                  T.C. Summary Opinion 2010-18



                      UNITED STATES TAX COURT



                  KEN RYAN, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28897-08S.             Filed February 23, 2010.



     Jennifer A. Gellner, for petitioner.

     Robert V. Boeshaar, for respondent.



     KROUPA, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect when the petition was filed.   Pursuant to section 7463(b),

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




     1
      All section references are to the Internal Revenue Code
(Code), and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
                                - 2 -

and this opinion shall not be treated as precedent for any other

case.

     This collection review matter is before the Court in

response to a Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 pertaining to a $3,4632

failure to deposit payroll taxes penalty under section 6656(a)

and a $5 failure to pay payroll taxes penalty assessed against

petitioner for the quarter ending on December 31, 2006 (quarter

at issue).    We must determine whether petitioner is liable for

those penalties.    We hold that it is not.

                             Background

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

The stipulation of facts and their accompanying exhibits are

incorporated by this reference.    Petitioner’s principal place of

business was Alaska at the time it filed the petition.

     Petitioner Ken Ryan, Inc. (KRI) is an S corporation

providing online language training.     KRI is solely owned and

operated by Ken Ryan (Mr. Ryan).    Mr. Ryan maintained the

company’s financial records and controlled its corporate accounts

in 2006.    KRI relied on Barry Fowler (Mr. Fowler), a certified

public accountant, to provide tax services and perform payroll

preparation services.    KRI and Mr. Ryan had worked with Mr.



     2
        All amounts are rounded to the nearest dollar.
                                 - 3 -

Fowler for many years, and Mr. Fowler was familiar with KRI’s

operations and payroll history.

     KRI made semi-weekly Federal payroll tax deposits before

2006.   Most of KRI’s payroll tax deposits were for Mr. Ryan,

KRI’s only full-time employee.    Mr. Ryan determined that he had

accumulated sufficient funds for his living expenses and did not

require regular paychecks throughout the year.    Mr. Ryan

consulted with Mr. Fowler to determine whether KRI could issue

him an annual paycheck at the end of the year to eliminate the

expense of processing unnecessary payrolls.

     Mr. Fowler researched whether an annual paycheck is allowed.

He specifically looked at the tax payroll preparation tables in

Internal Revenue Service (IRS) Publication 15 (Circular E),

Employer’s Tax Guide, and he found no language prohibiting the

use of an annual payroll.   Mr. Fowler concluded that KRI could

use an annual payroll.   Mr. Fowler’s only cautionary note was

that Mr. Ryan needed to receive a reasonable salary from KRI.

Mr. Fowler advised Mr. Ryan that during the year he could

transfer cash from the KRI corporate account (KRI account) into

Mr. Ryan’s individual investment account (individual account) as

an advance payment for his services.     Mr. Fowler advised KRI that

the transfer of funds would not constitute wages at the time of

transfer provided Mr. Ryan was obligated to repay the advances.
                               - 4 -

KRI therefore did not need to deposit employment taxes until the

end of the year.

     Mr. Ryan followed Mr. Fowler’s advice.    Mr. Ryan transferred

funds totaling $176,000 from the KRI account to his individual

account at various times throughout 2006.    Mr. Ryan performed

services for KRI and satisfied his repayment obligation with an

accounting done at the end of 2006.    KRI credited the advances

made to Mr. Ryan with the compensation due to Mr. Ryan for his

services, resulting in a net payment of zero.    KRI filed a Form

941, Employer’s Quarterly Federal Tax Return, for the quarter at

issue, reporting employment taxes of $72 for October, $145 for

November, and $80,948 for December.

     Respondent selected KRI’s Form 941 for the quarter at issue

for audit.   Respondent requested additional information regarding

how and when payrolls were made during the quarter at issue.      KRI

provided respondent with no documentation as to specific dates

when funds were transferred from KRI to Mr. Ryan.    Respondent

determined that KRI failed to deposit and failed to pay payroll

taxes on transfers from KRI’s account to Mr. Ryan’s individual

account during the quarter at issue.    KRI subsequently made the

required deposits, but respondent assessed the failure to deposit

and failure to pay penalties against KRI that are at issue.    Mr.

Fowler requested a collection due process (CDP) hearing on behalf

of KRI.
                               - 5 -

     Mr. Fowler failed to answer his phone for the scheduled

telephone CDP hearing with Appeals officer Linda Cochran (AO

Cochran) because of a misunderstanding as to the time zone in

which the telephone hearing would occur.   Mr. Fowler and AO

Cochran eventually discussed the case.    AO Cochran reviewed the

materials Mr. Fowler submitted to AO Cochran to explain why no

penalties should apply and determined not to abate either

penalty.   KRI timely filed a petition contesting AO Cochran’s

determination not to abate the payroll tax penalty assessments.

                             Discussion

     We are asked to decide whether petitioner with only one

employee is liable for failure to deposit and failure to pay

payroll taxes in this collection review matter.   The Court in

collection review matters will review an Appeals office

determination de novo where the underlying tax liability is at

issue.   Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).     A

taxpayer’s underlying tax liability may be at issue if he or she

did not receive a deficiency notice for such tax liability or did

not otherwise have an opportunity to dispute such tax liability.

Sec. 6330(c)(2)(B).   Respondent concedes that KRI has not had the

opportunity to challenge the tax liability.    Thus, the Court will

review de novo AO Cochran’s determination that KRI is liable for

the payroll tax penalties.
                                 - 6 -

       Failure to deposit and failure to pay penalties do not apply

if a taxpayer can show that the failure was due to reasonable

cause and not willful neglect.    Sec. 6656(a); Charlotte’s Office

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

425 F.3d 1203 (9th Cir. 2005).    A taxpayer establishes reasonable

cause by showing that ordinary care and prudence were exercised.

See sec. 301.6651-1(c)(1) and (2), Proced. & Admin. Regs.       The

failure to timely deposit is due to willful neglect if it

resulted from a conscious decision or from reckless indifference.

See United States v. Boyle, 469 U.S. 241, 245 (1985).     The

taxpayer has the burden of proving reasonable cause and the

absence of willful neglect.    Rule 142(a); Higbee v. Commissioner,

116 T.C. 438, 447 (2001).

       Petitioner contends that the failure to deposit and failure

to pay penalties should be abated because it acted with

reasonable cause and not willful neglect in reliance upon the

advice of Mr. Fowler.   A taxpayer’s reliance on a tax advisor’s

guidance regarding substantive legal issues may constitute

reasonable cause even when such advice may be mistaken.    See

United States v. Boyle, supra at 250-251; McMahan v.

Commissioner, 114 F.3d 366 (2d Cir. 1997), affg. T.C. Memo. 1995-

547.    The tax advisor must be competent on the specific matter,

and the taxpayer must supply that advisor with all relevant

information.    See Lehrer v. Commissioner, T.C. Memo. 2006-156.      A
                                - 7 -

taxpayer generally must prove each of these elements to show his

or her reliance on a professional tax advisor was reasonable.

Bowen v. Commissioner, T.C. Memo. 2001-47.    We now analyze the

facts and circumstances to determine whether KRI’s reliance

constituted reasonable cause.

       Mr. Ryan is KRI’s only full-time employee.   Mr. Ryan does

not have a background in finance or tax, and he is not an

attorney.    KRI showed that it provided Mr. Fowler necessary and

accurate information to render tax advice.    Mr. Fowler had

advised KRI and Mr. Ryan for many years and was familiar with

KRI’s operations and payroll history.    Mr. Fowler performed

research on the permissibility of annual payroll and employment

tax.    Mr. Fowler advised KRI that it could have an annual

payroll.    Mr. Fowler also told KRI that the transfer of funds

from the KRI account to Mr. Ryan’s individual account did not

constitute wages at the time of transfer provided Mr. Ryan had an

obligation to repay the advance.    KRI and Mr. Ryan followed Mr.

Fowler’s guidance from the time the legal question arose and

through the IRS administrative process.    We agree with KRI that

it was not required to seek a second opinion in this situation.

See United States v. Boyle, supra at 251.

       Respondent argues that it was unreasonable for KRI to rely

on Mr. Fowler’s advice because Mr. Fowler did not base his

opinion on any specific Code provision and indeed the advice was
                                 - 8 -

wrong.    KRI may have been ill advised.    That is not the standard

for a reasonable cause determination, however.      We find that KRI

exercised the requisite ordinary business care and prudence in

seeking the advice of Mr. Fowler even if his advice was wrong.

Taking into consideration the complexity of the issue and all the

facts and circumstances, we find that KRI acted with reasonable

cause and not willful neglect when it relied on the advice of Mr.

Fowler.    Accordingly, we do not sustain AO Cochran’s

determination regarding the payroll tax penalties.

     We have considered all arguments made in reaching our

decision, and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.

     To reflect the foregoing,



                                              Decision will be entered

                                         for petitioner.
