Designated Orders: 10/30/17 to 11/3/2017

Continuance and a Remand

Docket # 16277-16 L, Kevin J. Mirch & Marie C. Mirch v. C.I.R. (Order Here).

This collection due process case was calendered for trial on November 13 in San Diego, California. Respondent filed both a motion for continuance and a motion for remand on October 26. The Court granted both motions.

In granting the first motion, the case was stricken from trial on the November 13 docket. In granting the second motion, the case is remanded to the IRS Office of Appeals for further consideration. The IRS is further ordered to offer Petitioner an administrative hearing at the Appeals Office located closest to Petitioner’s residence (or a mutually agreed location) at a mutually agreed date and time no later than January 30, 2018. It is further ordered that the parties shall file status reports no later than March 5, 2018.

I would speculate if there was cause for concern by the IRS to remand this collection due process case rather than go forward with litigation before the Tax Court.

No Determination – No Jurisdiction

Docket # 12528-17S, Mas Construction Service LLC v. C.I.R. (Order of Dismissal for Lack of Jurisdiction Here).

During tax years 2012 and 2013, the Petitioner was an S corporation operating as a construction company. Mark A. Sauerhoefer was the sole owner and sole officer of the S corporation. His treatment under the S corporation was as an employee with $4,500 as W-2 wages in 2012 and $8,550 in 2013. On December 22, 2014, Respondent sent Petitioner a letter informing it that the Employer’s Quarterly Federal Tax Return (Form 941) and Employer’s Annual Federal Unemployment Tax Return (Form 940 – FUTA) were selected for examination for the tax years in question. On May 22, 2015, Respondent sent initial examination results to Petitioner, focused on Mr. Sauerhoefer’s amount of reasonable wages. Petitioner responded with a letter contesting those findings. On July 2, 2015, Respondent sent a letter to Petitioner explaining the findings with an included Form 4668, Employment Tax Examination Changes Report. The report concluded Petitioner failed to report reasonable wage compensation for Mr. Sauerhoefer for the tax years at issue, proposed he should have reported $40,000 in annual wages during those years, and concluded that Petitioner was liable for proposed employment tax increases, additions to tax under IRC sections 6651(a)(1) and (2) and penalties under section 6656. In response, Petitioner sent several emails and a letter contesting the amount of reasonable compensation. On May 11, 2016, an informal Appeals hearing was held where Petitioner continued to raise the reasonable compensation issue. On February 8, 2017, the Appeals Office sent a settlement offer letter to Petitioner that Petitioner did not accept. Respondent did not issue to Petitioner a notice of determination of worker classification for the tax years. On June 5, 2017, Petitioner filed a petition with the Tax Court, stating the “taxpayer disagrees with wages determined for 2012-2013 by the IRS and employment taxes assessed.”

On September 15, 2017, Respondent filed a motion to dismiss for lack of jurisdiction on two grounds. The first count is that no notice of determination of worker classification, as authorized by IRC section 7436 to form the basis for a Tax Court petition, was sent to Petitioner. The other count is that no other determination was sent from the Respondent to Petitioner that would grant Tax Court jurisdiction. On October 6, 2017, Petitioner filed a notice of objection to the Petitioner’s motion.

In the discussion of this case, Judge Armen states that Petitioner consistently treated Mr. Sauerhoefer as an employee during the tax years at issue. As a result, Respondent did not make a determination that he was an employee, but rather concluded that Petitioner failed to report reasonable wage compensation. As IRC section 7436(a)(1) confers jurisdiction on the Court to determine the “correct and proper amount of employment tax” when making a worker classification determination, not when concluding that Petitioner underreported reasonable wage compensation as occurred. Footnotes 3 and 4 discussed 7436(a) and 7436(a)(2), respectively, and help bring Judge Armen to the conclusion that Respondent did not make any determinations under 7436(a)(1) or (2). The Court granted the motion to dismiss because the Tax Court lacked jurisdiction over the case as Respondent never made any determination of worker classification and did not make a determination regarding relief under section 530 of the Revenue Act of 1978.

Footnote 5, however, notes that this is not the end of the story. Mr. Sauerhoefer is also an individual petitioner of the Tax Court with docket number 12527-17S, on the Tax Court calendar for the Atlanta, Georgia trial session that begins February 26, 2018. The notice of deficiency attached to the petition in that case states Respondent “determined that your compensation from Mas Construction is $40,000 per year rather than the $4,500 and $8,500 as reported on your returns for the taxable years ending December 31, 2012 and December 31, 2013, respectively”. Mr. Sauerhoefer is thus able to make his arguments to the Tax Court in February 2018 about how reasonable the compensation truly was.

Takeaway: While the S corporation did not have a notice of determination, Mr. Sauerhoefer had a notice of deficiency. Since the notice is necessary for Tax Court to have jurisdiction under the petition, one case survives by having that essential element.