535 Ramona Inc. v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 14 September 2010
• Docket Number: No. 6443-07L.,6443-07L.
• Citation: 135 T.C. 353,135 T.C. No. 17
• Court: U.S. Tax Court
• Parties: 535 RAMONA INC., Petitioner,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.

135 T.C. No. 17

535 RAMONA INC., Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 6443-07L.

09-14-2010

[135 T.C. No. 2]

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 the 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 FACT

Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by 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 80 individuals by the end of 1996 and had payroll expenses for the second, third, and fourth quarters of 1996.

[135 T.C. No. 3]

For 1996, petitioner used a payroll service company, ExpressPay Plus (ExpressPay), to prepare its payroll. In 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 $322,784)^[1] 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.

[135 T.C. No. 4]

(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 unemployment fund. In January 1999, the California Employment Development Department (EDD) reported to the IRS that it had no record of petitioner's paying any wages in 1996. In March 1999, the IRS notified petitioner of the discrepancy between the EDD report and the information on the 1996 Form 940-EZ. Petitioner did not 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 penalty of $1,743 and interest of $3,730. Subsequently, respondent assessed additional penalties, an addition to tax, and interest and gave petitioner credit for small overpayments of subsequent employment tax liabilities.

In 2004, both petitioner and the IRS made further inquiries. In letters dated May 6, 2004 (to the IRS), and April 4, 2006 (to petitioner), EDD reported that, with respect to petitioner for 1996, neither taxable wages nor contributions were reported to the department; the letters further stated that petitioner's account was "inactive for tax year 1996." In February 2009, EDD

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advised the IRS that petitioner's unemployment insurance account with California first became active on January 1, 1999.

Levy Notice

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 Hearing

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 correctly 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 Notice

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

[135 T.C. No. 6]

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 Determination

On February 20, 2007, 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 and that the levy notice was "appropriate based on all available information". The notice of determination sustained in full the levy notice.^[2]

Petition

In response to the notice of determination, petitioner timely filed the petition and an amended petition.

OPINION

I. Introduction

We must determine whether respondent may proceed by levy to collect the additional FUTA tax, penalties, and interest that respondent claims petitioner owes (the disputed liability). That, in large part, depends on whether petitioner made

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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 of respondent's evidentiary objections. Finally, we shall state our analysis and conclusion.

II. Sections 6320, 6330, and 6331

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, among other things, collection alternatives the taxpayer proposed and whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the

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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 have an opportunity to dispute the tax liability. Sec. 6330(c)(2)(B).

Respondent concedes that petitioner was entitled to, and 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 we apply 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]

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III. Relevant FUTA and California State Tax Provisions

A. FUTA Provisions

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 thereunder * * * [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 experience 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 submits

To the district director a certificate of the proper officer of each State (with respect to the law

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of which the additional credit is claimed) showing for the taxpayer—

(1) The

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