t c memo united_states tax_court atlantic coast masonry inc petitioner v commissioner of internal revenue respondent docket no filed date james p dempsey an officer for petitioner jeremy h fetter and shelley turner van doran for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined that for purposes of federal employment_taxes the individuals corporate officers masons and laborers listed in a table attached to a notice_of_determination of worker classification notice_of_determination should be legally classified as petitioner’s employees and thus determined deficiencies in additions to and penalties with respect to petitioner’s federal employment and unemployment taxes as follows period type ended of tax1 additions to tax penalty sec sec sec_6651 a amount fica itw dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure futa dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure dollar_figure futa dollar_figure dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure fica itw dollar_figure dollar_figure dollar_figure futa dollar_figure dollar_figure dollar_figure 1fica refers to the federal_insurance_contributions_act secs itw refers to the statutory income_tax_withholding required pursuant to sec_3402 futa refers to the federal_unemployment_tax_act secs 2the amount of the sec_6651 addition_to_tax could not be computed at the time the notice was issued in its posttrial brief petitioner concedes that for purposes of federal employment_taxes its two corporate officers should be legally classified as employees thus the issues remaining for decision are whether the masons and laborers listed as workers on the notice_of_determination should be legally classified as employees as respondent maintains or as independent contractors as petitioner maintains and if the masons and laborers listed as workers on the notice_of_determination should be legally classified as employees then a whether petitioner is entitled to relief from employment_taxes pursuant to the revenue act of pub_l_no sec_530 stat pincite sec_530 b whether petitioner is liable for an addition_to_tax for failure to timely file returns pursuant to sec_6651 for the tax periods involved c whether petitioner is liable for the addition_to_tax for failure to timely pay pursuant to sec_6651 for the tax periods involved and d whether petitioner is liable for the penalty for failure to timely deposit tax pursuant to sec_6656 for the tax periods involved all rule references are to the tax_court rules_of_practice and procedure and unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times findings_of_fact some of the facts are stipulated and are so found we incorporate by reference the stipulation of facts and the attached exhibits petitioner was incorporated in it elected to be treated as a subchapter_s_corporation for federal_income_tax purposes at the time petitioner filed its petition its principal_place_of_business was in florida during all relevant times petitioner acted as a subcontractor providing masonry services petitioner had gross revenues in excess of dollar_figure million for each of the and calendar years petitioner had two shareholders corporate officers blanche dempsey and james dempsey ms dempsey and mr dempsey or collectively dempseys the dempseys each held a interest in petitioner ms dempsey served as its president she performed bookkeeping and clerical services for petitioner she possessed signature_authority on petitioner’s checking accounts mr dempsey is a licensed mason and has worked in the masonry industry since he served as petitioner’s vice president procuring all masonry work it performed and overseeing its day-to-day operations mr dempsey submitted proposals for masonry jobs on behalf of petitioner to general contractors for construction projects the proposals included in the record provide that petitioner would furnish all labor materials equipment and supervision necessary to complete the job mr dempsey negotiated and executed the subcontract agreements contracts governing the work to be performed by petitioner he issued invoices to the general contractors the general contractors paid these invoices via checks made out to petitioner the checks were then either deposited into petitioner’s bank account or more often cashed at either petitioner’s bank or at a local check cashing company during the years involved all checks that were cashed on behalf of petitioner were cashed by either mr dempsey or ms dempsey after commencing a project mr dempsey made purchasing decisions on behalf of petitioner with respect to the materials needed for the job including the concrete and blocks to be used as well as a fastening gun and quantities of sand if required mr dempsey rented cranes and forklifts on behalf of petitioner the contracts with the general contractors provided that the materials so paid for belonged to the general contractor petitioner was reimbursed for the cost of the materials and lease expenses mr dempsey did not personally manage petitioner’s construction projects rather he contracted with others to supervise or be the foreman of the job one such supervisor was william mcnally mr mcnally generally worked exclusively for petitioner although in he worked for others as well at the start of each job mr dempsey would tell mr mcnally this is how much money that we have in this job and do you think you can do it with your manpower if the answer was yes they would shake hands there were no written contracts and mr mcnally would begin to organize the project mr mcnally’s compensation consisting of a base_amount and a percentage of profits was paid in cash mr dempsey testified that mr mcnally and the other supervisors would make money based on their productivity and we would split this job throughout the whole job if the production was good we made money and if the production was bad we didn’t mr mcnally received no fringe_benefits from petitioner and petitioner did not pay workers’ compensation insurance premiums on his behalf because petitioner had no full-time workers other than the dempseys mr mcnally’s first responsibility was to find masons and laborers these individuals were hired on a per-job basis the record reveals that masons and laborer sec_1mr mcnally was not classified as petitioner’s employee by respondent in the notice_of_determination mr mcnally testified that he worked with mr dempsey as an independent_contractor and was paid on a and filed his taxes like that worked for petitioner in worked for it in and worked for it in mr mcnally kept a telephone list of the masons and laborers with whom he had worked and would contact those individuals whenever he needed help often the masons and laborers mr mcnally contacted would bring friends or relatives to the jobsite mr mcnally supervised the masons and laborers he oversaw the number of bricks each mason laid per day and was responsible for the completion of the project on schedule mr mcnally had the authority to hire and fire masons and laborers at will mr dempsey could also fire anyone including mr mcnally working on the project mr dempsey gave mr mcnally the plans of the building project and instructed him that the building had to go up in a certain way and i mr mcnally made sure that was done on a daily basis mr mcnally liaised with the general contractor and was authorized by mr dempsey to change if necessary specifications that had been agreed upon by petitioner and the general contractor mr mcnally brought in only experienced individuals the masons and laborers brought their own tools with them including trowels levels additional wheelbarrows and tape measures at the commencement of the project mr dempsey would visit the worksite to confirm that everything was in place including the blocks the cement and the equipment he would meet the masons and laborers and tell them what was to be done and how they would be paid and provide to them instructions relating to the masonry work the masons and laborers worked an eight-hour day but they were paid on a piecework basis in other words they were paid according to the number of blocks bricks or cubic yards of cement laid mr dempsey established the amount to be paid per block brick or cubic yard the masons and laborers were paid weekly by mr dempsey who handed each of them envelopes with the appropriate amount of compensation in cash or delivered the envelopes to mr mcnally for distribution to the workers petitioner maintained cash logs that recorded how much money each mason or laborer received as well as how much money mr mcnally and the other supervisors earned 2masons are skilled workmen and require little or no supervision insofar as workmanship is concerned petitioner stopped maintaining cash logs regarding masonry worker payments in the last quarter of which was approximately the time respondent began petitioner’s tax examination see infra p although petitioner stopped recording cash outlays to the masons and laborers its general ledger indicated that the amount of its gross_receipts remained constant most of the masons and laborers worked exclusively for petitioner when a particular job was completed the masons and laborers were let go if another job was in progress mr mcnally often invited them to join the new project if workers were needed petitioner’s operations were conducted in a manner that at best could be described as informal transactions were conducted in cash and often not recorded adequately petitioner had few written contracts or agreements and the documentation that did exist was incomplete and contradictory and it appears that regulatory filings were misleading if made at all petitioner did not pay wages as such to the dempseys instead petitioner made multiple distributions to them and paid many of the dempseys’ personal expenses these distributions and expenses totaled hundreds of thousands of dollars over and petitioner did not issue forms 1099-misc miscellaneous income or forms w-2 wage and tax statement to the dempseys for or nor did petitioner file any information returns for those years and the dempseys did not timely file their form sec_1040 u s individual_income_tax_return for or respondent has no record of petitioner’s filing any form_1120s u s income_tax return for an s_corporation during the years involved nor does respondent have any record of any form_1096 annual summary and transmittal of u s information returns or form_940 employer’s annual federal unemployment futa_tax return filed by petitioner for any of the years or periods involved petitioner filed one form_941 employer’s quarterly federal tax_return for the fourth quarter of but respondent has no record of any others respondent prepared substitutes for returns with respect to all of petitioner’s unfiled information returns on date respondent notified petitioner that it had been selected for employment_tax examination two weeks later ie date the dempseys filed their respective form sec_1040 for on january 3this form is used to transmit paper forms and w-2g to the commissioner they filed their respective form sec_1040 for on date approximately three months after respondent commenced his examination petitioner submitted to the examining agent form_1120s for petitioner’s tax_year as well as copies of a form_1096 a form_941 for the fourth quarter of and a form uct-6 florida department of revenue employer’s quarterly report petitioner also provided forms 1099-misc for the years involved for some of the masons and laborers for petitioner provided forms 1099-misc for of the masons and laborers whom petitioner paid dollar_figure or more during that year for petitioner provided forms 1099-misc for of the masons and laborers whom petitioner paid dollar_figure or more and for petitioner provided forms misc for of the masons and laborers whom it paid dollar_figure or more at trial mr dempsey admitted that the information returns filed were prepared after they were due respondent determined that the dempseys failed to report the following amounts of wages from petitioner employee ms dempsey mr dempsey dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 4petitioner also submitted forms 1120s for it sec_2002 and tax years petitioner maintained a workers’ compensation insurance_policy which did not cover any of the masons or laborers petitioner never inquired as to whether any of the masons or laborers had their own insurance it appears they did not petitioner’s workers’ compensation insurance carrier conducted a policy audit of petitioner for the period of date through the audit report named ms dempsey as an employee of petitioner mr dempsey as a subcontractor and two unrelated businesses forte crane and john a walker sons as subcontractors it did not mention mr mcnally the masons or the laborers i the workers’ legal classification opinion employers and employees are subject_to employment_taxes ie fica and futa fica provides a social_security_tax payable by both employers and employees see sec_3101 sec_3111 futa provides for unemployment taxes payable by employers see secs employers are required to withhold fica tax as well as federal_income_tax on wage payments they make to their employees see sec_3102 sec_3402 these employment_taxes do not apply to payments to independent contractors the commissioner’s determinations are presumed correct and taxpayers bear the burden of proving that those determinations are erroneous rule a 290_us_111 this principle applies to the commissioner’s determination that a taxpayer’s workers are employees 77_f3d_236 8th cir 117_tc_263 if an employer-employee relationship exists its characterization by the parties as some other relationship is immaterial sec_31_3121_d_-1 employment_tax regs as stated supra p petitioner now concedes that its corporate officers ie the dempseys were its employees we thus are left to decide the legal employment classification of the masons and laborers whether an individual is an employee or an independent_contractor is a factual question to which common_law principles apply see sec_3121 sec_3306 weber v commissioner 103_tc_378 aff’d per curiam 60_f3d_1104 4th cir guidelines for determining the existence of an employment relationship are found in three substantially_similar sections of the 5the common_law of employer-employee relations refers to ‘the general common_law of agency rather than the law of any particular state ’ 503_us_318 n quoting 490_us_730 regulations-- sec_31_3121_d_-1 sec_31_3306_i_-1 and sec_31_3401_c_-1 employment_tax regs relating to fica futa and income_tax_withholding respectively the regulations adopt the common_law definition of an employee under the common_law an employer-employee relationship exists when the principal has the right to control and direct the service provider not only as to the result to be accomplished but also as to the details and means by which that result is accomplished sec_31_3121_d_-1 sec_31_3306_i_-1 employment_tax regs see also sec_31_3401_c_-1 employment_tax regs the principal need not actually direct or control the matter in which the services are performed it is sufficient that the principal has the right to do so weber v commissioner t c pincite twin rivers farm inc v commissioner tcmemo_2012_184 relevant factors in determining whether a worker is an employee or an independent_contractor include the degree of control exercised by the principal over the details of the work which party invests in the facilities used by the worker the opportunity of the worker for profit or loss whether the principal can discharge the individual whether the work is part of the principal’s regular business the permanency of the relationship and the relationship the parties believe they were creating ewens miller inc v commissioner t c pincite weber v commissioner t c pincite all of the facts and circumstances are considered and no one factor dictates the outcome ewens miller inc v commissioner t c pincite degree of control the right of the principal to exercise control_over the agent whether or not the principal in fact does so is the crucial test for the existence of an employer- employee relationship weber v commissioner t c pincite john keller action auto body v commissioner tcmemo_2012_62 an employer-employee relationship exists when the principal retains the right to direct the manner in which the work is to be done controls the methods to be used in doing the work and controls the details and means by which the desired result is to be accomplished 55_tc_142 petitioner failed to prove that mr dempsey did not control the masons’ or the laborers’ work the evidence reveals that petitioner acting through mr dempsey possessed the right and requisite degree of control to establish an employer-employee relationship mr dempsey had the ultimate authority in instructing the masons and laborers with respect to what they were to do had 6the examining revenue_agent testified without objection by petitioner that in interviews some of the masons and laborers stated they would receive instructions relating to the masonry jobs from mr dempsey none of the masons laborers or supervisors other than mr mcnally testified at trial the right of approval as to the quality of their work set the masons’ and laborers’ working hours at eight hours per day and paid them for their work on a weekly basis as opposed to at the end of the project we are mindful that the day- to-day operations were turned over to supervisors such as mr mcnally nonetheless we are satisfied that the masons and laborers were aware that mr mcnally was working for petitioner and that their pay came from petitioner masons are skilled laborers and the masons supervised the laborers who helped them it was not necessary for mr dempsey or anyone else to exercise close supervision over them an employer need not stand over the employee to control an employee ewens miller inc v commissioner t c pincite ellison v commissioner t c pincite nevertheless mr dempsey had the right to control the results to be accomplished and the manner in which the masons’ work was to be performed this factor weighs in favor of classifying the masons and laborers as employees investment in facilities none of the parties petitioner masons or laborers had any significant investment in the facilities petitioner purchased all of the building materials ie the concrete and the cement and leased all of the heavy equipment eg cranes and forklifts used to construct the buildings but it was reimbursed for the building materials and lease expenses the masons used their own tools eg trowels levels and tape measures to perform their task the record is silent as to any investment in the facilities by the laborers this factor carries no weight in determining the legal employment classification of the masons and laborers opportunity for profit and risk of loss the masons and laborers could not share in the profit if the project came in under budget unlike mr mcnally and the other supervisors nor could they suffer a loss if the project came in over budget we are mindful that piecework compensation has been considered to be an indicator of independent_contractor status see 549_f2d_190 but there is also judicial authority for classifying piecework workers as employees see eg 331_us_722 slaughterhouse boning workers more properly considered employees in part because they were an integrated unit_of_production for the taxpayer this factor weighs in favor of classifying the masons and laborers as employees 7the contracts between the petitioner and the general contractors provided that the materials so purchased belonged to the general contractors see supra p right to discharge the workers employers typically have the right to terminate employees at will ellison v commissioner t c pincite twin rivers farm inc v commissioner supra mr dempsey on behalf of petitioner could fire any worker who did not perform to his satisfaction this factor weighs in favor of classifying the masons and laborers as employees integral part of the business when workers are an essential part of the taxpayer’s normal operations we weigh this factor in favor of an employer-employee relationship see john keller action auto body v commissioner tcmemo_2012_62 day v commissioner tcmemo_2000_375 the masons and laborers were an essential part of petitioner’s business without them the jobs procured on petitioner’s behalf could not have been completed this factor weighs in favor of classifying the masons and laborers as employees 8independent contractors also may be terminated at will thus we give some but not great weight to this indicia of an employer-employee relationship see john keller action auto body v commissioner tcmemo_2012_62 lewis v commissioner tcmemo_1993_635 citing neely v commissioner t c memo permanency of the relationship a transitory work relationship may weigh in favor of independent_contractor status ewens miller inc v commissioner t c pincite citing herman v express sixty-minutes delivery serv inc 161_f3d_305 5th cir in this case the masons and laborers were engaged by petitioner for only one job at a time once it was completed the masons and laborers were free to work elsewhere this factor weighs in favor of classifying the masons and laborers as independent contractors the relationship the parties believed they created there was no meaningful testimony with respect to this factor therefore this factor carries no weight in determining the legal employment classification of the masons and laborers in sum there are four factors weighing in favor of classifying the masons and laborers as employees one factor weighing in favor of classifying the masons and laborers as independent contractors and two factors which carry no weight giving due consideration to the totality of the facts presented and bearing in mind that petitioner bears the burden of proving respondent’s classification erroneous we conclude that the masons and laborers should be legally classified as petitioner’s employees accordingly we hold petitioner is liable for federal employment_taxes additions to tax and penalties as determined by respondent despite our conclusion that the masons and laborers were petitioner’s employees sec_530 allows petitioner relief if three requirements are satisfied petitioner must not have treated the individuals as employees for any period petitioner must have consistently treated the individuals as nonemployees on all tax returns for periods after date and petitioner must have had a reasonable basis for not treating the individuals as employees see sec_530 119_tc_121 aff’d 93_fedappx_473 3d cir john keller action auto body v commissioner tcmemo_2012_62 petitioner did not file the required information returns including forms misc with respondent for any of the workers in question as required by sec_6041 and sec_6041a therefore not all requirements for sec_530 relief have been satisfied because petitioner failed to meet all of the sec_530 requirements it does not qualify for relief see joseph m grey pub accountant p c v commissioner t c pincite in sum we hold that petitioner is liable for the employment_taxes as determined by respondent ii sec_6651 additions to tax and sec_6656 penalty sec_6651 imposes an addition_to_tax of up to for failure to timely file a tax_return unless the taxpayer shows such failure is due to reasonable_cause and not due to willful neglect sec_6651 imposes an addition_to_tax of up to for failure to timely pay the amount of tax shown on any return unless the failure is shown to be due to reasonable_cause and not due to willful neglect if a taxpayer fails to make a required_deposit on the date prescribed for that deposit sec_6656 imposes a penalty equal to the applicable_percentage of the amount of the underpayment determined pursuant to sec_6656 this penalty is not imposed if the failure to pay was due to reasonable_cause and not willful neglect to establish reasonable_cause the taxpayer must show that he exercised ordinary business care and prudence in providing payment of his tax_liability but nonetheless was unable to meet his obligations see 469_us_241 251_f3d_862 9th cir 121_tc_89 aff’d 425_f3d_1203 9th cir bruner v commissioner tcmemo_1998_246 petitioner has not shown reasonable_cause for failing to timely make the proper return filings failing to timely pay the amounts of tax shown on the returns or failing to timely make the required deposits petitioner made no argument with respect to these failures except to state that it never filed its returns or paid its taxes on time consequently petitioner is liable for the sec_6651 addition_to_tax the sec_6651 addition_to_tax and the sec_6656 penalty we have considered all of the parties’ contentions and to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing and petitioner’s concession decision will be entered for respondent


internal_revenue_service number release date index number -------------------------------------- ----------------------------------------------- --------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-105091-08 date date legend x ----------------------------------------------------------- --------------------------------------- y z ------------------- --------------- a ------------------------------------------------------------- --------------------------------- b ------------------------------------------------------------- ----------------------------- state date date date date year dollar_figurem ------------- ---------------- ------------------- ------------------- ---------------------- ------- --------- plr-105091-08 dollar_figuren ----------- dear ------------------ this letter responds to your letter dated date requesting relief under sec_1362 and sec_1362 of the internal_revenue_code facts you have represented that the facts are as follows x made a timely election to be taxed as an s_corporation for federal tax purposes effective date however at the time of the initial election x did not qualify as an s_corporation subsequently x took corrective action to qualify as an s_corporation by incorporating under state law on date until date a was the sole shareholder of x on date b became the second shareholder of x x intended to issue new shares to both a and b but instead issued the shares to y and z state s_corporations y is wholly owned by a and z is wholly owned by b although the shares of x were held by y and z x represents that at all times it has acted and filed consistently with its belief that it was an s_corporation specifically a reported y’s share of income on a’s federal_income_tax return and b reported z’s share of income on b’s federal_income_tax return except in year when due to an inadvertent error b underreported z’s share of income by dollar_figurem x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation which the secretary may require law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply plr-105091-08 sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that an s_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center additionally we conclude that x’s s election terminated on date when y and z both ineligible shareholders acquired x stock we also conclude that the termination of x’s s election constituted an inadvertent termination within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided that x’s subchapter_s_election has not otherwise terminated under sec_1362 this ruling is conditioned on b sending a payment of dollar_figuren with a copy of this letter to the following address internal revenue plr-105091-08 service cincinnati service_center west rivercenter blvd covington ky stop terri lackey manual deposit this payment must be sent no later than date if this condition is not met then this ruling is null and void furthermore if this condition is not met x must send notification that its s election has terminated to the service_center with which x’s s election was filed except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the above-described facts under any other provision of the code in particular no opinion is expressed or implied concerning whether x's s election was otherwise valid under sec_1362 this ruling is directed only to the taxpayer that requested it sec_6110 of provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david r haglund david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for ' purposes


t c memo united_states tax_court c lynn moses petitioner v commissioner of internal revenue respondent docket no 1710-12l filed date c lynn moses pro_se kimberly l clark for respondent memorandum findings_of_fact and opinion vasquez judge pursuant to sec_6330 petitioner seeks review of respondent’s determination to proceed with collection by levy of his unpaid unless otherwise indicated all section references are to the internal_revenue_code code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure federal_income_tax for the issues for decision as to the years in issue are whether petitioner failed to report gross_income whether petitioner is liable for additions to tax under sec_6651 and and a and whether respondent abused his discretion in sustaining the proposed levy action i background findings_of_fact petitioner did not file federal_income_tax returns for consequently the internal_revenue_service irs prepared a substitute for return sfr for each year based on a bank deposit analysis of an account petitioner maintained at key bank during the years at issue a revenue_agent obtained the account’s records through a third-party_summons and determined on the basis of those records that petitioner was engaged in a real_estate trade_or_business and that petitioner had failed to report income from his business for the years at issue the revenue_agent also determined that petitioner had failed to report his shares of his wife’s community_income before trial a revenue_agent met with petitioner to review respondent’s bank deposit analyses as a result of this discussion respondent conceded at trial and on brief that the deficiencies should be reduced by dollar_figure dollar_figure and dollar_figure for and respectively respondent also conceded that petitioner is not liable for an addition_to_tax under sec_6654 for on date respondent mailed copies of a notice_of_deficiency for the years at issue to each of three addresses that the irs had on file for petitioner one of the addresses was petitioner’s last_known_address however all three notices were returned to respondent as unclaimed petitioner did not file a petition with the court contesting the deficiency determinations and on date the irs assessed petitioner’s tax_liabilities for the years at issue on date and on date the irs also assessed additions to tax for the years at issue ii petitioner’s collection_due_process appeal petitioner failed to pay the assessed tax_liabilities and on date the irs sent petitioner letter final notice--notice of intent to levy and notice of your right to a hearing on date the irs received petitioner’s timely filed form request for a collection_due_process or equivalent_hearing on that form petitioner requested a face-to-face hearing and stated his intent to audio record the hearing petitioner also stated that he planned to verify that the irs had followed proper procedures challenge the tax_liabilities and accrued penalties and discuss collection alternatives if it could petitioner requested a collection_due_process cdp hearing with respect to his unpaid tax_liabilities for be proven that petitioner owed the tax on date the irs’ office of appeals appeals mailed petitioner a letter informing him that his case had been received for consideration settlement officer eric d edwards settlement officer edwards was assigned petitioner’s case on date settlement officer edwards mailed petitioner a letter scheduling a telephone cdp hearing for date in the letter settlement officer edwards instructed petitioner to submit a completed form 433-a collection information statement for wage earners and self-employed individuals and signed tax returns for tax years by date petitioner failed to submit the requested documentation by the deadline on date settlement officer edwards attempted to call petitioner for the scheduled cdp hearing but petitioner’s telephone number had been disconnected irs records showed no other known telephone number for petitioner the same day settlement officer edwards mailed petitioner a letter offering him another opportunity for a telephone cdp hearing settlement officer edwards instructed petitioner to submit by date a completed form 433-a copies of personal bank statements signed tax returns for tax years and proof that estimated_tax payments had been paid in full settlement officer edwards also informed petitioner that appeals would not entertain frivolous issues and that audio recordings are allowed only in face-to-face hearings petitioner did not call the number provided by settlement officer edwards and failed to submit the requested documentation by the deadline instead petitioner mailed settlement officer edwards a letter dated date requesting a copy of the rules that govern cdp hearings and insisting on a face-to-face hearing in the letter petitioner questioned why settlement officer edwards had requested tax returns for tax years as petitioner did not want to give up information that is not necessary or required by the law during the course of the cdp hearing petitioner did not propose any collection alternative on date the irs issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination sustaining the proposed levy petitioner while residing in idaho timely petitioned this court for review of the notice_of_determination before the notice_of_determination was issued settlement officer edwards verified that all legal and administrative requirements for collection had been met opinion i statutory framework sec_6331 authorizes the secretary to levy upon property and property rights of a taxpayer liable for tax if the taxpayer fails to pay the tax within days after notice_and_demand for payment is made sec_6330 provides that no levy may be made on any property or right to property of any person unless the secretary has notified such person in writing of the right to a hearing before the levy is made if a taxpayer requests a hearing in response to a notice_of_levy pursuant to sec_6330 a hearing shall be held before an impartial officer_or_employee of appeals sec_6330 at the hearing the taxpayer may raise any relevant issue including appropriate spousal defenses challenges to the appropriateness of the collection action and collection alternatives sec_6330 a taxpayer is precluded from contesting the existence or amount of the underlying tax_liability unless the taxpayer did not receive a notice_of_deficiency for the liability in question or did not otherwise have an earlier opportunity to dispute the liability sec_6330 see also 114_tc_604 the phrase underlying tax_liability includes the tax_deficiency additions to tax and statutory interest 115_tc_329 following a hearing appeals must determine whether proceeding with the proposed levy action is appropriate in making that determination appeals is required to take into consideration verification presented by the secretary during the hearing process that the requirements of applicable law and administrative procedure have been met relevant issues raised by the taxpayer and whether the proposed levy action appropriately balances the need for efficient collection_of_taxes with the taxpayer’s concerns regarding the intrusiveness of the proposed collection action sec_6330 sec_6330 grants this court jurisdiction to review the determination made by appeals in connection with the sec_6330 hearing where the validity of the underlying tax_liability is properly at issue we review the taxpayer’s liability de novo see sego v commissioner t c pincite 114_tc_176 petitioner bears the burden_of_proof regarding his underlying tax_liabilities see rule a where the underlying tax_liability is not properly at issue we review the determination for abuse_of_discretion sego v commissioner t c pincite goza v commissioner t c pincite ii petitioner’s challenge to his underlying tax_liabilities a petitioner’s right to challenge underlying liabilities sec_6330 permits a taxpayer to raise any relevant issue relating to the unpaid tax or the proposed collection method if the taxpayer seeks tax_court review of the notice_of_determination the court can consider only an issue that was properly raised in the cdp hearing sec_301_6330-1 q a-f3 proced admin regs an issue will not be considered properly raised if the taxpayer fails to request consideration of the issue or requests consideration but does not present evidence to appeals after being given a reasonable opportunity to do so id on form petitioner disputed the underlying liabilities however there is nothing in the record to show that petitioner provided any evidence to settlement officer edwards to dispute the liabilities even though petitioner has no right to have this issue considered in this proceeding we choose to do so here for the sake of completeness b validity of the underlying liabilitie sec_1 deficiency as a general_rule the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 in the court_of_appeals for the ninth circuit to which an appeal of this case presumably would lie absent a stipulation to the contrary see sec_7482 the presumption of correctness does not attach in cases involving unreported income unless the commissioner first establishes an evidentiary foundation linking the taxpayer to the alleged income- producing activity see 596_f2d_358 9th cir rev’g 67_tc_672 the requisite evidentiary foundation is minimal and need not include direct evidence see banister v commissioner tcmemo_2008_201 aff’d 418_fedappx_637 9th cir once the commissioner produces evidence linking the taxpayer to an income-producing activity the burden shifts to the taxpayer to rebut the presumption of correctness of the commissioner’s deficiency determination by establishing by a preponderance_of_the_evidence that the deficiency determination is arbitrary or erroneous 92_tc_661 see also 181_f3d_1002 9th cir aff’g tcmemo_1997_97 for each of the years at issue respondent reconstructed petitioner’s income using the bank_deposit_method the use of the bank_deposit_method for computing income has long been sanctioned by the courts 64_tc_651 aff’d 566_f2d_2 6th cir a bank deposit is prima facie evidence of income and the commissioner need not prove a likely source of that income 87_tc_74 citing estate of mason v commissioner t c pincite respondent has established the requisite minimal evidentiary foundation linking petitioner with an income-producing activity by introducing evidence that he was engaged in a real_estate trade_or_business and earned_income from his business during the years at issue therefore petitioner bears the burden of proving that respondent’s deficiency determinations are arbitrary or erroneous petitioner was given ample opportunity to provide evidence both before and at trial petitioner however offered no testimony or other evidence at trial petitioner neither showed nor claimed that the bank_deposits were nontaxable consequently petitioner has failed to rebut the presumption that respondent’s determinations are correct accordingly we sustain respondent’s determinations as to petitioner’s underlying tax_liabilities for except for those amounts respondent conceded additions to tax a burden_of_proof and production sec_7491 provides that the commissioner bears the burden of production with respect to the liability of any individual for additions to tax the commissioner’s burden of production under sec_7491 is to produce evidence that it is appropriate to impose the relevant penalty addition_to_tax or additional_amount 118_tc_358 see also 116_tc_438 if a taxpayer files a petition alleging some error in the determination of an addition_to_tax or penalty the taxpayer’s challenge generally will succeed unless the commissioner produces evidence that the addition_to_tax or penalty is appropriate swain v commissioner t c pincite the commissioner however does not have the obligation to introduce evidence regarding reasonable_cause higbee v commissioner t c pincite b sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless the taxpayer can establish that such failure is due to reasonable_cause and not willful neglect petitioner did not file a tax_return for any of the years at issue petitioner has not argued that his failure_to_file was due to reasonable_cause and not due to willful neglect we therefore hold that petitioner is liable for sec_6651 additions to tax for c sec_6651 sec_6651 imposes an addition_to_tax for failure to timely pay the amount shown as tax on a return unless the taxpayer can establish that such failure is due to reasonable_cause and not willful neglect the commissioner’s burden of production requires him to introduce evidence that the tax was shown on a federal_income_tax return 120_tc_163 when a taxpayer has not filed a return the sec_6651 addition_to_tax may not be imposed unless the secretary has prepared an sfr that meets the requirements of sec_6020 127_tc_200 aff’d 521_f3d_1289 10th cir petitioner failed to timely pay his tax_liabilities for the years at issue respondent introduced into evidence the sfrs he prepared for the years at issue thereby satisfying his burden of production petitioner has offered no evidence indicating that his failures to pay were due to reasonable_cause and not willful neglect we therefore hold that petitioner is liable for sec_6651 additions to tax for d sec_6654 sec_6654 imposes an addition_to_tax in the case of any underpayment of estimated_tax by an individual a taxpayer has an obligation to pay estimated_tax for a particular year only if he has a required_annual_payment for that year sec_6654 a required_annual_payment generally is equal to the lesser_of of the tax_shown_on_the_return for the taxable_year or if no return is filed of the tax for such year or if the individual filed a return for the immediately preceding_taxable_year of the tax shown on that return sec_6654 wheeler v commissioner t c pincite heers v commissioner tcmemo_2007_10 respondent conceded that petitioner is not liable for an addition_to_tax under sec_6654 for thus respondent’s burden of production under sec_7491 requires him to produce evidence that petitioner had required annual payments for under sec_6654 petitioner made no payments of estimated_tax for any of the years at issue respondent established that petitioner had a required_annual_payment for each of the years petitioner did not file federal_income_tax returns for the years at issue therefore petitioner’s required annual payments for were equal to of the tax for those years petitioner has not argued that any of the exceptions to the sec_6654 addition_to_tax applies we therefore hold that petitioner is liable for sec_6654 additions to tax for iii determination to sustain the proposed levy action we now turn to respondent’s determination to proceed with collection which we review under an abuse_of_discretion standard appeals abuses its discretion if it acts arbitrarily capriciously or without sound basis in fact or law 112_tc_19 acting without a sound basis in fact or law means that an agency such as the irs makes an error of law or rests its determination on a clearly erroneous finding of fact or applies the correct law to facts which are not clearly erroneous but rules in an irrational manner 249_f3d_1121 9th cir citations omitted see also 496_us_384 petitioner contends that settlement officer edwards abused his discretion in refusing to conduct a face-to-face cdp hearing we disagree this court has held that a face-to-face hearing is not required under sec_6330 katz v commissioner t c pincite williamson v commissioner tcmemo_2009_188 stockton v commissioner tcmemo_2009_186 leineweber v commissioner tcmemo_2004_17 we have also held that an appeals officer’s denial of a face-to-face hearing does not constitute an abuse_of_discretion where a taxpayer fails to present nonfrivolous arguments and refuses to provide requested financial information see zastrow v commissioner tcmemo_2010_215 moline v commissioner tcmemo_2009_110 aff’d 363_fedappx_675 10th cir summers v commissioner tcmemo_2006_219 the regulations further provide that if a face-to-face hearing is not held a hearing conducted by telephone by correspondence or by review of documents will suffice for purposes of sec_6330 see sec_301_6330-1 q a-d7 proced admin regs the record demonstrates that a face-to-face hearing would not have been productive petitioner was given an opportunity to participate in a telephone cdp hearing on two separate occasions but failed to take advantage either time outside of petitioner’s argument that he had not received a notice_of_deficiency for the years at issue he presented only frivolous and groundless arguments throughout his dealings with respondent additionally petitioner although requested to do so on several occasions failed to submit requested financial documentation ie form 433-a and file past-due returns thus settlement officer edwards did not abuse his discretion in determining petitioner was not entitled to a face-to-face hearing settlement officer edwards considered all other issues petitioner raised petitioner did not offer a collection alternative to be considered however even if he had petitioner failed to provide financial documentation rendering settlement officer edwards unable to evaluate collection alternatives see roman v commissioner tcmemo_2004_20 rodriguez v commissioner tcmemo_2003_153 furthermore settlement officer edwards determined that the requirements of applicable law and administrative procedure were met finally at trial petitioner offered no evidence that respondent’s decision to sustain the proposed levy action constituted an abuse_of_discretion accordingly we hold that respondent did not abuse his discretion in sustaining the proposed levy in reaching our holding we have considered all arguments made and to the extent not mentioned we consider them irrelevant moot or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------------------- --------------------------------------------------- ----------------------------- ------------------------------- ---------------------------- ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi plr-123438-18 date date ------------------------------- x --------------------------------------------------- state date -------------- ---------------------------- dear --------------- this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_301_7701-3 to be classified as an association_taxable_as_a_corporation for federal tax purposes facts the information submitted states that x is a state limited_liability_company that was formed on date x represents that as of date x was eligible to elect to be classified as an association_taxable_as_a_corporation for federal tax purposes however x failed to timely file a form_8832 entity classification election electing to be classified as an association_taxable_as_a_corporation effective date law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in plr-123438-18 sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 ii provides that unless the entity elects otherwise a domestic eligible_entity is disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed sec_301_7701-3 provides in general that an election made under sec_301_7701-3 must be signed by a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic_extension of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonable and in good_faith and granting relief will not prejudice the interests of the government conclusion plr-123438-18 based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending copies of this letter to x’s authorized representatives sincerely associate chief_counsel passthroughs and special industries by ______________________________ stacy l short senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc