Attorney-at-Law

THE GREAT DISSENTER – REDIVIVUS

In Uncategorized on 09/03/2013 at 18:18

Yes, he’s at it again, Judge Mark V. Holmes, The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being.

Today he has a double-header, first writing 2013 T. C. Memo. 207, James R. Dixon, filed 9/3/13, overturning IRS’ levy on Jim and wife Sharon’s home for unpaid income taxes (because they did pay, albeit late, and via their wholly-owned corporation, as withholding taxes). Judge Holmes reviews the history of the Dixons and Tryco, their corporation, and finds IRS can only collect once. The records for the relevant years are lost, so IRS claims  Jim and Sharon can’t prove what was supposed to be withheld. Judge Holmes, however, finds Jim’s and Sharon’s testimony, and such records as remain from their criminal cases (yes, they were convicted) credible, and knocks out the levy. Even though the years of the non-withholding are closed, Tax Court can review those years to ascertain how to deal with a year that is open. And IRS’ levy on Jim and Sharon’s home gets lifted as the tax was paid.

So far, so good.

But the second opinion finds The Great Dissenter dissenting, even though the majority, per Judge Lauber, holds for Jim and Sharon in 141 T. C. 3, filed 9/3/13.

Jim and Sharon had income tax liabilities arising from their employment by their wholly-owned C Corp Tryco. So did Tryco, for not withholding when it should. After Jim and Sharon get nailed for their various delictions, they borrow money against their home and send the money to Tryco (which is more or less out of business), which in turn remits checks to IRS with Forms 941 and letters directing IRS to apply payments to Jim’s and Sharon’s withholding. But these are for the restitution and tax loss sustained by the government on account of Jim and Sharon’s criminal convictions.

IRS did, but then changed its mind, relying on the “withheld at the source” language of Section 31, and these payments clearly weren’t, and also mindful of the $23 million in payroll withholdings Tryco still owes.

IRS says an employer can’t allocate late withholdings to individual employee-taxpayers, but Judge Lauber says no, and cites a number of reclassification cases, where the employer can pay the tax as to one member of an employee class and sue for a refund, to challenge the reclassification of all members. Withholdings are “divisible” taxes, that is, allocated to a particular individual account.

Now the Section 6205 adjustment period for underwithholdings is long past for the years at issue. So Jim and Sharon don’t get the benefit of the Section 31 “even if not paid by the employer” credit for the late paid withholding.

But Judge Lauber and the majority do allow the credit for the designated payments made late by Tryco. IRS argues Tax Court has no jurisdiction over employment taxes. True, says Judge Lauber, but these are income taxes for Jim and Sharon. The amounts paid are not at issue; crediting them is.

Now this is a levy case, so either de novo or abuse-of-discretion applies, but either way, IRS must credit the payments as Tryco directed.

IRS’s general policy is that voluntary payments (and these were, even though Jim and Sharon made them as part of their criminal plea deal) must be credited as the taxpayer directs. And there’s much precedent to support this. For further details read Judge Lauber’s opinion.

And the policy prevents IRS from double-dipping–collecting the same tax twice, as in TFRPs and withholdings. To the extent the employee has paid the tax, the TFRP penalty is abated. This is so even if the Code does not provide explicitly.

Now of course Jim and Sharon owe interest and penalties. The late payment doesn’t wipe that out, as the taxes were not withheld “at the source” or within the correction timeframe of Section 6205. IRS can levy for those, if it wishes.

And Judge Lauber is not discussing any of Tryco’s tax incidents from this arrangement, or whether the payment by Tryco is additional compensation to Jim and Sharon.

Judge Goeke concurs, but points out that the majority rules on the law. Judge Holmes found the facts in 2013 T. C. Memo. 207, and the majority is not going behind those findings, including without in any way in limitation of the generality of the foregoing, as the high-priced lawyers say, the credibility of Jim and Sharon. “The Court is also aware that James Dixon pleaded guilty to Federal tax evasion for 2006, United States v. Dixon, No. 4:12CR00521-001 (S.D. Tex. Apr. 1, 2013), the same year petitioners testified that they knew nothing about the nonpayment of withheld taxes for tax years 1992-95. Similarly, Sharon Dixon was also later convicted for subsequent Federal tax crimes. United States v. Dixon, No. 4:12CR00522-001 (S.D. Tex. Feb. 13, 2013).” 141 T. C. 3, at pp. 39-40. Apparently Judge Goeke, and Judges  Wherry, Kroupa, Morrison and Lauber are less than thrilled with the credibility of Jim and Sharon.

But Judge Holmes, not a whit dismayed, charges to the front. “Imagine that a check arrives at the IRS from John Green with a letter that says ‘This check is to be applied to my tax bill for 2013. Also, please credit my friend Joe Black’s account for the same amount. He gave me the money that let me write this check and I’d like him to benefit as well.’ If things work as they should at the Service, Green’s account should be credited; and the suggestion that the same check should be credited for Joe Black’s account would cause some tittering, or maybe just a puzzled look on the face of the IRS employee opening the envelope.” 141 T. C. 3, at p. 41.

Now Judge Holmes agrees with the majority that the Section 31 credit doesn’t apply here, or else Jim and Sharon would be off the hook for interest and penalties. But designated payments don’t help either, as Section 31 says the employee only gets credit where the wages were withheld at the source. So while Tryco’s payments bailed out Tryco, they do nothing for Jim and Sharon even though they supplied the money (presumably as a capital contribution) to Tryco.

Judge Lauber and the majority can’t override the clear statutory bar to crediting payments made after the Section 6205 self-correct period is over. Yes, there’s an asymmetry here, but Congress should fix it, not Tax Court.

“What colors these cases, and makes the Dixons look sympathetic, is that the money Tryco paid is money that the Dixons contributed to the corporation after they took out a home-equity loan for almost a half-million dollars. It was this money that they sent to Tryco, and had Tryco pay over to the IRS….The Dixons couldn’t have been much more clear… they told the IRS to pay the taxes “of the corporation,” the same entity that formally sent along the payment. The Dixons did ask the IRS to apply the payments to the portion of Tryco’s employment-tax bill that was attributable to Tryco’s failure to withhold taxes from James’s and Sharon’s wages. But that isn’t the same thing as asking the IRS to apply the payments directly towards the Dixons’ individual income-tax liabilities, because Tryco was asking the IRS to apply the payments toward a specific part of Tryco’s tax bill.” 141 T. C. 3, at pp. 43-44. (Emphasis by the Court).

Now let’s give a Taishoff “good try” to Larry Campagna, Esq., Jim’s and Sharon’s astute attorney. Larry testified he used the Tryco maneuver because “had Mr. and Mrs. Dixon remitted the income taxes directly for their account, then the 941 liability for Tryco would not have been reduced by the payment, and the Government would have been asking for a double collection of the same money on the income tax side and the employment tax side.” 141 T. C. 3, at p. 44.

No, says Judge Holmes, because Section 3402 would have credited Tryco for the payment Jim and Sharon made, but not vice versa.

But Larry was hunting bigger game than the $92K involved here. “By instead contributing the money to Tryco–their employer–and then having Tryco pay it as employment tax, the Dixons hoped that the IRS would treat the payments as the IRS treats normal withholding payments, which would then erase many years of interest and penalties.” 141 T. C. 3, at p. 45 (Footnote omitted, but read it; the interest was over $530K. And when Larry testified that he wasn’t worried about the interest when he planned this, Judge Holmes didn’t find “this particular part of his testimony credible”.)

Now for the big story: “The majority glosses over some of the other tax consequences of its decision today. The Dixons had to contribute $602,119 to Tryco because Tryco wasn’t doing much business anymore. The Dixons were controlling shareholders, and their capital contributions would have increased their bases in the Tryco stock. Tryco’s employment-tax burden is smaller to the extent of the payments that it made, but it is still so large that the company stock may still be worthless, manufacturing a tidy loss for the Dixons. When the Dixons eventually abandon or sell Tryco, they’ll get a bigger loss than they otherwise would have because of their increased bases.

“And we shouldn’t forget that Tryco was the Dixons’ employer. As the majority acknowledges… employers that pay their employees’ bills are treated as if they were paying wages instead….. But Tryco’s payments were in 1999 and 2000, meaning the Dixons have untaxed income for 1999 and 2000, years for which assessment is now barred by the statute of limitations (assuming that the Dixons began filing their tax returns on time). We also shouldn’t forget that paying wages–this time in the form of paying tax bills–also comes with its own withholding tax obligations for Tryco under section 3403, which it, once again, won’t have fulfilled.” 141 T. C. 3, at pp. 57-58. (Citations omitted).

Finally, with a really loud “good try” to Larry Campagna, Esq., : “The Dixons did what they did because they were swinging for the fences–they wanted to reduce Tryco’s employment-tax bill, reduce their own income-tax liabilities, bump up their bases in probably worthless Tryco stock, and use section 31 to erase many years of penalties and interest. I don’t blame them for trying–the law was, and after today, will remain, unclear.” 141 T .C. 3, at p. 59.

But Congress created the asymmetry–the employer gets the break when the employee pays late, but not the other way around. And Congress should fix that, not Tax Court. Judges Halpern and Buch agree.

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