Operating Engineers v. United States

Background

Operating Engineers Local Union No. 3 (OE3) failed to timely file, pay, or deposit payroll taxes for the third quarter of 2018, the fourth quarter of 2018, and the first quarter of 2019. The Internal Revenue Service assessed penalties totaling $587,297.16, which OE3 paid along with accrued interest. After the IRS denied OE3’s refund requests, OE3 brought this lawsuit seeking repayment of the penalties and statutory interest.

OE3 argued that its failures were caused by reasonable circumstances rather than willful neglect. It attributed the problems to the June 2018 resignation of Accounting Manager Lillian Morata and the conduct and mental-health difficulties of Angela Rose, OE3’s Finance Director/Controller, who had responsibility for payroll-tax duties. Rose disputed OE3’s characterization of her condition as a psychological breakdown and testified that she had been extremely stressed while handling the work.

After Morata resigned, no one consistently paid or deposited OE3’s payroll taxes during the second half of 2018. OE3 later implemented reforms, including hiring a third-party payroll vendor, hiring a Chief Financial Officer to oversee the finance department, and filling the Accounting Manager position.

Summary-judgment standard

The court explained that summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The evidence must be viewed in the light most favorable to the party opposing the motion, but that party must identify specific evidence showing a genuine issue for trial.

Reasonable cause

The Internal Revenue Code requires penalties for failing to timely file returns, pay taxes, or deposit withheld taxes unless the taxpayer proves that the failure resulted from reasonable cause and not willful neglect. The taxpayer bears the burden of proving both requirements. Reasonable cause generally requires showing that the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply on time.

The court relied on the rule that a taxpayer generally cannot avoid penalties merely by relying on an employee or other agent to perform a known tax duty. The court also considered Ninth Circuit precedent holding that a company may be excused only if it was disabled from complying because of circumstances beyond its control.

The court held that OE3 had not established reasonable cause as a matter of law. The undisputed facts showed that OE3 relied on Rose, acting within the scope of her authority, to meet its payroll-tax obligations. Rose was not an OE3 officer or board member and was directly supervised by Business Manager Russell Burns, who had authority over the organization’s operations and staff. The court therefore concluded that OE3 was not disabled from complying with its tax duties and could not avoid responsibility by relying on its employee.

Third-quarter 2018 filing

OE3 argued that a factual dispute existed about whether its third-quarter 2018 payroll-tax return had been timely mailed. The return was due October 31, 2018, and the Government’s records showed that it was filed on April 25, 2019. OE3 relied on Rose’s testimony that she believed she had mailed the return in early October 2018, although the IRS never received it.

The court ruled that this testimony did not create a genuine factual dispute. A Treasury regulation limits the methods for proving delivery of an undelivered tax document to direct proof of actual delivery, proof of registered or certified mail, or proof of an authorized private delivery service. OE3 offered none of those forms of proof. The court therefore found that OE3 had not raised a genuine issue about the timeliness of the return.

IRS first-time-abatement procedures

OE3 also argued that the third-quarter 2018 penalties might have qualified for an administrative waiver under the IRS’s First Time Abatement procedures. The court rejected that argument because those procedures provide administrative, not judicial, relief. The Internal Revenue Manual governs the IRS’s internal affairs, does not have the force of law, and does not create rights for taxpayers.

Disposition

Judge Alex Tse granted the Government’s motion for summary judgment. The opinion states that the Government’s motion was granted; it does not separately state that the case or OE3’s claim was dismissed with or without prejudice.