Alvin S. Brown & Associates

In connection withr 26 U.S.C. § 7201, the Government was required to prove three elements at trial: “(1) the existence of a substantial tax debt, (2) willfulness of the nonpayment, and (3) an affirmative act by the defendant, performed with intent to evade or defeat the calculation or payment of the tax.” United States v. Josephberg, 562 F.3d 478, 488 [103 AFTR 2d 2009-1657] (2d Cir. 2009). Failing to file a tax return does not by itself constitute an affirmative act, United States v. Romano, 938 F.2d 1569, 1573 [68 AFTR 2d 91-5234] (2d Cir. 1991),

U.S. v. LITWOK, Cite as 109 AFTR 2d 2012-XXXX, 04/30/2012

UNITED STATES OF AMERICA, Appellee, v. EVELYN LITWOK, Defendant-Appellant.

Court Name:      UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT,

Docket No.:        Docket No. 10-1985-cr,

Date Decided:   04/30/2012

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT,

With respect to the tax evasion counts of conviction under 26 U.S.C. § 7201, the Government was required to prove three elements at trial: “(1) the existence of a substantial tax debt, (2) willfulness of the nonpayment, and (3) an affirmative act by the defendant, performed with intent to evade or defeat the calculation or payment of the tax.” United States v. Josephberg, 562 F.3d 478, 488 [103 AFTR 2d 2009-1657] (2d Cir. 2009). Litwok contends that, at most, the evidence indicated that she failed to file her returns, which does not satisfy the third element requiring some affirmative act. While we agree that failing to file a tax return does not by itself constitute an affirmative act, United States v. Romano, 938 F.2d 1569, 1573 [68 AFTR 2d 91-5234] (2d Cir. 1991),

We have previously described as examples of affirmative acts conduct such as making false statements to the IRS for the purpose of evading taxes, United States v. Klausner, 80 F.3d 55, 62 [77 AFTR 2d 96-1540] (2d Cir. 1996), establishing accounts in the names of other entities to conceal income, Josephberg, 562 F.3d at 491, and ““handling of one’s affairs to avoid making the records usual in transactions of the kind,”” id. (quoting Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943)). More broadly, we have held that “[a]n affirmative act includes “any conduct, the likely effect of which would be to mislead or to conceal.”” Klausner, 80 F.3d at 62 (quoting Spies, 317 U.S. at 499).

There are many different ways in which the tax may be evaded or an attempt made to evade a tax. Counts Two, Three, and Four allege that the defendant evaded or attempted to evade a tax by failing to file income tax returns for the years 1995, Count Two, 1996, Count Three, and 1997, Count Four.

As the Government acknowledges, the District Court’s further elaboration of the third element was error because it enabled the jury to conclude that simply failing to file a return — without, for example, any attempt by Litwok to conceal her income — could constitute an affirmative act. Cf. 3 Leonard B. Sand et al., Modern Federal Jury Instructions-Criminal, ¶ 59.01, Instr. 59-7 (2011) (noting that, if applicable, the jury should be instructed “that the failure to file a tax return is not sufficient by itself to satisfy this [third] element. Instead, the government must prove beyond a reasonable doubt the act of evasion described in the indictment.”). Because the jury instruction on tax evasion, viewed as a whole, was erroneous, the particular explanation regarding the third element should not be given again if Count Two is retried, and the jury should be properly instructed.

CONCLUSION

For the foregoing reasons, we REVERSE the judgment of conviction for tax evasion for the years 1996 and 1997 (Counts Three and Four), VACATE the judgment of conviction as to the counts of mail fraud and tax evasion for the year 1995 (Counts One and Two), and REMAND to the District Court for further proceedings consistent with this opinion.

—————————————————————————-

From one of the cases cited above:

“An affirmative act” of evasion “includes “any conduct, the likely effect of which would be to mislead or to conceal.”” United States v. Klausner, 80 F.3d 55, 62 [77 AFTR 2d 96-1540] (2d Cir. 1996) (quoting Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943)). “Such conduct includes “false statements made to Treasury representatives for the purpose of concealing unreported income.”” United States v. Klausner, 80 F.3d at 62 (quoting United States v. Beacon Brass Co., 344 U.S. 43, 45–46 [42 AFTR 654] (1952)); see also United States v. Winfield, 960 F.2d 970, 973 [70 AFTR 2d 92-5267] (11th Cir. 1992) (“an affirmative act constituting an evasion or attempted evasion of the tax occurs when false statements are made to the IRS after the tax was due”). Accordingly, “concealment of assets or covering up of sources of income, [and] handling of one’s affairs to avoid making the records usual in transactions of the kind” are examples of conduct sufficient to create an inference of evasion. Spies, 317 U.S. at 499.

IRS Memorandum May 3, 2012, Control Number: SBSE-05-0512-045, Expiration: May 3, 2013, Impacted: IRM: 5.8

MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS (CALIFORNIA, GULF STATES, AND SOUTH ATLANTIC)

FROM: Scott D. Reisher /s/ Scott D. Reisher Director, Collection Policy

SUBJECT: Reissuance of Guidance Involving Initial Offer Actions and First Contact Procedures in Field Offer in Compromise Cases

The purpose of this memorandum is to reissue interim guidance memorandum SBSE-05-0611-054 dated June 14, 2011, titled Initial Offer Actions and First Contact Procedures in Field Offer in Compromise Cases.

These interim procedures provide guidance to offer specialists (OS) relative to the initial review of offer cases, first contact procedures, and taxpayer discussions during an offer in compromise (OIC) investigation.

As stated in IRM 5.8.1.2, Timeliness of Offer Investigations, “The timeliness of case actions in an offer investigation is important not only to ensure the efficiency of the process but also is a key component of taxpayer satisfaction.” During initial contact with the taxpayer (TP) or Power of Attorney (POA), it is critical that the OS discuss the viability of the OIC and for the TP/POA to clearly understand what document(s) or information is required to make a recommendation on the acceptability of the OIC.

IRM 5.8.4.7(3) and 5.8.4.8 discuss the initial offer actions which must be completed by the OS and procedures for taxpayer contact. These actions include a review of the financial information, completion of a preliminary asset/equity table (AET) and income/expense table (IET), and contacting the taxpayer by telephone or in writing to secure additional information, if necessary.

Upon issuance of this memorandum, a deviation is being granted to allow for screening of offer cases to determine the taxpayer’s current compliance with return filing, current year estimated tax payments, current quarter federal tax deposits, and required payments under the Taxpayer Increase Prevention and Reconciliation Act of 2005 (TIPRA). The

2

area offices may establish processes to have the screening discussed in this memorandum conducted by tax examiners prior to assignment to the offer specialists.

If compliance screening is not conducted by the field area office until assignment to an OS, the OS should review the offer for current compliance, and if necessary, contact the TP/POA by telephone to discuss and set a reasonable deadline for any tax returns or tax payments which must be submitted prior to the offer investigation proceeding. If the taxpayer does not become compliant, the offer should be returned or closed as a mandatory withdrawal. Prior to returning the offer, internal sources must be researched to verify if any tax returns are pending or posted. The procedures in IRM 5.8.7.3 – Return Reconsideration will apply if it is determined that the taxpayer submitted returns/payments in a timely manner.

Additionally, during this initial screening process the OS should determine if any “delay of collection” criteria (as described in IRM 5.8.4.18) apply before completing the detailed financial evaluation. Since this process is being established to expedite case processing, the IRM timeframes to complete initial analysis when a separate compliance check and “delay of collection” determination(s) are made is extended to 45 days, or 50 days if the OS is not co-located with their manager, to allow the taxpayer time to comply any request for filing or payment.¹ NOTE: If appropriate, the OS may allow the taxpayer a reasonable period of time to become compliant, yet the initial financial analysis discussed in 2. below must be completed within the 50 day timeframe discussed.

NOTE: The OS is not limited in their discussion with the TP/POA during this “compliance” contact and may discuss additional issues relative to the offer investigation, including a taxpayer’s obvious ability to full pay the liability determined from the financial information submitted by the taxpayer and alternative resolutions.

Subsequent to the initial screening or if no screening was conducted, the following actions must be included in the OS initial offer actions:

1. Prior to contact with the TP/POA, available internal sources must be researched to verify and supplement taxpayer information. Information should not be requested from the taxpayer that is available through internal sources.

2. Upon completion of the initial financial analysis the OS, in most instances, should make initial contact with the TP/POA by telephone. The initial telephone contact discussion should include the following:

• Reasonable collection potential (RCP) as determined in the initial analysis and the viability of the taxpayer’s offer based on the information provided and reviewed.
• Any special circumstances or other issues that exist. The TP/POA should also be asked if there are any special circumstances or other issues that were not considered in the initial analysis.
• If financial analysis shows the taxpayer can fully pay via current installment agreement guidelines (absent special circumstances), alternative resolutions should be discussed with the taxpayer, if not previously discussed in the “compliance” contact, and an attempt

¹ If there are no compliance issues to address, the additional 15 days for initial analysis does not apply.

3

should be made to secure a withdrawal of the offer. If the taxpayer agrees to enter into an installment agreement, the field should process the agreement under normal procedures.

• Any information or documents that were not provided and inclusion would change the outcome of the case decision.

Any request for additional information discussed during the telephone contact may be supplemented with correspondence such as an additional information request letter.

NOTE: If you are able to leave a message on an identified VMS, request a call back within 2 business days. If you are not able to reach the TP/POA by phone within 2 business days or the TP/POA does not return your call, send an additional information request letter in accordance with IRM 5.8.4.8.

Discussion of the TP’s offer and the offer process by telephone with the TP or POA will expedite the offer investigation and allow the TP to understand the reasoning behind any recommendation. The discussion of any disputed asset values, encumbrance allowance/disallowance, income determinations, or expense allowance/disallowance should be thoroughly documented in the AOIC or ICS histories. This documentation will assist the manager, independent administrative reviewer, and Appeals in understanding the basis for the recommendation.

The OS should also remember the initial contact time frames are the maximum time frames for contact. Wherever possible, the OS should strive to make initial contact as soon as possible after case receipt.

If you have any questions, please feel free to contact me or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst.

cc: National Taxpayer Advocate

www.irs.gov

Burden of Proof Generally, taxpayers bear the burden of proving, by a preponderance of the evidence, that the determinations of the Commissioner in a notice of deficiency are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving entitlement to any claimed deductions. Rule 142(a)(1);INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992).

Section 7491(a)(1) provides that if, in any court proceeding, the taxpayer introduces credible evidence with respect to factual issues relevant to ascertaining the taxpayer’s liability for a tax, the burden of proof with respect to such factual issues will be placed on the Commissioner. Credible evidence is the quality of evidence which, after critical analysis, a court would find sufficient to decide the issue on if no contrary evidence were submitted. Baker v. Commissioner, 122 T.C. 143, 168 (2004) (quoting Higbee v. Commissioner, 116 T.C. 438, 442 (2001)).

Tax Lien Law

Pursuant to section 6321, the Federal Government obtains a lien against “all property and rights to property, whether real or personal” of any person liable for Federal taxes upon demand for payment and failure to pay. See Iannone v. Commissioner, 122 T.C. 287, 293 (2004). The lien arises automatically on the date of assessment and persists until the tax liability is satisfied or becomes unenforceable by reason of lapse of time. Sec. 6322; Iannone v. Commissioner, 122 T.C. at 293. The purpose of filing, pursuant to section 6323, notice of the lien that arises under section 6321 is to protect the Government’s interest in a taxpayer’s property against the claims of other creditors. See sec. 6323(a). Filing an NFTL validates the Government’s lien against a subsequent purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor. See id.; Stein v. Commissioner, T.C. Memo. 2004-124 [TC Memo 2004-124]; Lindsay v. Commissioner T.C. Memo. , 2001-285, aff’d, 56 Fed. Appx. 800 [91 AFTR 2d 2003-951] (9th Cir. 2003).  Pursuant to section 6321, the Federal Government obtains a lien against “all property and rights to property, whether real or personal” of any person liable for Federal taxes upon demand for payment and failure to pay. See Iannone v. Commissioner, 122 T.C. 287, 293 (2004). The lien arises automatically on the date of assessment and persists until the tax liability is satisfied or becomes unenforceable by reason of lapse of time. Sec. 6322; Iannone v. Commissioner, 122 T.C. at 293. The purpose of filing, pursuant to section 6323, notice of the lien that arises under section 6321 is to protect the Government’s interest in a taxpayer’s property against the claims of other creditors. See sec. 6323(a). Filing an NFTL validates the Government’s lien against a subsequent purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor. See id.; Stein v. Commissioner, T.C. Memo. 2004-124 [TC Memo 2004-124]; Lindsay v. Commissioner T.C. Memo. , 2001-285, aff’d, 56 Fed. Appx. 800 [91 AFTR 2d 2003-951] (9th Cir. 2003).

If the Commissioner chooses to file an NFTL, he must provide the taxpayer with written notice not more than five business days after the filing and he must advise the taxpayer of the right to a hearing before the Appeals Office. Sec. 6320(a). If the taxpayer requests such a hearing, the Appeals Office must verify that the requirements of any applicable law or administrative procedure have been met. Secs. 6320(c), 6330(c)(1). The Appeals Office must also determine whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. Secs. 6320(c), 6330(c)(3). Finally, the Appeals Office must consider any issues raised by the taxpayer at the hearing, including appropriate spousal defenses, challenges to the appropriateness of collection actions, and offers of collection alternatives such as an installment agreement. Secs. 6320(c), 6330(c)(2) and (3).

If the Commissioner chooses to file an NFTL, he must provide the taxpayer with written notice not more than five business days after the filing and he must advise the taxpayer of the right to a hearing before the Appeals Office. Sec. 6320(a). If the taxpayer requests such a hearing, the Appeals Office must verify that the requirements of any applicable law or administrative procedure have been met. Secs. 6320(c), 6330(c)(1). The Appeals Office must also determine whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. Secs. 6320(c), 6330(c)(3). Finally, the Appeals Office must consider any issues raised by the taxpayer at the hearing, including appropriate spousal defenses, challenges to the appropriateness of collection actions, and offers of collection alternatives such as an installment agreement. Secs. 6320(c), 6330(c)(2) and (3).

S. J. Balsamo, et ux. v. Commissioner, TC Memo 2012-109 , Code Sec(s) 6320; 6330.

S. JOSEPH BALSAMO AND EDNA MAE BALSAMO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Case Information:

Code Sec(s):       6320; 6330

Docket:                Dkt. No. 1235-10L.

Date Issued:       04/12/2012.

Judge:   Opinion by Wells, J.

Tax Year(s):

Disposition:

HEADNOTE

1.

Reference(s): Code Sec. 6320; Code Sec. 6330

Syllabus

Official Tax Court Syllabus

Counsel

S. Joseph Balsamo and Edna Mae Balsamo, pro sese.

Shannon E. Loechel, for respondent.

WELLS, Judge

This case is before the Court on respondent’s motion for summary judgment pursuant to Rule 121. 1 We must decide whether respondent’s Appeals Office abused its discretion when it upheld respondent’s notice of Federal tax lien (NFTL) with respect to petitioners’ 1996, 1997, 1998, 1999, 2001, 2004, 2005, and 2006 tax years.

Background

The facts set forth below are based upon examination of the pleadings, moving papers, responses, and attachments. Petitioners are husband and wife who resided in Georgia at the time they filed their petition.

Petitioners filed tax returns for their 1996, 1997, and 1998 tax years but failed to pay the full amount of their tax liability for each year. Additionally, petitioners also failed to report some income on their 1996 and 1998 returns, and respondent subsequently issued notices of deficiency to petitioners with respect to those years. Petitioners did not file petitions in the Tax Court disputing those notices of deficiency. On or about March 14, 2002, respondent sent petitioners a notice of intent to levy with respect to their 1996, 1997, and 1998 tax years. Petitioners had an equivalent hearing with respect to the proposed levy for their 1996, 1997, and 1998 tax years, and on December 6, 2002, respondent’s Appeals Office issued a decision letter (2002 decision letter) determining not to uphold the proposed levy. The 2002 decision letter explained that the basis for the Appeals Office’s determination was that petitioners had a small balance due, had filed their return and paid their tax liability for 2000, had a modest income, and were elderly and in poor health. The 2002 decision letter concluded: “Based on the Balsamos [sic] ages and health conditions, the decision to place the account in currently not collectible status is the least intrusive of the collection alternatives. No levy action is currently proposed by Compliance and none should be initiated unless information shows a substantial positive change in their financial affairs.”

For their 1999, 2001, 2004, 2005, and 2006 tax years, petitioners similarly filed their tax returns but failed to pay the amounts due. Additionally, they failed to report some of their income on their 2006 tax return, and respondent issued petitioners a notice of deficiency. Petitioners did not petition the Tax Court with respect to the 2006 notice of deficiency. On various dates during 2006, respondent sent petitioners notices of intent to levy with respect to their 1999, 2001, and 2004 tax years. Petitioners requested a collection hearing with respect to the notices of intent to levy. Respondent contends that the Appeals Office conducted an equivalent hearing and issued a decision letter on May 29, 2007 (2007 decision letter); however, respondent cannot find a copy of the 2007 decision letter. Nonetheless, petitioners refer to the 2007 decision letter in some of their correspondence with respondent and they do not dispute that they received the 2007 decision letter, so we will accept that it was sent to them and that the 2007 decision letter contained a determination to uphold the proposed levies. Respondent has not levied to collect petitioners’ 1999, 2001, or 2004 tax liability.

On or about November 12, 2008, respondent issued petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 with respect to their 1996, 1997, 1998, 1999, 2001, 2004, 2005, and 2006 tax years. Petitioners timely filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing. In an attachment to the Form 12153, petitioners proposed to settle their tax liability of approximately $23,000 by making six monthly payments of $200 each for a total of $1,200 (informal offer-in-compromise). At the time they filed their Form 12153, petitioners had not yet submitted their 2007 tax return, but they submitted that return in response to a request from respondent’s Appeals Office. After receiving a copy of petitioners’ 2007 tax return, respondent’s Appeals Office granted petitioners a face-to-face hearing. Petitioners’ case was subsequently assigned to C.M. Hardman (Ms. Hardman) for the face-to-face hearing. Before the hearing, Ms. Hardman contacted petitioners and requested that they complete a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and submit copies of their tax returns from 1996 through 2008. On May 28, 2009, Ms. Hardman met with S. Joseph Balsamo (petitioner) for the collection hearing. Mrs. Balsamo did not appear at the hearing. At the hearing, Ms. Hardman pointed out to petitioner that petitioners had made some errors on their 2007 tax return and that they had not yet submitted their 2008 return. She also instructed petitioner to complete Form 433-A. Petitioner agreed to correct the errors on petitioners’ 2007 return, to submit their 2008 return, and to submit Form 433-A. At the hearing, Ms. Hardman also explained to petitioner that he is required to report and pay self-employment tax with respect to his part-time work as a computer consultant.

Ms. Hardman met with petitioner for a followup hearing on June 25, 2009. Petitioner brought the 2002 decision letter to the hearing and contended that petitioners had been told by respondent that their account was in “currently not collectible” status and that they therefore no longer owed taxes for 1996, 1997, and 1998. Ms. Hardman explained to petitioner that “currently not collectible” is a temporary status and does not mean that petitioners no longer owe taxes.

Petitioner had not completed Form 433-A or submitted petitioners’ 2008 tax return, and Ms. Hardman therefore advised him that she was not able to consider petitioners’ informal offer-in-compromise at that time. However, she gave him additional time to submit the required documents. Additionally, Ms. Hardman advised petitioner that the informal offer-in-compromise was unlikely to be accepted because petitioners had at least $200,000 in equity in their home. Petitioners were not able to complete the Form 433-A by the date agreed upon, but Ms. Hardman again granted them additional time. On July 21, 2009, Ms. Hardman received a Form 433-A from petitioners, but they failed to include copies of their bank statements, despite the fact that the Form 433-A clearly states: “Please include your current bank statements (checking, savings, money market, and brokerage accounts) for the past three months for all accounts.” Petitioners attached other required documents to the Form 433-A. On the Form 433-A, petitioners stated that the current value of their home was $200,000 but that the home was subject to an existing mortgage of $23,900. Petitioners also disclosed that they owned stock with a current value of $32,000.

On or about December 17, 2009, respondent’s Appeals Office issued to petitioners a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination), sustaining the NFTL. The notice of determination explained that because petitioners failed to file their 2008 tax return 2 and because they failed to make the required estimated tax payments with respect to petitioner’s self-employment income for 2008 and 2009, they were not in compliance with paying and filing requirements and were therefore ineligible to have their collection alternative considered. The notice of determination stated that the Appeals Office had verified that all legal and procedural requirements had been met and addressed all other issues raised by petitioners.

After receiving the notice of determination, petitioners timely filed their petition in this Court. Petitioners subsequently also filed an amended petition.

Discussion

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials and may be granted where there is no genuine issue of material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b);Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences are viewed in the light most favorable to the nonmoving party. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 [73 AFTR 2d 94-1198] (7th Cir. 1994). However, the party opposing summary judgment must set forth specific facts that show a genuine issue of material fact exists and may not rely merely on allegations or denials in the pleadings. Rule 121(d).

Where the underlying tax liability is not in issue, we review the determination of the Appeals Office for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). In reviewing for abuse of discretion, we will reject the determination of the Appeals Office only if the determination was arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 308, 320 (2005), aff’d, 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006). Petitioners do not dispute the underlying liabilities. Consequently, we review the determination of the Appeals Office for abuse of discretion.

Where, as in the instant case, we review the Appeals Office’s determination to sustain the filing of an NFTL for abuse of discretion, we review the reasoning underlying that determination to decide whether it was arbitrary, capricious, or without sound basis in fact or law. We do not substitute our judgment for that of the Appeals Office, and we do not decide independently whether we believe the lien should be withdrawn. See id.

Respondent contends that the determination of the Appeals Office should be sustained because petitioners failed to provide the required information and were not in compliance with their obligations to file estimated taxes with respect to petitioner’s self-employment income. We agree; either of those grounds would be sufficient, standing alone, to justify the Appeals Office’s refusal to consider petitioners’ offer-in-compromise. We have consistently held that it is not an abuse of discretion for the Appeals Office to reject collection alternatives and sustain the proposed collection action on the basis of the taxpayer’s failure to submit requested financial information. See Huntress v. Commissioner, T.C. Memo. 2009-161 [TC Memo 2009-161]; Prater v. Commissioner, T.C. Memo. 2007-241 [TC Memo 2007-241]; Roman v. Commissioner, T.C. Memo. 2004-20 [TC Memo 2004-20]. In doing so, the Appeals Office is following the requirements of section 301.6320-1(e)(1), Proced. & Admin. Regs. Petitioners contend that the Appeals Office did not instruct them to include copies of their bank statements with the Form 433-A. However, the Form 433-A clearly states: “Please include your current bank statements (checking, savings, money market, and brokerage accounts) for the past three months for all accounts.” Petitioners should have been aware that they were required to include copies of all their bank statements with the Form 433- A, and they were given several extensions of time to submit the completed Form 433-A, yet they failed to do so. Accordingly, we conclude that it was not an abuse of discretion for the Appeals Office to refuse petitioners’ offer-in-compromise on the basis that petitioners failed to submit all of the required documents.

Similarly, we have held that it is not an abuse of discretion for the Appeals Office to refuse to consider a taxpayer’s offer-in-compromise on the grounds that the taxpayer has a history of noncompliance and is not in compliance with current tax obligations. See Giamelli v. Commissioner 129 T.C. 107, 111-112 (2007). In , doing so, the Appeals Office is following the requirements of the regulations.See sec. 301.6320-1(d)(2), , Proced. & Admin. Regs. (“the IRS does not consider offers to compromise from taxpayers who have not filed required returns or have not made certain required deposits of tax”). Although petitioners dispute respondent’s contention that they did not file their 2008 tax return, they have not contested respondent’s contention that they failed to make estimated tax payments with respect to petitioner’s self-employment income. Accordingly, petitioners were not in compliance with their current tax obligations, and it was not an abuse of discretion for respondent to refuse their offer-in-compromise.

Consequently, we conclude that no genuine issues of material fact remain and hold that respondent is entitled to judgment as a matter of law that there was no abuse of discretion in the determination to reject petitioners’ informal offer-in-compromise and sustain the NFTL. Accordingly, we will grant respondent’s motion for summary judgment.

In reaching these holdings, we have considered all the parties’ arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate order and decision will be entered for respondent.

1

Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.

2

As we explain below, petitioners dispute respondent’s contention that they never filed their 2008 tax return, but we conclude that this dispute is irrelevant to the question of whether the Appeals Office abused its discretion.

Justin C. Laue v. Commissioner, TC Memo 2012-105 , Code Sec(s) 61; 6651; 6654; 6673; 7491.
JUSTIN CARL LAUE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .Case Information:
Code Sec(s): 61; 6651; 6654; 6673; 7491Docket: Docket Nos. 23661-10, 23666-10.Date Issued: 04/11/2012HEADNOTE
XX.
Reference(s): Code Sec. 61; Code Sec. 6651; Code Sec. 6654; Code Sec. 6673; Code Sec. 7491
Syllabus
Official Tax Court Syllabus
Counsel
Justin Carl Laue, pro se.Joseph A. Peters, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Petitioner asserts that the money he received from Broadband Management Solutions, L.L.C. (BMS), specifically wages and nonemployee compensation he earned during 2005 and 2006, was for “labor” and not “services” and therefore does not constitute taxable income. He filed Forms 1040, U.S. Individual Income Tax Return, for 2005 and 2006, reporting zero as the amount of his taxable income for each year. He claimed refunds for all amounts withheld from his paychecks, e.g., Federal income tax withholding, Federal employment tax withholding, and State income tax withholding. After initially processing these purported returns, respondent deemed each to be frivolous. Respondent thereafter determined petitioner’s income from third-party payor information, prepared substitutes for returns, and issued petitioner notices of deficiency. In those notices, respondent made the following determinations:
Additions to tax                                             Sec.           Sec.                Sec.                                                           6651(a)(2)  1                          Deficiency         6651(a)(1)                            6654(a)        Year       2005              $30,869           $6,945.53        $7,717.25          $1,238.22        2006              42,988             9,672.30         8,167.72         2,034.38       <1>               Respondent concedes the sec. 6651(a)(2) additions to tax.After respondent’s concession, the issues remaining for decision are: (1) whether petitioner had unreported income as respondent determined; (2) whether petitioner is liable for the additions to tax for failing to timely file his income tax returns; (3) whether petitioner is liable for the additions to tax for failing to make estimated tax payments; and (4) whether petitioner is liable for sanctions pursuant to section 6673.
All section references are to the Internal Revenue Code, as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practices and Procedures.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference. Petitioner resided in Colorado when he filed his petitions.
During 2005 and 2006 petitioner worked for BMS. BMS paid petitioner for his services. At trial, after repeatedly evading questions posed to him by the Court, petitioner begrudgingly stated that the money he received from BMS was for “labor” but claimed that the amounts received were not “gains, profit or income” made in the course of a “trade or business”.
In 2005 BMS made two types of payments to petitioner. One type, in the total amount of $69,653, was characterized by BMS as wages in its payroll register and on the Form W-2, Wage and Tax Statement, that BMS provided to petitioner and the Internal Revenue Service. That Form W-2 is included in the record. The other type of payment was characterized by BMS as nonemployee compensation. Respondent determined the amount of petitioner’s nonemployee compensation to be $20,801. However, the record does not contain direct evidence as to the specific amount.
In 2006 BMS paid petitioner $130,308 as nonemployee compensation. A Form 1099-MISC, Miscellaneous Income, reporting that BMS paid petitioner $121,890.08 as nonemployee compensation for 2006 is contained in the record.
Petitioner’s 2005 Form 1040 reported the following amounts of income: (1) $5,210.61 that petitioner received as distributions from retirement accounts; petitioner characterized these distributions as wages, and (2) $258 as a State income tax refund. No other income was reported on the 2005 Form 1040. Petitioner claimed withholding credits totaling $13,719.51, an amount he calculated by adding all amounts withheld from his BMS paychecks as well as the standard deduction. Attached to the 2005 Form 1040 were (1) a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., on which petitioner reported he received zero wages, tips, or other compensation, and (2) a “corrected” Form 1099-MISC on which petitioner reported he received zero in nonemployee compensation. On the “corrected” Form 1099-MISC, petitioner typed:
This corrected Form 1099-MISC is submitted to rebut a document known to      have been submitted by the party identified above as `PAYER’ [i.e., BMS]      which erroneously alleges a payment to the party identified above as the      `RECIPIENT’ of “gains, profit or income” made in the course of a “trade or      business”. Under penalty of perjury, I declare that I have examined this      statement and to the best of my knowledge and belief, it is true correct, and      complete.On his 2006 Form 1040 petitioner reported he received no wages, nonemployee compensation, or income of any kind. Petitioner attached two “corrected” Forms 1099-MISC; each stated that he received no nonemployee compensation. Both Forms 1099-MISC contained a typed disclaimer stating that the Forms 1099-MISC BMS filed “erroneously alleges a payment” to petitioner, made “in the course of a `trade or business”.
On May 10, 2007, respondent mailed petitioner a letter informing him that his purported tax return for 2005 had been rejected. On March 26, 2008, respondent mailed petitioner a letter informing him that his purported tax return for 2006 had been rejected. On May 7, 2008, respondent assessed frivolous return penalties against petitioner for his 2005 tax year (petitioner does not challenge these penalties). On May 28, 2010, respondent prepared substitutes for returns pursuant to section 6020(b) for 2005 and 2006. On July 21, 2010, respondent mailed petitioner two notices of deficiency, one for 2005 and the other for 2006.
OPINION
I. Whether Petitioner Had Unreported Income In general, the Commissioner’s determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it wrong. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). In unreported income cases, however, the Commissioner must establish “some reasonable foundation for the assessment” to preserve the presumption of correctness. See Erickson v. Commissioner, 937 F.2d 1548, 1551 [68 AFTR 2d 91-5262] (10th Cir. 1991), aff’g T.C. Memo. 1989-552 [¶89,552 PH Memo TC]. Respondent has established that reasonable foundation.
With respect to 2005, respondent introduced a copy of the Form W-2 BMS prepared reporting that it paid petitioner $69,653 in wages. The notice of deficiency refers to this amount as well as to $20,801 in nonemployee compensation. Attached to the notice of deficiency were Form 4549, Income Tax Examination Changes, and Form 886-A, Explanation of Items. These documents detail the calculations respondent made in reaching his determination for 2005. With respect to 2006, respondent introduced a Form 1099-MISC prepared by BMS reporting that it paid petitioner $121,890.08 as nonemployee compensation. The notice of deficiency for 2006 refers to a total of $130,308 in nonemployee compensation. Form 4549 and Form 886-A were attached to the notice of deficiency and provide the calculations respondent used in making his determination for 2006. These documents demonstrate that respondent had information linking petitioner to an income-producing activity, i.e., his employment.
Respondent’s documentation is similar to that presented inRapp v. Commissioner, 774 F.2d 932 [56 AFTR 2d 85-6202] (9th Cir. 1985), where the Court of Appeals for the Ninth Circuit held that the Commissioner had sufficiently linked the taxpayers with income-producing activities. The record inRapp contained the notices of deficiency, summonses to third parties, Form 1040, and various documents the Commissioner prepared. In finding these documents sufficient for the requisite linkage, the court stated: “these records reflect that the IRS had before it information linking the Rapps [the taxpayers] with income-producing activities, including employment, the sale of their residence, and involvement in a business * * * [although] the underlying information does not itself appear in the record”.Id. at 935. The court noted that the taxpayers did not attack the presumption of correctness of the Commissioner’s determination on the ground that there was no linking of the taxpayers with the income-producing activities, but rather argued only that the Commissioner did not properly allow them certain deductions. 1 Id.; see also Banister v. Commissioner, T.C. Memo. 2008-201 [TC Memo 2008-201], aff’d, 418 Fed. Appx. 637 [107 AFTR 2d 2011-1156] (9th Cir. 2011).
Petitioner does not challenge respondent’s determination on the ground that there was no information linking him with the income-producing activity. Moreover, we find it telling that petitioner attached to his 2005 Form 1040 a “corrected” Form 1099-MISC and attached two “corrected” Forms 1099-MISC to his 2006 Form 1040. All of these “corrected” Forms 1099-MISC showed zero income. We ascertain from the aforesaid actions that petitioner received at least one Form 1099-MISC for 2005 and at least two Forms 1099-MISC for 2006 from BMS. This would, in turn, enable us to ascertain that, although the record contains no direct evidence as to the specific amounts he received that BMS designated as nonemployee compensation for 2005 and 2006, petitioner in reality received amounts in excess of those reflected by direct evidence. 2 , T.C. 672 (1977). This is a higher evidentiary standard than that required by the Court of Appeals for the Tenth Circuit.
We therefore find that the connection between petitioner and the income-producing activity is sufficiently acknowledged to permit the presumption of correctness to attach to respondent’s determination. See Rapp v. Commissioner, 774 F.2d at 935; Hahn v. Commissioner, T.C. Memo. 1992-203 [1992 RIA TC Memo ¶92,203]. Petitioner thus bears the burden of proving respondent’s deficiency determination to be arbitrary or erroneous. He has failed to do so.
Petitioner argues that the moneys he received from BMS do not constitute income. He further argues that because respondent initially processed his purported 2005 and 2006 Federal income tax returns, respondent is required to accept those returns as valid.
Petitioner contends that the money he received from BMS is for his “labor” and is not taxable because it was not “gains, profit or income” made in the course of a “trade or business”. Petitioner’s contention is characteristic of tax-protester rhetoric that has been universally rejected by this and other courts.
Section 61(a)(1) defines gross income as all income from whatever source derived, including compensation for services. Petitioner’s position is frivolous and devoid of any basis in law. We need not refute petitioner’s logic with somber reasoning and copious citation of precedent, for to do so might suggest that it has some colorable merit. See Crain v. Commissioner, 737 F.2d 1417, 1417 [54 AFTR 2d 84-5698] (5th Cir. 1984); Wnuck v. Commissioner, 136 T.C. 498 (2011).
Petitioner’s second argument is that because his purported 2005 and 2006 Federal income tax returns were initially processed as valid, respondent is (1) forbidden from reclassifying those returns as frivolous, and (2) bound to accept his tax computation. Petitioner cites Service Center Advice 200114033 (Apr. 6, 2001) for the proposition that “Once the document is treated by the Service as a valid return, it is deemed to have satisfied the *** Beard v. Commissioner, 82 T.C. 766 [ (1984), aff'd per curiam, 793 F.2d 139 [58 AFTR 2d 86-5290] (6th Cir. 1986)] test, and, therefore, should be considered a return for all tax purposes.” Initially we note that a Service Center Advice is not precedent, is not law, and is not binding. Regardless, petitioner misconstrues Service Center Advice 200114033. That Advice merely states that in cases where the Commissioner accepts a tax return as valid for some purposes, he must treat that return as valid for all purposes. It does not state that if the Commissioner mistakenly begins to process a frivolous return as valid, the Commissioner may not correct the error.
Respondent did not act in an arbitrary or erroneous manner by rejecting petitioner’s 2005 and 2006 tax returns as frivolous. In Beard v. Commissioner, 82 T.C. at 777, we held that for a tax return to be considered valid, four requirements must be satisfied: “First, there must be sufficient data to calculate tax liability, second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.” Petitioner’s purported returns fail the very first test because he did not include his wages and nonemployee compensation on those returns. Moreover, he attached a Form 4852 and “corrected” Forms 1099-MISC in an affirmative attempt to avoid reporting the amounts of his income. Petitioner’s purported returns also fail the third test because he takes an unreasonable position in claiming that wages and nonemployee compensation he received are not income. As we previously stated in Coulton v. Commissioner, T.C. Memo. 2005-199 [TC Memo 2005-199]: “the Commissioner should not be forced to accept as a return a document clearly not intended to provide the required information.”
Petitioner refers to the opinion of the Court of Appeals for the Ninth Circuit in United States v. Long, 618 F.2d 74 [46 AFTR 2d 80-5004] (9th Cir. 1980), holding that a return filed by an individual who “had inserted zeros in the spaces reserved for entering exemptions, income, tax, and tax withheld” constituted a valid return. The court therein concluded that the Commissioner should have accepted the taxpayer’s income tax returns as valid because “A return containing false or misleading figures is still a return.” Id. at 76. Petitioner’s case is appealable to the Court of Appeals for the Tenth Circuit, whose opinions pursuant toGolsen v. Commissioner,54 T.C. 742 (1970), aff’d, 445 F.2d 985 [27 AFTR 2d 71-1583] (10th Cir. 1971), we follow.
In United States v. Rickman, 638 F.2d 182 [47 AFTR 2d 81-379] (10th Cir. 1980), a criminal case, an individual inserted zeros in all of the spaces on his tax return. The taxpayer, relying on Long, argued that his was a valid return. The Court of Appeals for the Tenth Circuit reviewed the opinion of the Court of Appeals for the Ninth Circuit in Long and stated that “we respectfully disagree with that decision.” Rickman, 638 F.2d at 184. The court then held that the taxpayer had failed to file a valid tax return. We therefore find that petitioner has failed to establish that respondent’s determination of his unreported income was arbitrary or erroneous. We sustain respondent’s determination in that regard.
II. Additions to Tax Section 7491(c) provides that the Commissioner bears the burden of production and must produce sufficient evidence showing the imposition of an addition to tax or a penalty is appropriate. If the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner’s determination is incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
A.  Section 6651(a) Addition to Tax Section 6651(a) imposes an addition to tax for failure to file an income tax return by the time prescribed by law unless the taxpayer proves that such failure is due to reasonable cause and not willful neglect. See United States v. Boyle, 469 U.S. 241, 245 [55 AFTR 2d 85-1535] (1985); McGowan v. Commissioner, T.C. Memo. 2009-172 [TC Memo 2009-172]. Respondent has met his burden of production by demonstrating that petitioner’s purported Federal tax returns were not valid under the test set forth inBeard, as noted supra p. 11. Petitioner has not otherwise provided a reasonable cause for not filing. We therefore sustain respondent’s imposition of the addition to tax under section 6651(a)(1).
B.  Section 6654(a) Addition to Tax Section 6654(a) imposes an addition to tax on individual taxpayers who underpay their estimated income tax. Respondent determined that petitioner is liable for the addition to tax for 2005 and 2006. A taxpayer has an obligation to pay estimated tax for a particular year if he has a “required annual payment” for that year. Sec. 6654(d). A “required annual payment” is generally equal to the lesser of (1) 90% of the tax shown on the individual’s return for that year (or if no return is filed, 90% of his or her tax for the year), or (2) if the individual filed a return for the immediately preceding taxable year, 100% of the tax shown on that return. Sec. 6654(d)(1); Wheeler v. Commissioner, 127 T.C. 200, 210-212 (2006), aff’d, 521 F.3d 1289 [101 AFTR 2d 2008-1696] (10th Cir. 2008); Brennan v. Commissioner, T.C. Memo. 2009-77 [TC Memo 2009-77]. Respondent may meet his burden of production by showing petitioner’s liability for the year at issue and the immediately preceding year.
Respondent has demonstrated that petitioner had tax liabilities for 2005 and 2006 and that he made no tax payments. Respondent established, and petitioner conceded, that petitioner had a tax liability for 2004. Respondent introduced transcripts showing that petitioner filed a Federal income tax return for 2004, that he had a tax liability for that year, and that he paid the 2004 tax. In contrast, petitioner did not offer any evidence of his own to refute respondent’s evidence. Nor did petitioner argue or establish any of the defenses enumerated in section 6654(e). Consequently, respondent’s imposition of the section 6654(a) addition to tax is sustained. See Perkins v. Commissioner, T.C. Memo. 2011-207 [TC Memo 2011-207].
III.  Section 6673 Sanctions At trial respondent’s counsel requested that the Court impose sanctions against petitioner pursuant to section 6673(a)(1). Section 6673(a)(1) authorizes the Court to require a taxpayer to pay a penalty to the United States in an amount not to exceed $25,000 whenever it appears to the Court that the taxpayer instituted or maintained the proceeding primarily for delay or that the taxpayer’s position in the proceeding is frivolous or groundless. Petitioner was notified of respondent’s intention to pursue sanctions under section 6673 both in respondent’s motion for partial summary judgment, filed September 20, 2011, and in respondent’s pretrial memorandum. Petitioner nonetheless went ahead in making his frivolous arguments at trial.
Petitioner’s position in these cases is frivolous and groundless. His argument that the wages and nonemployee compensation paid to him by his employer are not income lacks merit.
Petitioner was evasive throughout his trial in responding to the Court’s questions. He denied receiving wages from BMS; he denied he provided services to BMS; and he denied that BMS was in a trade or business. 3 We agree with respondent that sanctioning petitioner is warranted. Pursuant to the authority granted to us under section 6673(a)(1), we shall require petitioner to pay to the United States a penalty of $5,000.
To reflect respondent’s concessions,
Decisions will be entered under Rule 155.
1  The Court of Appeals for the Ninth Circuit requires the Commissioner to present a minimal evidentiary foundation for the deficiency in unreported income cases. See Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), rev’g 67 T.C. 672 (1977). This is a higher evidentiary standard than that required by the Court of Appeals for the Tenth Circuit.2  We note that sec. 6201(d) is not applicable. Sec. 6201(d) provides that if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return (e.g., a Form W-2 or a Form 1099-MISC) and has fully cooperated with the Secretary, then the Secretary has the burden of producing reasonable and probative information regarding the deficiency in addition to the information reported on the information returns. Petitioner’s arguments are not reasonable and he has not cooperated with respondent’s agents.3  Petitioner argued that “trade or business” is defined as the performance or the function of a public office.

The Supreme Court will not review a former corporate officer’s liability for section 6672 penalties.  Conway, (CA 5th cir 7/19/2011) 108 AFTR 2nd 2011-5336.  The Supreme Court has declined to review a decision of the Fifth Circuit that the president/CEO of a defunct airline was a responsible person who willfully failed to remit excise taxes. The Fifth Circuit rejected the taxpayer’s claims that he relied on counsel in paying other creditors before IRS and that a post-9/11 law extending the date of payment excused payment altogether.Background. Under Code Sec. 6672(a), if an employer fails to properly pay over certain taxes, including transportation excise taxes, IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is “willfulness” for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.Facts. Michael Conway founded and operated National Airlines, Inc. (National), and was National’s chief executive officer (CEO), president, and chairman of its board of directors during the tax periods at issue (quarters ending Sept. 30, 2000; Sept. 30, 2001; and Dec. 31, 2001). National began flying passengers in ’99, but was under bankruptcy protection by December of 2000 and ceased operations at the end of 2001. When National stopped doing business, it had reported but failed to pay transportation excise taxes for the tax periods at issue of $1,832,501.01, $3,497,448.32, and $4,803,626.85, respectively.Evidence showed that Conway knew of the unpaid excise taxes for the third quarter of 2000, at the latest, when National declared bankruptcy. Further, he knew of the unpaid taxes from 2001, at the latest, on Sept. 22, 2001, when Congress passed the Air Transportation Safety and System Stabilization Act (the Act) giving airlines a deferral of time within which to pay their excise taxes.Conway was an authorized check signer on each of National’s checking accounts, ran National’s day-to-day operations, continued to receive his salary (the highest in the company) after knowing of the unpaid taxes, and personally paid, authorized, or acquiesced in the payment of millions of dollars to non-IRS creditors. Evidence further showed that he had the authority to determine which bills were paid. Conway admitted that the excise taxes collected by National weren’t segregated into separate bank accounts.In National’s bankruptcy, IRS filed an administrative claim for over $11 million, most of which reflected the unpaid excise taxes from 2001. National never objected to the claim. The Chapter 7 trustee allowed IRS’s claim in its entirety.On or around Mar. 14, 2003, IRS notified Conway of its intent to assess trust fund recovery penalties against him, which he timely appealed on May 9. IRS rejected his appeal and made its assessments against Conway under Code Sec. 6672 on Mar. 28, 2006.Conway argued that the Act converted the unpaid excise taxes from trust funds to short-term loans, effectively making the government a partner with the airlines, and that he didn’t pay the excise taxes based on counsel’s advice. He also argued that he wasn’t a responsible person, and that he didn’t act willfully.District Court sides with IRS. The district court found that the facts clearly showed that Conway was liable as a matter of law—he was the chief individual responsible for the overall business of National, he was its CEO and president, he was an authorized check signer, and he could hire and fire employees—and rejected his argument that he relied on counsel as “conclusory and disingenuous.” It further found that he acted willfully, as shown by evidence that he authorized payments to creditors other than IRS after learning of the unpaid taxes, and rejected his argument that National’s bankruptcy created an encumbrance on the available funds that prevented him from making payments to IRS.The court also considered, and ultimately rejected, his argument that the Act excused payment of the excise taxes, finding that there was no indication that Congress intended to do anything more than defer their payment. The Act and accompanying IRS guidance unambiguously provided for an extension of time to pay, and not forgiveness of, the excise taxes.CONWAY v. U.S., Cite as 108 AFTR 2d 2011-5336 (647 F.3d 228), 07/19/2011 , Code Sec(s) 6672; 4261________________________________________Michael J. CONWAY, PLAINTIFF-APPELLANT v. UNITED STATES OF AMERICA, DEFENDANT-APPELLEE.Case Information:[pg. 2011-5336]Code Sec(s): 6672; 4261Court Name: U.S. Court of Appeals, Fifth Circuit,Docket No.: No. 10-40485,Date Decided: 07/19/2011.Prior History: District Court, (2010, DC TX)  105 AFTR 2d 2010-1310, 2010-1 USTC ¶50297, adopting (2010, DC TX)  105 AFTR 2d 2010-1299, affirmed. Earlier proceedings at (2009, DC TX)  104 AFTR 2d 2009-7803, adopting (2009, DC TX)  104 AFTR 2d 2009-7802 and reconsidering in part and vacating (2009, DC TX)  103 AFTR 2d 2009-2525, adopting (2009, DC TX)  103 AFTR 2d 2009-2523.Tax Year(s): Years 2000, 2001.Disposition: Decision against Taxpayer.Cites: 647 F.3d 228, 2011-2 USTC P 50,512, 2011-2 USTC P 70304.HEADNOTE1. 100% penalty for failure to pay over trust fund taxes—air transport excise taxes—responsible person—officers of bankrupt corps.—willfulness—refunds— counterclaims—summary judgment. District court properly granted govt. summary judgment on its Code Sec. 6672 penalty claim that CEO of bankrupt airline co. was liable for not paying excise taxes that co. collected from passengers over to IRS. It was clear that taxpayer was responsible person during all periods, including time after which co. filed bankruptcy, when considering his status as CEO/founder/pres./ board chair and facts that he had hiring/firing and check-signing authority. It was also clear that he acted willfully when considering that he paid other creditors ahead of IRS despite knowing taxes were going unpaid. Reasonable cause defense that he relied on advice of counsel was belied by facts that purported counsel advice just comprised general advice about co. closing and reopening its accounts at time of bankruptcy filing and/or other vague statements that didn’t contain any advice or suggestion that taxes shouldn’t be paid or weren’t owed. Also, alternative defenses that taxes were excused by operation of Sept. 11 terrorist attacks and Air Transportation Safety and System Stabilization Act or that there were no available unencumbered funds were meritless; and allegation that taxpayer believed he had arranged for taxes to be paid was irrelevant because regardless of any good faith belief in what was arranged, other creditors were still paid ahead of IRS.Reference(s): ¶ 66,725.02(30) ; ¶ 66,725.01(37) USTR Excise Taxes ¶42,615.01(3) Code Sec. 6672; Code Sec. 42612. 100% penalty for failure to pay over trust fund taxes—proof—effect of bankruptcy—air transport excise taxes—claims and counterclaims—estoppel. These issues weren’t discussed on appeal.Reference(s): ¶ 66,725.01(50) ; ¶ 74,338.531 Code Sec. 6672; Code Sec. 4261OPINIONIN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT,Appeal from the United States District Court for the Eastern District of TexasBefore JOLLY, HAYNES, and GRAVES, Circuit Judges.Judge: HAYNES, Circuit Judge:Michael Conway (“Conway”) appeals from the district court’s summary judgment determination that, pursuant to 26 U.S.C.   § 6672, he is personally liable for excise taxes that National Airlines (“National”) collected from its passengers but failed to pay over to the United [pg. 2011-5337] States during his tenure as National’s CEO. Because we hold that the district court properly found that Conway was a “responsible person” 1 and that his failure to pay taxes was willful, as defined by this circuit’s precedents, we AFFIRM the judgment of the district court.I. BackgroundConway founded National in April 1995. From National’s inception until its Chapter 7 bankruptcy in May 2003, Conway served as National’s CEO, president, and chairman of the board. As an airline, National was required to collect a transportation excise tax from its passengers and pay over the collected taxes to the Government at regular intervals. See 26 U.S.C.   § 4261. These taxes were assessed against and paid by National’s passengers; National held these taxes in trust for the Government. See Begier v. IRS,  496 U.S. 53, 55 [65 AFTR 2d 90-1095] (1990).National struggled as a business and never reported a profit for an entire year. In the third quarter of 2000, Conway and the other directors of National began to discuss the possibility of declaring bankruptcy. On Thursday, November 30, 2000, National sent its quarterly excise tax return to the IRS with a check for $1,832,501.01 to pay those taxes. The IRS received and deposited the check on December 4, 2000. However, National filed for Chapter 11 bankruptcy on December 6, 2000, and, on the advice of counsel, closed its bank accounts to establish new accounts for reorganization. The accounts were closed before the check to the IRS had been debited, and payment to the IRS was refused. 2 In the period immediately following the bankruptcy filing, National made no efforts to pay the excise taxes.During bankruptcy, National regularly made bi-weekly payments of the excise taxes it collected in the ordinary course of business. However, the terrorist attacks of September 11, 2001, had a dramatic effect on the aviation industry. In response to that problem, Congress passed the Air Transportation Safety & System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001) (“Stabilization Act” or “Act”). One provision of the Act allowed airlines to defer paying over the collected excise taxes until November 15, 2001. 49 U.S.C. § 40101. Pursuant to authority granted under the Stabilization Act, the IRS extended the deferral to January 15, 2002.  IRS Notice 2001-77, 2001-2 C.B. 576; 2001 IRB LEXIS 424. Many airlines also received direct infusions of money under the Stabilization Act, including National, which received approximately $21 million from the Government. On January 15, 2002, when the taxes for the third quarter of 2001 became due, National filed an excise tax return, but did not pay over the collected taxes, instead requesting a six-month extension for payment. Similarly, on January 30, 2002, National sent in a tax return for the fourth quarter of 2001 without payment. 3On November 6, 2002, National shut down all operations, and on May 7, 2003, National’s bankruptcy was converted to Chapter 7. Between May 2001 and its November 6, 2002 shutdown, National had receipts and outlays of approximately $430 million.On January 29, 2003, the IRS made a request for payment of the unpaid excise taxes in the amount of $11,572,151.91. On March 14, 2003, the Government sent Conway notice that it intended to seek to recover the unpaid excise taxes from him personally. The Government made quick assessments against Conway in the amounts of $148,325.00, $3,497,448.32, and $4,803,626.85. On June 2, 2006, Conway made small payments towards the excise taxes for each of the deficient quarters and filed for a refund of those amounts. The refund was denied.Conway filed suit in district court seeking a refund of the amounts paid and an abatement of the amounts owing. The Government filed an answer and counterclaim for the amount owing followed by a motion for summary judgment on Conway’s liability for the unpaid excise taxes under  § 6672. The district court granted the motion and entered judgment for the Government in the amount of $8,449,358.93 plus interest. Conway timely appealed.II. DiscussionA. Standard of ReviewThis court reviews the district court’s grant of summary judgment de novo. Staff IT, Inc. v. United States,  482 F.3d 792, 797 [99 AFTR 2d 2007-1779] (5th Cir. 2007). Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Id. at 797–98.The district court found that Conway was liable for National’s tax deficiency under 26 U.S.C.   § 6672(a), which provides: [pg. 2011-5338]Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.Liability under  § 6672 thus is composed of two elements: (1) that the taxpayer was a “responsible person,” and (2) that the taxpayer willfully failed to collect, account for, or pay over such taxes. See Mazo v. United States,  591 F.2d 1151, 1153 [43 AFTR 2d 79-853] (5th Cir. 1979). On appeal, Conway contests both that he was a responsible person and that he willfully failed to account for or pay over the excise taxes for both periods at issue.B. Conway was a Responsible Person 41. Pre-Petition[1] Conway first claims that he was not a responsible person under  § 6672. The Supreme Court has clarified that a “responsible person” is not limited to persons “in a position to perform all three of the enumerated duties with respect to the tax dollars in question.” Slodov, 436 U.S. at 250. Moreover, “[t]his circuit takes a broad view of who is a responsible person under  § 6672.” Logal v. United States,   195 F.3d 229, 232 [84 AFTR 2d 99-7047] (5th Cir. 1999). We have enumerated six factors to consider in determining whether someone is a responsible person under the statute:whether such a person: (i) is an officer or member of the board of directors; (ii) owns a substantial amount of stock in the company; (iii) manages the day-to-day operations of the business; (iv) has the authority to hire or fire employees; (v) makes decisions as to the disbursement of funds and payment of creditors; and (vi) possesses the authority to sign company checks.Barnett v. IRS,  988 F.2d 1449, 1455 [71 AFTR 2d 93-1614] (5th Cir. 1993). Each of these factors weighs in favor of finding that Conway was a responsible person for the taxes at issue. The undisputed record shows that Conway was the founder, CEO, president, and chairman of the board of National during the periods in question; he was one of the largest individual stockholders; and he had the most individual authority, including the authority to hire and fire employees and to determine which creditors would get paid. Conway was also authorized to sign checks on each of National’s company accounts. No reasonable jury could find that Conway was not a responsible person before National’s bankruptcy, so Conway was a responsible person with regard to the pre-petition taxes. Thus, he had an obligation to make sure were collected, paid over and accounted for by November 30, 2000, which was prior to National’s December 6 bankruptcy. See Mazo, 591 F.2d at 1154 (“[T]he liability of responsible persons generally is not limited to restoring actual cash diverted from the trust; it encompasses the duty to have initially or to collect funds to pay withholding taxes.”); Newsome v. United States,  431 F.2d 742, 745 [26 AFTR 2d 70-5078] (5th Cir. 1970) (“[L]iability under  section 6672 can also be premised upon use of withheld funds for other corporate purposes before the date for the corporation to pay over the funds.”(emphasis added)).2. During BankruptcyFurthermore, bankruptcy did not change Conway’s status as a responsible person with regard to the post-petition taxes. Notably, Conway acknowledges that during the bankruptcy, National continued to pay over the majority of its excise taxes without needing approval of the bankruptcy court and concedes that those excise taxes were paid in the normal course of business. 5 We conclude that the district court did not err in finding that Conway was a “responsible person” under  § 6672 for all periods at issue.C. Conway Acted Willfully1. The Nature of Reasonable CauseConway also disputes that his failure to pay over the taxes was willful. A responsible per- [pg. 2011-5339] son acts willfully if “he knows the taxes are due but uses corporate funds to pay other creditors” or “he recklessly disregards the risk that the taxes may not be remitted to the government.” Logal, 195 F.3d at 232. When a responsible person becomes aware of tax liability, he has “a duty to ensure that the taxes [are] paid before any payments [are] made to other creditors.” Barnett, 988 F.2d at 1457. Where there is undisputed evidence that the responsible person directed payments to other creditors while knowing of the tax deficiency, willfulness is established as a matter of law. Id.; see also Howard v. United States,  711 F.2d 729, 736 [52 AFTR 2d 83-5777] (5th Cir. 1983) (“A considered decision not to fulfill one’s obligation to pay the taxes owed, evidenced by payments made to other creditors in the knowledge that the taxes are due, is all that is required to establish willfulness.”). However, evidence that the taxpayer acted with reasonable cause can sometimes defeat a finding of willfulness. See Howard, 711 F.2d at 736 (“The failure to remit taxes under  section 6672(a) is not willful if the taxpayer can produce a “reasonable cause” for this failure.”); Newsome, 431 F.2d at 746. “[T]o further the basic purposes of  section 6672, reasonable cause should have a very limited application.” Newsome, 431 F.2d at 747 (internal citations omitted); see also Logal, 195 F.3d at 233 (““[A]lthough we have recognized conceptually that a reasonable cause may militate against a finding of willfulness, no taxpayer has yet carried that pail up the hill.”” (internal citation omitted)).Conway knew no later than January 19, 2001, when National filed a bankruptcy schedule reflecting the unpaid taxes, that the pre-petition excise taxes had not been paid. As to the post-petition taxes, Conway knew that they had not been paid no later than January 15, 2002, when he signed a request for an extension of time to pay over the taxes. National Airlines made payments in excess of $220 million to creditors between February 2002 and November 2002, far more than the approximately $8 million in unpaid excise taxes at issue in this case. Thus, in the absence of reasonable cause, Conway’s willfulness is established as a matter of law, and summary judgment on the issue is proper.Conway raises several arguments to establish reasonable cause for his failure to pay over the taxes. He argues that: (1) he relied on the advice of counsel not to pay over the taxes, and thus had reasonable cause; (2) the Stabilization Act justified National’s post-petition failure to pay even past the deadline set by the Act; (3) National lacked the unencumbered funds to pay the taxes; and (4) he believed that National had fully paid the excise taxes and otherwise lacked intent to avoid paying over the taxes. Conway also argues that the district court conflated National’s tax liability with his personal liability for the taxes. For the reasons discussed below, these arguments are not persuasive.2. Reliance on Counsel 6Conway’s primary argument on appeal is that his failure to pay over the taxes was based on reliance on the advice of counsel, and thus he had reasonable cause. The advice of counsel may constitute reasonable cause under some circumstances. Compare Newsome, 431 F.2d at 748 n.12 (“The term “reasonable cause” has been interpreted as advice by counsel under certain circumstances not to pay the withheld taxes as they became due, advice of non-collection by attorney and tax collector, [and] advice by counsel that there was no tax liability.” (internal citations omitted)) with Logal, 195 F.3d at 233 (“No [reasonable cause] defense may be asserted by a responsible person who knew that the withholding taxes were due, but who made a conscious decision to use corporate funds to pay creditors other than the government.”). However, cases in which the taxpayer’s reliance on the advice of counsel was found to have provided reasonable cause have been cases in which the advice of counsel tended to negate an element of willfulness under  section 6672. See Gray Line Co. v. Granquist,  237 F.2d 390, 395 [50 AFTR 288] (9th Cir. 1956) (noting that taxpayer relied upon advice from counsel that no taxes were owed); Anderson v. United States, No. 19303, 1977 U.S. Dist. LEXIS 13860, at 7–10  [56 AFTR 2d 85-5573] (W.D. La. Sept. 22, 1977) (noting that the taxpayer relied on the advice of counsel to structure bankruptcy estate to prefer the Government to other creditors).Conway has not raised a material fact issue supporting a finding that his reliance on counsel’s advice provided reasonable cause so as to negate willfulness. Regarding National’s pre-petition taxes, the only advice of counsel found in the record is Chief Financial Officer Ray Nakano’s statement that National’s bankruptcy counsel advised National to close its then current bank accounts and open new ones as a debtor in possession. As a result of National’s following of this advice, the checks sent to the IRS were not paid (though there is [pg. 2011-5340] no indication counsel knew of this consequence). Such advice is not the equivalent of advice that the taxes were not owed, and thus does not constitute reasonable cause for purposes of  § 6672. See Newsome, 431 F.2d at 747–48 (“[The taxpayer] was not advised, nor did he interpret the advice as meaning, that he had been justified in using withheld taxes during December and January to pay other creditors or that he should continue to pay creditors with funds then available … instead of paying the government.”). Therefore, Conway has failed to put forward any evidence that National relied on counsel’s advice so as to have reasonable cause for its failure to pay the pre-petition taxes.Similarly, there is no evidence in the record that National’s failure to pay its post-petition taxes was due to reliance on the advice of counsel. Conway’s reference to a few vague and conclusory statements of reliance in the record falls far short of pointing to specific substantive evidence that would support a conclusion that the taxes were not owed. While there is some evidence that counsel told management what debts to pay, no evidence suggests that counsel advised that preferring other creditors would not subject National’s officers to personal liability for the excise taxes. See Newsome, 431 F.2d at 748 (holding that an attorney’s advice to execute a chattel mortgage in favor of the taxpayer’s bank did not provide reasonable cause where “the attorney did not advise [the taxpayer] that he could prefer the bank over the United States without subjecting himself to  section 6672 liability”). Nor is there evidence of any specific attorney stating that excise taxes were simply not owed.At best for Conway, the advice of counsel argument requires that the responsible person actually and reasonably rely on advice that is actually given. Cf. United States v. Boyle,  469 U.S. 241, 252 [55 AFTR 2d 85-1535] (1985) (“The failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not “reasonable cause” for a late filing under  § 6651(a)(1).”). In light of the undisputed evidence that Conway knew the taxes were due and continued to favor other creditors, as well as our precedents establishing the exceedingly limited nature of the “reliance on counsel as reasonable cause” defense, we hold that Conway has failed to put forward evidence of his reliance on the advice of counsel such as would establish reasonable cause under  § 6672.3. Stabilization ActConway argues that even if personal liability would normally attach under these circumstances, the court should find that this case is extraordinary because of the September 11 terrorist attacks and the subsequent Stabilization Act. Generally, it is not a defense to liability under  § 6672 that payment of the collected taxes would threaten the continued existence of the business entity. See Bowen, 836 F.2d at 967 (stating that the taxpayers’ use of the collected taxes for other corporate expenses “made the United States “an unwilling joint venturer in the corporate enterprise”” (internal citations omitted)); see also Mazo, 591 F.2d at 1154 (“[I]f a corporation has only sufficient cash to pay net wages, and does so, there may literally be no funds to constitute the corpus of the trust, but the responsible persons are nevertheless liable for failure to collect the withholding taxes.”). Conway argues, however, that the Stabilization Act authorized National to use the withheld taxes as working capital.We disagree. Nothing in the plain language of the Act evinces an intent to allow the airlines to use the excise taxes as working capital. By the plain terms of the Stabilization Act, its effect was to allow airlines to defer paying over the collected excise taxes until January 15, 2002, as authorized by the IRS. Because these taxes are collected from passengers, and were not intended to become the property of National, more than a mere statutory deferral of payment would be required to evince an intent to allow the collected taxes to be used for operational purposes. Because the plain language of the statute is unambiguous, we need not examine the legislative history. 7 Similarly, nothing in the act demonstrates congressional intent to render payment of the excise taxes beyond the ordinary course of business.4. Other ArgumentsConway also argues that his failure to pay over the taxes was not willful because National lacked the unencumbered funds to pay the excise taxes after they became due and because he believed that payment for the taxes had successfully been arranged at the time that he left National.Conway has the burden of raising a fact issue that would support a conclusion that the funds paid to other creditors were encumbered. See Barnett , 988 F.2d at 1458 (“We next observe that the burden to prove that the loan pro- [pg. 2011-5341] ceeds and accounts receivable deposited into the Company’s bank accounts … were “encumbered” falls on [the taxpayer.]”). In this circuit, funds are encumbered when “restrictions preclude a taxpayer from using the funds to pay the trust fund taxes.” Id.; see also Honey v. United States,  963 F.2d 1083, 1090 [69 AFTR 2d 92-1333] (8th Cir. 1992) (“[F]unds are encumbered only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds.”). However, as the district court found, Conway has submitted no evidence that the funds paid to other creditors had a legal priority over the unpaid excise taxes. Therefore, Conway has not met his burden of raising a fact issue on encumbrance.Conway also argues that he did not act willfully in regard to the pre-petition taxes because, at the time he left National, he believed he had arranged for those taxes to be paid. Noting that corporate officers have a duty to ensure that payment is made, we have repeatedly rejected the argument that a taxpayer’s good faith belief that payment for the taxes had been arranged is a defense to personal liability under  § 6672. See Mazo , 591 F.2d at 1157; see also Bowen, 836 F.2d at 968  [61 AFTR 2d 88-564] (finding that a taxpayer acted willfully despite the taxpayer’s good faith belief that it would be able to obtain a loan to pay over the tax liabilities). While Conway may have had earnest intentions to pay back the taxes, willfulness does not require an intent “to defraud or to deprive the United States of taxes.” See Gefen v. United States,  400 F.2d 476, 482 [22 AFTR 2d 5496] n.7 (5th Cir. 1968). As discussed above, it is sufficient that other creditors were consciously preferred to the United States. Id.Finally, Conway’s argument that the district court conflated National’s tax liability with Conway’s personal liability is frivolous in light of the district court’s proper conclusion that Conway was a responsible person and that he willfully failed to pay over the taxes. 8III. ConclusionFor the foregoing reasons, we AFFIRM the district court’s summary judgment.________________________________________1  The courts have adopted the phrase “responsible person” to signify a person whose position in a company makes him responsible for the collection, accounting, or payment of trust-fund taxes. See 26 U.S.C.   § 6672;Slodov v. United States ,  436 U.S. 238, 245–46 [42 AFTR 2d 78-5011] & n.7 (1978).________________________________________2  The unpaid taxes for the third quarter of 2000 will hereinafter be referred to as the “pre-petition taxes.”________________________________________3  Hereinafter, National’s unpaid excise taxes for the third and fourth quarters of 2001 are referred to as the “post-petition taxes.”________________________________________4  Conway appears to have conceded this issue during oral argument. In the interests of justice and because it was fully briefed, we address the argument briefly.________________________________________5  Conway’s argument that the Stabilization Act converted the post-petition taxes into something beyond “ordinary course” falls short on numerous levels. Conway has provided no support for his argument that the deferral of the payment of excise taxes rendered their eventual payment outside the course of ordinary business. Indeed, at the time of National’s Chapter 11 proceedings, the bankruptcy court’s local rules provided that “[d]ebtors operating businesses in cases under Chapters 7, 11, or 13 shall pay all taxes, fees, and other required payments to governmental entities on a timely basis, except where otherwise ordered for good cause shown.” Bankr. D. Nev. R. 960, subsequently amended, Bankr. D. Nev. R. 1015 (2009). Even assuming arguendo that the payments did require approval of the bankruptcy court, this requirement alone would not strip Conway of his responsible person status. See Neckles v. United States,  579 F.2d 938, 940 [42 AFTR 2d 78-5807] (5th Cir. 1978) (“Although the appellant may not always have had the “final” say about paying creditors, in the apocalyptic sense of that word, he did have significant control over disbursements.”); Barnett, 988 F.2d at 1455 (“[ Section 6672] expressly applies to “any” responsible persons, not just to the person most responsible for the payment of the taxes.”). At a minimum, Conway had the authority and duty to seek approval from the bankruptcy court for payment of the post-petition taxes, a step that he has not shown that he ever pursued. See Gustin , 876 F.2d at 492.________________________________________6  The parties dispute whether National’s reliance on counsel was properly presented at the administrative hearings and thus whether the issue was waived under the variance doctrine. Because we hold that Conway has failed to establish a genuine issue of material fact as to his reliance on the advice of counsel, we do not reach the issue of variance.________________________________________7  See Tidewater Inc. v. United States,  565 F.3d 299, 303 [103 AFTR 2d 2009-1682] (5th Cir. 2009). Furthermore, were we to consider the legislative history, it does not change our analysis. Conway points to a few sparse statements in the legislative history that the Stabilization Act was intended to financially benefit the airlines. It is probable that these statements refer to other provisions of the act which allowed for direct payments to the airlines, and under which National received $21 million.________________________________________8  For the first time in his reply brief, Conway asserted many new arguments, including the IRS’s alleged failure to abide by its collection procedures. Arguments raised for the first time in a reply brief are forfeited. See Yohey v. Collins, 985 F.2d 222, 225 (5th Cir. 1993).

Losses from a passive activity are generally allowed for the year they are sustained only to the extent of passive activity income.  Sec. 469(a)(1)(A), (d)(1). Credits attributable to a passive activity are generally allowed only to the extent of the taxpayer’s regular tax liability for the year with respect to all passive activities.  Sec. 469(a)(1)(B), (d)(2).

In general, a passive activity is a trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1). A taxpayer materially participates in an activity when he or she is involved on a regular, continuous, and substantial basis.  Sec. 469(h)(1). Participation generally means all work done in connection with an activity by an individual who owns an interest in the activity.  Sec. 1.469-5(f), Income Tax Regs.

A taxpayer can establish material participation by satisfying any one of seven tests provided in the regulations. Sec. 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988); see Miller v. Commissioner, T.C. Memo. 2011-219 [TC Memo 2011-219]; Bailey v. Commissioner, T.C. Memo. 2001-296 [TC Memo 2001-296]. Of these, petitioner asserts that the three following tests are relevant to these cases:

(2) The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year; ***

(7) Based on all of the facts and circumstances *** , the individual participates in the activity on a regular, continuous, and substantial basis during such year. To satisfy the material participation test under paragraph (a)(7), a taxpayer must participate in an activity for more than 100 hours during the taxable year.  Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

Generally, petitioners bear the burden of proof. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992); Rockwell v. Commissioner, 512 F.2d 882, 886 [35 AFTR 2d 75-1055] (9th Cir. 1975), aff’g T.C. Memo. 1972-133 [¶72,133 PH Memo TC]. This burden may shift to respondent if petitioners introduce credible evidence with respect to any relevant factual issue and to meet other conditions, including maintaining required records. See sec. 7491(a)(1).

The following case applies this law:

Nelson T. Uyemura, et ux. v. Commissioner, TC Memo 2012-102 , Code Sec(s) 179; 469.

NELSON TOSHITO UYEMURA AND WENDI MICHIKO UYEMURA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent NELSON TOSHITO UYEMURA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .

Case Information:

Code Sec(s):       179; 469

Docket:                Docket Nos. 1437-10, 1438-10.

Date Issued:       04/10/2012

HEADNOTE

XX.

Reference(s): Code Sec. 179; Code Sec. 469

Syllabus

Official Tax Court Syllabus

Counsel

Paul J. Sulla, Jr., for petitioners.

Jonathan Jiro Ono and Peter R. Hochman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: In these consolidated cases, respondent determined a deficiency of $1,159 with respect to the individual 2006 income tax return of Nelson Toshito Uyemura (petitioner) and a deficiency of $3,659 with respect to the 2007 joint income tax return of petitioner and Wendi Michiko Uyemura. The issue for decision is whether losses and a business energy investment credit claimed with respect to petitioner’s “micro-utility” sales activity are limited by the passive activity rules under section 469. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. At the time the petitions were filed, petitioners resided in Hawaii.

During the years in issue, petitioner was employed as a manager. Wanting to acquire a solar water heater for home use, petitioner met with a representative of Hawaii Environmental Holdings d.b.a. Mercury Solar (Mercury Solar) to learn about its solar equipment.

Mercury Solar made petitioner aware of a business opportunity which Mercury Solar markets as a “zero net/free” program. Through this program, Mercury Solar encourages buyers to purchase one system for personal use and at least one other for investment purposes. The purchase is at least partially financed through one or more loans. Mercury Solar installs the investment system at the residence of a “ratepayer”, who pays a set monthly fee for a number of years to the equipment owner to purchase the solar energy produced by the investment system. A ratepayer is not an owner or purchaser of the micro-utility equipment.

Under Mercury Solar’s program, the equipment owner can contract with another company, the Power Change Co., LLC (PCC), to collect ratepayers’ monthly payments on behalf of the equipment owner. From these collections, PCC makes the equipment owner’s loan and State excise tax payments and, at the end of the year, reports the annual income to the equipment owner. Mercury Solar’s sales literature explains that the equipment owner is responsible for paying income tax and State excise tax on the ratepayer income and that the income should be reported using a Schedule C, Profit or Loss From Business.

Mercury Solar suggests that the equipment owner will qualify for certain tax deductions and credits and extends a tax credit guarantee to the equipment owner so long as he or she has a Federal or State tax liability and “meaningfully participates” in the micro-utility activity. A referral fee is paid by Mercury Solar to the equipment owner if he or she refers others who listen to a sales presentation and/or purchase equipment. Mercury Solar represents that a purchase of solar equipment through this program is potentially “free” through this combination of loans, tax refunds resulting from credits and deductions, and referral and ratepayer payments.

In 2005 petitioner bought two solar water heating systems from Mercury Solar. Mercury Solar installed one system at petitioner’s residence and the other at the residence of a ratepayer. Petitioner agreed to have PCC collect the ratepayer’s monthly payments, maintain payment records, and make petitioner’s loan and State excise tax payments. In 2006 petitioner bought an additional solar water heating system that Mercury Solar installed at a second ratepayer’s residence. Petitioner also agreed to have PCC collect this ratepayer’s monthly payments.

Mercury Solar provided petitioner with the ratepayers he acquired during the years in issue. Petitioner has never met his ratepayers and has not been to their residences to inspect the solar equipment. Petitioner does not maintain any records or documentation with respect to his micro-utility sales activity. Petitioner has tried to find other ratepayers for himself and has referred sales leads to Mercury Solar. On his 2006 individual income tax return, petitioner claimed a net loss in connection with the micro-utility sales activity of $12,217, which was primarily the result of a section 179 expense deduction for the investment system purchased in 2006. Petitioner also claimed a section 48 business energy investment credit of $3,554 in connection with the same solar water heating system. However, because of statutory limitations petitioner was unable to use the credit for that year. On the 2007 joint income tax return, petitioners claimed a net loss with respect to the micro-utility sales activity of $707 and the unused business energy investment credit of $3,554 carried forward from petitioner’s 2006 tax return.OPINION

Respondent argues that petitioners’ micro-utility losses and business energy investment credit are disallowed because they stem from an activity in which petitioner did not materially participate or from a rental activity, which is presumptively passive. Petitioner counters that his micro-utility activity was not a passive rental activity and that he materially participated in its operations.

Petitioners have not proven or presented adequate evidence to shift the burden of proof that any of the material participation tests they rely upon are satisfied. As the sole owner of the micro-utility activity, petitioner claims he performed all “tasks, functions and services of and for the business, including management and marketing”, with the exception of sending invoices to and collecting payments from his ratepayers. However, because individuals with PCC collected payments, maintained records regarding the income, and made petitioner’s loan and State excise tax payments and individuals with Mercury Solar 1 installed the equipment at his ratepayers’ homes, petitioner’s participation did not constitute substantially all of the participation of any individual in the micro- utility activity.

Petitioners also have failed to prove that petitioner participated in the micro- utility activity for more than 100 hours during each of the years in issue. A taxpayer can prove participation by any reasonable means.  Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Reasonable means “may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.” Id.

While the regulations permit some flexibility with respect to the evidence required to prove material participation, we are not required to accept postevent “ballpark guesstimates”, nor are we bound to accept the unverified, undocumented testimony of taxpayers. See Estate of Stangeland v. Commissioner T.C. Memo. , , Memo. 2003-151, Richter v. Commissioner, T.C. Memo. 2002-90 [TC Memo 2002-90], and Sparkman v. United States, 2009 WL 5103165 [104 AFTR 2d 2009-7856] (D. Haw. Dec. 28, 2009). 2010-185; Shaw v. Commissioner, T.C. Memo. 2002-35 [TC Memo 2002-35]; Scheiner v. Commissioner, T.C. Memo. 1996-554 [1996 RIA TC Memo ¶96,554].

Petitioner maintained no records or documentation of his participation such as appointment books, calendars, or logs, and he did not provide any type of narrative summary of his participation. Petitioner admitted that Mercury Solar provided him with his ratepayers and that he has never met any of them. Apart from very general statements that he talked to some people about becoming ratepayers and referred sales leads to Mercury Solar, petitioner offered virtually no evidence of duties he performed, the dates they were performed, or the approximate time he spent performing them.

We conclude that petitioner did not materially participate in the micro-utility sales activity during the years in issue and that the micro-utility was a passive activity under section 469(c)(1). The losses reported for 2006 and 2007 with respect to the micro-utility activity are subject to the passive loss limitations imposed by section 469 and are disallowed. Thus we need not address whether the micro-utility activity constitutes a passive rental activity. See  sec. 469(c)(2).

In addition, the business energy investment credit reported on the 2006 individual tax return and claimed on the 2007 joint tax return is subject to the passive activity credit limitations under section 469 and is disallowed because there was no tax liability with respect to the micro-utility activity for 2006 or 2007. Even if this credit were not disallowed by the application of  section 469, it is otherwise disallowed completely because of section 179. Through cross-referencing sections 38(b)(1), 46(2), and 48(a), the Internal Revenue Code establishes that the section 48 business energy investment credit is one type of section 38 general business credit. A section 38 credit is not allowable if a  section 179 election has been made, as petitioners did, with respect to the same equipment.  Sec. 179(d)(9); see King v. Commissioner, T.C. Memo. 1990-548 [¶90,548 PH Memo TC] (holding that a section 179 election is irrevocable except with the consent of the Commissioner and to the extent the cost of property is deducted under section 179, it does not qualify for a credit under  section 38).

We have considered the arguments of the parties not specifically addressed in this opinion. They are either without merit or irrelevant to our decision. To reflect the foregoing,

Decisions will be entered for respondent.

1

For other cases involving activities of Mercury Solar, seeSparkman v. Commissioner, T.C. Memo. 2009-308 [TC Memo 2009-308], Sparkman v. Commissioner, T.C. Memo. 2005-136 [TC Memo 2005-136], aff’d, 509 F.3d 1149 [100 AFTR 2d 2007-6961] (9th Cir. 2007), Hvidding v. Commissioner T.C.

© 2012 Thomson Reuters/RIA. All rights reserved

IRS has recently published a guide for examiners auditing COBRA continuation cases. The guide provides insight as to what types of documents and information examiners may seek during the course of an audit.

Background on COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was enacted to give “covered employees” (i.e., those who were provided coverage under a group health plan by virtue of their performance of services for one or more persons maintaining the plan) and their families (“qualified beneficiaries”) who would otherwise lose coverage under a group health plan as a result of a “qualifying event” the right to temporarily continue health benefits. Qualifying events include the covered employee’s retirement, termination (other than by reason of the employee’s gross misconduct), reduction in hours, death, or entitlement to Medicare benefits; divorce or legal separation from the covered employee; loss of dependent child status; and bankruptcy of the employer. The coverage generally must be the same as that received immediately before the qualifying event.

If the election is made, the qualified beneficiary is covered under the plan (see “period of coverage,” below) as long as he pays the applicable premium—generally no more than 102% of what it would it would cost, including both the employer and employee portions, to cover a similarly situated individual who is still covered by the plan. (Code Sec. 4980B) The premium may be paid in monthly installments, and the plan must allow at least 45 days after the election date for the initial payment.

Notice requirements. The following requirements ensure that qualified beneficiaries are aware of their rights to health care continuation coverage:

… the group health plan must provide, at the time coverage under the plan commences, a written notice to each covered employee and spouse of their rights under Code Sec. 4980B;

… the employer must notify the plan administrator within 30 days (potentially longer for a multiemployer plan) after the employer’s bankruptcy or the covered employee’s death, termination (other than for gross misconduct), reduction in hours, or entitlement to Medicare;

… the covered employee or qualified beneficiary must notify the plan administrator within 60 days of any divorce or legal separation from the covered employee, a child ceasing to be a dependent, or a determination that the covered employee or a member of his family is disabled; and

… generally within 14 days after receiving notice of a qualifying event, the plan administrator must notify the qualified beneficiaries of their COBRA rights.

Period of coverage. In general, the health care continuation coverage must be made available for 18, 29, or 36 months, depending on the type of qualifying event and whether the qualified beneficiary was disabled at the time. Coverage begins on the date of the qualifying event and continues through:

… the last day of the maximum required coverage period (in general, 18 months after termination or reduction in hours, extended to 29 months if the qualified beneficiary was disabled at the time, or 36 months for other qualifying events);

… the date on which the employer ceases to maintain or provide any group health plan;

… the first day of any failure to timely pay plan premiums for the qualified beneficiary (generally considered timely made if within 30 days after the due date);

… the first day that the qualified beneficiary becomes entitled to Medicare benefits;

… the first day that the qualified beneficiary becomes actually covered under any other group health plan that is not maintained by the employer, and which does not contain any exclusion or limitation with respect to any preexisting condition of the beneficiary; or

… the date of termination of extended coverage for disability under Social Security.

Noncompliance penalty. Under Code Sec. 4980B(b), a $100 per day nondeductible tax is imposed with respect to a qualified beneficiary, up to $200 per family, for each day that the taxpayer fails to comply with the COBRA requirements. Although the employer is generally the party liable for the tax, the plan is the liable person if it is a multiemployer plan, and certain other third parties (e.g., insurers and third-party administrators) may also be liable.

The period of violation is called the “noncompliance period.” The noncompliance period begins on the date the failure to comply takes place, which can be the first date that coverage is denied, the date that a notice is not sent out as required, or some other date, and generally ends on the date the failure to comply is corrected. However, the noncompliance period for any particular qualified beneficiary will end, regardless of whether the failure is corrected, on the date that is six months after the last date on which continuation coverage would have been required for that beneficiary. (Code Sec. 4980B(b)(2)(B)(ii))

Certain limits may apply to the tax if the failure was unintentional and due to reasonable cause and not willful neglect. (Code Sec. 4980B(c)) In addition, a minimum tax applies in certain situations. (Code Sec. 4980B(b)(3)(A))

The guide notes that the tax sanction is designed to deter noncompliance. There is no relief under the Code for individuals affected by the noncompliance—i.e., those who have been denied, or charged an excessive premium for, COBRA continuation coverage. However, a failure to comply with the COBRA requirements in the Code may also constitute a failure to comply with parallel requirements in the Employee Retirement Income Security Act of 1974 (ERISA), which does provide a remedy for those individuals.

The COBRA tax is reported on Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code. The form reports the tax due for group health plans’ or employers’ failures to:

… satisfy continuation coverage requirements under Code Sec. 4980B; and

… meet portability, access, and renewability requirements under Code Sec. 4980D.

Different due dates for Form 8928 apply, depending on which failure occurs.

Examination procedures. If the taxpayer (i.e., the employer) is subject to the health care continuation coverage requirements, examiners are told to determine whether the taxpayer is compliant with those requirements. The guide suggests that examiners obtain the following documents and survey the continuation coverage procedures the taxpayer has in place:

… a copy of the health care continuation coverage procedures manual;

… copies of standard health care continuation coverage form letters sent to qualified beneficiaries;

… a copy of the taxpayer’s internal audit procedures for health care continuation coverage;

… copies of all group health care plans; and

… details pertaining to any past or pending lawsuits filed against the taxpayer for failing to provide appropriate continuation coverage.

Based on the procedures that the taxpayer has in place, examiners should analyze specific areas for noncompliance. Examiner should interview responsible parties regarding the number of qualifying events and how the plan administrator is notified of such events, the method by which qualified beneficiaries are notified of their rights to continuing COBRA coverage, elections made by qualified beneficiaries to continue coverage, and premiums paid for coverage.

Other documents that may be helpful to examiners include copies of the taxpayer’s federal and state employment tax returns filed during the period under examination and the preceding year, a list of the individuals affected by a qualifying event, and a list of all individuals covered at the beginning and end of the current and preceding years for each plan.

Examiners are directed to review the taxpayer’s personnel records and confirm whether employees and qualified beneficiaries were properly notified of their rights to continuing health coverage. Copies of various notification letters should be included in the personnel records. These records should also indicate the beginning date(s) of any failure to comply for purposes of computing the excise tax due. Examiners should also be able to substantiate certain information, such as the name and address of each beneficiary, date of qualifying event, and type of coverage received under COBRA, from the personnel records; otherwise, supporting documents should be requested.

If the taxpayer is denied coverage based on dismissal for gross misconduct, the examiner should check to see if the covered employee was denied unemployment benefits for the same reason. In a multiemployer plan, if a grievance for gross misconduct was arbitrated independently under the union agreement, and the employer lost in the grievance process, this may indicate a failure to comply with COBRA law requirements. In certain instances, the examiner may need to contact former employees, including the complainant or other individuals, subject to the Code Sec. 7602(c) rules regarding third-party contacts.

Audit Techniques and Tax Law to Examine COBRA Cases (Continuation of Employee Health Care

Coverage)

Published Date: March 2012

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would

affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

• Background

• Introduction

• Examination Procedures

• Computing the Excise Tax

o Noncompliance Period

o Liable Persons

o Maximum Annual Amount of Tax

http://www.irs.gov/pub/irs-ccdm/cc-2012-008.pdf

IN RE HUDSON OIL CO., INC., Cite as 63 AFTR 2d 89-450, 09/30/1988 , Code Sec(s) 167

U.S. Bankruptcy Court, Dist. of Kansas, In Proceedings for Reorganization Under Chapter 11 of the Bankruptcy Code,  Case Nos. 84-20002—84-20009,  09/30/1988  63 AFTR 2d 89-450, 88-2 USTC P 9554.

2. “Reasonable Cause” for Failure to
Timely File the Return

.

Section 6651(a)(1) reads in pertinent part:

“In case of failure … to file any return … on the date prescribed therefor …, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate ….” (Emphasis added.)

The purpose of the civil penalty is to ensure timely filing of tax returns so that tax liability can be ascertained and paid promptly. See United States v. Boyle, 469 U.S. 241, 245 [55 AFTR2d 85-1535] (1985). To escape the penalty, the taxpayer bears the heavy burden of proving both (1) that the failure did not result from “willful neglect,” and (2) that the failure was “due to reasonable cause.” Id.

The term “willful neglect” is not defined in the Internal Revenue Code. However, courts interpret the term to generally mean a conscious, intentional failure or reckless indifference on behalf of the taxpayer. See Boyle, 469 U.S. at 245-47; Hatfried, Inc. v. Commissioner, 162 F.2d 628, 634 [35 AFTR 1496] (3d Cir. 1947)

Like the counterpart, the term “reasonable cause” is also not defined by the Internal Revenue Code. However, a relevant Treasury Regulation requires the taxpayer to demonstrate that he “exercised ordinary business care and prudence” but nevertheless was “unable to file the return within the prescribed time.” See 26 CFR §301.6651(c)(1) (1984). The Supreme Court has recently cited the regulation with approval. Boyle, 469 U.S. at 246 and n.4 (“Thus, the Service’s correlation of ‘reasonable cause‘ with ‘ordinary business care’ is [pg. 89-461] consistent with Congressional intent, and over 40 years of case law as well.”) See also Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844, and n.14 (1984); and Fleming v. United States,  648 F.2d 1122, 1124 [ 48 AFTR2d 81-6217] (7th Cir., 1981).

In his proposed conclusions of law, the trustee persuasively contends that “reasonable cause” exists for the following reasons:

Reasonable cause for late filing exists when a taxpayer, who has filed its return after the due date, has done so in reliance on advice of tax counsel that the taxpayer should not file a return until all events have occurred that affect the accuracy of the return, even if occurrence of the events fall after the due date of the return.

The evidence at trial clearly supported the factual basis for the trustee’s “reasonable cause” defense of reliance on an accountant’s advice to not file the 1983 return until it was complete and accurate. Yarmchuk testified that he wanted to file a complete and accurate return, but because of the condition of the books and the shortcomings of the accounting system, he was concerned about the integrity of the numbers. Yarmchuk thought he should wait at least until Price Waterhouse completed its audit report of the companies’ financial statement for the period January 1, 1983 to January 3, 1984, and the DOL completed its calculations. Yarmchuk advised the trustee of his concerns. The trustee testified that he relied on Yarmchuk’s advice concerning the timing of the filing of the return.

.

The Court finds that it was physically impossible for the trustee to have prepared the 1983 return within that three week period. The books and records of the company were in disarray. It took a team of Price Waterhouse accountants over a year to complete their audit of the financial records of the debtors, covering substantially the same period of time as the tax return. Price Waterhouse did not deliver the audit report until seven months after the trustee’s appointment. Yarmchuk testified that he spent over 1,000 hours preparing the return which ended up to be over 200 pages long.

In the final analysis of the trustee’s “reasonable cause” defense, this Court must sit back, look at the whole picture, and ask the question posed by the Treasury Regulation: Did the trustee exercise “ordinary business care and prudence” but nevertheless was “unable to file the return within the prescribed time.” The answer is clearly yes. It was physically impossible for the trustee to file the return in time. The IRS really gave him no choice but to allow the extension of time to expire. He reasonably relied on advice by the accountant that the return could not be filed until they were assured it was accurate and complete. Moreover, the trustee kept the IRS fully apprised of his reason for delay in filing the return. This Court finds that the trustee has shown that the failure to file the return was due to reasonable cause. As such, the IRS’ imposition of the late-filing penalty under §6651(a)(1) is also overturned on this ground.

.

The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all relevant facts and circumstances. See  § 1.6664-4(b)(1) and (f)(1). All relevant facts, including the nature of the tax investment, the complexity of the tax issues, issues of independence of a tax advisor, the competence of a tax advisor, the sophistication of the taxpayer, and the quality of an opinion, must be developed to determine whether the taxpayer was reasonable and acted in good faith.

Generally, the most important factor in determining whether the taxpayer has reasonable cause and acted in good faith is the extent of the taxpayer’s effort to assess the proper tax liability. See § 1.6664-4(b)(1); see also Larson v. Commissioner,  T.C. Memo. 2002-295. For example, reliance on erroneous information reported on an information return indicates reasonable cause and good faith, if the taxpayer did not know or have reason to know that the information was incorrect. Similarly, an isolated computational or transcription error is not inconsistent with reasonable cause and good faith.

CONGDON v. U.S., Cite as 108 AFTR 2d 2011-6340, 08/11/2011  : U.S. District Court, Eastern Dist. of Texas,  Docket No.:         No. 4:09-CV-289,  Date Decided:               08/11/2011.

To avoid the imposition of the monetary penalty under I.R.C. § 6038(b), a taxpayer must make an affirmative showing that the failure to file the appropriate information returns was due to reasonable cause. I.R.C. § 6038(c)(4). In addition, the taxpayer must establish that he substantially complied with section 6038. Treas. Reg § 1.6038–2(k)(3)(ii). Although the statutes and regulations are silent on the definition of “reasonable cause” under section 6038, the Internal Revenue Manual provides that “reasonable cause will be considered by the examiner per I.R.M. 20.1.1.” I.R.M. 20.1.9.1.1(4). Reasonable cause is also addressed by other sections of the Internal Revenue Code.

Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless is unable to comply with those obligations.

I.R.M. 20.1.1.3.1(1). The elements that must be present to constitute reasonable cause are a question of law, but whether those elements are present in a given situation is a question of fact. New York Guangdong Finance, Inc., v. Commissioner, 588 F.3d 889, 896 [104 AFTR 2d 2009-7492] (5th Cir.2009) (regarding a similar penalty assessment provision). The parties agree that to demonstrate reasonable cause, the Plaintiff must show that he exercised ordinary business care and prudence. Id.; United States v. Boyle, 469 U.S. 241, 249 [55 AFTR 2d 85-1535] n. 8, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985).

The IRS gives some examples of what might be considered reasonable cause, such as reliance on erroneous advice by the IRS, the taxpayer is unable to obtain records, or death, serious illness, or unavoidable absence. I.R.M. 20.1.1.3.1.2.4; I.R.M. 20.1.1.3.1.2.5; I.R.M. 20.1.1.3.2.4. Ignorance of the law, in and of itself, does not constitute reasonable cause. I.R.M. 20.1.1.3.1.2.1. However, reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances. I.R.M. 20.1.1.3.1.2.1. Some factors to be considered include the following: the taxpayer’s education, if the taxpayer has been previously subject to the tax, if the taxpayer has been penalized before, if there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know, and the level of complexity of a tax or compliance issue. Id. Generally, the most important factor in determining whether the taxpayer has reasonable cause and acted in good faith is the extent of the taxpayer’s effort to report the proper tax liability. Treas. Reg. § [pg. 2011-6343] 1.6664–4(b)(1); I.R.M. 20.1.5.6.2. Failure to file because of an erroneous belief that no return is required to be filed is not reasonable cause. Southeastern Finance Co. v. Commissioner, 4 T.C. 1069, 1945 WL 180 (1945), aff’d. 5th Cir. (1946). However, a taxpayer’s sophistication with respect to tax laws, at the time the return was filed, is relevant in determining whether the taxpayer acted with reasonable cause. Kees v. Commissioner, T.C.M.,1999-41, at 5  [TC Memo 1999-41].