                            T.C. Summary Opinion 2015-49



                           UNITED STATES TAX COURT



               JOHN C. HOM & ASSOCIATES, INC., Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1465-13S L.                          Filed August 17, 2015.



      John C. Hom (an officer), for petitioner.

      Bryant W. H. Smith and Sarah E. Sexton, for respondent.



                                SUMMARY OPINION


      PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, subsequent section references are to the
                                                                        (continued...)
                                          2

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      This case is before the Court on petitioner’s request for review of

respondent’s determination to sustain a notice of Federal tax lien relating to an

assessment for penalties under section 6721(e) for intentional disregard of the

information return filing requirement.2

                                     Background

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

incorporate by reference the parties’ stipulations of fact and the accompanying

exhibits.

      Petitioner is a California corporation with its principal place of business in

Marin County, California, when it filed the petition. John C. Hom (Mr. Hom) is

petitioner’s owner and president. Petitioner was incorporated in 1986. The

California Franchise Tax Board suspended the powers, rights and privileges of


      1
        (...continued)
Internal Revenue Code in effect for the years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
      2
        Petitioner attached two additional notices of determination to the petition.
These notices related to liabilities other than the sec. 6721(e) penalty. At trial,
petitioner conceded all issues other than the liability for the sec. 6721(e) penalty.
Respondent has not determined, nor made an alternative claim, that petitioner is
liable for a penalty under sec. 6721(a).
                                          3

petitioner on March 1, 2004. The powers, rights and privileges of petitioner were

revived on April 11, 2012, before the petition in this case was filed.

      During the years 2004 and 2006 petitioner was a geotechnical engineering

firm specializing in soil testing services and providing geotechnical consulting.

Mr. Hom was the only licensed engineer on petitioner’s staff. Mr. Hom performed

geotechnical investigations for various projects, such as parking lots and retaining

walls. Mr. Hom explored the subsurface conditions of proposed jobsites and

analyzed the results of fieldwork to provide recommendations for construction.

During construction, Mr. Hom inspected the site grading and observed the

installation of drainage facilities. Upon completion of construction, Mr. Hom

performed a final inspection of the construction project. In 2002 Mr. Hom

decided to become a professional poker player. Since then, he has spent more time

in poker playing activities and less time working as an engineer.

      For the 2004 and 2006 years petitioner issued Forms W-2, Wage and Tax

Statement, to employees, but failed to file those forms and the Forms W-3,

Transmittal of Wage and Tax Statements, with the Social Security Administration

(SSA). Mr. Hom generally followed a procedure for issuing Forms W-2 to

employees and filing Forms W-2 and W-3 with the SSA. After mailing the forms

to the SSA, Mr. Hom would save copies of the Forms W-2 and W-3 on his
                                           4

computer. Because Mr. Hom retained copies of the 2004 and 2006 Forms W-2

and W-3 on his computer, he believed that he had completed the previous step of

filing those forms with the SSA.

      Respondent assessed penalties against petitioner pursuant to section 6721(e)

for intentional disregard of the Form W-2 and W-3 filing requirement in the

amounts of $2,070.30 for 2004 and $8,018.75 for 2006. On August 2, 2011,

respondent filed a notice of Federal tax lien3 against petitioner. On September 6,

2011, petitioner submitted Form 12153, Request for a Collection Due Process or

Equivalent Hearing. On November 15, 2012, respondent’s Settlement Officer

(SO) Linda L. Cochran conducted a collection due process hearing with Mr. Hom

by telephone. Mr. Hom disputed the underlying tax liabilities but did not provide

any documents to support petitioner’s position regarding the underlying tax

liabilities. SO Cochran sustained the lien action for the section 6721(e) penalties

and issued a notice of determination on December 13, 2012. Petitioner timely

filed a petition. As indicated, at trial petitioner conceded all issues except for the

section 6721(e) penalties.




      3
       We note that respondent’s pretrial memorandum states that respondent filed
a Federal tax lien on August 2, 2011. We presume that respondent meant that a
“notice” of Federal tax lien was filed on August 2, 2011.
                                           5

      On December 17, 2013, respondent filed a motion for summary judgment

and a declaration of SO Cochran in support of respondent’s motion for summary

judgment. On September 10, 2014, the Court denied respondent’s motion for

summary judgment. Attached to SO Cochran’s declaration is a letter from

Revenue Officer Steve Bugos to Appeals dated April 3, 2012. In respondent’s

posttrial memorandum, respondent conceded that Revenue Officer Bugos’ letter

was a prohibited ex parte communication.4

                                     Discussion

      We have jurisdiction under section 6330(d)(1) to review respondent’s

determination that the notice of Federal tax lien was proper and that respondent

may proceed to collect by it.5 In reviewing the Commissioner’s decision to sustain

collection actions, where the validity of the underlying liability is properly at

issue, the Court reviews the Commissioner’s determination of the underlying tax

liability de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.



      4
       In particular, respondent conceded that the statements (1) “He is difficult to
deal with.” and (2) “He is very argumentative and unwilling to listen.” were
prohibited ex parte communications.
      5
        The Pension Protection Act of 2006, Pub. L. No. 109-280, sec. 855, 120
Stat. at 1019, amended sec. 6330(d) and granted this Court jurisdiction over all
sec. 6330 determinations made after October 16, 2006. Perkins v. Commissioner,
129 T.C. 58, 63 n.7 (2007).
                                           6

Commissioner, 114 T.C. 176, 181-182 (2000). The Court reviews any other

administrative determination regarding proposed collection actions for abuse of

discretion. Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114

T.C. at 182.

      At the collection hearing a taxpayer may raise any relevant issue relating to

the unpaid tax or the proposed levy, including spousal defenses, challenges to the

appropriateness of the collection actions, and offers of collection alternatives.

Sec. 6330(c)(2)(A). In addition, he may challenge the existence or amount of the

underlying tax liability, but only if he did not receive a notice of deficiency or

otherwise have an opportunity to dispute that liability. Sec. 6330(c)(2)(B).

      Petitioner did not have a prior opportunity to dispute the underlying tax

liabilities because the section 6721(e) penalties that generated the underlying

liabilities are not penalties for which respondent was required to issue a notice of

deficiency.6 Therefore, petitioner was properly allowed to contest the section

6721(e) penalties for intentionally disregarding the 2004 and 2006 Form W-2 and

W-3 filing requirement. See sec. 6330(c)(2)(B); see also Montgomery v.

      6
       Generally sec. 6213(a) provides that no assessment of a deficiency in
respect of any tax imposed by subtit. A or B or ch. 41, 42, 43, or 44 may be made
unless a notice of deficiency is mailed to the taxpayer providing an opportunity for
review by the Tax Court. The penalty under sec. 6721(e), is found in ch. 68,
subch. B, Assessable Penalties, and thus is not subject to deficiency procedures.
                                          7

Commissioner, 122 T.C. 1, 5-10 (2004); Sego v. Commissioner, 114 T.C. at 609;

Goza v. Commissioner, 114 T.C. at 180-181. Accordingly, we review

respondent’s determination de novo.

I.    Ex Parte Communication

      Respondent has conceded that there was a prohibited ex parte

communication between Revenue Officer Bugos and Appeals. We must decide

what action, if any, the Court should take as a result of the prohibited ex parte

communication. In Drake v. Commissioner, 125 T.C. 201, 210 (2005), the case

was remanded to the Appeals Office for a new section 6330 hearing with an

independent Appeals officer who had received no communication relating to the

credibility of the taxpayer or the taxpayer’s representative. See also Indus.

Investors v. Commissioner, T.C. Memo. 2007-93; Moore v. Commissioner, T.C.

Memo. 2006-171. In Sapp v. Commissioner, T.C. Memo. 2006-104, we

concluded that the ex parte communications did not prejudice the taxpayer in part

because the taxpayer made only tax-protester arguments before Appeals.

      Respondent urges us to not remand this case to the Appeals Office, noting

that Congress did not provide “‘a specific remedy for prohibited ex parte

communications’,” quoting Moore v. Commissioner, T.C. Memo. 2006-171.

Respondent urges that, because the proper level of scrutiny in this case is de novo
                                          8

review and we have already conducted a trial on the merits, we are in a better

position to adjudicate petitioner’s challenge of the underlying tax liabilities than a

different settlement officer. If we remand the case to respondent’s Appeals Office,

the case will potentially come before us again when respondent issues a new

notice of determination. Since we have already held a trial on the merits, we

conclude that remand of this case to the Appeals Office for a new section 6330

hearing would unnecessarily burden petitioner and respondent with a second

hearing and possibly with a second trial on the merits. Since we review the matter

de novo, we will not remand this case to the Appeals Office.

II.   Section 6721(e) Penalty

      Section 6051(a) requires an employer to provide Forms W-2 to its

employees. Petitioner complied with this provision. Section 6051(d) permits the

Secretary to prescribe regulations requiring duplicate Forms W-2 to be filed with

the Secretary. Section 31.6051-2, Employment Tax Regs., requires an employer to

file copies of Forms W-2 and a transmittal Form W-3 with the SSA. Section

6721(a) imposes a penalty of $50 for each Form W-2 that an employer fails to file

with the SSA. When the employer intentionally disregards the filing requirement

of Form W-2 in section 31.6051-2, Employment Tax Regs., section 6721(e)

increases the penalty that would otherwise be calculated under section 6721(a) to
                                          9

the greater of $100 for each Form W-2 or 10% of the total wages required to be

reported on Form W-2.

      Petitioner has the burden of proving that respondent’s determination to

assess the section 6721(e) penalties is inappropriate. See Rule 142(a)(1). While

section 7491(c) places a burden of production upon the Commissioner with

respect to an individual’s liability for a section 6721(e) penalty, section 7491(c) is

not applicable where the taxpayer is a corporation as in this case. See NT, Inc. v.

Commissioner, 126 T.C. 191, 194-195 (2006).

      Section 301.6721-1(f)(2), Proced. & Admin. Regs., defines intentional

disregard as knowing or willful according to the facts and circumstances. Section

301.6721-1(f)(3), Proced. & Admin Regs., provides that the facts and

circumstances to be considered include, but are not limited to:

            (i) Whether the failure to file timely * * * is part of a pattern of
      conduct by the person who filed the return of repeatedly failing to file
      timely * * *;

             (ii) Whether correction was promptly made upon discovery of
      the failure;

            (iii) Whether the filer corrects a failure to file * * * within 30
      days after the date of any written request from the Internal Revenue
      Service to file * * *; and
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              (iv) Whether the amount of the information reporting penalties
      is less than the cost of complying with the requirement to file timely
      ***

In Gerald B. Lefcourt, P.C. v. United States, 125 F.3d 79, 83 (2d Cir. 1997), the

Court of Appeals defined “intentional disregard” in the context of section 6721(e)

as voluntary, conscious, and intentional conduct. In other words, the penalty

applies when the failure was not accidental, unconscious, or inadvertent. See id.

In American Vending Group, Inc. v. United States, 103 A.F.T.R.2d (RIA) 2009-

2181(D. Md. 2009), the District Court concluded that the taxpayer did not act with

intentional disregard and the failure to file was accidental where the Forms W-2

and W-3 were prepared but were likely misplaced on a messy desk and not filed.

In In re Flanary & Sons Trucking, Inc., 93 A.F.T.R.2d (RIA) 2004-1078 (Bankr.

E.D. Tenn. 2004), the bankruptcy court concluded that the taxpayer did not act

with intentional disregard where an officer testified that he had mailed the Forms

W-2 and W-3 and that if they had not been received by the Service, it was not

because of intentional disregard on his part. The bankruptcy court noted that

“[w]hile a taxpayer’s testimony as to the mere mailing of the return may be

insufficient as a matter of law to establish actual filing, such testimony is clearly

pertinent when ascertaining whether the taxpayer knowingly or willfully

disregarded its filing obligations.” Id. We now consider the facts and
                                         11

circumstances presented herein to decide whether petitioner intentionally

disregarded the filing obligation.

      A.     Pattern of Conduct

      Petitioner failed to file the 2004 and 2006 Forms W-2 and W-3 with the

SSA. The failure to file these forms for two years in and of itself does not

establish a pattern of conduct.

      We note that SO Cochran determined that there was a pattern of conduct

because petitioner has a mixed history in (1) failing to file Forms 940, Employer’s

Annual Federal Unemployment (FUTA) Tax Return, and Forms 941, Employer’s

Quarterly Federal Tax Return, (2) filing these forms late, or (3) both. Mr. Hom

testified, however, that petitioner may not have had employees during some of the

periods where Forms 940 or 941 were not filed. Mr. Hom was the sole engineer

on petitioner’s staff. Since 2002, Mr. Hom has spent less time working as an

engineer and more time pursing an activity as a professional poker player. There

is not sufficient evidence in the record for this Court to determine for what periods

petitioner either failed to file Forms 940 and 941 or filed these forms late. Nor is

there sufficient evidence for us to conclude whether petitioner was required to file

Forms 940 and 941 for any period where petitioner either failed to file these forms

or filed these forms late. If petitioner was required to file Forms 940 and 941 and
                                           12

failed to file them for some periods, we are not convinced that this failure would

establish a pattern of conduct that includes the failure to file the 2004 and 2006

Forms W-2 and W-3. We conclude that this factor is neutral.

      B.     Correction of Failure To File

      There is no evidence in the record that respondent ever prompted petitioner

to correct the failure to file the 2004 and 2006 Forms W-2 and W-3. The record is

unclear on whether petitioner ever attempted to correct the failure to file. Mr.

Hom testified that he provided counsel for respondent with copies of these forms

as part of discovery in this case but did not address whether he had provided these

forms to respondent previously. We have concluded on the basis of the record that

Mr. Hom believed that petitioner had filed the 2004 and 2006 Forms W-2 and

W-3. Absent respondent’s prompting, Mr. Hom would have no reason to know

that petitioner needed to correct the failure to file. Therefore, this factor is neutral.

      C.     Cost of Complying Versus Amounts of Penalties

      Since no payment is required with the filing of Forms W-2 and W-3, there is

no cost of complying with the provision other than the time taken to prepare the

Forms W-2 and W-3 and the cost of postage. The section 6721(e) penalties

assessed are $2,070.30 for 2004 and $8,018.75 for 2006. Any rational taxpayer
                                          13

would comply with the reporting requirement and avoid the risk of assessment of

this penalty. Therefore, this factor favors petitioner.

      D.     Conclusion Regarding Section 6721(e) Penalties

      Mr. Hom testified convincingly that he believed that he filed the 2004 and

2006 Forms W-2 and W-3 because he had retained copies of the forms on his

computer and he was in the habit of storing the copies on his computer after the

forms were filed. In addition, there was no pattern of conduct that would indicate

that petitioner consistently failed to file Forms W-2 and W-3 since the forms were

unfiled only for 2004 and 2006. We conclude that while the evidence is

insufficient to establish actual filing, the evidence does establish that petitioner did

not intentionally disregard its filing obligation for Forms W-2 and W-3.

Therefore, petitioner is not liable for the penalty for intentional disregard of the

filing requirement under section 6721(e).

      We have considered the parties’ arguments and, to the extent not discussed

herein, we conclude the arguments to be irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                      An appropriate decision will be

                                               entered.
