May v. Comm'r of Internal Revenue, s. 14385–05

• Decision Date: 24 October 2011
• Docket Number: Nos. 14385–05,4782–07.,s. 14385–05
• Citation: 137 T.C. No. 11,137 T.C. 147
• Parties: Mark W. MAY and Cynthia R. May, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Cynthia R. May, Petitioner,andMark W. May, Intervenor v. Commissioner of Internal Revenue, Respondent.
• Court: U.S. Tax Court

137 T.C. 147

137 T.C. No. 11

Mark W. MAY and Cynthia R. May, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.Cynthia R. May, Petitioner,andMark W. May, Intervenor

v.Commissioner of Internal Revenue, Respondent.

Nos. 14385–05

4782–07.

United States Tax Court.

Oct. 24, 2011.

P–H's corporation reduced P–H's paycheck by amounts that were not remitted to the Government. R determined fraud penalties and disallowed deductions for State and local income taxes. Ps claim this Court does not have jurisdiction to redetermine underpayments, that no underpayments exist, that P–H is not liable for fraud penalties, and that the deductions for State and local taxes are proper.

Held: This Court has jurisdiction to redetermine the applicability of sec. 6663, I.R.C., penalties for fraud resulting from overstated withholding tax credits.

Held, further, an “underpayment” includes a taxpayer's overstated credits for withholding under the rule in Feller v. Commissioner, 135 T.C. 497, 2010 WL 4456035 (2010).

Held, further, sec. 1.31–1(a), Income Tax Regs., is inapplicable because funds due to the Government were not actually withheld from P–H's wages. This is a matter of first impression for this Court, and we adopt the test applied in United States v. Blanchard, 618 F.3d 562 (6th Cir.2010).

Held, further, P–H is liable for fraud penalties under sec. 6663, I.R.C.

Held, further, Ps are entitled to a partial deduction for local income taxes paid.

Mark W. May and Cynthia R. May, pro sese.

Edward Lee Walter, for respondent.

GOEKE, Judge:

Respondent determined deficiencies in petitioners' 1994, 1995, and 1996 joint Federal income taxes of $7,659, $10,389, and $8,771, respectively, as a result of unpaid State and local income taxes deducted on petitioners' returns. Respondent also determined penalties for fraud under section 6663 ¹ for 1994, 1995, and 1996 against Mark May (Mr. May) of $84,957.75, $89,748.75, and $70,160.25, respectively, resulting from the deficiencies and overstated credits for taxes withheld from wages. Respondent separately determined that Cynthia May (Mrs. May) is not entitled to relief under section 6015 from joint and several liability for the years at issue. The cases were then consolidated for trial. After trial respondent conceded that Mrs. May is entitled to relief under section 6015(b) for the years at issue, resolving all issues pertaining to her. After this concession, the issues remaining for decision are:

(1) Whether the Court has jurisdiction to redetermine the underpayments for purposes of calculating the section 6663 fraud penalties when a portion of the underpayment for each taxable year resulted from overstated credits for taxes withheld from wages. We hold that the Court does have jurisdiction to determine the correct amounts of the underpayments and corresponding penalties;

(2) whether Mr. May is liable for the section 6663 fraud penalties for the taxable years at issue with respect to the claimed withholding tax credits. We hold that Mr. May is so liable; and

(3) whether Mr. May is liable for the deficiencies resulting from disallowed deductions for State and local income taxes paid and for section 6663 fraud penalties with respect to such deficiencies. We hold that Mr. May is liable for the deficiencies in part and for section 6663 fraud penalties with respect to the remaining deficiencies.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. At the time the petition was filed, Mr. May was incarcerated in Kentucky; Mrs. May resided in Ohio.

During 1994, 1995, and 1996 Mr. May was an employee, officer, and shareholder of Maranatha Financial Group, Inc. (Maranatha), a corporation with approximately 100 employees. Mr. May was also Maranatha's president and CEO. Mr. May received a biweekly paycheck and pay stub issued by a payroll service provider, Paychex, for his services to Maranatha. The pay stubs reflected biweekly gross pay of $10,000 per pay period. After withholdings for Federal, State, local, and FICA taxes, Mr. May's net paycheck was in the range of $6,500 per pay period.

During the years at issue Mr. May fully controlled the finances of Maranatha. Mr. May had sole check signature authority on Maranatha's corporate bank account and was the sole signatory on payroll checks issued by Paychex on Maranatha's behalf. Mr. May did not sign the paychecks manually, but an electronic facsimile of his signature appeared on all paychecks.

During the years at issue Maranatha withheld all proper taxes from employee paychecks (including Mr. May's) but failed to remit these withholdings to Federal, State, or local tax authorities. Maranatha used at least a portion of the nonremitted funds to continue operation of the business, which included paying Mr. May an annual salary of $260,000. Mr. May was admittedly the person responsible for remittance of these withholdings and was aware of the failure to remit them. Mr. May was also responsible for filing Maranatha's Forms 941, Employer's Quarterly Federal Tax Return, but failed to file those forms for the taxable years in issue until early 1997. Because he was the responsible officer, all unremitted withholdings were later assessed against Mr. May under section 6672.

Petitioners timely filed joint Federal income tax returns with the Internal Revenue Service (IRS) for the taxable years 1994, 1995, and 1996. Attached to each tax return was Mr. May's Form W–2, Wage and Tax Statement, issued by Paychex. Petitioners claimed withholding credits each year resulting from amounts withheld from Mr. May's paychecks for Federal taxes. Petitioners also claimed deductions each year for State income taxes paid through withholdings. Petitioners also claimed deductions in 1995 and 1996 for local taxes paid. Petitioners testified that they paid local income taxes by personal check during 1995 and 1996 and produced a copy of a single canceled check issued to and endorsed by the city of Xenia, Ohio, for $2,550 in April 1997.

On April 9, 2002, Mr. May was indicted on two counts of Federal income tax evasion, as well as four counts of willful failure to account for and pay over payroll taxes while working for Maranatha. The U.S. District Court for the Southern District of Ohio found Mr. May guilty on all six counts. On appeal, the U.S. Court of Appeals for the Sixth Circuit affirmed the conviction but vacated the sentence and remanded the case for resentencing. After resentencing, Mr. May appealed the District Court's resentencing to the Court of Appeals for the Sixth Circuit, which again vacated the sentence and remanded with a directed order of restitution. This second appeal did not address or disturb the underlying conviction.

Evidence at the criminal trial established that Mr. May had used funds in the corporate account for personal expenditures. However, no such evidence was presented in these cases.

On May 4, 2005, respondent issued a notice of deficiency to petitioners for tax years 1994, 1995, and 1996. Petitioners timely filed a petition for redetermination of the deficiencies and penalties.

OPINION

I. Jurisdiction To Redetermine Section 6663 Fraud Penalties Resulting From Overstated Credits for Taxes Withheld From Wages

The jurisdiction of this Court is limited by statute and attaches only upon the issuance of a valid notice of deficiency and the timely filing of a petition. Pietanza v. Commissioner, 92 T.C. 729, 735, 1989 WL 28334 (1989), affd. without published opinion 935 F.2d 1282 (3d Cir.1991). In these cases, the notice of deficiency determined a deficiency relating to disallowed deductions for State and local income taxes, as well as section 6663 fraud penalties applied to the deficiencies and underpayments resulting from overstated credits for tax withholding. Petitioners argue that this Court does not have jurisdiction over any aspect of these cases involving the overstated withholding credits because they do not meet the statutory definition of a tax deficiency so as to form the basis for a valid notice of deficiency. This Court has previously addressed this issue in Rice v. Commissioner, T.C. Memo.1999–65. Rice involved overstated withholding credits which resulted in a section 6663 fraud penalty but no deficiency. In holding that this Court had jurisdiction to redetermine fraud penalties, including the effect of the overstated withholding credits on the amount of the penalty, the Court stated:

Section 6665 provides that “additions to the tax, additional amounts, and penalties * * * shall be paid upon notice and demand and shall be assessed, collected, and paid in the same manner as taxes”. A deficiency in tax is assessed, collected, and paid only after respondent makes a determination and sends a notice of that determination in accordance with section 6213, which provides for the jurisdiction of this Court. Eck v. Commissioner, 16 T.C. 511, 515, 1951 WL 105 (1951), affd. per curiam 202 F.2d 750 (2d Cir.1953). Thus, respondent, in sending a notice determining petitioner was liable for a section 6663 penalty, was complying with the law that requires him to proceed in the same manner as if there were a deficiency. “The statute was intended to mean * * * that where such a notice was sent, the Tax Court has jurisdiction.” Accordingly, a statutory notice from respondent, in which no deficiency is determined, advising the taxpayer that a penalty for fraud is due, is a valid basis for jurisdiction to this Court. [ Id.; emphasis added.]

Applying this logic, we find that this Court has jurisdiction to the extent necessary to redetermine whether any section 6663 fraud penalties are applicable.

II. Fraud With Respect to Overstated Withholding Credits

Respondent has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b). To satisfy the burden of proof, respondent must show by clear and convincing evidence: (1) An underpayment of tax exists for each year; and (2) Mr. May intended to evade...