The U.S. Court of Federal Claims issued an opinion reiterating the bright-line rule that a taxpayer has a non-delegable duty to timely file returns and pay taxes. In All Stacked Up Masonry, Inc. v. United States, No. 20-161T (Ct. Cl. Oct. 23, 2020), the Court held that when a corporate taxpayer delegates its payroll tax filing and paying obligations to an employee, subsequent failure to timely file and pay cannot constitute reasonable cause as a matter of law. The Court granted the government’s motion to dismiss for failure to state a legal claim upon which relief could be granted.
The taxpayer in All Stacked Up Masonry, Inc. was a corporation with employees that performed unspecified masonry work. The taxpayer failed to timely file, deposit and pay with respect to nine Forms 941 (Dec. 31, 2013 through Dec. 31, 2015) and Forms 944. The taxpayer paid the associated penalties and interest, then filed a claim for refund with IRS on Oct. 31, 2017. The claim was denied, but IRS Appeals abated 16.66% ($3,197.03). The taxpayer subsequently filed a timely complaint in the Court of Federal Claims seeking a refund of the remaining $95,590.67 it paid to the IRS asserting that it exercised reasonable cause; therefore the penalties should be excused.
Payroll taxes generally include deductions from employee wages for Social Security, Medicare and federal income tax withholding liability. Employers are required to make monthly or semi-weekly deposits during the quarter, pay tax by the end of quarter and file a quarterly Form 941. The IRS can assess penalties under section 6651 (for failing to pay or file), and under section 6656 (for failing to deposit). If the taxpayer can show that any of these failures were due to ‘reasonable cause and not due to willful neglect’, the taxpayer may be excused from the penalty. The owner of the taxpayer corporation argued that hiring an employee to perform the tax obligations was reasonable cause because he suffered an injury in March of 2013 and could not personally perform them. In addition, he argued that the employee might now have known how to properly operate the QuickBooks software or the software itself malfunctioned.
The Court analyzed the taxpayer’s argument through the lens of United States v. Boyle, 469 U.S. 245 (1985). The taxpayer in Boyle retained an attorney to file an estate tax return, but because of a clerical oversight, the attorney filed the return three months late. There, the Supreme Court announced the bright-line rule that the duty to file is ‘fixed and clear’ and hiring an agent to attend to the matter does not relieve the taxpayer of its duty to comply with the statues. In other words, reliance on a third-party is not reasonable cause when a deadline is missed. Accordingly, the Court of Claims initially found that the act of delegating tax preparation duties, however prudent and reasonable it might have been for business operations, bears no relationship to whether there is reasonable cause to excuse the failures.
In Boyle, the Court recognized certain situations in Internal Revenue Manual (IRM) where there could be reasonable cause, for example: unavoidable postal delays, filing timely but with the wrong IRS office, reliance on erroneous IRS employee advice, death or serious illness of the taxpayer or immediate family, unavoidable absence, destruction of taxpayer’s records or place of business and failure of the IRS to meet with the taxpayer or provide forms or information necessary to filing. Boyle, at 243, n. 1. The Court of Claims concluded from Boyle that in order for the taxpayer to show reasonable cause, it must allege facts that show the omissions were beyond the taxpayer’s control and due to no fault of its own. The taxpayer did not establish any of these facts suggesting impossibility, lack of fault or being thwarted by events beyond the taxpayer’s control. Consequently, the Court found the taxpayer could not demonstrate reasonable cause and the absence of willful neglect.
The taxpayer made several other reasonable cause arguments the Court did not find persuasive. Citing Boyle, the Court said the duty belongs to the taxpayer and that “it requires no special training or effort ascertain a deadline and make sure that it is met.” Thus, the Court rejected the taxpayer’s argument that employee user error with software was reasonable cause. The Court also rejected the taxpayer’s assertion that the software itself was defective because no evidence was proffered, only a statement to that effect in the pleadings. Finally, the Court rejected the physical injury of the corporate taxpayer’s owner. The Court noted that the taxpayer was the corporation and there was no evidence proffered that the corporation itself was disabled. In fact, the Court noted, the corporation continued operations despite the injury of its owner.
This decision is not helpful to taxpayers. The IRS already relies heavily on the bright-line rule in Boyle that meeting deadlines is a non-delegable duty and does not constitute reasonable cause. Taxpayers, who may be considering paying a delinquency penalty and then ultimately filing a suit for refund in the Court of Federal Claims, should be aware of this case and Court’s view.