But The Flesh Was Weak

Add-ons for failure to file returns, and pay the sums withheld, for FICA/FUTA/ITW have outs for reasonable cause. But as STJ Eunkyong (“N’Yawk”) Choi tells us and Donald S. Tracy, T. C. Sum. Op. 2023-20, filed 5/30/23, there’s a higher bar for trust funds than ordinary income tax.

“In determining whether a taxpayer’s failure to pay was reasonable, the Court will also consider the nature of the tax at issue. Treas. Reg. § 301.6651-1(c)(2) (‘[C]ircumstances which . . . may constitute reasonable cause for nonpayment of income taxes may not constitute reasonable cause for failure to pay over taxes described in section 7501 that are collected or withheld from any other person.’). However, the Court must still give consideration ‘to all the facts and circumstances of the taxpayer’s financial situation.” Id.; see also Fran Corp., 164 F.3d at 819 (stating that taxpayers are not subject to heightened scrutiny for failure to pay trust fund taxes, and the type of tax in issue is only one fact for courts to consider).” T. C. Sum. Op. 2023-20, at p. 6.

And unlike the Art. III big boys and girls, pore l’il ol’ Art. II Tax Court has no equitable powers.

But STJ N’Yawk has a heart. This Donald has a sad story. He’s 92 years old.

“A Navy veteran, petitioner had long been determined disabled because of hearing loss and a back injury that had worsened with time.  He was nearly deaf and had significant balance difficulties. Petitioner also suffered from joint disease in his knees and hips (which were in poor condition and needed replacing), atrial fibrillation, hypertension, and cardiopulmonary disease. As he took the steps necessary to close his law practice, petitioner’s assistant of more than 25 years helped him in his daily business operations while another attorney substantially worked petitioner’s cases. In addition, he relied on a part-time aide for his daily living activities, including grocery shopping, errands, laundry, cooking,  and cleaning. During this time, petitioner also cared for his dying wife of 55 years.

“An attorney, petitioner had an ethical obligation to his remaining clients. He could not simply close his practice and walk away. Although petitioner’s law practice continued to operate, it was not he who did the bulk of the work. Petitioner’s assistant and another attorney kept the law practice operating until it closed.” T. C. Sum. Op. 2023-20, at p. 2.

The assistant is the one who failed to follow the systems Donald had put in place for assuring collection, reporting, and payment of trust funds.

“…the assistant, privy to the law practice’s declining income and fearful of losing her job, did not perform the duties assigned to her in relation to petitioner’s employment taxes.” Idem. As as soon as Donald found out, he got the returns filed and the withholdings paid.

IRS gave Donald a partial abatement of the add-ons. STJ N’Yawk gives him the rest.

Now just because you’re sick, you’re not off the hook for filing and paying.

“Illness or incapacity generally does not prevent a taxpayer from filing returns where the taxpayer is able to continue his business affairs despite the illness or incapacity. (‘[A] taxpayer’s selective inability to perform his or her tax obligations, while performing their regular business, does not excuse failure to file.”). Further, failure to timely file is not excused by a taxpayer’s reliance on an agent, and such reliance is not reasonable cause for a late filing under section 6651(a)(1).” T. C. Sum. Op. 2023-20, at p. 5 (Citations omitted).

But Donald’s systems save the day, both for late filing and for late paying.

“Notwithstanding petitioner’s many difficulties due to his failing health and advanced age, petitioner was diligent in exercising ordinary business care and prudence. He had systems in place to ensure tax compliance. Petitioner’s systems had not previously failed him in his approximately 60 years of solo law practice. It was reasonable, and not willfully neglectful, for petitioner to trust his systems’ continued reliability. Further, it was not petitioner’s reliance on his assistant but his inability to adequately supervise her (due to his failing health and advanced age) that caused his failure to file. Petitioner acted quickly to file the outstanding returns upon discovering he was out of compliance.  Had he been able to supervise his assistant properly, petitioner would have ensured that the returns were filed.” T. C. Sum. Op. 2023-20, at p. 5.

So STJ N’Yawk doesn’t need to consider hardship. Donald wins.

Takeaway- Be systematic. Old or young, be systematic.