BEFORE THE OFFICE OF TAX APPEALS

STATE OF ALASKA

IN THE MATTER OF: Case No. 5-OTA-97

NEW WEST FISHERIES, INC.,

DECISION ON RECONSIDERATION

The taxpayer, New West Fisheries, Inc. (New West), appeals from an informal conference decision of the Department of Revenue (DOR) which upheld a five percent penalty for late payment of the Fisheries Business Tax (AS 43.75)(FBT) and Seafood Marketing Assessment (AS 16.51.120)(SMA) for 1995. The issue on appeal is whether the failure of New West to pay the 1995 taxes on time was due to reasonable cause.

At the pre-hearing conference held on May 22, 1997, the parties agreed that there was no need for an oral hearing. The parties agreed to submit the case for decision based on the written record, which included statements by New West employees regarding the circumstances surrounding the payment of the 1995 taxes. The record was closed on June 18, 1997.

The initial decision in this case, issued on October 31, 1997, found reasonable cause to abate the late payment penalty. DOR requested reconsideration. On December 19, 1997, reconsideration and supplemental briefing were ordered. The record on reconsideration was closed on February 2, 1998. This is the decision on reconsideration and the final administrative decision in this matter. Although this decision modifies the original decision in some respects, it reaches the same conclusion regarding reasonable cause.

Brad E. Amberian and Brewster Jamieson of the law firm of Lane Powell Spears Lubersky LLP, and Ronald Bauleke, CPA, represented the taxpayer. Tim Cottongim, Appeals Officer, and Deborah Vogt, Deputy Commissioner, represented DOR.

The following findings of fact are based on a preponderance of the evidence. ¹

1. AS 43.75.030 provides that fisheries business taxes must be paid, and the returns filed, before April 1 after the close of the calendar year. In most years taxes are due on March 31. However, in 1996, March 31 fell on a Sunday. Under 15 AAC 05.310, the regulation regarding payment of taxes, when the tax due date falls on a weekend or holiday, the due date is extended until the next succeeding working day. Accordingly, the due date for the 1995 fisheries business taxes and returns was Monday, April 1, 1996.

2. On Friday, March 29, 1996, New West, located in Bellingham, Washington, shipped a package, containing its 1995 FBT/SMA returns and a check for tax payments totaling $334,000, to DOR offices in Juneau. The tax package was sent by United Parcel Service (UPS) next day air delivery.

3. The package should have been delivered to DOR by April 1, 1996, but delivery was delayed until Tuesday, April 2, 1996, because UPS erred in sorting the parcel and initially sent it to Ketchikan instead of Juneau.

4. The check for the 1995 taxes cleared, and DOR obtained use of the funds, on April 4, 1996.

5. 15 AAC 05.310 requires taxpayers to make payment by wire transfer of annual taxes totaling $150,000 or more. The wire transfer method of payment was adopted by regulation in September 1982. Instructions regarding the wire transfer requirement have been included in the FBT returns since 1986.

6. New West paid its 1989 taxes by wire transfer. In March of 1991, Dana Kern, an employee of New West, contacted DOR by phone to inquire about paying the 1990 taxes by check instead of wire transfer. Ms. Kern was told that "payment by check was acceptable as long as the check was on time." New West’s check for the 1990 taxes was received by DOR on March 14, 1991.

7. In early 1992, Kelly Kroon, a new employee of New West who had responsibility for preparing the tax returns, noticed that in the previous year the taxes had been paid by check although the FBT return contained instructions about wire transfer. She phoned DOR to ask about the method of payment. She was told that it was acceptable to pay by check "as long as the check and report were in to the department on time." In 1992 and for the next four years Kelly Kroon made the tax payments for New West by check.

8. New West’s checks for the 1991 and 1992 taxes were received by DOR on March 9, 1992, and March 23, 1993, respectively. The check for the 1993 taxes was received on March 29, 1994. The check for the 1994 taxes was received on March 28, 1995. In each instance DOR obtained actual use of the funds on or before the March 31 due date. New West’s tax liability for each of these years, 1991 through 1994, exceeded $150,000, the threshold for the wire transfer requirement. DOR did not object to the fact that New West paid its taxes for 1991 through 1994 by check instead of wire transfer.

9. On April 4, 1996, after receiving the late delivery by UPS of New West’s 1995 returns and taxes, DOR assessed New West a five percent failure to timely pay penalty of $16,700, plus interest. No penalty was assessed for late filing of the returns.

10. New West timely appealed the penalty assessment and paid the interest attributable to the late payment. On December 16, 1996, DOR issued an informal conference decision that sustained the penalty assessment. New West filed this appeal with the Office of Tax Appeals on January 13, 1997.

AS 43.05.220(a) imposes a penalty of five percent of the unpaid balance of a tax for each 30-day period or fraction thereof during which a taxpayer fails to file a return or pay taxes due under Title 43 "unless it is shown that the failure is due to a reasonable cause and not to willful neglect." The issue here is whether New West has shown that the late payment of its fisheries business taxes and seafood marketing taxes for 1995 was due to reasonable cause. ²

15 AAC 05.200 (c) describes certain circumstances that may constitute reasonable cause under AS 43.05.220. These include, but are not limited to: (1) disasters which render it impossible to make a timely payment or which make delay unavoidable; (2) acts or omissions of a third party which were beyond the control of the taxpayer and which made delay unavoidable; and (3) the taxpayer acted in good faith and took all steps and precautions reasonably necessary to ensure timely payment.

The Alaska regulations also provide that DOR will apply the administrative and judicial interpretations of Internal Revenue Code § 6651 and Treasury Regulations § 301.6651-1(c) in determining whether a delinquency is due to reasonable cause. 15 AAC 05.200(b). The cited Treasury Regulation provides, in pertinent part:

A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship ...if he paid on the due date. (Emphasis supplied.) ³

26 CFR Ch. 1 (4-l-96 Edition) §301.6651-1 (c)

At the outset it should be emphasized that the issue here is whether reasonable cause exists to excuse the late payment. No penalty was assessed for late filing of the fisheries business tax return. DOR concedes that the UPS delivery error which caused the returns and check to arrive

one day after the due date constituted reasonable cause for late filing. Indeed, an error by a third party over which the taxpayer has no control is one of the specific circumstances described as reasonable cause under 15 AAC 05.200(2).

DOR contends, however, that the UPS delivery error is not reasonable cause to excuse the late tax payment. DOR argues that New West did not exercise ordinary business care and prudence in insuring timely payment of taxes for two reasons. First, New West failed to comply with the wire transfer instructions on the return. Second, New West failed to insure that the check for the 1995 taxes would be received by DOR in time for DOR to obtain actual use of the funds by the due date, the same as if the taxes had been paid by wire transfer.

New West argues that the UPS shipping error constituted reasonable cause for late payment as well as for late filing. New West contends that in paying the 1995 taxes by check it was complying with verbal instructions from DOR that payment by check instead of wire transfer was acceptable provided that the checks were received by DOR "on time". New West paid its taxes by check instead of wire transfer in each of the five preceding years, notwithstanding the wire transfer requirement, and DOR did not object. New West argues that the only difference between 1996 and the previous five years was that in 1996 a shipping error by UPS delayed delivery past the tax due date. ⁴

On first impression, DOR’s position in this appeal seems to penalize the taxpayer for failure to use the wire transfer method of payment. DOR acknowledges that there is no penalty under the Alaska statutes for failure to pay by wire transfer. However, DOR insists that the penalty assessed against New West is not for failure to make a wire transfer but for failing to make a timely payment.

DOR’s brief on reconsideration clarified the rationale for the penalty. DOR does not consider receipt of a taxpayer’s check on the tax due date to be a "payment" of taxes where the tax amount exceeds $150,000 and must be paid by wire transfer under 15 AAC 05.310. DOR reasons that 15 AAC 05.310 was adopted pursuant to the specific authority in AS 43.05.250 for DOR to determine acceptable methods of payment other than cash. Accordingly, the regulation defines what constitutes a "payment". In a situation where a wire transfer is required, DOR’s receipt of a check is not a "payment". Payment does not take place until money is remitted. When taxes are paid by wire transfer money is remitted on the day of the wire transfer. When taxes are paid by check, however, money is not remitted until the check clears and thereby provides good and available funds.

This interpretation by DOR of the effect of the payment regulation is reasonable. This interpretation explains why the late payment penalty was assessed. Since receipt of a check is not "payment", New West’s payment of its 1995 fish taxes would have been late even it the check had been delivered to DOR on the April 1due date. However, DOR’s interpretation of the effect of the payment regulation does not resolve the question of whether there is reasonable cause under the particular facts of this case to excuse the late payment. I turn now to that question.

It is of paramount importance that New West did not simply ignore the wire transfer instructions. In fact, New West paid its fish taxes by wire transfer until 1991. The evidence establishes that New West changed its method of payment from wire transfer to check after seeking advice from DOR concerning the method of payment. In March 1991 a New West employee, Dana Kern, contacted DOR to inquire about paying by check instead of wire transfer. Ms. Kern, who is no longer employed by New West, states that she was told that "payment by check was acceptable as long as the check was on time."⁵

In January 1992, Kelly Kroon, the new employee responsible for filing the taxpayer’s returns and paying the taxes, noticed that the taxes had been paid by check the previous year, despite the wire-transfer instructions on the return. She telephoned DOR to ask about the method of payment. Kelly Kroon says she was told that it was acceptable to pay by check "as long as the check and the report were in to the department on time." Given this advice, it was reasonable for Kelly Kroon (or for any ordinary small business taxpayer, exercising reasonable care) to conclude that "on time" meant that the check had to be delivered to DOR on or before the tax due date.

Ms. Kroon’s conduct in paying taxes for New West from 1992 until 1996 is consistent with an understanding that payment would be timely if the checks were delivered to DOR by the tax due date. In 1992 and 1993 the checks that Ms. Kroon sent in payment of New West’s fish taxes were delivered to DOR more than a week before the tax due date. In 1994 and 1995 the checks were delivered to DOR within two or three days of the tax due date. In 1996 Kelly Kroon sent the check by reputable, overnight courier service three days before tax due date. ⁶ Under the UPS delivery schedule the check should have arrived in Juneau on March 30. Even assuming that delivery to DOR could not be made until DOR offices opened on Monday morning, April 1, the check would have been delivered to DOR on the tax due date if UPS had not mistakenly delivered the package to Ketchikan.

DOR does not dispute the statements of Ms. Kroon and Ms. Kern that a DOR employee advised them over the telephone that payment by check was acceptable as long as the check was "on time". However, DOR contends that in these circumstances "on time" meant the check had to be delivered to DOR sufficiently early for the check to clear so that DOR had actual use of the funds on the tax due date, the same as if payment were made by timely wire transfer. This contention is based on DOR’s interpretation of the regulation addressing the method of payment. However, the requirement that a taxpayer’s check for taxes in an amount over $150,000 must clear by the tax due date to be considered timely is not found in the regulations. Moreover, there is no evidence that this instruction was communicated to the taxpayer in this case.. ⁷

On this record, I conclude that this taxpayer, relying on oral advice from DOR, reasonably believed that payment by check was acceptable provided that the check was delivered to DOR by the tax due date. This conclusion is based on the undisputed statement of Kelly Kroon; the taxpayer’s payment history in the years preceding the payment at issue; the fact that Ms. Kroon’s account of the advice that she received from DOR was corroborated by Ms. Kern, who is no longer employed by New West and was not involved with the disputed 1996 payment; and the absence of any evidence that DOR specifically informed New West that the check had to clear by the tax due date to be considered timely.

The failure of a taxpayer to timely pay taxes because of a reasonable, though erroneous, belief formed in reliance on the statements or actions of tax officials may constitute reasonable cause to avoid a penalty. Gilmore v. U.S., 443 F. Supp. 91 (D. Md. 1977). In Gilmore, the court found reasonable cause to abate penalties where an employer failed to with-hold and pay employment taxes because he reasonably believed that the salespersons working for him were independent contractors, not employees, in reliance on the fact that the IRS had failed to assess employment taxes after auditing his business in previous years. Id. at 98-99.

DOR argues, however, that a taxpayer’s reliance on oral advice from an unidentified DOR employee is insufficient to establish reasonable cause. In support of this argument DOR cites federal tax cases which held a taxpayer’s reliance on IRS statements insufficient to show reasonable cause where the taxpayer had not shown that the IRS employee who offered the advice had the authority to do so or had available all of the facts. See, Lust v. Commissioner, T.C. Memo 1975-16 (1975); Lawrence Block Co., Inc., 12 T.C. 366 (1949).

The cases cited by DOR are distinguishable from this case in at least two significant respects. The obvious difference is that here the taxpayer sought advice from DOR, not the much larger and impersonal IRS. While it may not be reasonable for a taxpayer to rely on oral advice from an unidentified employee of the IRS, a vast organization that has thousands of employees, or to expect the IRS to respond to allegations of oral advice from an unidentified source, the considerations relating to reasonable reliance are different when a taxpayer seeks advice from DOR concerning payment of Alaska taxes. ⁸

The second important distinction is that in the instant case the taxpayer sought advice on the specific procedural question of whether payment could be made by check instead of by wire-transfer, not on a question concerning tax liability. In order to respond to the specific taxpayer query in this case, the only information that DOR needed to know concerning the taxpayer’s circumstances was inherent in the query itself; i.e. the taxpayer’s tax liability exceeded the amount required to be paid by wire transfer. In this context, it is apparent that the DOR agent who advised the taxpayer had all of the material facts. ⁹

I conclude that under the circumstances presented in this case, the taxpayer’s reliance on oral advice from DOR was reasonable. I further conclude that the taxpayer’s reasonable, but mistaken, belief that payment would be timely if the check was delivered to DOR by the tax due date establishes reasonable cause for the late payment.

By including a reasonable cause exception to the late payment penalty under AS 43.05.220, the legislature recognized that a taxpayer should not be penalized for errors made despite the exercise of reasonable care. See, 15 AAC 05.200(c)(3); Spies v. U.S., 317 U.S. 492 (1943).¹⁰ Since the facts of the instant case demonstrate that New West exercised ordinary business care in arranging to make timely payment of its 1995 fish taxes but failed to do so because of a reasonable misunderstanding concerning payment procedure and a UPS delivery error, New West should be relieved from the substantial late payment penalty.

Based on the evidence presented in this case, and for the reasons discussed above, I conclude that reasonable cause does exist under AS 43.05.220 (a) to excuse the taxpayer’s late payment of fisheries business and seafood marketing taxes for 1995. Therefore, DOR must abate in full the penalty assessed for late payment.

This is the final administrative decision under AS 43.05.465(f). Pursuant to AS 43.05.480, a party may seek judicial review in superior court by filing a notice of appeal, in accordance with the Court Rules of Appellate Procedure, within 30 days of the date of service of this decision.

Dated: March 5, 1998

Shelley Higgins, Administrative Law Judge

Footnotes:

¹ AS 43.05.455 provides that the taxpayer bears the burden of proof on questions of fact by a preponderance of the evidence unless a different standard of proof has been set by law for a particular question. In this case, the preponderance of evidence standard applies. Moreover, in this case most of the facts are undisputed. The parties are in substantial agreement as to what happened but disagree about the conclusions to be drawn from the undisputed facts. (return to text)

² "Willful neglect" is not at issue here because DOR concedes that New West did not willfully neglect to pay its taxes on time. "Reasonable cause" is a mixed question of fact and law. Whether the elements that constitute "reasonable cause" are present in a given situation is a question of fact, but what elements must be present to constitute "reasonable cause" is a question of law. United States v. Boyle, 469 U.S. 241, at 249, n.8 (1985).  (return to text)

³ In a case involving a penalty for late filing, the United States Supreme Court held that the correlation of "reasonable cause" with "ordinary business care and prudence" under the regulations is consistent with Congressional intent. United States v. Boyle, 469 U.S. 241, 246 (1985) ("Congress obviously intended to make absence of fault a prerequisite to avoidance of the late-filing penalty... A taxpayer seeking a refund [of penalties] must therefore prove that his failure to file on time was the result neither of carelessness, reckless indifference, or intentional failure." 469 U.S. at 246, n.4). (return to text)

⁴ New West does not claim that the disputed payment in 1996 was timely under the "timely-mailed-timely filed" rule, 15 AAC 05.310(c). This regulation provides that a payment made by check is considered timely if it is postmarked on or before the day of the month on which it is due. This is essentially the same as the rule applicable to federal tax returns under 26 USC 7502. However, 15 AAC 05.310 limits the application of this rule to tax payments of amounts under the threshold amounts for which payment by direct wire transfer is required. (return to text)

⁵ Although there is no explanation in the record as to why New West wanted to pay by check instead of by wire-transfer, it stands to reason that administrative convenience was a factor. However, given the stiff penalty under AS 43.05.220 of five percent of the total tax liability when payment is even a day late, and the unavoidable risk that delivery of a check to DOR may be delayed, it seems that in most situations the relative convenience of paying by check instead of wire transfer would be outweighed by the risk of a penalty assessment. The wire transfer method may be less convenient but it provides certainty that payment will be timely if the taxpayer’s bank initiates transfer of funds on the tax due date. See, 15 AAC 05.310(e)(4). (return to text)

⁶ The 1996 check was for payment of the full amount of taxes due. (return to text)

⁷ DOR did not introduce any evidence in support of its contention that the New West employees who asked for advice on the method of payment would have been instructed to submit payment by check sufficiently early so that DOR could obtain actual use of the tax funds on or before the tax due date. Instead, DOR argued that given the clear instructions on wire transfer in the regulations and the tax return, it was not reasonable for the taxpayer to rely on oral advice concerning an alternative method of payment from a DOR employee that the taxpayer can not now identify. See, infra, p.7. However, at the informal conference stage of this appeal, DOR itself identified the DOR Tax Examiners who were responsible for fish taxes in 1991 and 1992 when the taxpayer asked for advice on the method of payment. DOR further discovered that one of those Tax Examiners did recall having discussions with taxpayers concerning the method of payment but did not recall any specific discussions with New West. Informal Conference Decision, December 16, 1996,at 6-7. In this proceeding DOR chose not to submit testimony from that Tax Examiner. (return to text)