                  T.C. Memo. 2011-155



                UNITED STATES TAX COURT



    CUSTOM STAIRS & TRIM, LTD., INC., Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 9204-09L.                Filed July 5, 2011.



     P filed a petition for review pursuant to secs. 6320
and 6330, I.R.C., in response to R’s determination that
the lien and levy actions were appropriate.

     Held: P exercised ordinary business care and
prudence in providing for payment of its tax liability.
R’s determination to impose a failure to deposit
penalty and a failure to pay addition to tax and to
proceed with collection actions is reversed.



Rebecca L. Cordes (an officer), for petitioner.

John F. Driscoll, for respondent.
                               - 2 -

              MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for review of a Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 (notice of

determination).1   Petitioner, Custom Stairs & Trim, Ltd., Inc.

(Custom Stairs), through its vice president, Rebecca L. Cordes

(Ms. Cordes), seeks review of respondent’s determination to

impose a penalty and an addition to tax and to proceed with a

proposed levy and to keep in place a filed lien.

     These collection actions stem from a penalty under section

6656 and an addition to tax under section 6651(a)(2) relating to

Custom Stairs’ unpaid employment taxes reported on Form 941,

Employer’s Quarterly Federal Tax Return, for the second quarter

of 2008.   The IRS imposed the penalties and the additions to tax

on Custom Stairs for 15 consecutive quarters beginning in 2005;

only one of these quarters is in dispute.   The issue for decision

is whether the section 6656(a) failure to deposit penalty of

$3,124.79 and the section 6651(a)(2) failure to pay addition to

tax of $224.50 should be abated because Custom Stairs’ failure to




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

make the deposits was due to reasonable cause.2   As a result of

the penalties, plus interest and collection costs, less payments

made, Custom Stairs’ balance due as of April 3, 2010, was

$1,575.26.3

                          FINDINGS OF FACT

     Some of the facts have been stipulated.   The stipulations,

with accompanying exhibits, are incorporated herein by this

reference.    At the time the petition was filed, Custom Stairs had

its principal business address in Pensacola, Florida.   During the

period at issue in 2008, Ms. Cordes was vice president of Custom

Stairs, a company in the business of building circular wooden

staircases.   Custom Stairs timely filed Form 941 for the period



     2
      Respondent’s administrative file focuses almost exclusively
on the sec. 6656(a) penalty. The petition indicates in par. 5:
“I disagree that there was a neglect or refusal to pay” and “I
disagree that I did not establish reasonable cause to abate
penalties”. See also Ms. Cordes’ Dec. 10, 2008, letter to Susan
Shaw, the revenue officer assigned to this case, “requesting
reductions of penalties”. Similarly, in the attachment to Form
12153, Request for a Collection Due Process or Equivalent
Hearing, under “Lien Withdrawal” item 3 Custom Stairs refers to
“penalties”.
     3
      The balance due, as of Apr. 6, 2010, per respondent’s
records (Form 4330, Certificate of Assessments, Payments, and
Other Specified Matters) was $1,595.26. This amount was derived
by adding the sec. 6656(a) penalty of $3,124.79 and the sec.
6651(a)(2) addition to tax of $244.50, respectively, to assessed
interest through Sept. 29, 2008, of $180.97 plus “collection
costs” of $45, less Custom Stairs’ payment against the charges of
$2,000.
                               - 4 -

ending June 30, 2008, with a reported tax liability of

$28,900.40.

     Custom Stairs has been in business since December 1985

fabricating stairways for residential properties along the Gulf

Coast.   Its troubles began in September 2004 when Hurricane Ivan,

the 10th most intense Atlantic hurricane ever recorded,4 struck

the Gulf Coast, severely damaging Custom Stairs’ place of

business and severely affecting many of its customers.

     In 2005 through 2008 as Custom Stairs felt the effects of

the hurricane, collapse of the housing bubble, and economic

recession, it began laying off employees, eliminating vacations

and paid holidays, and cutting employee benefits.   In 2008 Custom

Stairs also contacted a real estate broker and listed its office

property with the hope of using the proceeds to pay off the

company’s debts.

     Custom Stairs has a history of timely filing its Forms 941

and making deposits of the tax assessed.   However, following the

hurricane, it also has a history of failing to pay the full

amount and having to pay penalties and interest.    Because of the

hurricane, Custom Stairs fell behind with its employment taxes in

early 2005 and was thereafter consistently in arrears.   For most


     4
      This Court takes judicial notice of the severity of
Hurricane Ivan.
                                        - 5 -

of these calendar quarters Custom Stairs actually paid over to

the Internal Revenue Service (IRS) amounts that would have fully

satisfied its liability for the current quarter; but the IRS

applied its payments to prior arrearages, leaving all or portions

of each successive quarter’s required deposits underpaid.5                 In

short, following the hurricane Custom Stairs never asked for, nor

did it receive, any penalty relief or a clean penalty-free start

until it sought relief in the 2008 quarter at issue here.                  Below

is a table showing Custom Stairs’ history with respect to the

Federal tax deposit penalty and failure to pay addition to tax

for the quarters ended March 31, 2005 through 2009.

         Penalties, Additions to Tax, Interest Assessments, and Payments

                                 Federal Tax     Failure
                    Date of        Deposit       To Pay
Quarter Ended     Assessment       Penalty      Addition   Interest    Payments
Mar. 31, 2005    Jun. 27, 2005     $1,301.01        ---          ---   $1,301.01
Jun. 30, 2005    Oct. 10, 2005      1,412.09      $49.68     $41.15     1,502.92
Sep. 30, 2005    Dec. 26, 2005      2,394.06      109.58      74.10     2,577.74
Dec. 31, 2005    Apr. 03, 2006      2,091.85        ---          ---    2,091.85
Mar. 31, 2006    Jun. 26, 2006      1,647.09        ---          ---    1,647.09
                                    1                        2
Jun. 30, 2006    Sep. 18, 2006       1,989.23       ---       12.70     2,001.92
Sep. 30, 2006    Jan. 01, 2007       1,735.37     38.80       32.41     1,806.58




     5
      Custom Stairs could have entirely avoided liability for
additions and/or penalties in all but 5 of the 16 quarters for
which they were assessed by allocating differently the tax
payments that it made. With such designations, the payments that
Custom Stairs is stipulated to have made would have timely paid
its employment taxes for 11 of the 16 delinquent quarters, and
Custom Stairs would thereby have avoided the great majority of
the $27,000 in penalties and additions that were assessed against
it.
                                       - 6 -

 Dec. 31, 2006   Apr. 02, 2007     1,710.42            ---         ---   1,710.42
 Mar. 31, 2007   May   28, 2007         324.25         ---         ---       324.25
                                       3
 Jun. 30, 2007   Sep. 03, 2007          778.97         0.40       0.30       819.67
 Sep. 30, 2007   Dec. 31, 2007      1,519.92        44.46      33.45      1,597.83
                                                   4          5          6
 Dec. 31, 2007   Apr. 07, 2008      1,845.56        72.57      56.51      1,974.64
                                   7                          8          9
 Mar. 31, 2008   Jun. 16, 2008      2,860.65        56.84      38.85      2,938.10
                                  10
 Jun. 30, 2008   Sep. 29, 2008      3,169.79      224.50      180.97      2,000.00
 Sep. 30, 2008   Dec. 15, 2008          831.67         ---         ---       831.67
 Dec. 31, 2008         None                ---         ---         ---        ---
                                                              11
 Mar. 31, 2009   May   25, 2009         605.03         ---        2.32       607.35
   Total                          26,216.96       596.83      472.76     25,733.04
 Net total assessed               27,286.55
 Less payments                    25,733.02
                                  12
 Amount remaining                  1,553.51
      1
        A statutory notice of intent to levy was issued on Oct. 23, 2006.
      2
        This interest was assessed on Nov. 20, 2006.
      3
        An additional $2 was assessed on Oct. 8, 2007, but was “cleared” after
payment was received. Resolution of the apparent $38 overpayment is not
explained in the record.
      4
        Of the $92.19 failure to pay addition to tax originally assessed,
$19.62 as well as $5.25 of the $64.03 originally assessed interest was abated
on Apr. 14, 2008.
      5
        An additional $2.27 of interest was abated and refunded on May 26,
2008.
      6
        After the $2.27 of interest abated and refunded on May 26, 2008.
      7
        An additional $110.17 Federal tax deposit penalty was assessed on
July 21, 2008, which was abated on July 21, 2008, after payment was received.
A statutory notice of intent to levy was issued on Sept. 1, 2008.
      8
        An additional $18.14 of interest was assessed on July 21, 2008, and
abated on Oct. 6, 2008.
      9
        After $18.24 was refunded.
      10
         $2,729.64 was initially assessed on Sept. 29, 2008, and an additional
$395.15 Federal tax deposit penalty was assessed on Nov. 3, 2008. This also
includes $45 of collection costs charged to Custom Stairs. An intent to levy
collection due process notice levy notice was issued on Nov. 20, 2008.
      11
         This $2.32 was assessed on Aug. 31, 2009. A statutory notice of
intent to levy was issued on June 29, 2009.
      12
         The apparent $21.75 discrepancy is not explained in the record.

      For the tax period ended June 30, 2008, Custom Stairs was

required to make employment tax deposits on April 9, April 16,

April 23, April 30, May 7, May 14, May 21, May 28, June 4,

June 11, June 18, and June 25.             During this period the IRS
                                - 7 -

treated no payments of Custom Stairs as tax deposits for the

quarter ended June 30, 2008; the first payment that the IRS

treated as a deposit for this quarter was received by respondent

on July 3, 2008.    By the time Custom Stairs timely filed Form 941

for the tax period ended June 30, 2008, Custom Stairs had made

$7,113.94 of payments that the IRS treated as deposits on the

$28,900.40 due.    As reflected in the preceding table, on

September 29, 2008, a $2,729.64 penalty under section 6656,

Failure to Make Deposit of Taxes, was assessed against Custom

Stairs for the second quarter of 2008, at issue, and an

additional $395.15 was assessed on November 3, 2008.

     However, Custom Stairs had in fact made payments totaling

$29,481.65--i.e., more than the liability for the quarter ended

June 30, 2008--before the due date for the Form 941.    Custom

Stairs had not designated them for that current quarter, however,

and the IRS allocated them instead to the prior March 31, 2008,

quarter, which was in arrears and for which penalties had already

been assessed.    Because of Custom Stairs’ nonallocation and

timing of its payments within the June 30, 2008, quarter,

penalties and additions were eventually assessed against it for

both those quarters.

     On July 30, 2008, an internal revenue officer, whose

pseudonym is Susan Shaw (Officer Shaw), visited Custom Stairs

after she was notified that there had been a substantial drop in
                               - 8 -

its Form 941 Federal tax deposit levels.   She explained that the

main purpose is “to try to get early intervention with businesses

that are falling behind in their payroll tax deposits.”   Officer

Shaw met with Ms. Cordes and explained that the most important

thing was for Custom Stairs to get and stay current.   She

directed that Custom Stairs pay current taxes first.   Ms. Cordes

explained to Officer Shaw that the hurricane and economic

downturn had severely affected their construction-based business.

     Officer Shaw left a handwritten Form 9297, Summary of

Taxpayer Contact, which, under the heading “Information/Documents

required”, stated:   “Provide current profit & loss”, “accounts

receivable listing”, “balance sheet/asset listing”, “bank

statements & canceled checks 4/1/2008-7/1/2008”, “copy of the

bank signature card”, “copy of 1120 for 2007”, and “provide

personal financial statements”.   Officer Shaw explained that

these documents were needed so that respondent could compile a

collection plan, determine whether the finances would support an

installment agreement, or determine whether respondent could

direct Custom Stairs to get a loan to pay the full amount.

     On August 1, 2008, Ms. Cordes called Officer Shaw and

explained that she believed that Custom Stairs would be able to

pay all past due tax liabilities within 8 weeks.   Officer Shaw

agreed to the proposal and apparently suspended any additional

investigation and financial review until October 1, 2008.    On
                                - 9 -

September 29, 2008, Officer Shaw noted that Custom Stairs had met

its current tax liabilities and that it had made about $15,000 in

deposits against past due amounts over the past 8 weeks.    She

noted that the balance “due [approximately $16,000] will be

resolved in a short time” but if the past due amounts were not

paid in full by October 31, 2008, she would have to secure the

bank records and documentation requested at the initial meeting.

Officer Shaw communicated the new deadline to Custom Stairs and

stated that if the remaining liabilities were not paid, Custom

Stairs would have to provide the records requested or a lien

would be filed and a levy might be initiated.   Officer Shaw also

noted that “TP [taxpayer] appears to be making swift progress, in

a construction/real estate related business, during a very poor

economic time.”

     On October 30, 2008, Officer Shaw noted that Custom Stairs

was up to date on current liabilities and had a balance of

$11,434 on past due liabilities.   She noted that Custom Stairs

was “not pyramiding” and that they appeared “to be earnestly

resolving delinquency, despite this being a construction related

business, during a very poor economic cycle for home

construction.”    Officer Shaw decided to delay following up with

Ms. Cordes until November 17, 2008, and communicated that

extension to Ms. Cordes.   A liability remained on November 20,

2008; and because Custom Stairs had failed to make the deposits
                              - 10 -

it promised and bring itself current by that date, a lien was

filed.

     On November 20, 2008, Custom Stairs was sent a Final Notice,

Notice of Intent to Levy and Notice of Your Right to a Hearing

(CDP levy notice), showing $9,919.27 still owed for the quarter

ended June 30, 2008.   On December 2, 2008, Custom Stairs was

mailed a Notice of Federal Tax Lien Filing and Your Right to a

Hearing.   Custom Stairs, on December 11, 2008, timely filed a

Form 12153, Request for a Collection Due Process or Equivalent

Hearing.   Under the heading “Offer in Compromise” Custom Stairs

requested a “reduced penalty, under the present economic

conditions”; and under the heading “Lien Withdrawal” Custom

Stairs stated that the lien was filed prematurely because Custom

Stairs had been keeping current while slowly making up the past

due liabilities.   It also stated that as of December 4, 2008, all

of the past due amounts (except penalties) had been paid.

     By letter dated February 18, 2009, Peter Salinger, the

settlement officer of the Tampa Appeals Office (Settlement

Officer Salinger) assigned to the case, informed Custom Stairs

that a telephone conference was scheduled for March 18, 2009.

Ms. Cordes responded to the letter on March 2, 2009, explaining

that she believed that the lien was unreasonable.   She again

explained that because the underlying taxes had been paid and the
                              - 11 -

only balance for that period was a penalty that she claimed

should be abated for reasonable cause, the lien was unnecessary.

     During the telephone hearing conducted on March 18, 2009,

Ms. Cordes explained to Settlement Officer Salinger that she did

not feel that she had to submit the requested documentation

because she had been making payments on the delinquent tax

liability.   Settlement Officer Salinger explained that under his

analysis Custom Stairs did not have reasonable cause for the

abatement of the penalty.   Custom Stairs did not submit any of

the documentation requested, and no collection alternatives were

offered.   When Settlement Officer Salinger asked Ms. Cordes how

she wished to resolve the liability, she informed him that she

did not know because she did not have the money to pay it.

     On March 26, 2009, Appeals Team Manager, Clifford Whitely,

mailed Custom Stairs a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330

(determination letter).   The letter explained that “the Notice of

Intent to Levy should not be withdrawn” and “the Notice of

Federal Tax Lien will not be withdrawn”.    It stated that the lien

was reasonable under the circumstances and that all of the legal

and procedural requirements had been met.   Custom Stairs timely

filed a petition with this Court on April 16, 2009, for review of

the Appeals Office’s actions and the determination letter.

Custom Stairs claimed that because it could not pay the tax
                              - 12 -

liability there was reasonable cause for the failure to pay and

therefore the penalties should be abated.     Custom Stairs

concluded that since the penalty was improper, there was no

underlying tax liability to warrant a lien against its property

and thus the lien was unnecessary and unreasonable.

     On February 5, 2010, respondent filed a motion for summary

judgment, and on March 10, 2010, Custom Stairs timely filed a

response.   By order dated April 13, 2010, this Court denied

respondent’s motion.   It did so because it determined that

“Whether petitioner’s failure to pay taxes was due to reasonable

cause is a material issue of fact”.     Summary judgment is

appropriate only where “the pleadings, answers to

interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law.”     Rule 121(b).   A

trial was held on May 24, 2010, in Mobile, Alabama.

                              OPINION

     Section 6320(a) and (b) provides that a taxpayer shall be

notified in writing by the Commissioner of the filing of a notice

of Federal tax lien and provided with an opportunity for an

administrative hearing.   An administrative hearing under section

6320 is conducted in accordance with the procedural requirements

of section 6330.   Sec. 6320(c).
                                - 13 -

     Section 6331(a) authorizes the Commissioner to levy upon

property or property rights of a taxpayer liable for taxes who

fails to pay those taxes within 10 days after a notice and demand

for payment is made.   Section 6331(d) provides that the levy

authorized in section 6331(a) may be made with respect to unpaid

tax liability only if the Commissioner has given written notice

to the taxpayer 30 days before the levy.    Section 6330(a)

requires the Commissioner to send a written notice to the

taxpayer of the amount of the unpaid tax and of the taxpayer’s

right to a section 6330 hearing at least 30 days before the levy

is begun.

     If an administrative hearing is requested in a lien or levy

case, the hearing is to be conducted by the Appeals Office.

Secs. 6320(b)(1), 6330(b)(1).    At the hearing, the Appeals

officer conducting it must verify that the requirements of any

applicable law or administrative procedure have been met.      Secs.

6320(c), 6330(c)(1).   The taxpayer may raise any relevant issue

with regard to the Commissioner’s intended collection activities,

including spousal defenses, challenges to the appropriateness of

the proposed levy, and alternative means of collection.    Sec.

6330(c)(2)(A); see also Sego v. Commissioner, 114 T.C. 604, 609

(2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000).

Taxpayers are expected to provide all relevant information

requested by Appeals, including financial statements, for its
                                - 14 -

consideration of the facts and issues involved in the hearing.

Secs. 301.6320-1(e)(1), 301.6330-1(e)(1), Proced. & Admin. Regs.

     If a taxpayer’s underlying liability is properly at issue,

the Court reviews any determination regarding the underlying

liability de novo.     Sego v. Commissioner, supra at 610; Goza v.

Commissioner, supra at 181-182.    We review any other

administrative determination regarding the proposed collection

action for abuse of discretion.     Sego v. Commissioner, supra at

610; Goza v. Commissioner, supra at 181-182.

     If raised at a hearing by the taxpayer, a taxpayer’s

underlying liability is properly at issue if the taxpayer “did

not receive any statutory notice of deficiency for such tax

liability or did not otherwise have an opportunity to dispute

such tax liability.”    Sec. 6330(c)(2)(B).   A taxpayer generally

is treated as not having had an opportunity to dispute a

liability that is self-reported as due on a return.      Montgomery

v. Commissioner, 122 T.C. 1, 9 (2004).    Custom Stairs did not

receive a notice of deficiency.    Respondent has not shown,

indicated, or alleged that Custom Stairs had an opportunity to

dispute the tax liability, and the penalty was related to a

liability that was self-reported as due on the return.

Consequently, the underlying liability is properly at issue.      See

sec. 6330(c)(2)(B).
                              - 15 -

     Under section 6656(a) if a taxpayer fails to make a required

deposit on the date prescribed for that deposit, a penalty equal

to the applicable percentage of the amount of the underpayment,

determined pursuant to section 6656(b), shall be imposed.

Section 6656(a) also provides that the penalty shall not be

imposed if “it is shown that such failure is due to reasonable

cause and not due to willful neglect”.   Likewise section

6651(a)(2) imposes an addition to tax of 0.5 percent per month up

to an aggregate total maximum of 25 percent for failure to timely

pay tax.   This addition to tax is also not to be applied if the

failure to pay was due to reasonable cause and not willful

neglect.

     Caselaw and legislative history indicate that the primary

purpose of these penalties is to ensure compliance.   United

States v. Boyle, 469 U.S. 241, 245 (1985); H. Rept. 101-247, at

1403 (1989).   The Commissioner’s policy statement explains that

the “Penalties are used to enhance voluntary compliance. * * *

Penalties provide the Service with an important tool * * *

because they enhance voluntary compliance by taxpayers.”

Internal Revenue Manual (IRM) Exhibit 20.1.1-1, Penalty Policy

Statement 20-1 (Dec. 11, 2009).

     It is uncontested that Custom Stairs failed to make the

required 2008 second quarter deposit payments by the dates they
                               - 16 -

were due.   We must decide whether that failure was due to

reasonable cause and not willful neglect.

     Custom Stairs during the years 2005 through June 2008 was

consistently in arrears, so that the numerous undesignated

payments it made were frequently applied to pay past due

liabilities.   Final payments satisfying the total tax amounts due

under the returns as filed were made shortly after the lien was

filed, leaving unpaid only a portion of the 2008 second quarter

penalties that had been assessed.

     Custom Stairs asserts that it had not fully recovered from

the damage caused in 2004 by Hurricane Ivan when it began to feel

the effects of the economic recession in 2008.   Custom Stairs

responded by laying off employees, eliminating vacations and paid

holidays, and curtailing employee benefits.   It even

unsuccessfully attempted to sell the real property in which it

conducted its business, in an effort to remain current with its

taxes and pay off its debts.

     Custom Stairs did not make the Federal tax deposits because

there was “not enough to pay the taxes” and meet its other

crucial operating expenses.    Mrs. Cordes explained that “I have

made conscious decisions to pay perhaps a vendor * * * but when

I’ve made a decision to not pay a tax payment on time versus a

vendor, it was simply to continue to stay in business.”    Custom

Stairs claims that its inability to timely pay the taxes on
                              - 17 -

account of the lingering effects of Hurricane Ivan and the

economic recession, in the context of this case, constitutes

reasonable cause.

     Respondent asserts that the mere inability to pay, coupled

with the payment of other creditors rather than the Treasury, is

never reasonable cause for abatement of the failure to deposit

penalty.   However, a majority of the Courts of Appeals that have

decided this issue have determined “that financial hardship can,

under certain circumstances, justify failure to pay and deposit

employment taxes”.   Diamond Plating Co. v. United States, 390

F.3d 1035, 1038 (7th Cir. 2004) (citing Van Camp & Bennion v.

United States, 251 F.3d 862, 868 (9th Cir. 2001), East Wind

Indus., Inc. v. United States, 196 F.3d 499, 507-508 (3d Cir.

1999), and Fran Corp. v. United States, 164 F.3d 814, 819 (2d

Cir. 1999)).   But see Brewery, Inc. v. United States, 33 F.3d

589, 592 (6th Cir. 1994).   IRM Exhibit 20.1.1-3 specifically

states, under the table heading “General Penalty Relief”, that

inability to pay is “Rarely Allowed on Employment Tax Deposits”,

implying that in certain rare circumstances, it is allowed.

     Respondent notes that this is not a first-time offense and

that Custom Stairs has been continually delinquent in making

employment tax deposits as reflected in the table supra.6    In


     6
      But see supra note 5, explaining that, had Custom Stairs
designated its payments differently, it would have been
                                                   (continued...)
                              - 18 -

respondent’s opinion, these facts negate any reasonable cause

defense.   Regulations promulgated under section 6656 do not

address “reasonable cause” except as to first-time depositors.

See sec. 301.6656-1, Proced. & Admin. Regs.   We will therefore

look to the analogous late-payment additions to tax under section

6651(a)(2) although we recognize it is not a “penalty” provision

per se.7

     Reasonable cause will be found if the taxpayer “exercised

ordinary business care and prudence in providing for payment of

his tax liability and was nevertheless either unable to pay the

tax or would suffer an undue hardship”.    Sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.   In determining whether the taxpayer

exercised ordinary business care and prudence, “consideration

will be given to all the facts and circumstances of the

taxpayer’s financial situation, including the amount and nature

of the taxpayer’s expenditures in light of the income”.    Id.    The

primary factors in determining whether a taxpayer exercised



     6
      (...continued)
delinquent in only 5 of the 16 quarters.
     7
      We have found the sec. 6656 penalty and attendant
reasonable cause exception similar to the sec. 6651(a)(2)
addition to tax before, even referring to sec. 6656 as an
addition to tax. See Charlotte’s Office Boutique, Inc. v.
Commissioner, 121 T.C. 89, 109 (2003), supplemented by T.C. Memo.
2004-43, affd. 425 F.3d 1203 (9th Cir. 2005). We also note that
the definition of “employment tax” does not exclude penalties.
See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268
(2001).
                              - 19 -

ordinary business care cited by the Courts of Appeals that allow

a reasonable cause defense for the inability to make employment

tax deposits are:   (1) The taxpayer’s favoring other creditors

over the Government, (2) a history of failing to make deposits,

(3) the taxpayer’s financial decisions, and (4) the taxpayer’s

willingness to decrease expenses and personnel.     Staff It, Inc.

v. United States, 482 F.3d 792 (5th Cir. 2007); Diamond Plating

Co. v. United States, supra at 1038; Van Camp & Bennion v. United

States, supra at 868; East Wind Indus., Inc. v. United States,

supra at 508-509; Fran Corp. v. United States, supra at 819-820.

     We begin by recognizing that Custom Stairs has, with great

effort and tenacity, eventually paid off all of the liability

shown on the June 2008 quarterly Form 941 tax return.

Nevertheless, Trust Fund Business Master File tax payments are a

particularly sensitive item for the Commissioner.    The Government

depends on the employer, as its agent and fiduciary, to timely

collect and timely pay over these taxes from third-party

employees and to make certain matching payments itself.    The

Government must give the employees credit for the withheld

amounts even when they are withheld and not paid over.

     Penalties therefore serve an important deterrence function,

and the taxpayer bears a heavy burden when seeking to avoid a

failure to pay or deposit penalty.     That said, here the deterrent

goal has been served with over $27,286.55 of penalties assessed
                              - 20 -

and $25,733.04 collected.   Moreover, it cannot be said that,

during the time relevant to its liabilities for the quarter ended

June 30, 2008, Custom Stairs held onto the taxes it had withheld

from its employees rather than paying them over.   On the

contrary, during the period for making deposits of those taxes,

Custom Stairs paid over to the IRS amounts greater than the

employment taxes it owed for that period (including trust funds).

Only because there were arrearages from prior quarters--for which

Custom Stairs has fully paid penalties that are not in dispute--

did the IRS characterize the payments made by Custom Stairs as

pertaining to a prior quarter.

     In applying the four factors discussed above and other facts

particular to Custom Stairs, we find that Custom Stairs’ failure

to make the deposits, in the context of the cascading penalties

encountered here, was due in significant part to Hurricane Ivan,

the 2008 economic collapse, and the practical fact of the

cascading penalties themselves.   Quarter after quarter current

funds were used to pay then-assessed penalties for the prior

quarter at the cost of not making all timely deposits for the

current quarter.   Given the unique and compelling facts present

here, we conclude the failure to timely deposit and pay was due

to reasonable cause.

     Custom Stairs has favored other creditors over the

Government and has a record of 15 consecutive quarterly instances
                                - 21 -

since 2005 where a penalty was assessed for failure to timely

make required deposits.    Despite these facts, we find that Custom

Stairs has exercised ordinary business care in its financial

decisions and its willingness to decrease expenses and personnel

in order to pay tax, interest, and penalties.    Custom Stairs

failed to allocate to its own advantage the payments that it

made, and the IRS cannot be criticized for making its own

allocation to prior quarters; but during the relevant time

period, Custom Stairs’ lapse was its failure to have paid in

prior quarters and its failure to allocate, not any current

failure to pay over to the IRS the tax it had withheld from its

employees.

     Respondent essentially argues that if Custom Stairs cannot

afford to make its tax payment timely it should go out of

business.    However, “Both the economy and the federal fisc are

negatively impacted by such an approach--the amount of money

flowing into the economy and the fisc is reduced as a result of

increased unemployment, idle buildings and plants, and decreased

sales of goods and services.”     East Wind Indus., Inc. v. United

States, supra at 509.     Custom Stairs paid to the IRS the money

withheld from its employees, and the IRS allocated those payments

toward previous liabilities and penalties.     Surprisingly, at

substantial sacrifice by its owners who provided personal funds,

even credit card charges, it has managed to stay in business.       As
                              - 22 -

to every other quarter it has both made the required late

deposits and paid the resulting penalties and interest in full.

The details of Custom Stairs’ efforts are elaborated on by Ms.

Cordes’ March 2, 2009, letter to Mr. Salinger and the National

Taxpayer Advocate’s memorandum attached to Custom Stairs’ Appeals

Office correspondence.

     Even respondent’s Officer Shaw noted that Custom Stairs

“appears to be making swift progress, in a construction/real

estate related business, during a very poor economic time.”

Custom Stairs was providing for the payment of its taxes and

making swift progress on its past due taxes during a bad economy.

One month later Officer Shaw noted that Custom Stairs was “not

pyramiding” by staying current with new tax liabilities and that

it appeared “to be earnestly resolving delinquency, despite this

being a construction related business, during a very poor

economic cycle for home construction.”   Officer Shaw had informed

Custom Stairs that its primary goal was to stay current while

making up the delinquent payments, and it had done just that.

     Custom Stairs has exercised ordinary business care and

prudence in cutting benefits and payroll, selectively and

prudently paying business expenses, and attempting to sell its

real property to provide for the timely payment of its tax

liability.   Therefore we find that the reasonable cause necessary

to negate, in accordance with their terms, the application of the
                               - 23 -

section 6651(a)(2) addition to tax and the section 6656 penalty

is present in this instance.

     The Court has considered all of respondents’ contentions,

arguments, requests, and statements.    To the extent not discussed

herein, the Court concludes that they are meritless, moot, or

irrelevant.

     To reflect the foregoing,


                                          Decision will be entered

                                    for petitioner.8




     8
      We note that because we have found that the penalties must
be abated, petitioner may be entitled to a refund. However, this
Court does not have jurisdiction under sec. 6330 to order a
refund. Greene-Thapedi v. Commissioner, 126 T.C. 1, 21 (2006).
