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No. 05-1090

In the Supreme Court of the United States

SYNERGY STAFFING, INC., FKA
PERSONNEL CONNECTION, INC., PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES
IN OPPOSITION

PAUL D. CLEMENT
Solicitor General
Counsel of Record
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

In the Supreme Court of the United States

No. 05-1090

SYNERGY STAFFING, INC., FKA
PERSONNEL CONNECTION, INC., PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES
IN OPPOSITION

Petitioner contends (Pet. 2, 4-5) that payroll tax de posits that it made during certain taxable quarters prior to, and including, the first taxable quarter of 1998 were misapplied by the Internal Revenue Service (IRS) be cause they were not applied to the specific payroll peri ods that petitioner designated on its deposit checks. The court of appeals held that petitioner's claim lacked merit because, during all times relevant to this case, "employers did not have the power to designate em ployee payroll tax deposits to [specific payroll] periods within a tax quarter." Synergy Staffing, Inc. v. United States, 134 Fed. Appx. 158, 158 (9th Cir. 2005) (citing 26 U.S.C. 6656(e)). That holding is correct and does not warrant further review by this Court.

1. During the pertinent period, petitioner, a cor poration that provides temporary employee placement services, was required to deposit payroll taxes into an account at an approved bank each time that it paid its employees. Synergy Staffing, Inc. v. United States IRS, 323 F.3d 1157, 1158 (9th Cir. 2003); Synergy Staffing, Inc. v. United States, No. 00-321, Statement of Uncon troverted Facts and Conclusions of Law (Facts and Con clusions of Law) at 8 (C.D. Cal. Oct. 10, 2003) (citing 26 C.F.R. 31.6302-1(b) and (c)); Pet. 2. On a quarterly ba sis, petitioner was required to make a payment to the IRS of the withheld taxes. 26 C.F.R. 31.6011(a)-4(a)(1); 26 C.F.R. 31.6071(a)-1(a).

Beginning in 1988, on several occasions, petitioner failed to make the payroll tax deposits each pay period as required. Synergy Staffing, 323 F.3d at 1158; Pet. 2. Each time that petitioner was late with a deposit, it in curred a failure-to-deposit penalty pursuant to Internal Revenue Code Section 6656. Synergy Staffing, Inc. v. United States, No. 00-321, Minute Entry at 2 (C.D. Cal. Oct. 9, 2003); Facts and Conclusions of Law at 8 (citing 26 U.S.C. 6656(b)(2)(1988)).

During the third taxable quarter of 1997 and the first taxable quarter of 1998,1 petitioner made several payroll tax deposits. Because they were not sufficient to cover all deposits due, petitioner "sought to prevent the impo sition of additional penalties and interest" under Section 6656 by placing "an instruction on [it]s check to apply the payment to current taxes." Synergy Staffing, 323 F.3d at 1158; see Pet. 2-3. If so applied, petitioner would still have owed the past-due amounts, and the interest accruing on those amounts, but would have avoided new failure-to-deposit penalties by ensuring that currently due amounts were paid in full. See Pet. 3.

Then-existing law, however, did not allow employers to designate that payroll tax deposits be applied to a particular payroll period within a taxable quarter. Syn ergy Staffing, 134 Fed. Appx. at 158. The rule was dif ferent than that applicable to voluntary tax payments, which then-existing IRS policy allowed to be designated to a particular quarter. United States v. Energy Res. Co., 495 U.S. 545, 548 (1990) (citing Rev. Rul. 79-284 (1979)). At that time, the IRS applied payroll deposits to the earliest payroll period in the taxable quarter for which amounts were due: "[D]eposits will be applied * * * against deposit liabilities in due-date order. Thus, a deposit will first be applied to satisfy any past due underdeposits within the same return period, with the oldest underdeposit being satisfied first." Rev. Proc. 90- 58 § 3. Accordingly, the IRS applied the deposits at is sue here to the earliest-due payroll periods in the tax able quarter designated by petitioner, rather than to the currently due payroll period in that quarter. As a re sult, petitioner incurred new failure-to-deposit penalties with respect to each new payroll period.

2. In 1998, Congress decided to "[m]itigat[e] [the] failure to deposit penalty" by amending Section 6656 to "allow[] the taxpayer to designate the period to which each deposit is applied." H.R. Conf. Rep. No. 599, 105th Cong., 2d Sess. 259. That new approach would alleviate the "[c]ascading penalties" which resulted from then- existing law when "payments that would otherwise be sufficient to satisfy current liabilities are applied to sat isfy earlier shortfalls." Ibid.

The amendment to Section 6656 was enacted on July 22, 1998, and became effective 180 days thereafter. Tax payer Bill of Rights 3, Pub. L. No. 105-206, Tit. III, § 3304, 112 Stat 742. The amended statute, as applied to deposits due after the effective date until December 31, 2001, 112 Stat. 743, authorized their designation to a particular payroll period within a tax quarter, and, as applied to deposits due after December 31, 2001, re quired that they be applied to the most recent payroll period within a tax quarter, unless designated other wise. 112 Stat. 742; see 26 U.S.C. 6656(e)(1) (Supp. 1999). Petitioner concedes that "[a]t the times material to this petition, Congress had not yet enacted 26 U.S.C. § 6656(e)." Pet. 1.

3. Petitioner nonetheless contends (Pet. 4) that, prior to the enactment of Section 6656(e), the IRS was required to apply payroll deposits as designated. Peti tioner relies on United States v. Energy Resources Co., 495 U.S. 545 (1990), but that decision is inapposite. In Energy Resources, this Court considered "IRS policy [that] permits taxpayers who 'voluntarily' submit pay ments to the IRS to designate the tax liability to which the payment will apply." Id. at 548 (citations omitted) (emphasis added). This case, by contrast, does not in volve petitioner's quarterly tax payments, as each such payment was applied to the tax quarter that petitioner designated. See Facts and Conclusions of Law at 3 (finding that each check "which designated the payment to a particular taxable quarter was credited to the speci fied quarter."). The case instead involves the applica tion of petitioner's tax deposits during that tax quarter, each of which was applied to the earliest pay period dur ing that quarter in accordance with then-existing law. Petitioner has cited no authority to support its position that, prior to the enactment of Section 6656(e), the IRS was required to apply tax deposits in the manner re quested by the taxpayer. As the statute did not then specify the process to be used in applying payroll depos its, the agency had broad authority to "fashion [its] own rules of procedure." See Vermont Yankee Nuclear Power Corp. v. NRDC, 435 U.S. 519, 543 (1978) (quoting FCC v. Schreiber, 381 U.S. 279, 290 (1965)); Cameron v. United States, 252 U.S. 450, 460-463 (1920).

It is therefore respectfully submitted that the peti tion for a writ of certiorari should be denied.

PAUL D. CLEMENT
Solicitor General

MAY 2006

1 See Facts and Conclusions of Law at 5 ("Of the relevant payroll tax deposit checks exhibited by [petitioner] in this action, only the two checks for the third quarter of 1997 and the seven checks for the first quarter of 1998 include a reference on the face of each check to a parti cular payroll period within the quarterly tax return period to which the payroll tax deposit relates.").