Business Law Question

WRITING A PROTEST LETTERProtest and Written Submissions to Appeals Division: If an IRS examination is not resolvedwithin the Examination Division, a thirty-day letter will be issued to set forth the proposedadjustments. The taxpayer has the right to request an administrative appeal to the AppealsDivision of IRS within thirty days of the date of the receipt of Letter 525, general 30 day letter(“Protest letter”).  Appeals Office
[Address of Appeals Office]
[City, State, ZIP Code]
Re: Protest of Proposed Adjustment – Taxpayer: Robert
Richards
Taxpayer Identification Number: [Taxpayer ID Number]
Tax Year: 2019
Dear Sir/Madam,
I am writing to protest the proposed adjustment made by
Internal Revenue Agent Williams in the examination of Robert
Richards’ 2019 Form 1040. The adjustment pertains to the
disallowance of a business bad debt deduction claimed by Mr.
Richards for a debt owed by his wholly-owned company,
Robert’s Rulers, Inc.
Background:
Robert Richards is an employee of Robert’s Rulers, Inc., an S
Corporation, and derives his primary source of income from the
salary and distributions provided by the company. Robert’s
Rulers, Inc. has encountered significant cash flow difficulties
and has fallen behind on payments to its suppliers, notably Inch
by Inch, Inc., which supplies crucial components for Robert’s
Rulers, Inc.’s products.
Inch by Inch, Inc.’s president, Michael Meter, threatened to
cease supplying Robert’s Rulers, Inc. with products and initiate
bankruptcy proceedings against the company if outstanding
invoices were not settled. To prevent potential bankruptcy and
preserve his business reputation, Mr. Richards personally
settled Robert’s Rulers, Inc.’s debt to Inch by Inch, Inc.
Issue and Argument:
Agent Williams disallowed the business bad debt deduction
claimed by Mr. Richards on the grounds that the payment did
not qualify as a business bad debt. However, we contend that
the payment meets the criteria for a deductible business bad
debt under relevant tax law.
Furthermore, Agent Williams assessed an Accuracy Related
Penalty alongside the deficiency for the disallowed item. We
assert that no accuracy-related penalty should be imposed as
Mr. Richards had reasonable cause for claiming the deduction
on his 2019 tax return.
Legal Analysis:
Our protest is based on thorough research into the concept of
business bad debts, job preservation, and relevant provisions of
the Internal Revenue Code. We have examined case law, IRS
guidance, and authoritative sources to support our position.
Additionally, we note that while Mr. Richards’ 2019 tax return did
not include a Form 8275 Disclosure Statement, this does not
diminish the validity of the deduction claimed. The absence of a
disclosure statement does not preclude the deductibility of a
valid business expense.
Conclusion:
In light of the foregoing, we respectfully request a conference
with the Appeals Division to present our case and provide any
further factual or legal submissions as required. We are
confident that a fair and impartial review of the facts and
applicable law will result in a favorable resolution for Mr.
Richards.
Enclosed please find the necessary documentation, including
Form 4549-E, Form 915, and the Explanation of proposed
adjustment prepared by Agent Williams, as well as a copy of
Publication 5 for reference.
Thank you for your attention to this matter. We look forward to
the opportunity to discuss this issue further and seek a
resolution in accordance with the law.
Sincerely,
[Your Name]
[Your Title/Position]
[Your Contact Information]
Attachments:
.
.
.
.
.
.
Form 4549-E Income Tax Discrepancy Adjustments
Form 915 Letter 915 – Letter to Transmit Examination
Report
Explanation of proposed adjustment prepared by the
Revenue Agent
Preparing a written Protest Letter to the Appeals Office
Appendix 22B Sample Protest Letter
Publication 5, “Your Appeal Rights and How to Prepare a
Protest If You Do Not Agree”
Preparing a Written Protest to the Appeals Office
Source of this page is RIA checkpoint
Generally, an appeal is initiated by filing a written protest stating the reasons why the taxpayer does not agree with
the disputed adjustments. If the total amount of tax exceeds $25,000, a formal protest is required. The outline of a
sample formal protest disagreeing with a proposed estate tax adjustment is as follows. See Appendix 22B for a
complete sample protest.
RE: Protest by Robert Richards
Social Security Number
Dear Mr. Richards:
I, Robert Richards, hereby protest the proposed adjustments income tax liability set forth in your 30-day letter dated
[date of 30-day letter], and the examination report transmitted therewith. The following information is submitted in
support of this protest.
(1) Conference.
The Estate wants to appeal the findings to the Estate Tax Attorney and requests a hearing before the Appeals Office.
(2) Name, address and daytime telephone number of taxpayer.
[Name and address of taxpayer]
[care of with name and address of attorney or accountant] [Telephone number]
Oct 15, 2021
Reply Refer to: 1484-6423
FYE 201812
Form 1040
Return filed April 15, 2020
(3) Itemized schedule of unagreed adjustments.
(4) Statement of facts.
(5) Statement of law.
(6) Summary of position.
Under penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying
documents, and, to the best of my knowledge and belief, they are true, correct, and complete.
[Alternatively, or additionally, the attorney or accountant may sign the protest using the following language:]
This protest was prepared by the undersigned. The undersigned does (or does not) know personally whether the
statements of fact contained in the protest [and any accompanying documents] are true and correct.
22-20
IRS 6/19
APPENDIX 22B
Sample Appeal Protest Letter
(See paragraph 2202.7)
Date
Internal Revenue Service
Federal Building
1100 Commerce Street
Dallas, Texas 75242
Re:
John Debit
SSN: 111-22-4344
Trouble, Inc. 52-9876543
Gentlemen:
I am in receipt of your letter dated February 20, 2018, Form 2751 (Proposed Assessment of Trust Fund Recovery
Penalty), and our correspondence with your Collection Support Unit confirming the extension of time for filing this
protest until April 30, 2017. On behalf of the taxpayer, John Debit, protest is hereby made on the adjustments in tax
liability set forth therein. The following information is submitted in support of this protest:
1. A conference in person relating to this appeal from the finding of the Chief, Collection Support Unit, is
requested.
2. Name and Address of Taxpayer:
John Debit, 100 Main Street, Dallas, Texas 75240
3. Tax Protested:
February 20, 2018—Reply to: 5401-1529
Form 2751(Trust Fund Recovery Penalty Assessment)
Form 941 (Employer’s Withholding Tax)
4. Periods:
Quarters ended March 31, 2016—$26,700 and June 30, 2016—$35,600
5. The determination appealed for is based on the following error:
Although John Debit was the Comptroller of Trouble, Inc., he was not a responsible person. Based on the
enclosed information, the assertion of the Trust Fund Recovery Penalty is totally unfounded, as he did not have
the authority to order payment of the payroll taxes. The president and sole shareholder of the company
overrode Mr. Debit and elected not to deposit said payroll taxes, much to the displeasure and against the advice
of Mr. Debit.
6. The facts that support this position are as follows:
a. John Debit was hired in 2000. Trouble, Inc., had not had previous payroll tax deposit problems. His initial
duties included supervising the posting of the various journals into the general ledger for the company and
its various subsidiaries, maintaining the payroll ledger, and managing investments for the company and its
subsidiaries. He was also responsible for preparing the weekly payroll and for reviewing the payroll
deductions to be sure that the proper withholding was being computed. He fulfilled all of his duties.
b. John Debit was subsequently promoted to comptroller in late 2015. In reality, his duties did not change. He
was also named secretary-treasurer of the company, solely because the bank the company dealt with
required at least two officers. Since the previous comptroller, who was the secretary-treasurer, had been
fired, a new officer was needed to satisfy the bank’s requirements.
Appendix 22B
22-21
IRS 6/19
c. As comptroller for Trouble, Inc., Mr. Debit did not have signatory authority over the company checking
account. As the enclosed documented information clearly shows, all deposit coupons and applicable
checks were prepared and readied for deposit on a timely basis. However, the president of Trouble, Inc.,
made the decision to pay other obligations of the corporation and not deposit the payroll taxes as prepared
by Mr. Debit.
7. The legal arguments in support of our position are as follows:
The statutory definition of the term person in IRC Sec. 6671(b) includes, for the purpose of the Trust Fund
Recovery Penalty, “an officer or employee of the corporation” who is “under a duty to perform the acts of
collecting, accounting for, and paying over income and FICA taxes withheld from employees.” Clearly the
determination of this person is a question of fact and the Court in Wilson v. U.S. (250 F.2d 312) concluded that
the standard used in making this determination is whether the person in question had the final word as to what
bills should or should not be paid, and when. Other standards used in assessing the liability issue focus on
whether the person has control over the financial affairs of the employer.
Mr. Debit did not have control over the company’s financial affairs. First, Mr. Debit was hired for specific duties
that did not involve overall financial management for Trouble, Inc., and he was not involved in the day-to-day
financial functions of the corporation. Mr. Debit never had check signing power. Although he was promoted to
comptroller, his duties did not substantially change. The Court held in the Pototzky (8 Cl. Ct. 308) that merely
holding a corporate office or position, without exercising any financial authority, was insufficient reason to
consider the taxpayer a responsible person. Additionally, in Bernardi v. U.S. (507 F.2d 682), the Court held that
an officer not charged with general control over the corporation’s business affairs was not responsible for the
payment of taxes since he was not considered a “responsible person” as described in IRC Sec. 6672(a). Mr.
Debit was hired to be primarily responsible for the general ledger. The financial management function was
controlled by Mr. Trouble. This fact is corroborated by affidavits from three of the other employees, which are
attached to this protest.
Furthermore, Internal Revenue Manual Section 5.7.3.3.1.2 states that, in general, non-owner employees who
act solely under the dominion and control of others, and who are not in a position to make independent
decisions on behalf of the business, will not be assessed with the penalty. Non-owner employees are those who
do not own any stock, interest, or other entrepreneurial stake in the company that employs them.
In addition, Mr. Debit did not willfully fail to pay over the payroll taxes. It is clear that Mr. Debit did not exercise
control, as discussed in Godfrey, Jr. v. U.S. (748 F.2d 1568). As the comptroller for Trouble, Inc., Mr. Debit was
clearly not in a position “to compel or prohibit the allocation of corporate funds” or payment of payroll taxes.
The government contends that Mr. Debit had the authority to pay the Trust Fund Taxes but elected not to use it.
Citing Harrington (504 F.2d 1306), the government believes that this is sufficient to impose liability on Mr. Debit.
However, the facts in Harrington are clearly and easily distinguishable. In Harrington, the individual was a 50%
shareholder and a director and officer of the corporation. In the present case, Mr. Debit is not a shareholder, not
a director, and was made an officer solely for the purposes of satisfying a bank requirement. While the by-laws
arguably provide him some authority, the facts in this case make it clear that Mr. Trouble ran the company, and
any authority Mr. Debit had was illusory.
Clearly, the law previously cited applies to the facts of this case. The government has erroneously presumed
that all officers of Trouble, Inc., “are responsible persons.” The facts as presented in this protest clearly indicate
that Mr. Debit is not a “responsible person” and, therefore, is not responsible for the penalty as assessed.
I have prepared the foregoing protest for the taxpayer, John Debit, but do not personally know if the statements of
fact contained in this protest are true and correct.
Very truly yours.
I.B. Good, CPA
Appendix 22B (Continued)