Opinion ID: 185447
Heading Depth: 2
Heading Rank: 2

Heading: Additions for Failing to Withhold U.S. Taxes

Text: 30 Section 6651(a)(1) of the Internal Revenue Code imposes a penalty for a person's failure to file a tax return unless the failure is due to reasonable cause and not due to willful neglect. 26 U.S.C. 6651(a)(1). Likewise, 6656(a) imposes a penalty on a person who fails to deposit withholding taxes unless his failure is due to reasonable cause and not due to willful neglect. Id. 6656(a). 31 In United States v. Boyle, the Supreme Court discussed the meaning of reasonable cause and willful neglect in 6651(a)(1). 469 U.S. 241, 245-46 (1985). The Boyle Court explained that to demonstrate reasonable cause a taxpayer must establish that he exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time. Id. at 246 (internal quotation omitted). Willful neglect, on the other hand, is demonstrated by the taxpayer's conscious, intentional failure or reckless indifference. Id. at 245. As the Court explained, the taxpayer maintains the heavy burden of proving that his failure to file a tax return was due to reasonable cause, not willful neglect. Id. The Commissioner suggests that the Boyle standard extends to 6656(a). 32 Despite the Supreme Court's clear statements in Boyle, appellant contends that the proper standard for determining whether it should pay an addition is found in Spies v. United States, 317 U.S. 492 (1943), a case in which the taxpayer faced criminal penalties. In Spies, the Supreme Court reasoned: It is not the purpose of the law to penalize frank difference of opinion of innocent errors made despite the exercise of reasonable care. Such errors are corrected by the assessment of the deficiency of tax and its collection with interest for the delay. Id. at 496. We echoed this same sentiment many years ago. See, e.g., Commissioner v. Clarion Oil Co., 148 F.2d 671, 677-78 (D.C. Cir. 1945); see also Palm Beach Trust Co. v. Commissioner, 174 F.2d 527, 527 & n.2 (D.C. Cir. 1949) (per curiam); Orient Inv. & Fin. Co. v. Commissioner, 166 F.2d 601, 604 (D.C. Cir. 1948). 33 Unfortunately, appellant and the Commissioner do not attempt to reconcile or distinguish Boyle and Spies. Worse, neither party addresses the other's claim concerning the appropriate standard. Indeed, in their briefs, appellant does not even cite Boyle, and the Commissioner does not cite Spies. 34 Although the Boyle Court did not address the meaning of the terms reasonable cause and willful neglect as used in 6656(a), the same terms used in the same statute for the same purpose presumably have the same meaning. See Allen v. CSX Transp., Inc., 22 F.3d 1180, 1182 (D.C. Cir. 1994). Because the same terms are used 6651(a)(1) and 6656(a) to define the circumstances in which a taxpayer is not required to pay additions, we see no reason why reasonable cause and willful neglect should not be interpreted consistently. 35 Notably, the Boyle Court did not overrule (or even cite) Spies. The Spies language cited by appellant, which is dicta, is not necessarily inconsistent with Boyle. After noting that the purpose of the tax code is not to penalize frank difference of opinion, the Spies Court pointed out that [i]f any part of the deficiency is due to negligence or intentional disregard of rules and regulations, the taxpayer is subject to additions. See 317 U.S. at 496-97. The Court's opinion in Boyle can be read as simply setting forth when a deficiency is due to negligence or intentional disregard rather than reasonable cause. 36 We need not fully contemplate the effect Boyle had on Spies to determine the outcome of this case; we therefore leave that question for another day. Appellant has not established that its failure to file tax returns or deposit withholding taxes was due to reasonable cause and not willful neglect as defined in Boyle. Although appellant purports in its appellate briefs that the transactions were founded on the U.S.-Netherlands Tax Treaty, it has not established that its deficiencies were not due to negligence or intentional disregard of rules and regulations as contemplated by Spies. Indeed, as we explained above, appellant failed to prove that it had any purpose other than avoiding U.S. taxes. See supra at 213-16. Because appellant bears the heavy burden of proving that its deficiencies were due to reasonable cause and not willful neglect, we have no basis for concluding that the Tax Court erred in upholding the additions imposed by the IRS.