T.C. Memo. 2021-74
UNITED STATES TAX COURT
BELL CAPITAL MANAGEMENT, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21714-07. Filed June 14, 2021.
William Edward Frantz and Robert H. Hishon, for petitioner.
Laura Beth Salant, Mistala M. Cullen, and David S. Weiner, for respondent.
MEMORANDUM OPINION
WELLS, Judge: The instant case is before the Court on a motion for
summary judgment filed by the Internal Revenue Service (IRS or respondent).
Served 06/14/21 -2-
[*2] The petition was filed for redetermination of employment status pursuant to
section 7436.1 In a Notice of Determination of Worker Classification (NDWC) the
IRS determined that Ron H. Bell was petitioner’s “employee” for purposes of the
Federal Insurance Contributions Act (FICA) under sections 3101, 3102(a), and
3111; the Federal Unemployment Tax Act (FUTA) under section 3301; and
income tax withholding under section 3402(a) (together, employment taxes) for
the periods listed below. The IRS also determined that petitioner was liable for
employment taxes, fraud penalties under section 6663, and failure to deposit taxes
penalties under section 6656 in the following amounts:
1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the relevant periods in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. -3-
[*3] Employment taxes Penalties
Quarter/year FICA tax FUTA tax Sec. 6656 Sec. 6663 Income tax withholding Dec, 31, 1996 $30,975 $434 $1,592 $191,557 $224,000 Dec. 31, 1997 43,490 434 2,218 289,142 341,600 Sept. 30, 1998 22,982 --- 1,149 122,236 140,000 Dec. 31, 1998 42,755 434 2,182 342,157 413,000 Sept. 30, 1999 43,802 --- 2,190 284,852 336,000 Dec, 31, 1999 35,670 434 1,827 285,378 344,400 Sept. 30, 2000 32,649 --- 1,632 192,486 224,000 Dec. 31, 2000 31,320 434 1,609 250,616 302,400 Mar. 31, 2000 20,845 --- 1,042 94,383 105,000 Dec. 31, 2001 1,450 434 116 11,725 13,750
The questions in issue are: (1) Is petitioner collaterally estopped from
denying that it was responsible for paying the employment taxes? (2) Has
respondent properly determined that Ron H. Bell should be legally classified as
petitioner’s employee for all tax periods in issue? (3) Is petitioner liable for the
employment taxes? (4) Is petitioner liable for fraud penalties? (5) Have the
periods of limitations for assessing and collecting the employment taxes and
penalties expired?
Background
Some facts are stipulated and are so found. The stipulation of facts is
incorporated herein by this reference. When the petition was filed, petitioner’s -4-
[*4] principal place of business was in Georgia. Additionally, where noted herein
we take judicial notice of the facts found in Foxworthy, Inc. v. Commission, T.C.
Memo. 2009-203, 2009 WL 2877850, aff’d 494 F. App’x 964 (11th Cir. 2012).2
See Fed. R. Evid. 201; Estate of Allen v. Commissioner, 6 T.C. 597, 604 (1946).
As detailed in Foxworthy, petitioner Bell Capital Management, Inc., was
incorporated in 1984 by Ron H. Bell, who at all relevant times owned 100% of the
stock and was its sole director. Foxworthy, Inc. v. Commissioner, 2009 WL
2877850, at *2. Petitioner provided investment services to individual clients and
their financial planners in exchange for quarterly fees. Id. at *3. From 1991
through 1995, petitioner paid Mr. Bell wages of $761,978, $978,772, $691,006,
$589,760, and $630,760, respectively. Id.
Sometime around 1996, petitioner changed Mr. Bell’s compensation
structure. Petitioner began leasing Mr. Bell’s services through “offshore employee
leasing transactions” (OEL transactions). Petitioner entered into a “Contract for
Personnel Services” with Nationwide Executive Staff Leasing (NESL) to lease Mr.
Bell’s services for a period beginning December 1, 1996, and ending November
2 In support of his motion for summary judgment, respondent submitted an affidavit with several exhibits admitted into evidence during the Foxworthy trial. Petitioner does not object and merely requests that this Court also take judicial notice of certain additional facts and documents, which are discussed herein where relevant. -5-
[*5] 30, 2001. The contract was signed by the president of NESL, Mr. Reiserer,3
and petitioner’s vice president, Mr. Comsudes. Pursuant to the contract, NESL
agreed to lease Mr. Bell’s services to petitioner on substantially a full-time basis.
Petitioner agreed to furnish space on its premises for Mr. Bell’s use while he
performed personnel services. Petitioner also provided an automobile for business
use and health, medical, and dental insurance fringe benefits, at petitioner’s sole
and exclusive cost.
Beginning December 1, 2000, petitioner signed a similar contract with
International Leasing Services, Inc. (ILS). The contract provided petitioner with
the nonexclusive rights to the personnel services of Mr. Bell as an economist,
financial planner, financier, business planner, investment counselor, wealth
manager, author, lecturer, and educator. During the tenure of petitioner’s
above-mentioned contracts, NESL and ILS each entered into personnel leasing
contracts with companies such as Montrain Services, Ltd., and Fitzwilliam
International Resources Services, Ltd. (together, leasing companies). In turn, Mr.
Bell entered into his own contracts with the leasing companies.
3 Mr. Reiserer came under an IRS secs. 6700 and 6701 investigation but passed away during July 2004, and the investigation was closed. -6-
[*6] After the implementation of the OEL transactions, Mr. Bell remained at the
helm of petitioner’s operations. From 1996 through 2001, Mr. Bell signed
petitioner’s Forms 1120S, U.S. Income Tax Return for an S Corporation, in his
capacity as president. Mr. Bell also signed petitioner’s 1999 State Corporation
Annual Registration and is listed as its chief executive officer, chief financial
officer, and as per the signature line, president. Mr. Bell was once again listed as
petitioner’s chief executive officer and chief financial officer on the 2001
registration, signed by Mr. Comsudes in his capacity as vice president. On August
6, 1999, the Securities and Exchange Commission accepted an offer of settlement
in an administrative proceeding instituted against petitioner, Mr. Bell, Mr.
Comsudes, and Mark S. Palmer. Petitioner admitted that Mr. Bell was petitioner’s
president and sole shareholder, and Mr. Comsudes and Mr. Palmer were its vice
presidents. The offer of settlement was submitted and accepted jointly by
petitioner and the individuals.
Pursuant to its contracts for personnel services, and as we found in
Foxworthy, Inc. v. Commissioner, 2009 WL 2877850, at *3, petitioner deducted
the following amounts paid for the services of Mr. Bell during the periods in issue: -7-
[*7] Year Amount 1996 $800,000 1997 1,220,000 1998 2,225,000 1999 2,430,000 2000 1,880,000 2001 425,000
For all the periods in issue, petitioner filed Forms 941, Employer’s
Quarterly Federal Tax Return, and Forms 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return. None of the amounts reported therein relates
to Mr. Bell. Petitioner did not deposit or pay any Social Security or Medicare
taxes, or income tax withholding on any payments made to or for the benefit of
Mr. Bell for any of the periods in issue.
In 2009 this Court ruled, among other things, that the OEL transactions
employed in the instant case lacked economic substance. Id. at *15. We found
that during the years in issue Mr. Bell continued to perform the same services for
petitioner as he had in the past and that he constructively received the money
petitioner transferred as part of the OEL transactions. Id. at *16-*18. We found
that the amounts paid by petitioner, net of fees charged by the leasing companies,
were deposited into various accounts owned and operated by entities with ties to -8-
[*8] Mr. Bell or his associates. Id. at *17. We further held that Mr. Bell entered
into the leasing contracts to conceal the money being transferred from petitioner to
himself. Id. at *22. Accordingly, we held that Mr. Bell fraudulently underpaid his
Federal income tax for the years in issue. Id. at *23.
Mr. Bell passed away in 2012. As part of the administration of Mr. Bell’s
estate, ownership of 100% of petitioner’s stock was transferred to Mr. Bell’s wife.
Respondent’s subsequent motion for summary judgment alleges that petitioner
fraudulently failed to pay employment taxes with respect to the OEL payments
made for Mr. Bell’s benefit.
Discussion
The purpose of summary judgment is to expedite litigation and avoid costly,
unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v.
Commissioner, 116 T.C. 73, 74 (2001). We 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); Elec. Arts, Inc. & Subs. v.
Commissioner, 118 T.C. 226, 238 (2002). We 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. Commissioner, 98 T.C.
518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). However, the nonmoving -9-
[*9] party may not rest upon the mere allegations or denials in his pleadings but
instead must set forth specific facts showing that there is a genuine dispute for
trial. Rule 121(d); see also Sundstrand Corp. v. Commissioner, 98 T.C. at 520.
As stated above, respondent determined that petitioner was Mr. Bell’s
employer. 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
secs. 3102(a) and (b) (employees’ FICA taxes), 3111 (employer’s FICA taxes),
3402 and 3403 (Federal income tax withholding). The first question in issue is
whether petitioner is collaterally estopped from denying that it was responsible for
paying the employment taxes. Relying on the doctrine of collateral estoppel, or
issue preclusion, respondent contends that as a result of our findings in
Foxworthy, petitioner may not contest its responsibility to pay the amounts of
those items that are taxes here in issue. Petitioner objects.
In Monahan v. Commissioner, 109 T.C. 235, 240 (1997), we stated:
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. United States, 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979)). * * * - 10 -
[*10] For this doctrine 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); Monahan v. Commissioner,
109 T.C. at 240.
Respondent is invoking this doctrine against petitioner, who was in privity
with Mr. Bell by virtue of his being its sole shareholder and president. See Hi-Q
Personnel, Inc. v. Commissioner, 132 T.C. 279, 292 (2009) (finding where
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 relitigation of employment tax issues decided in individual’s
case); Levitt v. Commissioner, T.C. Memo. 1995-464, 1995 WL 570439, at *18
(“A sole or controlling stockholder can be in privity with his * * * closely held
corporation.”), aff’d without published opinion, 101 F.3d 691 (3d Cir. 1996). - 11 -
[*11] In Foxworthy, a consolidated case in which Mr. Bell was a petitioner, we
decided that Foxworthy, Inc., was Mr. Bell’s alter ego; that the OEL transactions
lacked economic substance; that the money petitioner transferred as part of the
OEL transactions was never part of any valid deferred compensation plan and
instead was constructively received by Mr. Bell at the time of transfer by
petitioner; and that Mr. Bell implemented the plan to fraudulently underpay tax.
Foxworthy, Inc. v. Commissioner, 2009 WL 2877850, at *16-*23. The instant
case involves the exact same OEL transaction, and so the controlling facts are the
same. The legal principles regarding deferred compensation and fraud also remain
the same. These issues were actually litigated, and their resolution was essential
to our prior decision. Petitioner is therefore precluded from denying that the OEL
transactions lacked economic substance. Petitioner is similarly precluded from
denying that Mr. Bell arranged for the OEL transactions so as to fraudulently
underreport and underpay tax.
However, as petitioner contends, the determination of worker classification,
employment tax liability, and petitioner’s withholding requirements or intent as to
the transaction were not essential to our decision. Although we referred to the
payments made for Mr. Bell’s benefits as “wages”, see, e.g., id. at *27, we did not
address whether Mr. Bell met the definition of an “employee”. We now turn to - 12 -
[*12] whether respondent properly determined that Mr. Bell should be legally
classified as petitioner’s employee for all periods in issue.
Respondent contends that Mr. Bell was petitioner’s employee pursuant to,
among other statutes, paragraphs (1), (3), and (4) of section 3121(d). Section
3121(d) describes individuals who are considered employees regardless of their
status under the common law. Individuals described in those paragraphs are
commonly referred to as “statutory” employees. Joseph M. Grey Pub. Accountant,
P.C. v. Commissioner, 119 T.C. 121, 126 (2002), aff’d, 93 F. App’x 473 (3d Cir.
2004). One such category of statutory employees consists of officers of
corporations. Sec. 3121(d)(1). Section 31.3121(d)-1(b), Employment Tax Regs.,
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.
Petitioner admits that Mr. Bell was an officer. Petitioner’s tax returns,
annual State filings, and SEC documents from the periods in issue all identify Mr.
Bell as petitioner’s president. Petitioner also admits that Mr. Bell continued to
render the same services to petitioner during the periods in issue. The provisions - 13 -
[*13] in petitioner’s leasing contracts with NESL and ILS describe services
provided by Mr. Bell which are indisputably not “minor”. Finally, Mr. Bell
indirectly received remuneration from petitioner, a fact which petitioner is
collaterally estopped from challenging. Accordingly, Mr. Bell was petitioner’s
employee during the periods in issue, and petitioner is liable for the employment
taxes and related withholding.
We now turn to the fourth and fifth questions in issue: whether the periods
of limitations for assessing and collecting the employment taxes and withholding
amounts remain open and whether petitioner is liable for fraud penalties.
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.
Commissioner, 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.
Commissioner, 288 F.2d 517, 519-520 (2d Cir. 1961), aff’g T.C. Memo. 1960-32.
“Thus, 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. Commissioner, 102 T.C.
380, 385 (1994). - 14 -
[*14] Fraud is intentional wrongdoing on the part of the taxpayer with the specific
purpose to evade a tax believed to be owing. See McGee v. Commissioner, 61
T.C. 249, 256 (1973), aff’d, 519 F.2d 1121 (5th Cir. 1975).4 The Commissioner
has the burden of proving fraud by clear and convincing evidence. Sec. 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. Commissioner, T.C.
Memo. 1994-303. To satisfy the burden of proof, the Commissioner must show
that (1) an underpayment exists and (2) 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. Commissioner, 94 T.C. 654, 660-661 (1990).
The Commissioner must meet this burden through affirmative evidence because
fraud is never presumed. Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989);
see also Beaver v. Commissioner, 55 T.C. 85, 92 (1970).
As explained above, we have sustained respondent’s determination that
there exist underpayments of employment taxes and withholding. When deciding
intent, in the case of a corporate petitioner we look to the fraudulent intent of
4 In Bonner v. City of Prichard, Ala., 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Court of Appeals for the Eleventh Circuit adopted as binding precedent all Court of Appeals for the Fifth Circuit decisions issued before October 1, 1981. - 15 -
[*15] individuals acting in their capacity as corporate officers. See Benes v.
Commissioner, 42 T.C. 358, 382 (1964) (“Where fraud is alleged against a
corporate taxpayer, the requisite proof of fraudulent intent is to be found in the
acts of its officers, inasmuch as the corporation, being an artificial person created
by law, can have no separate intent of its own apart from those who direct its
affairs.”), aff’d, 355 F.2d 929 (6th Cir. 1966), overruled on another issue by
Truesdell v. Commissioner, 89 T.C. 1280 (1987). “Corporate fraud necessarily
depends upon the fraudulent intent of the corporate officer.” Federbush v.
Commissioner, 34 T.C. 740, 749 (1960), aff’d, 325 F.2d 1 (2d Cir. 1963).
We find that for each period in issue, petitioner’s withholding form and
Forms 941 and 940 were false or fraudulent returns because its officers
intentionally omitted payments made for Mr. Bell’s benefit with the specific
purpose to evade tax believed to be owing. Petitioner properly reported Mr. Bell’s
wages before 1996. For the periods in issue, petitioner’s officers entered into
leasing contracts which were part of an overall scheme of offshore transactions.
Mr. Bell’s already established fraud as to those offshore transactions is evidence
we can consider in finding petitioner’s fraudulent intent. See Hi-Q Personnel, Inc.
v. Commissioner, 132 T.C. at 292; Benes v. Commissioner, 42 T.C. at 382. Mr.
Bell acted in his capacity as petitioner’s officer when he designed and - 16 -
[*16] implemented the OEL transaction with Mr. Reiserer. See Foxworthy, Inc. v.
Commissioner, 2009 WL 2877850. Mr. Comsudes, another individual acting in
his capacity as an officer, assisted by signing petitioner’s lease agreements. We
find that as a result of the scheme to understate Mr. Bell’s Federal income,
petitioner evaded its employment tax obligations. Whether this was by design or
implementation is irrelevant. Any employment tax fraud was part and parcel of an
overall intent to defraud the Government. See Hi-Q Personnel, Inc. v.
Commissioner, 132 T.C. at 299 n.11. Petitioner had to avoid the employment
taxes due respondent for either it or Mr. Bell to evade responsibility. See id. The
reporting of one would almost certainly have led respondent to challenge the
omission of the other. See id.
Petitioner contends that respondent has not met his burden. Petitioner
alleges that it reasonably relied on its leasing agreements, and that Mr. Bell’s
actions and his secondary contracts with the leasing companies cannot be imputed
to petitioner. We disagree. Petitioner has identified no facts or evidence it could
present at trial to disprove that its officers entered into the leasing contracts with
full awareness and design of the overall OEL transactions. Petitioner merely
denies that Mr. Bell was the lone decision maker for petitioner and states that Mr.
Bell was not the sole officer. Even viewed in the light most favorable to - 17 -
[*17] petitioner, these two facts are insufficient to establish that petitioner’s role in
the OEL transactions is genuinely in dispute for trial. Petitioner does not identify
any such other decision maker or officer who could change our view. Neither
does petitioner identify what evidence such an alleged decision maker or officer
could present. Petitioner has supplied no information or affidavit in support of its
claim that its officers’ actions and leasing agreements were separate from Mr.
Bell’s fraudulent scheme. In fact, in Foxworthy we found that the other officer
involved in the transactions, Mr. Comsudes, signed whatever documents Mr. Bell
put in front of him. Foxworthy, Inc. v. Commissioner, 2009 WL 2877850, at *22.
Respondent has shown by clear and convincing evidence that petitioner
intentionally understated its employment tax and withholding obligations with the
specific purpose to evade Mr. Bell’s taxes. Because we have sustained the taxes
respondent determined, except to the extent discussed below, we conclude that the
entire underpayment is attributable to fraud. Accordingly, the usual three-year
period of limitations of section 6501(a) does not apply. See sec. 6501(c)(1); Neely
v. Commissioner, 116 T.C. at 85. Respondent’s determinations were thus timely.
Furthermore, for each period in issue, petitioner is liable for the section
6663(a) fraud penalty. Section 6663(a) provides: “If any part of any
underpayment of tax required to be shown on a return is due to fraud, there shall - 18 -
[*18] be added to the tax an amount equal to 75 percent of the portion of the
underpayment which is attributable to fraud.” Respondent has met his burden by
proving that the underpayments of tax were due to fraud. In doing so, respondent
has met the high burden of clear and convincing evidence, and there is no issue
with regard to the burden of production. See sec. 7491(c). In any case section
7491(c) does not apply to an entity such as petitioner because it is not a prevailing
party. See secs. 7491(a)(2)(C), 7430(c)(4)(A)(ii). Similarly, because the instant
fraud penalties are due to a failure to file tax returns or to pay tax, see sec. 6651,
there is no additional penalty approval requirement, see sec. 6751(b)(2)(A).
Petitioner contends that imposing fraud penalties in the instant case violates
the Eighth Amendment to the Constitution. The section 6663(a) fraud penalty is
remedial, rather than punitive, and thus does not implicate the Eighth Amendment
Excessive Fines Clause. See Thompson v. Commissioner, 148 T.C. 59, 64 (2017);
Wilson v. Commissioner, T.C. Memo. 2002-234. The fraud penalty is a civil
sanction provided primarily as a safeguard for the protection of the revenue and to
reimburse the Government for the heavy expense of investigation and the loss
resulting from a taxpayer’s fraud. See Helvering v. Mitchell, 303 U.S. 391, 401
(1938). Because petitioner is liable for the underpayment of employment taxes - 19 -
[*19] and intended to prevent the collection of those taxes, petitioner is liable for
the section 6663(a) fraud penalties in their entirety.
Finally, petitioner contends that respondent has improperly computed the
taxes owed. In Foxworthy, Inc. v. Commissioner, 2009 WL 2877850, at *27, we
held that the proper amounts petitioner paid to Mr. Bell as wages were $800,000,
$1,220,000, $2,225,000, $2,430,000, $1,880,000, and $425,000 for the services of
Mr. Bell in 1996, 1997, 1998, 1999, 2000, and 2001, respectively. It is these same
payment amounts which respondent determined in the NDWC to be wages
petitioner paid for Mr. Bell’s services in the OEL scheme. Respondent used the
correct basis for the assessments, and petitioner has shown no specific calculation
error.
Petitioner’s claim that it is entitled to an unquantified credit for any
employment taxes allegedly paid by the leasing companies is also mistaken.
Petitioner contends that corporate ledgers presented in Foxworthy show that
payroll taxes were paid. Whether another entity may have paid employment taxes,
however, is irrelevant to the question at hand. We are not subjecting Mr. Bell’s
wages to a second employment tax; we are finding that petitioner was Mr. Bell’s
employer, and as such the proper entity required to pay employment taxes. - 20 -
[*20] Petitioner is also mistaken that it is entitled to the lower withholding tax rate
under section 3509. Section 3509 does not apply if the liability is due to the
employer’s intentional disregard of the requirement to deduct and withhold such
tax. Because petitioner intentionally understated its employment tax and
withholding obligations, it intentionally disregarded its known requirement to
deduct and withhold tax and is not entitled to the lower withholding tax rate under
section 3509.
In conclusion and for the reasons stated above, subject to the adjustment to
the amount in Mr. Bell’s wages discussed above, we sustain respondent’s Notice
of Determination of Worker Classification dated June 22, 2007.
To reflect the foregoing,
An appropriate order and decision
will be entered.