In U.S. v. MPM Financial Group Inc., the Sixth Circuit scolded the defendant for exercising poor internal controls as it upheld a penalty for failure to comply with a notice of levy against one of its employees, who was also the corporation’s co-owner and president. Because the employer did not have “reasonable cause” for its failure to comply with the IRS notice, it was found liable for the amount in back taxes it failed to turn over, plus a 50% penalty under IRC section 6332(a)(2).
MPM appealed the ruling out of the Eastern District of Kentucky that found it liable for $29,233, plus the 50% penalty of $14,616, along with post-judgment interest. After the government’s motion to reconsider the calculation, the judgment against MPM was increased to $77,058.
The notice of levy issued pursuant to IRC section 6332(a) was received by MPM’s co-owner and president, Michael Morton, who was the delinquent taxpayer. Morton owed the IRS $104,009 in unpaid income taxes and penalties. In August 2000, MPM received the levy notice at its office via regular mail. The IRS agent assigned to the case later hand-delivered a “final demand” to Morton at MPM’s office. No funds were paid to the IRS before the levy was released in June 2001.
MPM’s other co-owners argued that the IRS agent knew Morton was uncooperative and untrustworthy, and that the agent should have tried to contact the company’s other directors or mail a notice to the company’s registered agent for service of process.
The appeals court disagreed, pointing out the notice was mailed to MPM at its business address and it was received in the ordinary course of business. MPM failed to honor the levy only because Morton, who was duly authorized as president to manage the office and open mail, ignored it. “MPM’s lack of internal controls cannot amount to reasonable cause for failing to honor the levy” and avoid the penalty, the Sixth Circuit said.
The Sixth Circuit also quoted the district court, which said that “MPM must keep in mind that if there had been a system of checks and balances in place at its office at the time this levy was served …, it is unlikely that Morton, the truly culpable party in this situation, would have been able to keep this notice of levy from coming to the attention of … MPM’s two other principal owners.” The court said that allowing this conduct to pass muster as reasonable cause would “undermine the underlying principle” of the levy to aid the government in promptly securing its revenues.
U.S. v. MPM Financial Group Inc., 99 AFTR2d 2007-940.
Prepared by JofA staff member Jeffrey Gilman , J.D.