U.S. Supreme Court No. 07-221
Amicus Curiae Brief in Support of Petition for Certiorari
Filed on September 20, 2007
Certiorari Denied October 1, 2007
Employers must withhold payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es from employees’ wages and forward them to the federal government, and failure to do so properly subjects the employer to penalties. But Congress has passed a law forgiving penalties if the failure was reasonably caused by “undue hardship.”
The law’s purpose is to deter those who willfully failed to pay, but without taking a “scorched earth” approach that forces troubled businesses to close, thus eliminating jobs, destroying investment, disrupting the economy, and ultimately, reducing tax collections. Congress has reasoned that by allowing non-paying companies to stay in business, they can recover and ultimately repay their owed taxes.
Staff IT, Inc., a Houston-based technician staffing company, failed to pay and deposit its payroll taxes after a “perfect storm” of the dot-com crash and the subsequent recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. reduced demand for Staff IT’s services. The company recovered by 2002 and resumed its tax payments, but the IRS has pursued penalties up to 60 percent.
The IRS takes the position that financial distress can never be “undue hardship” justifying the forgiveness of penalties. The Fifth Circuit Court of Appeals agreed with the IRS, ruling that unless a company ceases all payments to employees and creditors, it is not suffering “undue hardship.”
This approach is in conflict with the law, undermines Congress’s purpose, and is in conflict with four other circuit courts of appeal. One, the Ninth Circuit Court of Appeals, held in 2001 that “[i]f the potential ruin of a corporation is not relevant, then the reasonable cause exception is virtually meaningless.”
The Tax Foundation’s brief supports Staff IT, Inc.’s effort to have its case heard by the U.S. Supreme Court. If the lower court ruling stands, the brief argues, “troubled small business who owe taxes and creditors will end up paying neither. This is a result that benefits no one, and a result that Congress sought to avoid.”
Tax Foundation Files Two U.S. Supreme Court Briefs, by Joseph Henchman, September 25, 2007Share