In Uncategorized on 10/24/2011 at 18:44

Or, Withholding Without Paying Isn’t Withholding

So Mark W. May learns, in Mark W. May and Cynthia R. May, 137 T. C. 11, filed 10/24/11. Mark W. and Cynthia R., supra, gets consolidated for trial with Cynthia R. May, Petitioner, and Mark W. May, Intervenor, but Cynthia gets let out after trial on Section 6015(b) grounds, so Mark W. is the last man standing, except he’s in jail for tax fraud when the petition is filed.

Mark W. owned a 100-employee financial services firm, that he ran with an iron hand and an outstretched arm. He personally controlled all bank accounts, although he signed all checks by electronic facsimile. Anyway, Judge Goeke finds Mark W. was an officer, director, shareholder and financial czar of the firm.

Payroll checks and paystubs were generated by Paychex, an independent data processing firm and payroll preparer. Nevertheless, no matter what Paychex put on the paychecks or paystubs, Mark W. signed the checks (including his own $260,000 annual salary checks). And no matter what the withholding (FICA, Medicare, FUTA, Federal, State or municipal income taxes or whatever) was supposed to be paid, Mark W. never paid any of them. He used the money to run the business.

The forces of righteousness caught up with Mark W., and he was sent to a Federal installation in Kentucky to worthily lament his sins; the record does not state whether Mark W. actually did so.

Mark W. defends against the deficiencies in his income taxes caused by the non-remittance of the required withholding of his own salary on the grounds that Tax Court has no jurisdiction over a deficiency caused by penalties for fraud. This Judge Goeke disposes of via Rice, 1999 T.C. Mem. 65: “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), 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.” 137 T.C. 11, at pp. 7-8 (emphasis by the Court). Here there is a deficiency and there is fraud, so Mark W. loses that one.

Not to be so easily squelched, Mark W. argues that the amount of withholding of the taxes due, whether or not remitted to the Treasury, is properly to be credited to the taxpayer, namely him. How’s that for chutzpah? “In support of their position, petitioners cite section 1.31-1(a), Income Tax Regs., which states in part that ‘If the tax has actually been withheld at the source, credit or refund shall be made to the recipient of the income even though such tax has not been paid over to the Government by the employer.’” 137 T. C. 11, at p. 10.

In short, having diverted the trust funds, Mark W. wants credit for the funds he stole. Ol’ Mark W. is quite a lad, but Judge Goeke isn’t buying it. “In United States v. Blanchard, 618 F.3d 562, 576 (6th Cir. 2010), the defendant owned and operated his business and withheld taxes from his own paychecks but failed to remit those withholdings to the Government. In affirming the defendant’s conviction under 18 U.S.C. sec. 287 for making a false claim for a tax refund with regard to his personal taxes, the court stated: ‘Rather than creating an overly formalistic division between the personal and official capacities of an individual operating as both employer and employee, which would permit the corporate form to serve as a shield to individual liability, we find it more consonant with the purposes of §287 to conduct a functional inquiry into whether funds due the government left the defendant’s control and so may be deemed ‘actually withheld’ from his wages. * * *” 137 T.C. 11, at pp. 10-11.

So, being functional, Judge Goeke simply reviews the facts. Mark W. ran the show, owned the corporation, signed all the checks, was the responsible person for the withholding payments, was the only person who could make the payments but didn’t, and used the diverted trust funds to run the company (and incidentally pay himself). Though technically subject to withholding, what he really did was generate a phony W-2 for himself.

At the end of the day, Mark W. has fraud penalties, but is allowed a $772 deduction for local income taxes he paid the City of Xenia, Ohio, because he had a canceled personal check.

Takeaway- Withhold means withhold and pay.

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