                  T.C. Summary Opinion 2011-93



                      UNITED STATES TAX COURT



OSCAR OFILIO MOREIRA, DERIVATIVE OBLIGOR OF INTERNATIONAL MOTORS
                   PARTNERSHIP, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 938-09S.                Filed July 19, 2011.



     Jerome E. Comer, for petitioner.

     Matthew S. Reddington, for respondent.



     GOEKE, 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




     1
      All section references are to the Internal Revenue Code as
amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.

     The issue is whether respondent may proceed to collect from

Oscar Ofilio Moreira (petitioner) the unpaid employment taxes and

additions to tax for International Motors, a partnership, for tax

periods ending March 31, 2006, June 30, 2006, September 30, 2006,

and December 31, 2006.   For the reasons stated herein, we find

that respondent may proceed to collect the taxes and the

additions to tax under section 6654 only for the first three

quarters, but may not collect any amount for the final quarter.

                            Background

     On August 15, 2005, petitioner, and Fredy A. Quiroz (Mr.

Quiroz) formed a general partnership, International Motors, A

Virginia Partnership.2   Petitioner was a general partner of

International Motors, which conducted the retail sales of motor

vehicles.   After discussion, petitioner and Mr. Quiroz agreed to

alter the structure of International Motors.   On August 2, 2006,

Mr. Quiroz organized International Motors, LLC, in Virginia

without petitioner.   Petitioner learned of his exclusion from the

LLC only months after its formation.




     2
      All references to International Motors refer to the
Virginia partnership unless otherwise described as International
Motors, LLC.
                               - 3 -

     International Motors, LLC, submitted Forms 941, Employer’s

Quarterly Federal Tax Return, for all tax quarters during 2006

and a Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax

Return, for tax year 2006.3   International Motors, LLC, also

submitted a Form 1065, U.S. Return of Partnership Income,

reporting income tax for 2006.4

     On July 30, 2007, respondent issued petitioner a Letter

1058, Final Notice of Intent to Levy and Notice of Your Right to

a Hearing.   On November 13, 2008, a face-to-face hearing was held

in accordance with petitioner’s request.   On December 11, 2008,

respondent sent petitioner a Notice of Determination Concerning

Collection Action(s) Under Section 6230 and/or 6330 (notice).

The notice pertained to Forms 941 for liabilities of

International Motors for tax periods ending March 31, 2006, June

30, 2006, September 30, 2006, and December 31, 2006.   The notice




     3
      Petitioner objects to the accuracy of these documents and
specifically notes that International Motors, LLC, was not
created until Aug. 2, 2006.
     4
      Respondent does not stipulate as to the date received, nor
does the form provide a date received or prepared.
                                     - 4 -

contained a summary of petitioner’s arguments at his Appeals

hearing.      The amounts5 at issue are as follows:

                  Employment Tax &                 Additions to Tax
Tax Period       Assessed Interest   Sec. 6651(a)(1) Sec. 6651(a)(2)   Sec. 6654


Mar. 31, 2006         $4,961             $1,013          $292            $675
June 30, 2006          5,291              1,104           245             736
Sept. 30, 2006         5,116              1,094           170             729
Dec. 31, 2006          6,380                561           124             935

     Before petitioner filed this petition in this Court, he

pursued his former partner Mr. Quiroz and International Motors,

LLC, in the Circuit Court of the City of Richmond (circuit

court).      On November 20, 2008, an order was entered in

petitioner’s favor, and the circuit court awarded him $33,626 for

the purpose of paying the outstanding Form 941 employment tax

liabilities of International Motors, the partnership and the LLC,

for tax periods ending March 31, 2006, June 30, 2006, September

30, 2006, and December 31, 2006.          On March 23, 2009, the circuit

court entered a default judgment in favor of petitioner against

Mr. Quiroz and International Motors, the partnership and the LLC,

of $39,750 in compensatory damages.           On August 14, 2009, the

circuit court awarded compensatory damages to petitioner and

against Mr. Quiroz and International Motors, the partnership and

the LLC, of $119,250.




     5
        Amounts listed include interest assessed as of Mar. 24,
2010.
                                - 5 -

     Petitioner resided in Virginia when he timely filed his

petition.

                             Discussion

Collection Procedures

     Section 6330(a) provides that no levy to collect Federal tax

obligations may be made on any property of any person unless the

Secretary has notified the person in writing of the right to a

hearing before the levy is made.    Section 6330(b)(1) and (3)

provides that if a person requests a hearing, that hearing shall

be held before an impartial officer or employee of the IRS.      At

the hearing a taxpayer may raise any relevant issue, including

challenges to the appropriateness of the collection action and

collection alternatives, such as an offer-in-compromise.     Sec.

6330(c)(2)(A).    A taxpayer is precluded from contesting the

existence or amount of the underlying tax liability at the

beginning of the hearing unless the taxpayer did not receive a

notice of deficiency for the tax in question or did not otherwise

have an opportunity to dispute the tax liability.    Sec.

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

(2000).    In the present case, petitioner may contest the

underlying employment tax liabilities.

     Following a hearing the Appeals Office must make a

determination whether the proposed lien or levy action may

proceed.    The Appeals Office is required to take into
                                 - 6 -

consideration:   (1) The verification presented by the Secretary

that the requirements of applicable law and administrative

procedure have been met; (2) the relevant issues raised by the

taxpayer; and (3) whether the proposed levy action appropriately

balances the need for efficient collection of taxes with the

taxpayer’s concerns that the levy action be no more intrusive

than is necessary.    Sec. 6330(c)(3).

     Section 6330(d) grants the Court jurisdiction to review the

Appeals officer’s determination to proceed with collection action

via levy after the hearing.     Where the validity of the underlying

tax liability is at issue in a collection review proceeding, the

Court will review the matter de novo.     Davis v. Commissioner, 115

T.C. 35, 39 (2000).

     Petitioner contested his liability for the employment taxes

and resulting additions to tax at his lien and levy hearing.     As

stated previously, respondent concedes that petitioner’s

underlying tax liabilities are properly at issue in this case.

We agree and will review the tax liability determination.

     Petitioner argues that he is not personally liable for

International Motors’ outstanding liabilities for several

reasons.   His arguments are:   (1) That Mr. Quiroz was at all

times the managing partner of the partnership which position

included the management of finances; (2) that the partnership was

defunct in August 2006 and thus he could not have accrued tax
                                - 7 -

liabilities at any time after this date; (3) that he was not a

member of the LLC because he was excluded from the new entity;

and (4) that judgments in the circuit court decided in his favor

establish that he is not liable for the employment taxes.

     Respondent argues that an assessment against the partnership

is equivalent to an assessment against a derivatively liable

general partner.   Respondent also argues that petitioner was

undisputedly a general partner for the first three tax periods at

issue and that his continued participation in the new entity,

International Motors, LLC, also makes him liable for the last tax

period because the business of International Motors continued at

a partnership level.6

     Section 3402 requires employers to withhold and pay certain

Federal taxes incurred by its employees.   An “employer” is a

person for whom an individual performs a service as an employee,

and a partnership can be a “person” for this purpose.   See secs.

3401(d), 7701(a)(1).    See Remington v. United States, 210 F.3d

281, 283 (5th Cir. 2000); see also Helland v. United States, 90

AFTR 2d 2002-7045, 2002-2 USTC par. 50,754 (2002), affd. 96 Fed.

Appx. 719 (Fed. Cir. 2004).

     Virginia law provides that all general partners are liable

jointly and severally for all obligations of the partnership


     6
      Respondent does not argue that the sec. 6672 penalty is
applicable here.
                                - 8 -

unless otherwise agreed or provided by law.     Va. Code Ann. sec.

50-73.96 (2009).

      Petitioner does not dispute that he was a general partner of

the entity operating the business before the LLP’s formation, and

we determine that respondent is entitled to collect the tax

liability originating from any failure to pay employment taxes of

the partnership from any one of the general partners, including

petitioner.   Additionally, the circuit court judgments do not

prevent respondent from collecting assessments against the

partners.   We agree with respondent that petitioner is liable for

taxes during the first three tax periods of 2006 because of his

role as a general partner.   We find the partnership liable for

the entire third quarter liabilities on the limited record before

us.

      It is unclear, however, whether petitioner is liable for

employment taxes accrued during the final tax period of 2006.

Petitioner testified that he knew of the creation of the

International Motors, LLC.   He testified that he was aware of the

motivation for its creation and that he agreed with Mr. Quiroz to

alter the partnership in this way.      The intention for the LLC, as

understood by petitioner, was that all the assets and the

business of the former partnership would be operated under the

new LLC.    Additionally, petitioner testified that he opened bank

accounts for the new LLC and that he had signature authority for
                               - 9 -

the bank accounts when it was formed in August 2006.   Petitioner

stated that he used the LLC’s new tax ID number to open up this

account and that funds from the partnership were being funneled

into the new account for the LLC.   However, petitioner’s

involvement in the LLC does not extend beyond opening a bank

account sometime during the third tax quarter of 2006.

Petitioner testified credibly that he had no knowledge of the LLC

beyond August.   Respondent presents no arguments as to

petitioner’s membership or participation in the LLC other than

opening the bank account.   Petitioner was a general partner of

the partnership which operated the business and paid the

employees for the first three quarters and as such he was liable

for the employment taxes in those quarters.   However, we

determine that he is not individually liable for the LLC’s

liability in the fourth quarter on the basis of Virginia and

Federal law.

     We review an Appeals Office determination with respect to

collection alternatives for abuse of discretion.

Petitioner did not introduce any credible evidence that would

allow us to conclude that the determination to sustain the levy

was arbitrary, capricious, without foundation in fact or law, or

otherwise an abuse of discretion.   See, e.g., Giamelli v.

Commissioner, 129 T.C. 107, 112, 115-116 (2007).   The Appeals

Office verified that all requirements of applicable law or
                              - 10 -

administrative procedure were met.     It balanced the need for

efficient collection of taxes with petitioner’s concerns that the

collection action be no more intrusive than necessary.

Petitioner provided no collection alternatives, nor filed the

delinquent tax returns.   Thus the Appeals Office’s levy actions

were appropriate.   Accordingly, we conclude that respondent did

not abuse his discretion in sustaining the collection action.

Additions to Tax

     Respondent determined that petitioner is liable for

additions to tax for failure to timely file a return under

section 6651(a)(1), failure to timely pay tax under section

6651(a)(2), and failure to pay estimated income tax under section

6654.   The Commissioner bears the burden of production with

respect to a taxpayer’s liability for additions to tax under

sections 6651(a)(1) and (2) and 6654(a).     See sec. 7491(c); Rule

142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

Once the Commissioner meets his burden of production, the

taxpayer bears the burden of proof as to substantial authority,

reasonable cause, or similar provisions.     Sec. 7491(c); Rule

142(a); Higbee v. Commissioner, supra at 446-447.

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return on the date prescribed unless such failure is due

to reasonable cause and not willful neglect.     Petitioner does not

argue the tax returns were timely filed; rather, he argues that
                               - 11 -

he did not file a return during tax year 2006 because Mr. Quiroz

assumed all management responsibilities.    Relying on Mr. Quiroz

to ensure all duties and obligations of the partnership,

including the filing of its tax returns associated with operating

a partnership, was not prudent but petitioner believed the LLC

rather than the partnership was the taxpayer. This misconception

was reasonable on the facts before us. Accordingly, we hold that

petitioner is not liable for the section 6651(a)(1) additions to

tax.

       Section 6651(a)(2) imposes an addition to tax for failure to

timely pay the amount shown as tax on a return unless such

failure is due to reasonable cause and not willful neglect.

Petitioner has not paid the taxes due because he believes he is

not responsible for the partnership’s tax payments.    We find his

legal argument provides reasonable cause and a good faith reason

for his failure to pay, and therefore these additions to tax do

not apply.

       Section 6654 imposes an addition to tax on an underpayment

of estimated tax.    The partnership failed to file quarterly tax

returns for all periods at issue and also failed to file an

annual return.    Petitioner failed to make any estimated tax

payments for any of the tax periods at issue.    Because he is

liable for the partnership debt, petitioner is liable for the
                                - 12 -

additions to tax for failure to pay estimated taxes under section

6654.

     Because the LLC was the entity running the business in the

fourth quarter and petitioner was neither an owner nor

participant in the LLC during that quarter, he is not liable for

employment taxes for the fourth quarter.    Respondent may proceed

with collection from petitioner of the assessed employment taxes

for the first three quarters.

     To reflect the foregoing,


                                           An appropriate decision

                                     will be entered.
