STATE OF ALASKA

IN THE MATTER OF: Case No. 14-OTA-97

DYNCORP AND SUBSIDIARIES

FINAL DECISION

Corporate Income Tax 8312-8712

DynCorp and Subsidiaries, (Dyncorp or taxpayer) appeal from a March 3, 1997, informal conference decision of the Department of Revenue (DOR) which upheld the assessment of penalties for late filing. The sole issue in this appeal is whether reasonable cause exists for the late filing of Dyncorp’s amended Alaska corporate income tax returns for 1983 through 1987 following a final determination by the Internal Revenue Service (IRS) of the taxpayer’s adjusted federal income tax liability for those tax periods.

During the scheduling conference held on May 6, 1997, the parties stipulated to many of the material facts. However, a hearing was necessary to take additional, testimonial evidence relating to the circumstances surrounding the late filing of the amended returns.

The telephonic hearing was held on May 20, 1997. John Ireland, Assistant Director of Taxes for Dyncorp, Inc., and Gary Hevey, Tax Partner, KPMG Peat & Marwick, testified for the Taxpayer. Marshall Hyman, Vice President and Director of Taxes for Dyncorp represented the taxpayer. Tim Cottongim, Appeals Officer, represented the DOR. The record was held open until June 3, 1997, to provide the parties with an opportunity to file post-hearing memoranda.

A decision was issued on November 25, 1997. That decision found that there was reasonable cause to excuse the late fling of the amended returns. The DOR filed a timely motion to reconsider the decision pursuant to AS 43.05.465 (b). Reconsideration was ordered on the ground that the decision failed to consider an exhibit of record that seemed to show that Dyncorp had recomputed its adjusted Alaska tax liability for the years at issue several months before it filed the amended returns.

On March 25, 1998, a hearing was held for the purpose of taking further evidence relating to the reasonable cause issue. John Ireland represented Dyncorp. Mr. Ireland and Gary Hevey testified for the taxpayer. Mr. Cottongim and Carl Meyer, Chief of Appeals, represented DOR. The record on reconsideration was closed at the end of the hearing on March 25, 1998. This is the decision on reconsideration and the final administrative decision in this matter.

FACTS

1. Dyncorp is the parent of a controlled group of corporations, which includes forty-nine domestic subsidiaries and eight foreign corporations. In 1995 Dyncorp had over one billion dollars in gross receipts and filed 298 state income tax returns.

2. In January 1989 the Internal Revenue Service (IRS) began an audit of Dyncorp’s returns for 1985 through 1988. In July 1994 the IRS gave the taxpayer notice of proposed adjustments. Dyncorp appealed. By April 1995 Dyncorp had agreed to pay certain deficiencies asserted by the IRS for the tax periods involved. However, the IRS audit had also determined that Dyncorp was entitled to a substantial refund for one of the tax years and the refund component required approval of the audit by the Congressional Joint Committee on Taxation. The IRS notified Dyncorp by letter dated December 7, 1995, that the Joint Committee had approved the audit adjustments. Dyncorp had no control over, or advance notice of, the date that the IRS would issue the final determination.

3. AS 43.20.030(d) requires a taxpayer to provide DOR with notice of an IRS deficiency determination within 60 days after the final determination of the deficiency. December 7, 1995 is the date of the IRS final determination of the deficiencies for purposes of AS 43.20.030(d). The deadline for filing notice with DOR was February 7, 1996.

4. As a result of the IRS final deficiency determination, which involved 152 separate adjustments, the taxpayer had to redetermine the tax liabilities of nine separate companies for the years involved. Some companies had net operating loss carrybacks and capital loss carrybacks, which affected tax years back to 1982. In total, the taxpayer ended up amending 340 state returns, including 11 unitary returns. This work was completed, and all of the amended returns were filed, by June 21, 1996.

5. The taxpayer had 4 employees, including Assistant Director of Taxes, John Ireland, and three staff persons, available to incorporate the IRS adjustments into hundreds of state returns. Because the available staff was not sufficient to do the job, the taxpayer contracted with the accounting firm of KPMG Peat Marwick in December 1995 to prepare the spreadsheets, or workpapers, reflecting the IRS adjustments. The amended returns were then prepared from the spreadsheets. By agreement, the job of the accounting firm was limited in scope to preparing the spreadsheets incorporating the IRS adjustments, instead of actually preparing the returns, to limit the time and expense of the project. Dyncorp rejected the idea of having the accounting firm review and analyze all of the state returns for potential additional adjustments to reduce state tax liability.

6. KPMG Peat Marwick staff worked approximately 600 hours on the project during the seven month period from December 1995 until the amended state returns were filed in June 1996. The total bill to the taxpayer for this work was $51,510. (Exhibits 1-4).

7. John Ireland supervised the project of reviewing and amending the state tax returns to incorporate the IRS adjustments. He personally reviewed each amended return before filing. Ireland’s participation was critical because he was the one company official who had the institutional history and knowledge needed to review the amended returns for accuracy. At the start of the project, Mr. Ireland instructed the staff to give priority to completing the amended returns for timely filing in states in which the taxpayer had refunds coming. Those 32 returns were prepared first. The returns in states requiring unitary returns, including Alaska, were assigned a lower priority because of the complexity of the unitary returns. It took up to 16 hours for Mr. Ireland to review one unitary return.

8. Mr. Ireland was aware of the 60-day deadline under AS 43.20.030 (d) for reporting adjustments resulting from the final IRS determination. The Alaska filing requirement was noted on a schedule prepared by Mr. Ireland summarizing all of the amended state and local tax returns that Dyncorp had to file as a result of the IRS adjustments (Exhibit 5). The March 28, 1996, date at the top of the schedule containing the entry for Alaska reflected the date that Ireland started the schedule. Mr. Ireland entered the amount of recomputed tax liability for Alaska at a later date after the analysis was completed. Mr. Ireland did not seek an extension of the filing date in Alaska because he did not realize at the time that Dyncorp might be penalized for filing past the 60-day deadline.

9. On June 24, 1996, the DOR received amended Alaska corporation net income tax returns from the Taxpayer for five years, 1983 through 1987. The amended returns showed additional taxes owing in each year as a result of the IRS adjustments. Payment in full of the additional taxes was included with the amended returns.

10. In August 1996 DOR assessed the Taxpayer a 15 % penalty for failure to timely file on each of the amended returns. The penalty was revised upward to the maximum penalty of 25% during the informal conference process.

11. On March 3, 1997, DOR issued an informal conference decision affirming the 25% penalties for late filing of the amended returns for 1983 through 1987. This appeal followed.

DISCUSSION

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 at the time required by law "a return or report ... unless it is shown that the failure is due to a reasonable cause and not to willful neglect." The issue here is whether Dyncorp has shown that the late filing of its amended Alaska income tax returns was due to reasonable cause.¹

15 AAC 05.200(a) provides that penalties assessed under AS 43.05.220 will not be imposed if the taxpayer shows reasonable cause for delay in filing the return or paying the tax. Subsection (c) of the regulation describes certain circumstances, which may constitute reasonable cause. These include, but are not limited to: (1) disasters which render it impossible to make the filing or 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 filing or payment.

15 AAC 05.200(b) provides 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 late filing or late payment is due to reasonable cause. Treasury Regulation 301.6651-1(c) provides further guidance as to the meaning of "reasonable cause". It provides in pertinent part:

If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause.

(Emphasis supplied.)²

Dyncorp contends that it exercised ordinary business care and prudence and took in good faith all steps reasonably necessary to comply with the multiplicity of state filing requirements that arose when the IRS issued its final determination of Dyncorp’s adjusted tax liabilities for 1985-1988 on December 7, 1995. Dyncorp argues that given the tremendous task of amending 340 state returns, Dyncorp’s small tax staff, and the short time in which to refile, it acted responsibly in contracting with the Peat Marwick firm for assistance and in giving priority to meeting filing deadlines in those states where Dyncorp had potential refunds.

DOR argues that Dyncorp has failed to meet its burden of demonstrating that it exercised ordinary business care and prudence and was unable to comply with the filing requirement under AS 43,20.030 (d). DOR’s argument relies on federal tax cases which held that reasonable cause did not exist where the taxpayers claimed that a work overload prevented timely filing. Dustin v. Commissioner, 467 F.2d 47 (9th Cir. 1972); First County National Bank and Trust Co., of Woodbury, New Jersey v. U.S., 291 F. Supp. 837 (D. N.J. 1968).

In Dustin the taxpayer, an accountant, filed his personal income tax return six months late. The taxpayer argued that he had reasonable cause for the late filing because he was too busy preparing returns and performing other work for his clients. The taxpayer had required and obtained extensions for filing his personal returns in five of the six prior years. The Tax Court held that if the taxpayer had exercised ordinary business care and prudence he would not have taken on a workload that made it difficult to file his own return on time. The District Court affirmed this holding on appeal. 467 F.2d at 50.

In First County National Bank the taxpayer, the trust department for a bank acting as executor for a decedent’s estate, sought refund of a late filing penalty on a gift tax return. The executor-bank had filed the return seven months after acquiring knowledge of the decedent’s inter-vivos gifts and some eleven months after the return was due. The bank’s explanation for the late filing was that it was too busy with other work, including the administration of 351 trust accounts, preparation of over 160 fiduciary tax returns every year, and preparation of the inheritance tax return for the estate in question. However, the bank had not sought an extension of time for filing and did not contract for additional accounting assistance or legal services. The Court found that the delay in filing was due to willful neglect, not reasonable cause.³  First County National Bank and Trust Co., of Woodbury, New Jersey v. U.S., 291 F. Supp. 837 at 840 (D. N.J. 1968).

Although the taxpayer in the instant case offers essentially the same excuse of "too busy" that was rejected in the Dustin and First County National Bank cases, those cases are distinguishable in several important respects. First, unlike the taxpayers in the other cases, Dyncorp did contract for additional professional accounting help in an attempt to expeditiously perform the work required to review and amend hundreds of state tax returns and comply with the various refiling requirements in other states as well as Alaska. In this case the task of preparing the returns was made more complex and time consuming because the IRS audit and resulting adjustments spanned eight years. Dyncorp incurred expenses of over $50, 000 for outside professional assistance over a seven-month period to prepare the necessary amended returns.

Second, the filing requirement at issue in the instant appeal is fundamentally different than the filing requirements involved in the cases cited by DOR. The Dustin and First County National Bank cases involved original tax returns that were filed long after the date set by statute for filing annual returns. By contrast, this case involves amended returns filed four and a half months after the "floating" sixty-day deadline for taxpayers to file a notice of adjusted tax liability under AS 43. 20.030(d).⁴ That statute requires a taxpayer to file a notice within 60 days of the date that the IRS issues a final determination of taxes due under the taxpayer’s federal income tax return. In this case, Dyncorp had no advance notice of when the IRS would issue the final determination that triggered the 60-day period for filing. A taxpayer’s plea of "too busy" should be rejected as insufficient to excuse late filing in circumstances where the taxpayer has ample advance notice of a specific due date for filing an annual tax return, and ample time to plan and make arrangements for preparing the return. However, the same plea should be evaluated differently when, as here, a 60-day filing period is imposed without advance notice.

The facts of this case are closer to those in In Re Hudson Oil Company, 91 B. R. 932 (U.S. Bankruptcy Court, D. Kansas, 1988). In that case the court held that there was reasonable cause to excuse the late filing by a bankruptcy trustee of the bankrupt corporation’s federal tax return, which was due within weeks of the trustee’s appointment. The court concluded that the trustee exercised ordinary business care and prudence by immediately hiring competent accountants to review the bankrupt’s books and prepare the complicated tax return. The return was filed late because it took seven months for the accounts to complete the job.

This case presents extraordinary circumstances with respect to the short filing period, lack of advance notice, and amount of work involved to review and amend 360 separate tax returns affected by the IRS adjustments. In my opinion, under these particular circumstances, Dyncorp exercised ordinary business care and prudence and took the steps reasonably necessary to analyze and amend the hundreds of state returns affected by the IRS adjustments, including the Alaska income tax returns, in a timely and accurate manner.

The reasonable cause determination in this case requires consideration of the whole picture, i.e. the multitude of refiling obligations resulting from the IRS adjustments, instead of looking at the Alaska filing requirement in isolation. ⁵

Dyncorp could have filed a request for extension of the filing date before the February 7, 1996, deadline but did not do so. However, this alone does not justify imposing a penalty, although it probably would have obviated the need for this appeal. If Dyncorp had filed a copy of the IRS final determination letter and audit report with a request for additional time to file amended Alaska income tax returns, DOR probably would have granted an extension for filing amended returns. Moreover, if Dyncorp had filed a copy of the IRS audit report before the 60 day period expired, Dyncorp would have substantially complied with the AS 43.20.030 (d) requirement that the taxpayer "shall notify the department in writing of any …determination of deficiency". The statute does not expressly require that the taxpayer file amended Alaska income tax returns as Dyncorp did here. ⁶

The fact that Dyncorp filed accurate amended returns facilitated DOR review of the impact of the IRS audit adjustments on Dyncorp’s Alaska income tax liability for the years at issue. It is also significant that Dyncorp paid the adjusted tax liability shown on those amended returns in full at the time of filing. This conduct demonstrates that Dyncorp acted in good faith to meet its tax obligations to Alaska.

CONCLUSION

Based on all of the facts and circumstances 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 filing of its amended corporate income tax returns for 1983 through 1987. The penalties assessed for late filing of the amended returns must be abated.

This is the final administrative decision under AS 43.05.465(e). A party may seek judicial review of this decision filing a notice of appeal in accordance with the Alaska Rules of Appellate Procedure within 30 days of the date of service of this decision.

Dated: April 10, 1998.

Shelley Higgins, Administrative Law Judge

Footnotes:

¹ In determining whether reasonable cause exists to excuse a late filing in a tax appeal, the Administrative Law Judge makes findings of fact based on a preponderance of the evidence and exercises her own independent judgment in reaching a conclusion as to whether the circumstances surrounding the late filing or payment constitute reasonable cause. See AS 43.05.430. (return to text)

² 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)

³ Although DOR does not expressly argue that Dyncorp willfully neglected to file its amended returns on time, DOR relies principally on First County National Bank in support of applying the late filing penalties here. The issue in that case was whether the late filing was due to willful neglect. However, the court applied a definition of willful neglect which incorporates the "reasonable cause" standard:

A conscious decision to defer the filing of a tax return, after acquiring knowledge of its delinquency, beyond a reasonable time and without reasonable cause, is willful neglect.

291 F. Supp. at 841. (return to text)

⁴ As 43.20.30(d) provides in part:

Every taxpayer shall notify the department in writing of any alteration in, or modification of, the taxpayer’s federal income tax return and of a recomputation of tax or determination of deficiency (whether with or without assessment). A full statement of the facts shall accompany this notice. The notice shall be filed within 60 days after the final determination of the modification, recomputation or deficiency, and the taxpayer shall pay the additional tax or penalty under this chapter. For purposes of this section, a final determination shall mean the time that an amended federal return is filed or a notice or deficiency or an assessment is mailed to the taxpayer by the Internal Revenue Service, except in no event will there be a final determination for purposes of this section until the taxpayer has exhausted rights of the appeal under federal law. 

(return to text)

⁵ If Dyncorp had given priority to the Alaska returns, and ignored its obligations to other states, it might have been able to meet the short, 60-day filing deadline. But Dyncorp had sound business reasons for deciding to give first priority to preparing the amended returns in states where refunds were due and to place a lower priority on making the adjustments to more complicated unitary returns, like those of New York and Alaska. Mr. Hevey, a Peat Marwick partner with 30 years of professional experience in tax matters, testified that in his opinion Dyncorp acted responsibly under the circumstances. I agree.

However, if this case involved failure to meet the statutory date for filing an original tax return and paying taxes under AS 43.20, instead of the notice requirement of Section .030(d), the analysis and probable conclusion with respect to reasonable cause would be different. A corporate taxpayer, like Dyncorp, cannot avoid penalties for filing of original returns or payment of taxes after the due date on the grounds that the taxpayer does business in many different taxing jurisdictions and has to prepare many different returns for filing at the same time. In that situation, the ordinary business care and prudence requires the taxpayer to plan ahead and maintain sufficient staff and professional assistance to file returns and pay taxes on time. (return to text)