Opinion ID: 2516158
Heading Depth: 3
Heading Rank: 2

Heading: Did DynCorp Show Reasonable Cause for Late Filing?

Text: The department argues that the Office of Tax Appeals erred by reversing the department's finding that no reasonable cause existed for DynCorp's failure to give the department timely notice of changes to its federal tax returns. Under AS 43.20.030(d), a taxpayer must notify the Department of Revenue of any alteration of the taxpayer's federal income tax return and pay any additional taxes within sixty days. [14] A late-filing taxpayer is subject to a five percent penalty for each thirty-day period during which the taxpayer fails to file, up to a maximum penalty of twenty-five percent. [15] A taxpayer can avoid this penalty by showing that the failure is due to a reasonable cause and not to wilful neglect. [16] The department has adopted a regulation defining reasonable cause, which references the administrative and judicial interpretations of the federal Internal Revenue Code and Treasury Regulations: In determining whether the delinquency was due to reasonable cause and not to willful neglect, the department will apply the administrative and judicial interpretations of Internal Revenue Code Sec. 6651 and the Treasury Regulation Sec. 301.66511(c). [17] Thus, because the reasonable-cause exception in AS 43.05.220(a) mirrors the Internal Revenue Code's reasonable-cause exception, and because the department's regulation defining that exception explicitly adopts the body of federal law interpreting the Internal Revenue Code's exception and its related treasury regulation, we rely heavily on the decisions of the federal courts in resolving the question before us. The Supreme Court discussed the reasonable-cause exception in United States v. Boyle, [18] noting that the term reasonable cause requires the taxpayer to demonstrate that he exercised `ordinary business care and prudence' but nevertheless was `unable to file the return within the prescribed time.' [19] The Court also noted that the IRS regulations exempt taxpayers from the penalty when the tardiness results from postal delays, illness, and other factors largely beyond the taxpayer's control. The principle underlying the IRS regulations and practices [is] that a taxpayer should not be penalized for circumstances beyond his control.... [20] In In re Craddock, [21] the Tenth Circuit considered a case similar to DynCorp's, where the taxpayer argued that being too busy could constitute reasonable cause for late filing. Craddock owned a real estate development firm and his accounting department prepared the company's tax returns. [22] The firm experienced exponential growth, and Craddock hired additional accountants to keep up with the increased workload, building the accounting staff from five in the early 1980s to fifty by 1985. [23] Craddock also hired an outside accounting firm to review the returns prepared by his accounting department. [24] Through the relevant years, Craddock spent about fifty percent of his total payroll (approximately $1 million) on accounting and tax staff, and an additional $100,000 per year in fees to the outside accounting firm. [25] Craddock also purchased a new accounting system to help manage his growing business. [26] Despite all these efforts, he knew that his tax returns were not being timely filed, but did not instruct his staff to file them on time, because he wanted them to be accurate. [27] He also did not hire an outside firm to complete the returns, because they were too expensive. [28] The court ruled that, although Craddock had exercised some care in increasing his accounting staff, having outside firms review the tax returns, and replacing his antiquated computer system, he had failed to exercise `ordinary business care and prudence' in ensuring his returns were timely filed and failed to show that he was `unable' to file the returns on time. [29] The court wrote: Mr. Craddock's reasons for his failure to timely file, such as his records or information could not be assimilated fast enough, his accounting staff was overworked, and his computer system was inefficient, are not reasonable cause. A taxpayer is expected in the exercise of ordinary business care and prudence ... not [to] take on such a load that he could not fulfill his own legal obligations within the required time. Dustin v. Commissioner, 467 F.2d 47, 50 (9th Cir.1972) (internal quotation marks omitted); Oliver v. Commissioner, 73 T.C.M. (CCH) 2035, 2051, 1997 WL 66769 (1997) ([A] taxpayer is not excused from timely filing his income tax return merely because he is overworked.); Merriam v. Commissioner, 70 T.C.M. (CCH) 627, 1995 WL 522813 (1995) ([A] heavy workload and preoccupation with business affairs do not constitute reasonable cause for the untimely filing of a tax return.), aff'd, 107 F.3d 877 (9th Cir.1997) (table opinion).... The complexity of one's affairs also does not give reasonable cause. Edgar v. Commissioner, 56 T.C. 717, 762-63, 1971 WL 2464 (1971). [30] Considering that Craddock was a sole proprietor, the efforts that he undertook to avoid late filing stand in sharp contrast to the steps taken by DynCorpa billion-dollar-a-year multinational corporationto achieve the same result. Craddock hired fifty employees to work on his tax returns, while DynCorp employed a staff of four. While Craddock paid an outside firm more than $100,000 to review his staff's work, DynCorp paid approximately $51,000 for Peat Marwick's work. If Craddock could not escape the penalty for late filing, there is little basis for accepting DynCorp's claim that it should not have to pay. Moreover, Craddock, like Boyle and other federal cases applying Boyle, emphasized a second aspect of the reasonable-cause requirement: that in order to demonstrate reasonable cause for a late filing, the taxpayer must be able to show that the circumstances surrounding the late filing were beyond the taxpayer's control. [31] In Craddock, the court deferred to the bankruptcy court's finding that the circumstances surrounding the taxpayer's late filing were within his ability to control, and therefore he could not prove that he was unable to file the tax returns on time. [32] As in Craddock, the circumstances surrounding DynCorp's late filing were within the company's ability to control. The record shows that DynCorp chose to file amended returns first in states where DynCorp was entitled to a refund and to file unitary returns, like the Alaska return, last. DynCorp was aware of Alaska's sixty-day deadline, but decided to put the Alaska return low on its list of priorities. Moreover, despite DynCorp's reliance on an internal structure that required Ireland to review each of the amended returns, Ireland spent time on other projects instead of devoting his full time to supervising the amended returns. Thus, the company made choices to use the resources that it did have in a manner that prevented timely filing. These facts all indicate that DynCorp's late filing, like Craddock's, was within its ability to control. Because the company's delay in filing resulted from the manner in which it elected to allocate its resources, DynCorp's claim of reasonable cause is unavailing. DynCorp argues that Craddock is distinguishable because that case involved Craddock's ongoing knowledge that his annual tax returns were not being filed on time. In contrast, DynCorp argues, here the IRS forced a massive, one-time adjustment to DynCorp's numerous state tax returns. DynCorp insists that it could not have foreseen that its normal tax staff would not be up to the job of completing the amended returns. The Office of Tax Appeals adopted this position, finding that this case was distinguishable from cases involving original tax returns that were filed long after the date set by statute for filing annual returns. The Office of Tax Appeals deemed it significant that, instead of missing a fixed statutory deadline, like April 15, DynCorp missed a `floating' sixty day period for taxpayers to file a notice of adjustment of tax liability. Thus, the Office of Tax Appeals found that DynCorp had no control over, or advance notice of, the date that the IRS would issue its final determination. The Office of Tax Appeals found this case analogous to In re Hudson Oil Co. [33] There, a bankruptcy trustee was appointed over the taxpayer's estate three weeks before the taxpayer's federal tax return was due. The bankruptcy court found that the trustee had reasonable cause for late filing. A controlling factor was that the circumstances surrounding the late filing were beyond the trustee's control. [34] The trustee was given three weeks to prepare a tax return, using books that were in disarray. [35] The court found that it was physically impossible for the trustee to have prepared the ... return within that three week period. [36] But the record in this case belies the conclusion that DynCorp lacked advance notice of the IRS assessment. The IRS first notified DynCorp of the amount of its federal adjustments on July 8, 1994. The IRS issued DynCorp a second copy of its report in February 1995, and issued its final assessment on April 3, 1995. Because a refund was involved, the assessment was referred to a congressional joint committee for review. The committee approved the assessment without exception and issued a final decision on December 7, 1995. DynCorp thus knew for well over one year that it would have to file amended state tax returns. It also knew the probable amount of the impending adjustments eight months before the IRS's final determination. The only thing DynCorp did not know in advance was the exact time when Congress would stamp final approval on an IRS action where eventual approval could be predicted with reasonable certainty. Furthermore, the record reveals that DynCorp was penalized in 1992 when it failed to notify Alaska within sixty days of an IRS assessment, so it was on notice of the consequences of failing to comply with AS 43.20.030(d). Given these circumstances, surprise simply was not an element of this case. And in contrast to Hudson, the record here provides no support for the proposition that it would have been physically impossible for DynCorp to have anticipated, planned for, and met the demands that it faced as a result of the IRS assessment. In Hudson, a company's books were thrust on the trustee with no advance notice; and through no fault of the trustee, those books were in disarray. Here, on the other hand, DynCorp knew well in advance of congressional action that adjustments to its state returns would likely be necessary; and the company's late filing reflects its deliberate decision to keep its costs low and to prioritize its filing of amended returns to collect refunds first. This is not a case where the taxpayer was unable to meet Alaska's deadline, but rather is one where the taxpayer chose a course that predictably prevented it from filing on time. DynCorp nevertheless refers to the workload resulting from the IRS's assessment as the proverbial `100-year flood.' But the record hardly supports this assertion. DynCorp is a billion-dollar-a-year corporation, doing business in nearly every state and several foreign nations. The record shows that DynCorp was the subject of similar IRS assessments in the audit cycles preceding and following the one involved in this case. In a typical year, DynCorp files close to 300 state tax returns. Thus, the number of amended returns that DynCorp was required to prepare was not in itself unusual. In any event, the federal courts have consistently held that exercising ordinary business care and prudence requires the taxpayer to anticipate the magnitude and complexity of his tax obligations, and to plan accordingly. [37] For this reason, the size and complexity of the taxpayer's returns cannot establish reasonable cause for late filing. [38] Thus, even if the IRS assessment created an unusual amount of work for DynCorp, the applicable case law would recognize no ground for finding reasonable cause for late filing. Instead of questioning whether DynCorp had exercised ordinary business care and prudence in anticipating the size and complexity of its tax obligations, the Office of Tax Appeals applied a good business judgment test. The administrative law judge wrote DynCorp had sound business reasons for deciding to give first priority to preparing the amended returns in states where refunds were due and to place a lower priority on making the adjustments to more complicated unitary returns, like those of New York and Alaska. Mr. Hevey, a Peat Marwick partner with 30 years of professional experience in tax matters, testified that in his opinion DynCorp acted responsibly under the circumstances. I agree. Thus, the Office of Tax Appeals turned what should have been an inquiry into whether DynCorp exercised ordinary business care and prudence in ensuring timely compliance with Alaska's sixty-day deadline into an analysis of whether it made good business sense for DynCorp to deliberately choose not to comply with the deadline. DynCorp's actions might have been prudent business decisions in the narrow sense of being advantageous from the standpoint of the company's financial interests. But for purposes of the reasonable-cause exception, that is beside the point. From a business perspective, it always makes sense to make money. Were we to equate this kind of business prudence, or good business sense, with the reasonable-cause exception's requirement of ordinary business care, then businesses would always have reasonable cause to avoid paying taxes on time. Federal case lawwhich the department's regulation expressly adopts as Alaska's measureconfirms this point. By requiring circumstances beyond a company's control and proof that the company is actually unable to comply, these cases firmly establish that the exception for reasonable cause is not meant to spare the company from the disadvantageous legal consequences of its own financially advantageous decisions. Instead, the exception protects only against events that prove unavoidable despite the exercise of ordinary business care to avoid them and that unavoidably prevent a timely filing, once they occur. [39] Absent such circumstances, a claim of too busy does not establish reasonable cause, because the size of the taxpayer's workload is within the control of the taxpayer, and thus the taxpayer cannot show an inability to meet the tax deadline. [40] [O]ur system of self-assessment ... of a tax simply cannot work on any basis other than one of strict filing standards. Any less rigid standard would risk encouraging a lax attitude toward filing dates. [41] `If every taxpayer who ... was too busy to file a return escaped the penalty for failure to file, our tax system would soon collapse.' [42]