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FRAN CORP. v. UNITED STATES

February 27, 1998

FRAN CORP., Plaintiff, against UNITED STATES OF AMERICA, Defendant.


The opinion of the court was delivered by: BRIEANT

 Brieant, J.

 Before this Court in this action to refund tax penalties, is a motion by the Defendant, dated November 17, 1997, and a cross-motion by the Plaintiff, dated January 16, 1998, each seeking summary judgment pursuant to Fed. R. Civ. P. 56. Oral argument was heard on February 20, 1998 and decision reserved.

 Background

 The facts underlying this case are undisputed. In 1993 and 1994, Fran Corp. ("Plaintiff") was an electrical contractor doing business as All Bright Electric, Inc. Between April 1, 1993, and June 30, 1994, Plaintiff failed to timely withhold and pay federal income tax, social security tax and Medicare tax ("employment taxes") from the wages and salaries of its employees. The Plaintiff concedes that during this time it did pay various other creditors, including its employees and its primary suppliers. The Government concedes, and this Court agrees, that during its period of tax delinquency, Plaintiff was undergoing severe financial difficulties. At least some of these difficulties can be attributed to disputes with two separate customers (one of which was the State of New York) in 1992 which had resulted in the withholding from Plaintiff of progress payments for ongoing projects. By not paying the taxes when due, Plaintiff avoided being cast in default, and was able to complete the projects, and ultimately to pay its taxes, interest and penalties, and remain in business following resolution in its favor of the two customer disputes.

 Of course, Plaintiff's business choice in this regard had consequences. Over a period of five quarters, from the second quarter of 1993 to the second quarter of 1994, Plaintiff accumulated a total tax deficit of $ 252,117.49. The Internal Revenue Service ("IRS") assessed civil penalties against Plaintiff in the amount of a $ 6,327.63 penalty for failure to file returns pursuant to 26 U.S.C. § 6651(a)(1); a $ 12,768.77 penalty for failure to pay taxes pursuant to 26 U.S.C. § 6651(a)(2); and a $ 52,654.32 penalty for failure to deposit taxes pursuant to 26 U.S.C. § 6656(a). Plaintiff paid the penalties by October, 1995, and filed this action to obtain a refund of the penalties from Defendant.

 Again, it should be emphasized that all of these material facts are undisputed. As Plaintiff puts it, "there remains no material issue of fact that would preclude the granting of summary judgment . . . . [and] both Plaintiff and Defendant are willing to abide by this Court's decision on the law." Plaintiff's Mem. at 7.

 Discussion

 A. The statutory scheme

 The narrow question we are asked to address in this case is whether Fran Corp.'s decision not to pay its taxes constitutes "wilful neglect," or whether the circumstances which precipitated that decision represent "reasonable cause" as those terms are defined in 26 U.S.C. §§ 6651(a)(1), 26 U.S.C. §§ 6651(a)(2) and 26 U.S.C. § 6656(a). These three Code provisions provide for the assessment of various penalties against taxpayers who are untimely in their compliance with the tax laws. Essentially, they provide as follows:

 
. Title 26 U.S.C. § 6651(a)(1) prescribes the penalties for the failure to file tax returns in a timely fashion;
 
. Second, § 6651(a)(2) prescribes the penalties for failure to pay the amount of tax due in a timely fashion; and
 
. Third, Title 26 U.S.C. § 6656(a) prescribes the penalties to be assessed for a taxpayer's failure to deposit federal employment taxes with a government depository in a timely fashion.

 All three of these provisions, in exactly the same language, allow a taxpayer to avoid paying penalty assessments if it can show that the failure was "due to reasonable cause and not due to willful neglect." See 26 ...


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