) is dependent on the issuance 20 - of a valid notice of determination and a timely petition-for review ." Because neither the-notice of determination nor the . petition, referred to the propriety of . the lien notice, we lack ,jurisdiction under section 6330(d) to consider the lien notice . VII . Conclusio n ..The Appeals officer's determination affirming the levy notice against petitioner for 1996, is sustained . Respondent may proceed by levy to collect the disputed liability . An appropriate order and decision will be entered .