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Taxpayer Didn't Meet Partial Payment Rule for Requesting Refund of Sec. 6672 Penalty Tax. (Parker Tax Publishing October 2013)

Evidence submitted by the taxpayer was insufficient for the court to conclude that the full-payment requirement for filing a refund claim for the Code Sec. 6672 penalty tax had been met, as the taxpayer's conclusion that he met the divisible tax threshold for at least one employee assumed a certain level of consistency in restaurant work schedules without any reasonable basis for such an assumption. Kaplan v. U.S., 2013 PTC 309 (Fed. Cl. 10/9/13).

In 2010, the IRS assessed almost $87,000 of trust fund recovery penalties against Jonathan Kaplan. The IRS assessed this tax liability under Code Sec. 6672 after finding that for the first, second, and third quarters of 2008, Jonathan had failed to remit federal income and Federal Insurance Contributions Act (FICA) withholding taxes for the employees of Merchants Restaurant, LLC. Jonathan was listed as one of the company's three managing members in the certificate of formation filed with the Texas Secretary of State.

In the first six months of 2011, Jonathan made three payments of $100 toward the penalties associated with each of the three tax quarters. With each payment, he submitted IRS Form 843 to claim a refund of the amount he had paid. The IRS denied his three claims for a refund and reaffirmed the full judgment against him. Jonathan then sought a refund of these amounts by filing suit in the Court of Federal Claims.

Generally, a taxpayer must satisfy a tax liability in full before filing a refund claim. There is an exception to the full-payment rule for taxpayers seeking the refund of a divisible tax assessment, one example of which is a Code Sec. 6672 penalty tax resulting from an employer's failure to remit withholding taxes for a group of employees. This exception, or adjustment, to the full-payment rule derives from the premise that a Code Sec. 6672 assessment is a culmination of separable assessments for each employee from whom taxes were withheld. Accordingly, under this partial payment rule, the payment of one employee's withholding tax satisfies the full-payment rule for that employee. This one employee essentially serves as a test case by enabling employers to seek resolution of an employment tax dispute without the necessity of paying up front the entire amount at issue. Thus, courts recognize the partial payment of a Code Sec. 6672 assessment as sufficient, as long as that payment constitutes at least the income and FICA taxes withheld from one employee, even where the sum is a very small amount.

In support of his position, Jonathan offered into evidence one payroll report for one week of one quarter. Of the 30 employees in the report, four had gross FICA and income tax withholding of $7.69 or less. From that $7.69 figure, Jonathan extrapolated a total of $99.97 for a full 13-week quarter. Thus, he concluded, his payments of $100 must be enough to meet the divisible tax threshold for at least one employee.

The Court of Federal Claims held that the evidence Jonathan submitted was insufficient for the court to conclude that Jonathan satisfied the full-payment requirement. The problem with Jonathan's conclusion that he met the divisible tax threshold for at least one employee, the court said, was that it assumed a certain level of consistency in work schedules without any reasonable basis for such an assumption. Indeed, the court noted, a comparison with payroll reports from the fourth quarter of 2008 revealed tremendous variation in the number of hours worked. Given these circumstances, the court concluded that it would be unreasonable to extrapolate an entire quarter's worth of information from just one week's payroll report. Accordingly, the court held that Jonathan could not meet his burden of showing that the court has jurisdiction to hear his case.

For a discussion of the exception to the full payment rule for filing a refund claim for the penalty tax under Code Sec. 6672, see Parker Tax ΒΆ261,155. (Staff Editor Parker Tax Publishing)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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