1. Harry Hardluck and his ex-wife, Hortense Hapless Hardluck, were divorced in 20×0. Under the divorce decree, Harry was required to make payments of $600 a month (for the support of Hortense and their children).
Because the decree labels these payments as alimony, Harry had deducted them on his 20×1, 20×2, and 20×3 income tax returns. At the same time, Hortense has taken the position that these are child support payments and has not reported them as income for the years in question.
The IRS has audited Harry and Hortense and issued a Statutory Notice of Deficiency to Harry disallowing the deduction claimed for alimony payments. At the same time, the IRS issued a Statutory Notice of Deficiency to Hortense claiming that the payments were alimony and should have been reported as income. Harry and Hortense’s respective attorneys consult you as a noted tax expert in tax procedure to find out whether the IRS can actually make assessments in such an “inconsistent” fashion. What advice do you give them?
2. B.N. Krupt Company, Inc., timely filed its first-quarter 20×1 withholding tax return (Form 941) on April 29, 20×1. On May 1, 20×1, Mr. Scatterbrain, the president of the corporation, resigned. Scatterbrain normally signed all corporate checks and approved all financial transactions. No successor was appointed, but Mr. Disorganized, the vice president, and Ms. Slipshod, the treasurer, were given co-check-signing authority and together assumed Scatterbrain’s financial duties. Ms. Neglectful, the corporation’s sole shareholder and director, assumed the acting presidency.
Ten days before the second quarter 20×1 withholding tax return (Form 941) was due, Mr. Diligent, the accounts payable clerk, prepared the Form 941 and a check for the total amount due. Mr. Diligent gave the check and the Form 941 to the treasurer, Ms. Slipshod, to be signed and forwarded to Mr. Disorganized for co-signature of the check.
Because of the corporation’s poor financial condition that month, Mr. Disorganized decided to sign only certain checks and failed to co-sign the tax check. Mr. Disorganized returned all of the checks to Mr. Diligent. Mr. Diligent noticed that several checks were not co-signed and adjusted his cash disbursement journal accordingly. Mr. Disorganized resigned two days prior to the due date for filing the return. The corporation did not pay any tax for the second quarter and Ms. Neglectful had no knowledge of the nonpayment of the Form 941 taxes.
(A) For each person involved, state whether you think the person is liable for the 100-percent penalty under Code sec. 6672. Why or why not?
(B) The corporation’s portion of the FICA tax was also not paid. Is this amount included in the 100% penalty?
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