Taxpayer Liable for Taxes Misappropriated by Payroll Services Firm


After the Service notified A that it had underpaid its payroll taxes, A investigated and discovered that H, a company A hired to service its payroll accounting, had misappropriated tax funds collected from A.

Reliance

A taxpayer’s reliance on a third party to fulfill its tax obligations does not relieve the taxpayer of responsibility for those obligations; see Robert Boyle, 469 US 241 (1985) (timely filing of returns and payment of taxes are solely the duties of the taxpayer and are not delegable). A concedes that it was required to collect and pay over employment taxes. Misappropriation by a third party does not relieve an employer of that obligation; see Frontier Business Technologies, Inc., 288 BR 663 (when a payroll services provider misappropriated funds it had received from its clients for payment of their payroll taxes, the clients owed the unpaid taxes to the IRS); see also Able Galletti, 541 US 114 (2004) (“when an employer fails to withhold and submit the requisite amount of employment taxes, Section 3403 makes clear that the liable taxpayer is the employer”). Although the Service may, in certain circumstances, abate a penalty for failure to make payment timely, the abatement does not extend to the unpaid tax principal; see Sec. 6404(e)(1).

Delay

The IRS may abate interest on a tax deficiency if it is attributable to unreasonable error or delay by a Service officer or employee in performing a ministerial or managerial act (Sec. 6404(e)(1)). However, delay or error attributable to the taxpayer are not grounds for abatement. A argues that the IRS held the case in abeyance pending the resolution of the criminal prosecution. However, it was not unreasonable for the Service to refrain from collecting the outstanding tax delinquency until the prosecution was resolved. Moreover, nothing prevented A from paying the delinquency in the interim.

Estoppel

A also relies on judicial estoppel, an equitable principle intended to prevent one party from asserting an “inconsistent or mutually contradictory position with respect to the same matter in the same or a successive series of suits”; see Scarano v. Central R.R., 203 F2d 510 (3d Cir. 1953). “It is not intended to eliminate all inconsistencies, however slight or inadvertent; rather, it is designed to prevent litigants from ‘playing fast and loose with the courts’” (Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F3d 355 (3d Cir. 1996)). The doctrine is not implicated here.

The government’s position in the criminal prosecution was not irreconcilably inconsistent with the one it took during the proceedings related to A’s tax delinquency. As noted above, A is liable for employment taxes regardless of whether an intermediary misappropriated funds collected to pay that obligation. Moreover, the government is entitled both to prosecute H criminally for attempting to defeat a tax obligation—his own or someone else’s—and also to collect the delinquent taxes that A owed because of H’s embezzlement; see Sec. 7201.

Similarly, no estoppel arises from oral statements the Appeals Officer made during the administrative hearing. To prevail on a traditional estoppel defense, the record must establish reasonable reliance on a misrepresentation to a party’s detriment; see Heckler v. Comm’ty Health Services of Crawford County, Inc., 467 US 51, 59 (1984). However, when the government is involved, the party claiming estoppel must establish “affirmative misconduct or rare or extreme circumstances”; see Lewis Pepperman, 976 F2d 123 (3d Cir. 1992). Here, A rests its estoppel claim on the Appeals Officer’s oral statement that it should not be held responsible for money, interest or penalties stolen by H. That oral expression of opinion simply does not rise to the level of an estoppel; see Heckler, 467 US at 65 (1984) (estoppel cannot be erected on the basis of oral advice); and St. John’s Gen. Hosp., 875 F2d 1064 (3d Cir. 1989) (no estoppel when alleged misrepresentation was based on inadmissible hearsay, not written correspondence). Moreover, A was represented by counsel and, thus, its “failure to decipher the Tax Code cannot be excused by its reliance on a government employee’s error” (Est. of Edward J. Kunze, 233 F3d 948 (7th Cir. 2000)).

Pediatric Affiliates, 3d Cir., 4/16/07


Clarifications

In the May 2007 article by Larry Witner, “Treatment of Capitalized Costs of Intangible Assets (Part II),” Example 13 on p. 288 states that capitalized transaction costs in an asset acquisition are treated under Sec. 1060 as category 6 transaction costs, not eligible for amortization. However, Regs. Sec. 1.263(a)-5(g)(2)(i) states that such costs are added to the basis of the acquired (1) assets (in an asset transaction) or (2) stock (in a stock transaction). Assuming such costs are allocable to goodwill and the Sec. 197 anti-churning rules do not apply, they would be eligible for 15-year amortization.

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