EDMUND J BAPRAWSKI JR V DEPT OF TREASURY
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STATE OF MICHIGAN
COURT OF APPEALS
EDMUND J. BAPRAWSKI, JR., Trustee of the
Estate of CHARLOTTE D. BAPRAWSKI,
UNPUBLISHED
December 11, 2007
Petitioner-Appellant,
v
No. 273078
Tax Tribunal
LC No. 00-320915
DEPARTMENT OF TREASURY,
Respondent-Appellee.
Before: Davis, P.J., and Murphy and Servitto, JJ.
PER CURIAM.
Petitioner appeals as of right from a Tax Tribunal decision upholding a penalty
assessment of $121,856, reduced to $115,081 because of the overpayment of interest, imposed
against petitioner because he failed to timely file a tax return and pay estate taxes in connection
with his mother’s estate. We affirm.
This Court’s review of a Tax Tribunal decision is very limited. In the absence of an
allegation of fraud, this Court’s review is limited to deciding whether the tribunal committed an
error of law or adopted a wrong legal principle. Pheasant Ring v Waterford Twp, 272 Mich App
436, 438; 726 NW2d 741 (2006). Factual findings made by the tribunal will not be disturbed if
they are supported by competent, material, and substantial evidence on the whole record. Id.
The underlying facts are not in dispute. Petitioner failed to timely file the estate’s tax
return or pay the taxes due. As a result, a penalty of $121,856 was imposed pursuant to MCL
205.24(2), which provides:
Except as provided in subsections (3), (6), and (7), if a taxpayer fails or
refuses to file a return or pay a tax within the time specified for notices of intent
to assess issued on or before February 28, 2003, a penalty of $10.00 or 5% of the
tax, whichever is greater, shall be added if the failure is not for more than 1
month, with an additional 5% penalty for each additional month or fraction of a
month during which the failure continues or the tax and penalty is not paid, to a
maximum of 50%. Except as provided in subsections (3), (6), and (7), if a
taxpayer fails or refuses to file a return or pay a tax within the time specified for
notices of intent to assess issued after February 28, 2003, a penalty of 5% of the
tax shall be added if the failure is for not more than 2 months, with an additional
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5% penalty for each additional month or fraction of a month during which the
failure continues or the tax and penalty is not paid, to a maximum of 25%. In
addition to the penalty, interest at the rate provided in section 23 for deficiencies
in tax payments shall be added on the tax from the time the tax was due, until
paid. After June 30, 1994, the penalty prescribed by this subsection shall not be
imposed until the department submits for public hearing pursuant to the
administrative procedures act of 1969, 1969 PA 306, MCL 24.201 to 24.328, a
rule defining what constitutes reasonable cause for waiver of the penalty under
subsection (4), which definition shall include illustrative examples. [Emphasis
supplied.]
We disagree with petitioner’s argument that the decision whether to impose a penalty
under MCL 205.24(2) is discretionary. The statute states that a penalty “shall be added.” The
term “shall” indicates a mandatory directive. Costa v Community Emergency Medical Services,
Inc, 475 Mich 403, 409; 716 NW2d 236 (2006). Petitioner does not contest the calculation of the
penalty under MCL 205.24(2). Because it is undisputed that the tax return was not timely filed
and the estate taxes were not timely paid, a penalty was mandatory under MCL 205.24(2), except
as otherwise provided in the statute.
Petitioner argues that waiver of the penalty was appropriate under MCL 205.24(4),1
which provides:
If a return is filed or remittance is paid after the time specified and it is
shown to the satisfaction of the department that the failure was due to reasonable
cause and not to willful neglect, the state treasurer or an authorized representative
of the state treasurer shall waive the penalty prescribed by subsection (2).
[Emphasis added.]
Because subsection (4) uses the term “shall,” waiver of the penalty prescribed by subsection (2)
is mandatory if the requirements of subsection (4) are satisfied. Under subsection (4), petitioner
must show to the “satisfaction of the department that the failure was due to reasonable cause and
not to willful neglect.” Thus, upon an appropriate showing of reasonable cause, any penalty
prescribed by subsection (2) must be waived. 1999 AC, R 205.1013(4) provides that the
taxpayer has the burden of affirmatively establishing, by clear and convincing evidence, that the
failure to pay the tax was due to reasonable cause. See J W Hobbs Corp v Dep’t of Treasury,
268 Mich App 38, 53; 706 NW2d 460 (2005).
1
Although petitioner also refers to MCL 205.23, the penalty in this case was based only on MCL
205.24, for failure to timely file a return or pay taxes. MCL 205.23 allows penalties to be
imposed in situations where the amount of the tax actually paid is less than owed (deficiency) or
where there is an excessive claim for credit. See Schubert v Dep’t of Treasury, 212 Mich App
555, 563-564; 538 NW2d 447 (1995). Because the penalty in this case was not based on MCL
205.23, it is unnecessary to consider that statute.
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Petitioner argues that he established reasonable cause because (1) he received inaccurate
tax advice from his tax preparer, (2) there were insufficient assets to pay the taxes, and (3) the
estate was granted an extension by the federal government.
The Tax Tribunal relied on 1999 AC, R 205.1013 to determine what constitutes
reasonable cause for failing to timely pay a tax or file a return.2 Rule 205.1013(7) provides
examples of situations where a penalty should be waived for reasonable cause. However, those
situations generally involve circumstances beyond the control of the taxpayer and are not
applicable to the circumstances at issue in this case. Additional circumstances that may support
a finding of reasonable cause are set forth in Rule 205.1013(8), which provides:
The following factors alone do not constitute reasonable cause for failure
to file or pay. However, these factors may be considered with other facts and
circumstances and may constitute reasonable cause. The following factors are for
illustration only and are not an exclusive listing of factors:
(a) The compliance history of the taxpayer.
(b) The nature of the tax.
(c) The taxpayer’s financial circumstances, including the amount and
nature of the taxpayer’s expenditures in light of the income the taxpayer, at the
time of the expenditures, could reasonably expect to receive before the due date
prescribed for paying the tax.
(d) The taxpayer was incorrectly advised by a tax advisor who is
competent in Michigan state tax matters after furnishing the advisor with all
necessary and relevant information and the taxpayer acted reasonably in not
securing further advice.
(e) The taxpayer’s accounting and financial system that is designed to
ensure timely filing breaks down due to unavoidable circumstances and, upon
discovery, the taxpayer promptly complies.
(f) The death or serious incapacitating illness of the taxpayer or the
person responsible for filing the return or making the payment or a member of his
or her immediate family.
(g) Lack of funds to make timely payment.
2
Although the parties also refer to Revenue Administrative Bulletin 2005-3 in discussing the
concept of reasonable cause, the hearing referee relied on Rule 205.1013, which provides a more
comprehensive view of reasonable cause.
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(h) A taxpayer’s reliance on an employee or agent to file the return or
make the payment.
Subsection (8)(d) recognizes that waiver may be appropriate if the taxpayer received
inaccurate advice from his accountant. The hearing referee considered this factor, but found that
it was not established because petitioner did not affirmatively testify that his accountant did not
tell him that the taxes were due when he requested an extension and that any extension would not
delay the payment of taxes owed. The hearing referee also noted that petitioner did not call his
accountant as a witnesses, thus preventing the referee from determining what tax advice
petitioner may have been given. Under the circumstances, the referee did not err in finding that
petitioner failed to satisfy his burden of demonstrating that waiver of the penalty was appropriate
under subsection (8)(d).
Subsection (8)(g) recognizes that waiver may be appropriate if the estate lacked the funds
to pay the taxes when due. In this case, however, the referee found that, according to the estate’s
federal return, the estate held over $3 million in cash and marketable securities, and that
petitioner failed to satisfactorily explain why those assets could not have been used to pay the
estate’s state taxes on time. Therefore, the referee properly concluded that subsection (8)(g) did
not support a finding of reasonable cause in this case.
Petitioner also argues that because he obtained an extension for the federal taxes, this
constitutes “reasonable cause” pursuant to Revenue Administrative Bulletin (RAB) 1999-12,
which provides:
III. If a federal extension to pay the tax under IRC [Internal Revenue
Code] § 6163 or 6166 is not approved at the time the Michigan Estate Tax
becomes due and payable, the obligation to file the return and pay the tax remains
on the original due date. Therefore, in situations where an estate has applied for a
federal extension under either IRC § 6163 or 6166, the Department will assess the
failure to pay penalty if the tax is not paid by the original due date. However,
evidence that the Internal Revenue Service has granted the taxpayer an extension
of time to pay the tax under IRC § 6163 or 6166 will be accepted as reasonable
cause for waiver of the failure to pay penalty. Interest will be assessed on all
payments received after the original due date. [Emphasis added.]
The record discloses that petitioner only obtained an extension from the federal government of
the time for filing the estate’s federal return, not for paying the federal taxes owed. In fact, a
payment of those taxes was included with the request for an extension of the federal filing
deadline. Because petitioner did not submit an application to the IRS for an extension to pay the
federal estate taxes, the foregoing exception does not apply. Petitioner was still obligated to pay
the estate’s state taxes to respondent on the original due date. Moreover, the federal
government’s extension of time appears to have been approved in September 2002 after being
received August 26, 2002, and the tax at issue here was due August 23, 2002.
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For these reasons, the Tax Tribunal did not err in determining that petitioner failed to
establish reasonable cause for failing to timely file the estate’s tax return and pay the taxes due.
Therefore, the Tax Tribunal properly upheld the penalty assessed against petitioner.
Affirmed.
/s/ Alton T. Davis
/s/ William B. Murphy
/s/ Deborah A. Servitto
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