                       T.C. Memo. 2011-143



                     UNITED STATES TAX COURT



    PACIFIC WEST FINANCIAL & INSURANCE COMPANY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18486-07L.              Filed June 22, 2011.



     Dennis L. Perez and Jeff Stone (an officer), for petitioner.

     Karen Nicholson Sommers, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CARLUZZO, Special Trial Judge:   This is a section 6330(d)1

appeal from respondent’s determinations to uphold the filing of a

Notice of Federal Tax Lien and to collect by levy Pacific West



     1
      Section references are to the Internal Revenue Code of
1986, as amended, in effect for the relevant period. Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 2 -

Financial & Insurance Company’s (Pacific West) unpaid

employment tax liability for the fourth quarter of 2003.2

These determinations were made in a Notice of Determination

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

dated July 19, 2007 (the notice).

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Pacific West is a California corporation.   When the petition

was filed, Pacific West’s principal place of business was in

Anaheim Hills, California.   From the date it was organized and

began conducting business in 1998, Pacific West incurred various

employment tax liabilities that obligated it to file a Form 941,

Employer’s Quarterly Federal Tax Return, for each calendar

quarter it has been in existence.   The controversy between the

parties that has culminated in this proceeding has its origins in

the very first Form 941 Pacific West filed.

     In connection with the collection of employment tax

liabilities for periods that predate the period here in question,

respondent’s revenue officer discovered that with the exception

of the third quarter of 1999, every Form 941 previously filed had

been incorrectly prepared.   Apparently, Pacific West’s then

bookkeeper incorrectly combined income tax and Social Security



     2
      Pacific West also does business under the names of Nations
Direct Lending and Insurance and Nations Direct, Inc.
                                - 3 -

withholdings with Pacific West’s share of Social Security taxes

on a single line of each Form 941.      There is no dispute that

these components should not have been combined and should have

been reported on separate lines on the Form 941.      The revenue

officer required Pacific West to file a Form 941c, Supporting

Statement To Correct Information, for each Form 941 incorrectly

prepared, and Pacific West complied with the revenue officer’s

demand.

     Typically each Form 941c combined a request for abatement of

a portion of the tax incorrectly shown and overstated on one line

of the related Form 941 with a report of an additional tax

liability that should have been shown elsewhere on the related

Form 941.   For some quarters the request for abatement and

increased tax liability shown on a Form 941c offset each other.

For some quarters the result was a net abatement/overassessment;

for others the Form 941c resulted in a net tax increase.

     On or about November 17, 2003, Pacific West submitted a

Form 941c for the first three quarters of 2003 in order to

correct the mistakes made on the Forms 941 previously filed for

those quarters (the 2003 Form 941c).      On the 2003 Form 941c

Pacific West requested an abatement of $115,460.47 and reported

an additional tax liability of $124,029.62 for the second quarter

of 2003.    The processing of the 2003 Form 941c resulted in a net

abatement of $100,080.80 for the second quarter of 2003 (the
                               - 4 -

disputed abatement), computed by an unexplained $15,379.67

additional assessment offset against the $115,460.47 abatement

request.   The additional $124,029.62 tax liability for the second

quarter of 2003 reported on the 2003 Form 941c was not assessed

at the time the form was processed.

     Respondent’s records show that before the 2003 Form 941c was

filed, Pacific West’s employment tax liability shown on the

incorrectly filed Form 941 for the second quarter of 2003 had

been satisfied, in fact overpaid, by the periodic deposits

credited against that liability.   Respondent’s records also show

that following the disputed abatement resulting from the 2003

Form 941c, there was an overpayment in the amount of the disputed

abatement for that quarter and that overpayment was applied

against Pacific West’s employment tax liabilities for periods

dating back to 1999.

     The disputed abatement resulted in a discrepancy between

Pacific West’s total employment tax liability for all quarters of

2003, that is, $1,670,166.69, an amount not in dispute, and the

lesser amount that respondent’s records show as having been

assessed for those quarters.   This discrepancy was highlighted

when the amount of the assessment for all quarters of 2003 was

compared with information reported to the Social Security
                                 - 5 -

Administration.3    The amount of this discrepancy ultimately

resulted in a supplemental assessment made for the fourth quarter

of 2003.     Pacific West does not challenge respondent’s right to

have made that additional assessment.4

                                OPINION

     The parties agree that Pacific West’s total employment

tax liability for the four quarters of 2003 was $1,670,166.69.

They further agree that respondent appropriately and ultimately

assessed that amount.    According to Pacific West, that liability,

which includes its liability for the period here in issue, has

been paid.    Pacific West’s claim is a challenge to the existence

or the amount of the underlying liability, see Boyd v.

Commissioner, 117 T.C. 127, 131 (2001); Landry v. Commissioner,

116 T.C. 60 (2001), and we review, de novo, the extent of that

liability, see Boyd v. Commissioner, supra at 131; Landry v.

Commissioner, supra at 62.     Had the payments/deposits originally



     3
      The Social Security Administration (SSA) and the Internal
Revenue Service (IRS) have an agreement to exchange employment
tax data. Under combined annual wage reporting (CAWR), the IRS
compares the total employment tax liability reported to the SSA
on a Form W-3, Transmittal of Wage and Tax Statements, to the
total employment tax liability reported to the IRS. When this
reconciliation results in a discrepancy, a CAWR adjustment is
appropriate, and in the case of an underpayment an additional
assessment is made on the last available quarter of the relevant
tax year.
     4
      For a detailed discussion on this manner of assessment, see
In re Howard Indus., Inc., 225 Bankr. 388, 392 (Bankr. S.D. Ohio
1997), and Internal Revenue Manual pt. 4.19.4.4 (Mar. 1, 2003).
                                 - 6 -

applied against Pacific West’s employment tax liability for the

second quarter of 2003 not been reapplied, its claim, for the

most part, would be well made.    But those payments were

reapplied, and we turn our attention to respondent’s right to

have done so.

     Simple math discloses the consequences of respondent’s

application, or reapplication, of certain employment tax deposits

made during 2003 to quarters dating back to 1999; Pacific West’s

2003 employment tax liability has been underpaid in an amount

equal to the reapplied deposits, and that underpayment has given

rise to various penalties and interest now in dispute.

     The Commissioner, of course, has broad authority to apply

undesignated payments to a taxpayer’s outstanding tax

liabilities.    Rev. Proc. 2002-26, sec. 3.02, 2002-1 C.B. 746.

Furthermore, in lieu of refunding to the taxpayer taxes overpaid

for one period, the Commissioner may credit that overpayment

against the taxpayer’s outstanding liabilities for other periods.

Secs. 6402, 6512(b)(4).5


     5
      The record does not disclose how the reapplied deposits
were made or whether when made they were designated to be applied
to any particular quarter. Arguments contained in Pacific West’s
brief proceed as though the reapplied payments were designated to
be applied to the second quarter of 2003. The record contains no
support for this assertion. We recognize that otherwise
undesignated payments made with a return may be treated as a
designation to be applied against the tax liability shown on that
return, Hill v. United States, 263 F.2d 885, 887 (3d Cir. 1959);
Hayes v. Commissioner, T.C. Memo. 2005-57; Baimbridge v. United
                                                   (continued...)
                               - 7 -

     Pacific West does not challenge respondent’s general

authority to reapply tax payments from one period to another.

Instead, relying upon the language of section 6404, Pacific West

argues that none of the situations that allow for an abatement

apply to the second quarter of 2003.   See sec. 6404(a)(1), (2),

and (3).   According to Pacific West, respondent had no authority

to make the disputed abatement, and therefore, according to

Pacific West, there was no “overpayment” for that period that

would allow for respondent’s reapplication of the deposits

originally applied to that quarter.    Pacific West further argues

that it had no outstanding employment tax liabilities for some,

or many, of the periods to which the overpayment was applied.

     Pacific West’s argument regarding respondent’s authority to

have made the disputed abatement, however, fails to take into

account the consequence of the 2003 Form 941c.   On that document,

Pacific West requests an abatement of $115,460.47.   The requested

abatement is offset by a supplemental assessment of $15,379.67.

This supplemental assessment, although not explained, is

apparently based upon items reported on the 2003 Form 941c.

Netting the supplemental assessment against the request for


     5
      (...continued)
States, 335 F. Supp. 2d 1084, 1095 (S.D. Cal. 2004), but the
reapplied deposits were not made with a return. Nevertheless, it
seems clear that Pacific West intended, even if it did not so
designate, that the reapplied deposits be credited towards its
employment tax liability for the second quarter of 2003, and as
noted, that is how respondent originally treated those deposits.
                               - 8 -

abatement reported on the 2003 Form 941c results in an abatement

of $100,080.80.   This is the amount shown on respondent’s records

to have been an overpayment for the second quarter of 2003 and

applied to Pacific West’s employment tax liabilities for previous

quarters, and this is the abatement that Pacific West argues

respondent had no authority to make.

     Pacific West is hardly in a position to complain that

respondent had no authority to make the disputed abatement when

that abatement was made in response to its own request.     Even if

respondent’s authority to abate is limited as Pacific West

suggests, that authority has not been exceeded in this case.

     The processing of the 2003 Form 941c resulted in the

disputed abatement.   Arguably, at the time that form was

processed an additional assessment could have been made that

would have reduced or completely offset the disputed abatement,

but for reasons not explained, that did not occur.   Instead, the

application of routine supplemental assessment procedures

resulted in an additional amount being assessed for a later

quarter several months after that event.

     To the extent that the period between the abatement and the

supplemental assessment generated an overpayment for the second

quarter of 2003, respondent was free to apply that overpayment to

Pacific West’s outstanding employment tax liabilities for other

quarters.   We note that for some of those other quarters, Pacific
                              - 9 -

West’s claims for abatement or refund are pending.    Because our

jurisdiction over Pacific West’s employment tax liabilities for

those other quarters is limited, see Freije v. Commissioner, 125

T.C. 14 (2005), and because the record in this case would hardly

allow for an informed examination of the extent of Pacific West’s

employment tax liabilities for those other quarters, we think it

best that Pacific West pursue whatever remedies the pending

claims for abatement or refund might allow.

     As best we can determine from the record, a portion of the

underlying liability here in dispute is attributable to the

imposition of a section 6656 penalty.    The penalty apparently was

imposed on account of Pacific West’s failure to have made

sufficient deposits to satisfy its after-the-fact determined

employment tax liability for the fourth quarter of 2003.

     Section 6656 imposes a penalty upon any taxpayer who fails

to make certain tax deposits in a designated manner by

prescribed dates unless it is shown that such failure is due to

reasonable cause and not due to willful neglect.    See Charlotte’s

Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 109 (2003),

affd. 425 F.3d 1203 (9th Cir. 2005).    Proceeding as though

respondent had met his burden of production with respect to the

imposition of the section 6656 penalty, see sec. 7491(c), the

unusual and at least partially unexplained manner in which

Pacific West’s employment tax liability for that period has
                              - 10 -

evolved provides sufficient basis to reject, upon the ground of

reasonable cause, the imposition of a section 6656 penalty.    The

portion of the underlying liability attributable to a section

6656 penalty is to be abated, and it follows that respondent may

not proceed with collection of that amount.

     Otherwise, Pacific West does not suggest that in any other

manner respondent has failed to comply with the requirements of

sections 6320 and/or 6330.   From our review of the record we are

satisfied that respondent has satisfied those requirements.

Except as relates to the portion of the underlying liability

attributable to the section 6656 penalty, respondent may proceed

with collection as determined in the notice.

     To reflect the foregoing and to show Pacific West’s

outstanding employment tax liability for the relevant period,


                                         Decision will be entered

                                    under Rule 155.
