Van Camp & Bennion v. United States

• Decision Date: 13 September 2000
• Docket Number: DEFENDANTS-APPELLEES,PLAINTIFF-APPELLANT,No. 96-36068,96-36068
• Citation: 251 F.3d 862
• Parties: (9th. Cir. 2001) VAN CAMP & BENNION, A PROFESSIONAL SERVICE CORPORATION,, v. UNITED STATES OF AMERICA; PAUL BEENE, DISTRICT DIRECTOR OF INTERNAL REVENUE, WASHINGTON DISTRICT,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 862

251 F.3d 862 (9th. Cir. 2001)

VAN CAMP & BENNION, A PROFESSIONAL SERVICE CORPORATION, PLAINTIFF-APPELLANT, v. UNITED STATES OF AMERICA; PAUL BEENE, DISTRICT DIRECTOR OF INTERNAL REVENUE, WASHINGTON DISTRICT, DEFENDANTS-APPELLEES.

No. 96-36068

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted September 13, 2000--Seattle, Washington

Filed June 6, 2001

[Copyrighted Material Omitted]

Robert E. Kovacevich, Spokane, Washington, for the plaintiff-appellant.

David I. Pincus and Annette M. Wietecha, Attorneys, Tax Division, United States Department of Justice, Washington, D.C., for the defendants-appellees.

Appeal from the United States District Court for the Eastern District of Washington Cynthia Imbrogno, Magistrate Judge, Presiding. D.C. No. CV-94-00409-CI

Before: Mary M. Schroeder, Chief Judge, Robert R. Beezer, and Michael Daly Hawkins, Circuit Judges.

The opinion of the court was delivered by: Beezer, Circuit Judge

OPINION

Van Camp & Bennion, P.S. ("the corporation") claimed a refund of taxes and penalties paid following an Internal Revenue Service ("IRS") audit. The district court held that the corporation was entitled to a refund in part and remained liable for specific employment taxes and penalties.¹ The corporation appeals. We affirm in part, reverse in part and remand.

I.

In 1985, Walter R. Van Camp and Irving R. Bennion, attorneys, became shareholders of the appellant professional services corporation. Van Camp owned 60% of the stock and Bennion owned 40%. The corporation's president was Van Camp; Bennion was the vice-president and secretary-treasurer.

Van Camp specialized in personal injury law and professionally attracted clients seeking legal services. The corporation did not provide retirement benefits or malpractice insurance for Van Camp. Salary payments were irregular because corporate income was primarily derived from contingency fee agreements. Van Camp's personal expenses were often paid by the corporation and later charged against his salary.

The corporation's tax returns were prepared by an accountant who had full access to the corporation's books and records. The accountant worked closely with the corporation's bookkeeper. Van Camp's and Bennion's involvement with the returns was limited to signing the tax returns prepared by the accountant.

Van Camp did not receive compensation for performing his duties as a corporate official. These duties, such as attending the required annual meeting, took only one to two hours per year. Van Camp's other duties included hiring and firing employees on the advice of others and making all major corporate decisions.

In tax years 1990, 1991 and 1992, the corporation failed to pay employment taxes required by the Federal Insurance Contributions Act ("FICA"), I.R.C. §§ 3111, and Federal Unemployment Tax Act ("FUTA"), I.R.C. §§ 3301, for Van Camp and Bennion. The corporation asserted that Van Camp and Bennion properly should be classified as independent contractors. Upon audit, the IRS determined that employment taxes were due because Van Camp and Bennion should be classified as employees.

II.

Internal Revenue Code §§ 3121(d)(1) states that "the term `employee' means any officer of a corporation." The court considered whether an exception to section 3121(d)(1) applied. See Treas. Reg. §§ 31.3121(d)-1(b) (exception when an officer "performs only minor services"). The court found that Bennion was an independent contractor because he had very little involvement in corporate management and that Van Camp was an employee of the corporation because he had authority over the corporation's fundamental decisions and his management services were not minor. The district court held that neither Van Camp nor Bennion were common law employees under I.R.C. §§ 3121(d)(2).

The court concluded that the penalties assessed for the corporation's failure to pay employment taxes for 1989 and 1991 quarterly periods were proper. See I.R.C.§§§§ 6651 (failure to file return or pay tax), 6656 (failure to deposit tax), 6662 (negligent underpayment of tax). The district court held that a taxpayer's personal problems, financial difficulties and reliance on an accountant cannot be considered "reasonable cause" for failing to make tax payments. See Treas. Reg. §§ 301.6651-1(c)(1). The district court also found that the corporation's legal position was not "reasonably debatable" and that the payment of taxes would not impose an "undue hardship."

The judgment required the parties to calculate the proper amount of taxes and penalties. On September 11, 1996, the district court denied the corporation's motion for amendment of judgment, new trial and admission of new evidence.

The corporation appeals the conclusions that Van Camp is an employee and asks us to set aside the assessment of penalties.

III.

We review for clear error the question whether independent contractor status as opposed to employee status was correctly determined. Chin v. United States, 57 F.3d 722, 725 (9th Cir. 1995).

An employer is required to pay both social security and unemployment taxes on wages paid to employees. See I.R.C. §§§§ 3301 (FUTA), 3311 (FICA). "Wages" are defined as "all remuneration for employment." Id. §§§§ 3121(a), 3306(b); see also id. §§ 3121(b) (defining "employment" as "any service . . . performed . . . by an employee"). Under section 3121(d)(1), "the term `employee' means . . . any officer of a corporation."

The corporation argues that Van Camp falls under an exception to this classification: "[A]n officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation." Treas. Reg. §§ 31.3121(d)-1(b).

Because Van Camp performed only de minimis services as an officer, the corporation asserts that section 31.3121(d)-1(b) applies under the "dual capacity" doctrine, which treats a corporate officer as an employee only if the officer provides substantial services in his capacity as an officer. See Idaho Ambucare Ctr., Inc. v. United States, 57 F.3d 752, 756-57 (9th Cir. 1995) (describing "dual capacity" with approval, although not holding that it provides the correct interpretation of section 31.3121(d)-1(b)). This interpretation arises from the language of section 31.3121(d)-1(b): "[A]n officer . . who as such . . . performs only minor services" is not an employee. (Emphasis added). The government does not challenge the application of the "dual capacity" doctrine.

We next address whether Van Camp's services in his capacity as a corporate officer were de minimis. The district court found that Van Camp "performed more than minor services." In particular, "Van Camp made all management decisions, including the hiring and firing of employees, the securing of bank loans, approval of bills, and signing of all corporate checks."

The corporation has not shown clear error in the district court's finding that Van Camp exercised sole authority to make major corporate decisions. This finding supports the conclusion that Van Camp was an employee because"fundamental decisions regarding the operation of the corporation . . . are customarily made by corporate officers or other employees." Idaho Ambucare, 57 F.3d at 756 (quoting Rev. Rul. 82-83, 1982-1 C.B. 151, 152) (alteration in original).

IV.

The corporation next argues that the district court erroneously refused to abrogate the penalties for the corporation's failure to deposit and pay employment taxes during the 1989 and 1991 tax years.

The penalties at issue arise under I.R.C. §§§§ 6651 (assessing up to 25% penalty for failure to pay tax) and 6656(a) (assessing up to 10% of underpayment for failure to make deposit). "Under I.R.C. §§§§ 6651(a) and 6656(a), a taxpayer failing to timely file, pay, and deposit employment taxes shall be assessed a penalty, `unless it is shown that such failure[s] [are] due to reasonable cause and not due to willful neglect.' " Conklin Bros. of Santa Rosa, Inc. v. United States, 986 F.2d 315, 317 (9th Cir. 1993) (citation omitted and emphasis in original). To establish "reasonable cause," the taxpayer must show that he exercised "ordinary business care and prudence in providing for payment of his tax liability." See Treas. Reg. §§ 301.6651-1(c)(1).

If the underpayment results from negligence or intentional disregard of rules or regulations, an additional penalty of up to 10% of the underpayment is imposed under section 6662. "[T]he term `negligence' includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term `disregard' includes any careless, reckless, or intentional disregard." I.R.C. §§ 6662(c). Similar to the "reasonable cause" defense for sections 6651 and 6656, a taxpayer is negligent if it "fail[s] to make a reasonable attempt to comply" with the tax laws, fails "to exercise ordinary or reasonable care in the preparation of a tax return," or its argument "lacks a reasonable basis." Treas. Reg. §§ 1.6662-3(b)(1). The IRS's "determination of negligence is presumed to be correct." Howard v. Commissioner, 931 F.2d 578, 582 (9th Cir. 1991).²

The corporation argues that no penalties are warranted because of Van Camp's personal problems, the corporation's financial difficulties, reliance on the corporate accountant and the complex nature of the tax law. "Whether the elements that constitute `reasonable cause' are present in a given situation is a question of fact, but what elements must be present to constitute `reasonable cause' is a question of law." United States v. Boyle, 469 U.S. 241, 249 n.8 (1985) (emphasis in original).

A.

The corporation asserts that Van Camp's personal problems established reasonable cause for the corporation's failure to withhold taxes. The district court held that personal difficulties can never be a factor in a...