MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE,
FINDINGS OF FACT
The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in Michigan at the time he filed his petition. Petitioner is a college graduate with a degree in accounting and worked as a revenue agent for the Internal Revenue Service (IRS) for approximately 5 years.
Petitioner and A. Adonu Idahosa (Mr. Idahosa) formed a joint venture in 1988 called Symphony Financial Services (Symphony). Petitioner and Mr. Idahosa shared clients, and income and expenses from Symphony were divided between them. Petitioner reported his share of income from Symphony on a Schedule C, Profit or Loss From Business, attached to his Form 1040, U.S. Individual Income Tax Return.
TCF Leasing, Inc. (TCF Leasing), was incorporated in Michigan on May 21, 1992. TCF Leasing's 2009 Tax Ct. Memo LEXIS 243">*244 original shareholders were petitioner, his wife, and two children. Petitioner repeatedly changed TCF Leasing's name over the next 10 years. In January 2000 petitioner filed a certificate of amendment for TCF Leasing, changing the corporate name to Symphony Financial Services, Inc. On April 12, 2007, petitioner filed another certificate of amendment, changing the corporate name and form to Back Porch Workout, LLC (Back Porch Workout).
Petitioner formed Paradym in December 2004 to operate a temporary and contract employment agency. Paradym was organized under the laws of the State of Michigan, and petitioner signed the Paradym articles of organization as "organizer". Petitioner filed subsequent annual statements for 2006 and 2007, labeling himself the "managing member" and "owner" respectively. Petitioner did not file a Form 8832, Entity Classification Election, for Paradym.
Paradym filed a Form 941, Employer's Quarterly Federal Tax Return, for the fourth quarter ending December 31, 2005, but did not pay the tax due. Respondent assessed the amount shown on the Form 941.
On April 25, 2007, respondent sent petitioner a Final Notice, Notice of Intent to Levy and Notice of Your Right 2009 Tax Ct. Memo LEXIS 243">*245 to a Hearing (levy notice) for Paradym's unpaid tax. Respondent issued the levy notice to petitioner on the grounds that because petitioner was the only member of Paradym, Paradym was disregarded for Federal income tax purposes and petitioner was therefore liable for Paradym's unpaid tax.
On May 29, 2007, petitioner filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing. Petitioner argued that the collection action was improper because petitioner was not the sole member of Paradym. Therefore respondent was required to comply with the requirements of
On September 18, 2007, respondent issued a Notice of Determination Concerning Collection Action(s) Under
On June 28, 2007, respondent issued to petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under
On July 23, 2007, petitioner submitted a request for a collection due process (CDP) hearing in response to the lien notice. Petitioner's request in response to the lien notice raised the same argument he had raised in his request in response to the levy notice. Petitioner argued that the collection action was improper because he was not the sole member of Paradym. Therefore respondent was required to comply with the requirements of
On January 11, 2008, respondent issued a notice 2009 Tax Ct. Memo LEXIS 243">*247 of determination upholding the filing of the tax lien. The notice of determination indicates that respondent did not consider the arguments petitioner raised in his request for a CDP hearing because he had raised them in his earlier hearing in response to the levy notice. Respondent, although petitioner did not request it, considered whether there were grounds to withdraw the tax lien. Finding no grounds for withdrawal, respondent upheld the filing of the lien.
Petitioner filed his petition in docket No. 24712-07L on October 29, 2007, in response to the notice of determination upholding respondent's levy. Petitioner filed his petition in docket No. 3859-08L on February 13, 2008, in response to the notice of determination upholding respondent's lien. A trial was held on February 3, 2009, during a special session of the Court in Detroit, Michigan.
OPINION
Following a hearing the Appeals Office must make a determination whether the proposed lien or levy action may proceed. The Appeals Office is required to take into consideration: (1) The verification presented by the Secretary that 2009 Tax Ct. Memo LEXIS 243">*249 the requirements of applicable law and administrative procedure have been met; (2) the relevant issues raised by the taxpayer; and (3) whether the proposed levy action appropriately balances the need for efficient collection of taxes with the taxpayer's concerns that the levy action be no more intrusive than is necessary.
Petitioner argued at both the lien and levy hearings that he was not the sole member of Paradym and that respondent was required to comply with
A business entity, such as a limited liability company, with two or more members can be classified as either a partnership or a corporation. Upon formation an entity with two or more members is treated as a partnership unless it elects to be treated as a corporation.
A business entity with only one member can be classified as either a corporation or a disregarded entity. A single-member entity must make an affirmative election on a Form 8832 in order to be treated as a corporation separate 2009 Tax Ct. Memo LEXIS 243">*251 from its owner. If no election is made, the single-member entity is disregarded and is treated in the same manner as a sole proprietorship, branch, or division of its owner.
The parties' dispute focuses on Paradym's ownership. Petitioner does not dispute that Paradym is liable for the taxes at issue or contend that the taxes have been paid. Instead, petitioner argues that Back Porch Workout owned Paradym; thus, respondent cannot collect from petitioner and must attempt to collect from Back Porch Workout.
Respondent argues that petitioner is the sole member of Paradym and that Back Porch Workout does not own any interest in Paradym. Respondent contends that because Paradym never filed an election to be treated as a corporation and is therefore disregarded, it is proper for respondent to collect the unpaid tax directly from petitioner. Respondent points to Paradym's articles of organization and various State regulatory filings in which petitioner referred to himself as the organizer or managing member of Paradym.
Petitioner does not challenge the validity of the 2009 Tax Ct. Memo LEXIS 243">*252 check-the-box regulations. In any event, this Court has previously held those regulations to be valid in this context. See
We agree with respondent that petitioner was the sole member of Paradym. Because Paradym did not elect to be treated as a corporation, it is treated as a sole proprietorship. See
Petitioner's argument 2009 Tax Ct. Memo LEXIS 243">*253 that Back Porch Workout owned Paradym is not credible. Petitioner formed Paradym, and he has not offered any evidence to indicate that he transferred any of his membership units in Paradym since it was formed. Since its inception, petitioner has held himself out as owner of Paradym.
Although petitioner offered a Form 1065, U.S. Return of Partnership Income, for Paradym for tax year 2005, that document is not credible. Attached to the Form 1065 were two Schedules K1, Partner's Share of Income, Deductions, Credits, etc. The first Schedule K-1 was issued to Back Porch Workout and indicated that Back Porch Workout owned a 100-percent ownership interest in Paradym. The second Schedule K-1 was issued to "Anyone" with an address listed as "None" in Kalamazoo, Michigan. The purported Schedule K-1 showed a zero-percent ownership interest in Paradym. Not only was the Form 1065 created in 2007 after respondent had begun collection proceedings, but petitioner testified that the second Schedule K-1 was fabricated because it was the only way to process a partnership return for Paradym using petitioner's and Mr. Idahosa's tax return preparation software.
Petitioner formed Paradym in 2004 and never 2009 Tax Ct. Memo LEXIS 243">*254 elected to have it treated as a corporation for Federal tax purposes. Accordingly, Paradym is disregarded pursuant to
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code.↩
2.