F.E. Schumacher Co., Inc. v. U.S.

• Decision Date: 23 January 2004
• Docket Number: No. 5:02CV150.,No. 5:02CV1569.,No. 1:01CV0979.,1:01CV0979.,5:02CV150.,5:02CV1569.
• Citation: 308 F.Supp.2d 819
• Parties: F.E. SCHUMACHER COMPANY, INC., Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Ohio

308 F.Supp.2d 819

F.E. SCHUMACHER COMPANY, INC., Plaintiff, v. The UNITED STATES of America, Defendant.

No. 1:01CV0979.

No. 5:02CV150.

No. 5:02CV1569.

United States District Court, N.D. Ohio, Eastern Division.

January 23, 2004.

Andrew Agati, Squire, Sanders & Dempsey, Mark J. Valponi, Stephen M. Nechemias, Peter M. Poulos, Stephen H. Jett, Taft, Stettinius & Hollister, Kenneth A. Bravo, Ulmer & Berne, Cleveland, OH, for Plaintiff.

Michael W. Davis, Alejandro L. Bertoldo, United States Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OF OPINION

MANOS, District Judge.

On January 10, 2001, F.E. Schumacher Company, Inc., Plaintiff, filed a Complaint against the United States of America, Defendant, seeking judicial review of an Internal Revenue Service (hereinafter, IRS) collection due process determination affirming the imposition of a tax penalty in the amount of $30,094.80 plus interest (Docket No. 1, Case No. 1:01CV097).¹ The assessment penalized Plaintiff for remitting payroll taxes other than by Electronic Funds Transfer (sometimes hereinafter, EFT) pursuant to the Electronic Federal Tax Payment System (sometimes hereinafter, EFTPS) for the taxable period ending December 31, 1999. On January 24, 2002, Plaintiff filed a second Complaint against Defendant for judicial review of a separate collection due process determination (Docket No. 1, Case No. 5:02CV150). The action challenges assessment by the IRS of a 10% underpayment tax penalty in the amount of $84,895.19 for failure to deposit payroll and unemployment taxes by way of the EFTPS for the taxable periods ending September 30, 2000, December 31, 2000 and March 31, 2001, and December 21, 2000, respectively. The two (2) review actions request a determination by the Court that the above-referenced tax penalties were improperly assessed. Alternatively, Plaintiff seeks a determination by the Court that, if the penalties are appropriate, they should be abated according to law.

On August 9, 2002, Plaintiff filed a third Complaint against Defendant, this one seeking a refund of tax penalties in the amount of $59,906.31 (Docket No. 1, Case No. 5:02CV1569). The IRS imposed the penalty because Plaintiff did not deposit payroll taxes for the taxable periods ending March 31, 2000 and June 30, 2000, by way of the EFTPS. The Complaint seeks a judicial determination that imposition of the penalty was erroneous and prays for a full refund.

On August 4, 2003, the Court granted permission to the parties to file cross motions for summary judgment. The motions contemplate the three (3) actions initiated by Plaintiff regarding the tax penalties for remittance of certain payroll and unemployment taxes by means other than the EFTPS (Case Nos. 1:01CV097, 5:01CV150 and 5:02CV1569). On October 3, 2003, Plaintiff filed its Motion For Summary Judgment (Docket No. 17, Case no. 5:02CV1569) and Defendant filed a Cross Motion For Summary Judgment (Docket No. 20, Case No. 5:02CV1569). On October 24, 2003, the parties filed respective briefs in opposition to the motions (Docket Nos. 23 and 24, Case No. 5:02CV1569) and on November 7, 2003, each filed a Reply (Docket Nos. 29 and 30, Case No. 5:02CV1569).

The Plaintiff is an Ohio corporation with its principal place of business in Hartville, Ohio. Defendant is the United States of America. The actions seeking judicial review of collection due process determinations issued by the IRS (Case Nos. 1:01CV097 and 5:02CV150) arise under the provisions of 26 U.S.C. § 6330(d). The Court maintains jurisdiction thereover pursuant to 28 U.S.C. §§ 1331 and 1340. Plaintiff's refund action (Case No. 5:02CV1569) arises under 28 U.S.C. § 1346(a)(1) and together with 28 U.S.C. §§ 1331 and 1340, vest this Court with jurisdiction.

The matter before the Court comes upon Plaintiff's Motion For Summary Judgment and Defendant's Cross Motion For Summary Judgment. The parties have fully briefed the issues and the matter is ripe for disposition. For the following reasons, Defendant's Motion is GRANTED and Plaintiff's Motion is DENIED.

I. FACTS

The actions now before the Court relate to and arise out of assessment by the IRS of 10% tax penalties against Plaintiff for the last quarter of 1999, ending December 31, 1999; all four (4) quarters of 2000; the first quarter of 2001, ending March 31, 2001; and the first month (April) of the second quarter of 2001.² The IRS imposed the penalties as sanctions for Plaintiff's failure to deposit payroll and unemployment taxes electronically by way of the Electronic Federal Tax Payment System as required by 26 U.S.C. § 6302(h). Specifically, the penalties were imposed under 26 U.S.C. § 6656:

(a) Underpayment of deposits. — In the case of any failure by any person to deposit (as required by this title or by regulations of the Secretary under this title) on the date prescribed therefor any amount of tax imposed by this title in such government depository as is authorized under section 6302(c) to receive such deposit, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be imposed upon such person a penalty equal to the applicable percentage of the amount of the underpayment.

(b) Definitions. — Except as provided in subparagraph (B), the term "applicable percentage" means —

(i) 2 percent if the failure is for not more than 5 days,

(ii) 5 percent if the failure is for more than 5 days but not more than 15 days, and

(iii) 10 percent if the failure is for more than 15 days.

Section 6302(h) of the Internal Revenue Code (sometimes hereinafter, the Code) authorizes the Secretary of the Treasury to "prescribe such regulations as may be necessary for the development and implementation of an electronic fund transfer system which is required to be used for the collection of depository taxes." 26 U.S.C. § 6302(h)(1)(A). Treasury Regulation § 31.6302-1(h) describes and provides for the implementation of the electronic system. It identifies to which entities the system applies and delineates a phase-in schedule identifying dates by which those entities must deposit employment taxes electronically under the EFTPS.³ See 26 C.F.R. § 31.6302-1(h).

The IRS assessed Plaintiff with a 10% failure-to-deposit penalty, pursuant to 26 U.S.C. § 6656, for the quarter ending September 30, 1999 (the third quarter of 1999), because it did not use the EFTPS to deposit employment taxes. Upon request made by Plaintiff, the IRS abated the penalty (Joint Stipulation Of Fact at p. 3, ¶ 10). Thereafter, commencing with the fourth quarter of 1999 and through the first quarter of 2001, the IRS imposed upon Plaintiff § 6656 10% penalties for each taxable period for its failure to deposit employment taxes by EFT pursuant to the EFTPS. Plaintiff requested collection due process hearings to challenge the penalties imposed for the periods ending December 31, 1999, September 30, 2000, December 31, 2000, and March 31, 2001. The IRS upheld the imposition of penalties for each period and denied Plaintiff relief therefrom. The IRS refused to abate the penalties for the six (6) quarters at issue based upon its determination that Plaintiff did not establish reasonable cause for its failure to comply with the electronic method of deposit prescribed in the Internal Revenue Code (Joint Stipulation Of Fact at p. 3, ¶ 11).

During the time periods relevant to the instant dispute, Plaintiff paid its hourly employees every other Friday (Plaintiff's Motion For Summary Judgment at p. 3). Treasury Regulations mandate that payroll taxes associated with a Friday payroll schedule are due three (3) banking days later, usually the following Wednesday. See 26 C.F.R. § 31.6302-1(c)(2). During the time frame at issue, Plaintiff paid its salaried employees on the last day of each month (Plaintiff's Motion For Summary Judgment at p. 3). Pursuant to IRS Regulations, if the last day of the month falls on a Wednesday, Thursday or Friday, the payroll taxes are due three (3) banking days later, usually the following Wednesday. See 26 C.F.R. § 31.6302-1(b)(3) and (c)(2). If the last day of the month falls on a Saturday, Sunday or Monday, payroll taxes are due three (3) banking days later, usually the following Friday. Id. Federal unemployment taxes are due on or before the last day of the month following the end of each calendar quarter. See C.F.R. § 601.401(a)(5)(vi).

Plaintiff claims that it physically took its payroll taxes to the Bank One branch in Hartville, Ohio on the third banking day following the salaried and hourly payrolls (Plaintiff's Motion For Summary Judgment at p. 3). Plaintiff further alleges that on those days it received receipts from Bank One indicating that the proper Federal Bank, as Fiscal Agent for the United States, was credited in the amount of the taxes submitted (Plaintiff's Motion For Summary Judgment at pp. 3-4). The deposit slips created by Bank One certify that the funds were deposited with the appropriate Federal Reserve Bank on the same date they were submitted by Plaintiff (Plaintiff's Motion For Summary Judgment at p. 4). Plaintiff avers that all transmittals for the periods in question were timely according to IRS deadlines and that it was never penalized by the IRS for untimely payments (Plaintiff's Motion For Summary Judgment at p. 4).

II. LAW & ANALYSIS

A. Standard of Review

1. Federal Civil Rule 56

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).

When both parties file motions for summary judgment the Court applies the same standard of review provided in Civil Rule 56. ITCO Corp. v. Michelin Tire Corp., Com. Div., 722 F.2d 42, 45 n. 3 (4th Cir.1983). "When reviewing cross-motions for summary judgment, the court must...