Bell Capital Management, Inc. v. Commissioner, T.C. Memo. 2021-74 | June 14, 2021 | Wells, J. | Dkt. No. 21714-07

• Opinion

Short Summary: 

A single shareholder (“Shareholder”) owned 100% of the stock and served as the sole director for the petitioner.  For a period of 5 years, petitioner paid the Shareholder wages until a change in compensation structure.  Moving forward, petitioner leased the Shareholder’s services through offshore employee leasing transactions (OEL transactions).  During this period, petitioner furnished Shareholder with space to perform personnel services, loaned Shareholder an automobile for business use, and provided health insurance benefits, at petitioner’s cost.  Additionally, Shareholder signed petitioner’s Form 1120S, in his capacity as president.  Shareholder, further, listed himself on an annual corporate registration as CEO, CFO and President, as well as, admitted such status to the SEC as part of a settlement.  After the years of exclusive service to the petitioner (“Years at Issue”), Shareholder began leasing his services to other operations.

For the Years at Issue, petitioner paid Shareholder for services performed and deducted the amounts paid.  Petitioner filed Forms 941, Employer’s Quarterly Federal Tax Return, and Forms 941, Employer’s Annual Federal Unemployment (“FUTA”) Tax Return.  Petitioner did not report amounts relating to the Shareholder, including payment of Social Security or Medicare taxes, or income tax withholding, for any of the Years at Issue.

In a decade old case involving the petitioner and Shareholder, the Tax Court determined that the OEL transactions amounted to attempts to conceal money transferred from the Petitioner to the Shareholder.  Shareholder’s estate now holds ownership in the Petitioner.

Key Issues:

• Whether petitioner is collaterally estopped from denying that it was responsible for paying the employment taxes when it was in privity with an individual in a previous tax court case?
• Whether Commissioner has properly determined that a corporate officer should be legally classified as an employee for the tax periods at issue?
• Whether petitioner is liable for employment taxes?
• Whether Petitioner is liable for fraud penalties?
• Whether the limitations periods for assessing and collecting the employment taxes and penalties expired?

Primary Holdings: 

• The tax court concluded that the Petitioner was precluded from denying the OEL transactions lacked economic substance as determined in the previous tax court case against the Shareholder. However, the Petitioner is not precluded from challenging whether the Shareholder satisfy the definition of “employee.”
• The Tax Court concluded that Shareholder met the definition of an employee based on the facts, as stated above, and, thus, the Petitioner is liable for employment taxes and related withholding.
• The Tax Court concluded the Petitioner liable for fraud penalties because its corporate offers acted with the intention to omit payments made for Shareholder’s benefit for the specific purpose to evade taxes believed to be owed.
• The Tax Court concluded that no limitation period exists that would bar the Commissioner’s action.

Key Points of Law:

• The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. FPL Grp., Inc. & Subs. V. Comm’r, 116 T.C. 73, 74 (2001). A court may grant a motion for summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b). Courts construe the facts and draw all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate. Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992). However, the nonmoving party may not rest upon the mere allegations or denials in its pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d).
• It is the duty of the employer to collect, account for, and pay over both the employee’s and the employer’s FICA taxes and to withhold income tax. See 3102(a) and (b) (employees’ FICA taxes), 3111 (employer’s FICA taxes), 3402 and 3403 (Federal income tax withholding).
• The doctrine of issue preclusion, or collateral estoppel, provides that, once an issue of fact or law is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation. Montana v. U.S., 440 U.S. 147, 153 (1979).
• For the doctrine of collateral estoppel to apply, (1) the issue to be decided in the second case must be identical in all respects to the issue decided in the first case, (2) a court of competent jurisdiction must have rendered a final judgment in the first case, (3) a party may invoke the doctrine only against parties to the first case or those in privity with them, (4) the parties must have actually litigated the issue and the resolution of the issue must have been essential to the prior decision, and (5) the controlling facts and legal principles must remain unchanged. See Griswold v. Cty. of Hillsborough, 598 F.3d 1289 (11th Cir. 2010).
• Courts have found that where an individual was president and sole shareholder who committed fraud through his business, there was privity between the two; in the business case collateral estoppel precluded relitigating the employment tax issues decided in individual’s case. See Hi-Q Personnel, Inc. v. Comm’r, 132 T.C. 279, 292 (2009). A sole or controlling stockholder can be in privity with his closely held corporation. Levitt v. Comm’r, T.C. Memo. 1995-464, 1995.
• Section 31.3121 (d)-1(b) of the Treasury Regulations limits that category as follows:

(b) Corporate officers – Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation.

• In the case of the filing of a false or fraudulent return with intent to evade tax, the tax may be assessed at any time. Sec. 6501(c)(1); see Neely v. Comm’r, 116 T.C. 79, 85 (2001). If the return is fraudulent in any respect, it deprives the taxpayer of the bar of the period of limitations for that year. Lowy v. Comm’r, 288 F.2d 517, 519-520 (2d Cir. 1961). Where fraud is alleged and proven, the Commissioner is free to determine a deficiency with respect to all items for the particular taxable year without regard to the period of limitations. Colestock v. Comm’r, 102 T.C. 380, 385 (1994).
• Fraud is the intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing. See McGee v. Comm’r, 61 T.C. 249, 256 (1973). The Commissioner has the burden of proving fraud by clear and convincing evidence. I.R.C. § 7454(a); Rule 142(b) . The Commissioner’s burden of proof under section 6501(c)(1) is the same as that imposed by section 6663. See Pennybaker v. Comm’r, T.C. Memo. 1994-303. To satisfy the burden of proof, the Commissioner must show that an underpayment exists and that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Comm’r, 94 T.C. 654, 660-661 (1990). The Commissioner must meet this burden through affirmative evidence because fraud is never presumed. Petzoldt v. Comm’r, 92 T.C. 661, 699 (1989).
• Section 6663(a) provides that if any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

Insight:  While corporate titles in a single shareholder owned company may seem like “in name only,” the decision illuminates for the Corporate taxpayer and individual that holding oneself out as a corporate officer leans the IRS to claim the individual is an employee of the corporation.  The decision is also a stark reminder that, in the context of fraud under section 6663, the statute of limitations never sleeps.

Have a question? Contact Jason Freeman, Freeman Law, Texas.