Commonwealth Bank & Trust Company v. United States of America

Filing 12

MEMORANDUM OPINION by Senior Judge Charles R. Simpson, III on 7/3/2014; re 6 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM ; a separate order will be entered in accordance with this opinion. cc:counsel (TLB)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
COMMONWEALTH BANK AND
TRUST COMPANY

PLAINTIFF

v.

CIVIL ACTION NO. 3:13-CV-01204-CRS

UNITED STATES OF AMERICA

DEFENDANT

MEMORANDUM OPINION
This matter is before the Court on a FED. R. CIV. P. 12(b)(6) motion to dismiss (DN 6)
Count One of Plaintiff Commonwealth Bank & Trust Company’s (“Commonwealth”) Complaint
filed by Defendant United States of America (the “United States”). For the reasons set forth
below, the Court will grant the motion to dismiss.
BACKGROUND
Unless otherwise indicated, the following facts are undisputed. Commonwealth acts as a
fiduciary of numerous pension plans, individual retirement accounts, and employee benefit plans
with respect to which it is responsible for withholding federal income taxes. For taxable years
2004, 2005, 2007, 2008, 2009, and 2010, Commonwealth timely and fully deposited all withheld
income taxes, but failed to comply with 26 C.F.R. § 31.6302-1(h)(2)(ii)’s requirement that
taxpayers depositing more than $200,000 of taxes “must use electronic funds transfer… to make
all deposits of those taxes.” As a result, the Internal Revenue Service (“IRS”) assessed

Commonwealth with failure-to-deposit penalties in the amount of $252, 842.87 pursuant to 26
U.S.C. § 6656(a), which provides as follows:
In the case of any failure by any person to deposit (as required by this title or by
regulations of the Secretary under this title) on the date prescribed therefor any
amount of tax imposed by this title in such government depository as is
authorized under section 6302(c) to receive such deposit, unless it is shown that
such failure is due to reasonable cause and not due to willful neglect, there shall
be imposed upon such person a penalty equal to the applicable percentage of the
amount of the underpayment.
After paying the assessment in full and having its claims for refund denied by the IRS,
Commonwealth filed the present action on December 12, 2013, alleging that the IRS improperly
imposed the assessment under Section 6656(a) because: 1) there was no “failure… to deposit”
insofar as Commonwealth timely and fully deposited all withheld income taxes (Count One); and
2) even if there were a failure to deposit, such failure was “due to reasonable cause and not due
to willful neglect” (Count Two). Rather than failing to deposit its taxes at all, Commonwealth
argues that it merely failed to follow the proper procedures for doing so. Arguing that Section
6656(a) applies only to a “failure… to deposit,” Commonwealth claims that it did not violate
Section 6656(a) and therefore should not have been assessed failure-to-deposit penalties
thereunder.
On February 18, 2014, the United States filed a motion to dismiss (DN 6) Count One of
Commonwealth’s Complaint on the grounds that Section 6656(a) applies not only to a failure to
deposit per se, but also a “failure… to deposit (as required by this title or by regulations of the
Secretary under this title)…” 26 U.S.C. § 6656(a). Because 26 C.F.R. § 31.6302-1(h)(2)(ii)
requires that taxpayers depositing more than $200,000 of taxes “must use electronic funds
transfer… to make all deposits of those taxes,” the United States argues that Commonwealth’s

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manual deposit of its taxes amounted to a “failure… to deposit (as required by this title or by
regulations of the Secretary under this title)…” 26 U.S.C. § 6656(a).
Having considered the parties’ briefs and being otherwise sufficiently advised, the Court
will now address the motion to dismiss.
DISCUSSION
There is no dispute that Commonwealth’s tax obligation, on the occasion in question, was
in excess of $200,000, and that 26 C.F.R. § 31.6302-1(h)(2)(ii) required Commonwealth’s
payment to be by EFT. There is also no dispute that the IRS furnished deposit forms to
Commonwealth, and that Commonwealth erroneously used those forms to deposit its tax
obligation rather than using an EFT. Commonwealth’s deposit was timely, and in the full amount
due.
The IRS assessed the penalty against Commonwealth pursuant to 26 U.S.C. § 6656(a),
which provides as follows:
In the case of any failure by any person to deposit (as required by this title or by
regulations of the Secretary under this title) on the date prescribed therefor any
amount of tax imposed by this title in such government depository as is
authorized under section 6302(c) to receive such deposit, unless it is shown that
such failure is due to reasonable cause and not due to willful neglect, there shall
be imposed upon such person a penalty equal to the applicable percentage of the
amount of the underpayment.
26 U.S.C. §6656(a).
While conceding that the payment method it used was incorrect, Commonwealth
contends that dismissal of Count One is inappropriate because there has been in fact no
“underpayment.” 26 U.S.C. § 6656(b)(2) defines the term “underpayment” as “the excess of the
amount of the tax required to be deposited over the amount, if any, thereof deposited on or
before the date prescribed therefor.” Because it fully deposited its taxes—albeit in the wrong

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manner—Commonwealth argues that, in the case at bar, “the excess of the amount of the tax
required to be deposited over the amount… thereof deposited…” equals zero. Accordingly,
Commonwealth contends that no penalty should have been imposed based on an alleged
“underpayment.”
Several courts have considered, and rejected, the argument articulated by Commonwealth
on the grounds that it is inconsistent with the plain language and purpose of Section 6656(a). See
Fallu Prods., Inc. v. United States, No. 06-Civ. 13248, 2008 WL 397912 (S.D.N.Y. Feb. 13,
2008); F.E. Schumacher Co., Inc. v. United States, 308 F.Supp.2d 819, 821 (N.D. Ohio 2004).
In F.E. Schumacher Co., Inc., the IRS assessed the plaintiff failure-to-deposit penalties
based on its manual deposit of payroll and unemployment taxes. 308 F.Supp.2d at 821. In
challenging the assessment, the plaintiff argued “that penalties for its refusal to abide by Code
procedures are not authorized by Section 6656 because no ‘underpayments’ ever existed.” Id. at
827. In concluding that the assessment was properly imposed, the court explained that:
Under Plaintiff's interpretation, taxpayers could ignore any and all other
requirements of the tax Code and still avoid penalties under 6656 as long as they
make full and timely payment to an authorized government depository. Such a
reading is inconsistent with the statutory purpose of Section 6656. Again, §
6656(a) contemplates penalties for “failure by any person to deposit (as required
by this title or by regulations of the Secretary under this title)...” Plaintiff's
interpretation strips the parenthetical language of any impact or meaning and
effectively nullifies it. By focusing on the single word “underpayment,” Plaintiff
attempts to avoid the language which authorizes penalties for failure to make
deposits “as required by Title 26.” This selective interpretation is at odds with the
overall intent and meaning of Section 6656 and renders subsections (a) and (b)
inconsistent with one another.
Id. at 828.
Similarly, in Fallu Prods., Inc., the plaintiff “assert[ed] that [Section 6656(a)] authorizes
penalties only for a deficiency in the amount of taxes paid, not for a deficiency in the method by

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which payment is made.” 2008 WL 397912 at *2. Like the court in F.E. Schumacher Co., Inc.,
the court explained that:
Such an interpretation, however, ignores the subsection's parenthetical statement.
Its placement immediately following “failure... to deposit” emphasizes that the
deposit itself must satisfy the requirements of the Code and applicable Treasury
Regulations. Even narrowly construed, the statute authorizes FTD penalties for
violating a regulatory requirement that deposits be made electronically, even if
payment is made in full and on time by other means. That § 6656(a) is titled
“Underpayment of deposits” does not alter this conclusion because “[t]he caption
of a statute... cannot undo or limit that which the statute's text makes plain.” Intel
Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 256 (2004) (citation
omitted).
This plain reading of § 6656(a) also fits with the broader statutory scheme.
Section 6302(h) of the Code states that the Secretary of the Treasury “shall
prescribe such regulations as may be necessary for the development and
implementation of an electronic fund transfer system which is required to be used
for the collection of depository taxes.” 26 U.S.C. § 6302(h) (emphasis supplied).
The statute further explains that the electronic system should “ensure that such
taxes are credited to the general account of the Treasury on the date on which
such taxes would otherwise have been required to be deposited under the Federal
tax deposit system.” Id. With its direction that the Treasury Department
implement an electronic tax deposit system and prescribe regulations to govern its
operation, Congress expressed its intent that the system be utilized and made
obligatory for certain depository taxes. The reading that Fallu advocates,
however, would leave the choice of deposit method to the taxpayer.
Id. Accordingly, the court concluded that “the penalty provision of 26 U.S.C. § 6656 does, by its
text, reach a taxpayer's failure to deposit taxes electronically when required to do so by
regulation.” Id. at *3.
For the reasons set forth in these decisions, the Court likewise concludes that Section
6656(a) authorizes the imposition of a penalty based on a taxpayer’s failure to comply with 26
C.F.R. § 31.6302-1(h)(2)(ii)’s requirement that taxpayers depositing more than $200,000 of taxes
“must use electronic funds transfer… to make all deposits of those taxes.” In addition, the Court
notes an additional basis for concluding that Section 6656(a) was intended to authorize such a
penalty. As part of the Taxpayer Relief Act of 1997, Congress sought to temporarily relieve
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small businesses of the burden of depositing funds electronically by enacting the following
provision:
No penalty shall be imposed under the Internal Revenue Code of 1986 solely by
reason of a failure by a person to use the electronic fund transfer system
established under section 6302(h) of such Code if—
(1) such person is a member of a class of taxpayers first required to use
such system on or after July 1, 1997, and
(2) such failure occurs before July 1, 1998.
Taxpayer Relief Act of 1997, Pub. L. No. 105–34, 111 Stat. 788 (1997). By expressly providing
that, for a specified time period, “no penalty shall be imposed… by reason of a failure by a
person to use the electronic fund transfer system,” Congress implicitly expressed its intent that,
after expiration of the specified time period, penalties based on a taxpayer’s failure to deposit by
ETF could be properly assessed. Along with the reasons set forth in F.E. Schumacher Co., Inc.
and Fallu Prods., Inc., this further supports the proposition that Section 6656(a) authorizes the
imposition of a penalty based on a taxpayer’s failure to deposit by ETF.
Because it is undisputed that Commonwealth failed to make its deposit by ETF in
accordance with 26 C.F.R. § 31.6302-1(h)(2)(ii), the Court will grant the motion to dismiss
Count One of Commonwealth’s Complaint.
A separate order will be entered in accordance with this opinion.

C al R Smpo I , ei J d e
h r s . i sn I Sno u g
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U i dSae Ds i C ut
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July 3, 2014

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