Opinion ID: 6984410
Heading Depth: 2
Heading Rank: 2

Heading: The Tax Credit and Failure to Remit

Text: Employers subject to the Internal Revenue Code (the “Code”) are required to withhold income and FICA taxes from their employees’ wages and to remit those withholding taxes to the IRS. During the first and second quarters of 1984, while Atlas Guard and Penn were still owned by Servisco, Atlas Guard remitted both its own withholding taxes and those withheld by Penn. Due to an apparent clerical error, the IRS credited all of the first and second quarter payments to Atlas Guard’s account, and none to Penn’s account. This mistake left Atlas Guard with tax credits of $89,495.43 and $25,169.59 for the first and second quarters of 1984, respectively. Penn’s IRS account showed delinquencies in the same amounts. At the time Astro purchased Atlas Guard and Penn from Servisco in 1985, both Servisco and an independent auditor represented that Atlas Guard had a total withholding tax credit of $114,665.02 and that Penn was current in its tax payments. When Astro re-christened Atlas Guard and dissolved Penn, it assigned Atlas the same employer tax identification number formerly assigned to Atlas Guard. As a result, Atlas believed that it had a tax credit of over $114,000 in its account with the IRS. In July 1985, Atlas sought a refund from the IRS. In response, the IRS conducted an audit of Atlas’s books. Although the parties dispute the date, 1 at some point an IRS agent prepared, and sent to Atlas two “reconciliation sheets” indicating that Atlas had a tax credit of $89,495.43 for the first quarter of 1984 and a tax credit of $25,169.59 for the second quarter of 1984. Nonetheless, by the end of 1986, the IRS had still not acted on Atlas’s refund request, despite Atlas’s repeated requests that it do so. In late 1986, Astro sold Atlas’s mainland United States operations to a third party, retaining only Atlas’s Puerto Rico operations. In February 1987, Astro sold Atlas’s Puerto Rico operations. In April 1987, still unable to get a response to its refund request, Atlas asked its accountants for advice as to how to obtain a refund of the credit the IRS had confirmed. The accountants recommended that Atlas simply apply its credit against its outstanding withholding tax liabilities, consistent with the instructions on its quarterly withholding tax returns. In April 1987, Atlas followed its accountants’ advice: When filling out its withholding tax returns for the fourth quarter of 1986 and the first quarter of 1997, Atlas applied the purported tax credit plus statutory interest, which Atlas’s calculated to total in excess of $173,000, toward its withholding liabilities, which it calculated to be $157,359.29. 2 Astro then used all of the proceeds from the sale of Atlas to pay creditors other than the IRS. Over a year later, in May 1988, the IRS served Winter, Uribe, and the Romers with notice that, pursuant to 26 U.S.C. § 6672(a), it intended to assess them a penalty of $93,592.97 for Atlas’s failure to remit its withholding taxes during the last quarter of 1986 and the first quarter of 1987. 3 On May 31, 1988, Winter, Uribe, and the Romers protested the proposed penalty, explaining their belief that Atlas Guard had overpaid its withholding taxes in 1984 and that Atlas had properly applied this credit against its withholding tax liability in 1986 and 1987. On July 1, 1988, the IRS responded, stating that at the time Atlas filed the returns in question, it had “no credit available” from the first and second quarters of 1984. The IRS acknowledged that at one time Atlas’s account had been improperly credited, but maintained that the overpayments had been reassigned to the correct account during the second half of 1984, thereby eliminating the credit in Atlas’s account. The IRS did not contend that it had previously informed Atlas of the reassignment. As promised, on January 31, 1990, the IRS assessed a $93,592.97 penalty against the Romers, Uribe, and Winter, jointly and severally. On May 9, 1991, the IRS abated the entire penalty assessed against Ur-ibe, but did not abate the penalty assessed against the Romers or Winter. On March 25, 1993, Winter filed a claim with the IRS seeking abatement of the penalty assessed against him. On August 23, 1993, the IRS informed Winter that it would not consider his abatement claim, but would consider a refund claim if he chose to bring one after paying the full amount of the penalty.