Assessment Page 2

Trust Fund Handbook page1
Trust Fund Handbook page2
Trust Fund Handbook page3
Tax Fraud
Willfulness - knowledge of non-payment
Statute of Limitations
Assessment p1
Assessment p2
Assessment p3
GCM 33653

CONCLUSION

Based on the reasons stated in this memorandum, we find that there is no genuine issue of material fact that exists with respect to Long's counterclaims. Accordingly, we will grant the United States ' motion for summary judgment and deny Long's motion.

An appropriate order will issue.

¹ By stipulated order dated October 7, 1998 , both parties agreed that Long withdraw from this matter his claim in ¶61 of his first amended counterclaim complaint, in which Long averred the following:

61. It has also come to the attention of Counter-Claim [sic]. Plaintiff that in late 1995 and early 1996, an employee of Counter-Claim [sic] Defendant occasioned to have a conversation with an employed agent of a business competitor of Counter-Claim [sic] Plaintiff. During said conversation, said employee stated that Counter-Claim Plaintiff is being investigated for possible criminal activities, and will most likely be prosecuted and incarcerated within a federal penitentiary. It has also been reported that same employees of Counter-Claim [sic] Defendants and business competitor continue to this date, to have conversations.

First Amended Counterclaim Complaint at ¶61.

² 26 U.S.C. §7433, Civil damages for certain unauthorized collection actions, provides in pertinent part as follows:

(a) In general.--If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

26 U.S.C. §7433(a).

³ 26 U.S.C. §7432, Civil damages for failure to release lien, provides in pertinent part as follows:

(a) In general.--If any officer or employee of the Internal Revenue Service knowingly, or by reason of negligence, fails to release a lien under section 6325 on property of the taxpayer, such taxpayer may bring a civil action for damages against the United States in a district court of the United States .

26 U.S.C. §7432(a).

26 U.S.C. §6325 provides, inter alia, for the release of liens not later than 30 days after the day on which the liability is satisfied or unenforceable. 26 U.S.C. §6325(a)(1).

⁴ 26 U.S.C. §7431, Civil damages for unauthorized inspection or disclosure of returns and return information, provides in pertinent part as follows:

(a) In general.--

(1) Inspection or disclosure by employee of United States.--If any officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

26 U.S.C. §7431(a)(1).

26 U.S.C. §6103 states generally that returns and return information are confidential; however, such may be disclosed, inter alia, "for tax administration purposes." 26 U.S.C. §6103(k). This section further provides, in pertinent part:

An internal revenue officer or employee may, in connection with official duties relating to any audit, collection activity, or civil or criminal tax investigation or any other offense under the internal revenue laws, disclose return information to the extent that such disclosure is necessary in obtaining information which is not otherwise reasonably available, with respect to the correct determination of tax, liability for tax, or the amount to be collected or with respect to the enforcement of any other provision of this title.

26 U.S.C. §6103(k)(6).

[99-1 USTC ¶50,144] Ronald S. Howell, Plaintiff/Third-Party-Defendant v. United States of America , Defendant/ /Third-Party-Plaintiff/Appellant v. Edward B. Rogers, Third-Party-Defendant/Appellee

(CA-10), U.S. Court of Appeals, 10th Circuit, 97-4014, 12/29/98, 164 F3d 523, Reversing and remanding a District Court decision, 96-2 USTC ¶50,548

[Code Secs. 6203 and 6672 ]

Assessments: Validity of: Penalties, civil: Trust fund recovery penalty: Responsible person: Individual Master File: Characterization of assessment: Taxable period.--The IRS made a valid and enforceable assessment of the trust fund recovery penalty against a corporate president and shareholder even though it did not provide him with the pertinent parts of the records supporting the assessment that indicated the character of the liability and taxable period of the assessment. When the government pursues a claim for unpaid taxes in a judicial forum, as opposed to administratively, it is not required to comply with the notice and hearing requirements of Code Sec. 6303(a) before obtaining a judgment for tax liabilities. Further, the validity of the assessment did not rest on whether or when the individual invoked his right to request the information.
[Code Sec. 6672 ]

Penalties, civil: Trust fund recovery penalty: Responsible person: Willfulness.--A factual issue existed as to whether a corporate president and shareholder's failure to pay over the withholding taxes was willful, whether his efforts to protect the funds were reasonable, and whether those efforts were frustrated by circumstances beyond his control. Further proceedings on that issue were necessary.

Scott M. Matheson, Jr., United States Attorney, Salt Lake City, Utah 84101, Marion E.M. Erickson, Richard Farber, Department of Justice, Washington, D.C. 20530, for U.S. Joseph Jay Bullock, Karen Bullock Kreeck, Bullock Law Firm, 353 E. 300 South St., Salt Lake City, Utah 84111, for third-party-defendant/appellee.

Before: SEYMOUR, Chief Judge, and EBEL and KELLY, Circuit Judges.

SEYMOUR, Chief Judge:

The Government appeals the district court's grant of judgment as a matter of law in favor of Edward B. Rogers. The court's ruling was based on its conclusion that the assessment of a penalty under I.R.C. §6672 against Mr. Rogers for willful failure to pay over trust fund taxes was invalid because the Government had not provided Mr. Rogers with information as required by I.R.C. §6203 and 26 C.F.R. §301.6203-1. The Government also contends that Mr. Rogers' failure to pay the funds over was willful as a matter of law. We reverse the court's ruling that the assessment was invalid. We further conclude that a fact issue exists on whether Mr. Rogers' conduct was willful. We reverse and remand for further proceedings.

I

Mr. Rogers was the president and a director of Utah Title & Abstract Company from 1968 until he resigned from his various positions about March 1, 1988. He was also a fifty percent shareholder during 1988, the year at issue. Ronald S. Howell was an employee, director, and corporate secretary of Utah Title in 1988, and Alfred J. Newman was an employee, director, fifty percent shareholder, and corporate counsel. Utah Title failed to make payments to the Internal Revenue Service ( IRS ), as required by I.R.C. §3102(b), of the income and FICA taxes withheld in 1988 from employees' wages for the pay periods ending January 15, February 1, and February 15. On February 13, 1988, insurance underwriters for whom Utah Title acted as agent seized control of the company and took over its day-to-day business activities. Following this seizure, the banks with which Utah Title had general and trust accounts froze the accounts. The company filed for bankruptcy on February 29, 1988.

The IRS assessed a penalty in the amount of $58,560 under section 6672 against Mr. Howell in November 1988 and against Mr. Rogers in December 1988 in connection with the unpaid taxes for the first quarter of 1988, alleging that both men were responsible persons who had willfully failed to pay over the funds within the meaning of the statute. Mr. Howell thereafter paid $4311 toward the assessment and filed this refund action on October 26, 1993, against the Government. The Government counterclaimed against Mr. Howell for the outstanding amount of the assessment, and filed a claim against Mr. Rogers as well.

After the evidence had been presented at trial, the district court denied Mr. Rogers' motion to hold the assessment invalid as a matter of law, and granted the Government's motion to hold Mr. Rogers a responsible party as a matter of law. The case went to the jury, which returned a verdict in favor of Mr. Howell but was unable to reach a verdict as to Mr. Rogers' liability. The judge declared a mistrial and Mr. Rogers renewed his earlier motion for judgment as a matter of law on the validity of the assessment. The court granted the motion, ruling that the assessment was invalid because the IRS had failed to comply with the regulation requiring it to provide information upon request. The Government contends on appeal that the assessment was valid and that Mr. Rogers was willful as a matter of law.

II

We turn first to the issue of the validity of the assessment. The statute declares:

The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary. Upon request of the taxpayer, the Secretary shall furnish the taxpayer a copy of the record of the assessment.

I.R.C. §6203. The pertinent regulation provides in part:

The assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. . . . The date of the assessment is the date the summary record is signed by an assessment officer. If the taxpayer requests a copy of the record of assessment, he shall be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.

26 C.F.R. §301.6203-1 (1997).

The regulation thus provides that the records supporting the assessment must identify the taxpayer, the character of the tax liability, the taxable period, and the amount of the assessment. The taxpayer, upon requesting a copy of the record of assessment, must be provided the above four items of information as well as the date of the assessment.

The circumstances before us are unusual. The district court held that although documents presented at trial satisfied the requirements for supporting records, the items furnished by the IRS to the taxpayer post-assessment but pre-trial pursuant to his request had not provided information on the character of the liability assessed or the taxable period as required by the regulation. The court held that the assessment was therefore invalid, in effect ruling that the regulatory obligation imposed on the IRS to provide information upon request was a necessary part of the assessment itself. ¹ We disagree.

The district court correctly recognized that when the Government pursues a claim for unpaid taxes in court, as opposed to pursuing the claim administratively, the Government need not comply with the notice and hearing requirements of I.R.C. §6303(a) before obtaining a judgment for tax liabilities. See Marvel v. United States, 719 F.2d 1507, 1513-14 (10th Cir. 1983); see also United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989) (citing cases). This is so, the court pointed out, because the lawsuit itself provides that information to the taxpayer. We see no reason for the district court's conclusion that although the need for satisfying the notice and demand requirements is obviated by the pursuit of a judicial proceeding, the need for prior provision of the information at issue here is not similarly obviated. ²

We also agree with the IRS that the validity of an assessment cannot rest on whether or when the taxpayer invokes his right to request the information set out in section 301.6203 -1. As the IRS points out, no section of the Internal Revenue Code or the regulations imposes a sanction for the IRS 's failure to comply with this provision, and we are not willing to construe it in a manner that would invalidate by implication an otherwise valid assessment. Mr. Rogers cites no cases supporting his assertion that a valid assessment is made invalid by the failure to provide a requesting taxpayer the supporting information. ³ We hold that any failure by the IRS to comply with its duty to provide the information set out in section 301.6203 -1 did not render the assessment in this case invalid. We reverse the district court's ruling to the contrary. ⁴

We turn to the Government's argument that Mr. Rogers' failure to pay over the trust funds was willful as a matter of law. Subsequent to the trial in this case, we addressed en banc the issue of willfulness under section 6672. See Finley v. United States [97-2 USTC ¶50,613], 123 F.3d 1342 (10th Cir. 1997) (en banc). We stated that although

we agree with the notions that "willful" conduct under §6672 is not the same as "willful" conduct in the criminal context, and that certain facts are irrelevant to the determination of whether a responsible person willfully failed to pay withholding taxes[,] we are troubled by the possibility the courts have transformed 26 U.S.C. §6672 into a strict liability statute, outside the jury's realm, by (1) broadly defining the most likely fact scenarios leading to a failure to pay withholding taxes as "willful" conduct as a matter of law, and (2) closing the door on any opportunity for a responsible person to distinguish his case from those factual scenarios.

Id. at 1346. Accordingly, we held that

the better way to protect government revenue and preserve a role for the jury in this case and others without undermining existing precedent is to continue to apply the established paradigms to identify willful conduct as a matter of law, yet expressly recognize a reasonable cause exception to the application of those paradigms.

Id. at 1348. We further held that this exception should be narrowly construed, and "limited to those circumstances where (1) the taxpayer has made reasonable efforts to protect the trust funds, but (2) those efforts have been frustrated by circumstances outside the taxpayer's control." Id.

The Government contends the exception recognized in Finley does not require a remand in this case because Mr. Rogers voluntarily made a decision to prefer other creditors rather than pay over the trust funds. These undisputed facts, however, fit one of the paradigms that Finley held is subject to the reasonable cause exception. The Government's position, in effect, simply reads the exception out of existence.

The Government also argues that Mr. Rogers failed to show circumstances beyond his control which prevented him from fulfilling his statutory obligation to pay the funds over. Again we disagree. As we stated in Finley, we can rule on the availability of the exception as a matter of law "only if [the taxpayer] was fully heard on the issue of willfulness and, construing the evidence and inferences in [the taxpayer's] favor, we can find no legally sufficient evidentiary basis for a reasonable jury to find his conduct was not willful." Id. at 1349.

Here, as in Finley, Mr. Rogers should be given the opportunity to present evidence to a jury and receive a determination on whether he made reasonable efforts to protect the trust funds, and whether his efforts were frustrated by events beyond his control. Mr. Rogers presented evidence at his first trial showing that his actions with regard to the taxable periods at issue were in keeping with his past practice and the result of the nature of the company's business. The company maintained trust accounts as part of its escrow business through which over one million dollars passed every working day. Mr. Rogers would leave about a quarter of a million dollars in the accounts as a cushion to prevent their closure for lack of funds or bank charges. It was from this cushion that Mr. Rogers had caught up the taxes in the past. The IRS had previously cooperated with this past practice. In our view, this evidence creates a fact issue on whether Mr. Rogers' efforts to protect the trust funds were reasonable. Mr. Rogers also presented evidence that he was not able to complete his usual practice and pay the taxes as he had done previously due to the improper and unauthorized actions of the underwriters in seizing control of the company and the accounts and directing the payment of funds in a manner contrary to his past practice. This evidence creates a fact issue on whether Mr. Rogers' efforts were frustrated by circumstances beyond his control. We therefore reject the Government's argument that Mr. Rogers was willful as a matter of law.

The judgment of the district court is REVERSED and the case is REMANDED for further proceedings.

¹ Mr. Rogers also argues that the assessment was invalid because the supporting documents were allegedly prepared and dated several years after the assessment date. He argues that supporting documents must be prepared contemporaneously with or in relation to the assessment, citing Jones v. United States, 60 F.3d 584, 589-90 (9th Cir. 1995). We have reviewed the record supplied on appeal and can find no indication that Mr. Rogers presented this argument to the district court. We decline to consider it for the first time on appeal. See Gowan v. United States Dep't of the Air Force, 148 F.3d 1182, 1192 (10th Cir. 1998).

² Mr. Rogers does not argue to this court that he did not in fact have the substantive information the court ruled was not supplied by the Government. Indeed, the proceedings before and during trial indicate quite clearly that Mr. Rogers in fact possessed and knew that information. Rather, he argues, and the district court agreed, that the form in which the IRS purported to provide the information to him was in code not decipherable by the ordinary layman.

³ In holding the assessment invalid on this ground, the district court relied on Stallard v. United States [94-1 USTC ¶50,056], 12 F.3d 489 (5th Cir. 1994) (per curiam). That case is distinguishable in critical respects. There the taxpayer was not assessed at all with respect to the taxable period for which he was liable before the statute of limitation expired. Id. at 495. In determining whether the taxpayer was assessed for the proper period, the court examined the supporting record and simply did not address the question at issue here.

⁴ We have held, moreover, that the IRS may bring a judicial tax collection action even if an invalid assessment prevents it from attempting to collect taxes in an administrative proceeding. See Goldston v. United States [97-1 USTC ¶50,149], 104 F.3d 1198, 1200 (10th Cir. 1997).

[98-1 USTC ¶50,473] United States of America , Plaintiff v. Arthur Tarlow, Nicholas Pastoressa, John Caldara and Anthony Manfre, Defendants

U.S. District Court, East. Dist. N.Y., 94-CV-4854 (JLC), 5/14/98

[Code Sec. 6672 ]

Penalties, civil: Trust fund recovery penalty: Assessments, presumption of correctness: Burden of proof: Responsible person: Willfulness.--The assessment of the trust fund recovery penalty against a corporate director for nonpayment of payroll taxes was entitled to a presumption of correctness absent a showing that it was entirely arbitrary. The IRS 's failure to produce the only revenue agent who had pertinent knowledge of the claim, as well as its inability to locate part of its file relating to the penalty, did not invalidate the assessment. Documents produced by the IRS , together with preassessment documents introduced by the director, demonstrated that the IRS had a rational foundation when it assessed the 100 percent penalty. Accordingly, the director was barred from introducing preassessment documents at trial to attack the validity of the assessment. He also bore the burden of persuasion with respect to his status as a responsible person and whether he had acted willfully.

Gerald H. Parshall, Department of Justice, Washington , D.C. 20530 , for plaintiff. Bernard S. Mark, Kestenbaum & Mark, 40 Cutter Mill Rd., Great Neck, N.Y. 11021, for Arthur Tarlow. Kevin Matz, 919 Third Ave. , New York , N.Y. 10022 , for John Caldara.

MEMORANDUM AND ORDER

CADEN, Magistrate Judge:

By stipulation of the parties, this case is to be tried by me on June 2, 1998. The case is brought pursuant to §6672 of the Internal Revenue Code, and two issues to be determined at the bench trial are whether any of the named defendants were responsible persons at Central Security Systems, Inc. ("CSSI") for the first two calendar quarters of 1992, and whether they were willful with respect to CSSI's failure to pay its full tax obligations for those periods. Pursuant to §6672, the IRS imposed a 100% civil penalty on Arthur Tarlow ("Tarlow" or "defendant") in connection with CSSI's unpaid taxes in the amount of $2,227,555.97.

Before the court is the United States ' motion in limine to preclude Tarlow from introducing certain evidence at trial on the grounds that such evidence is irrelevant and inadmissible hearsay. Tarlow requests that the court dismiss the tax assessment as invalid and void because the IRS lacked a rational foundation when it levied the assessment against him. In the alternative, Tarlow requests that the court not afford the assessment the customary presumption of correctness and instead shift the burden of proof at trial to the United States .

For the reasons detailed below, the United States ' motion is granted and Tarlow is precluded from presenting evidence which attacks the presumption of correctness afforded to the assessment.

BACKGROUND

CSSI and the IRS have shared a long and tumultuous relationship. Since the 1980s, the IRS has investigated the corporation for tax fraud and evasion and has imposed several penalties upon CSSI throughout the years.

In 1990, CSSI hired Arthur Tarlow as a tax attorney and consultant to review its financials and determine the corporation's tax liabilities. As Tarlow became more involved with CSSI as a tax attorney, he also acted as a consultant to an investment group for which he prepared financials regarding the company. Tarlow himself eventually invested in CSSI and even served on its Board of Directors as of June 30, 1992.

Although Tarlow knew that payroll taxes were being paid by CSSI during the first and second quarter of 1992, he did not know the exact amounts that were being paid or for what periods. Tarlow was aware, however, that CSSI had a substantial payroll tax liability from the end of 1991 well into 1992.

On July 26, 1993 , a representative of the Secretary of the Treasury made an assessment against Tarlow for a 100% penalty in the amount of $2,227,555.97, pursuant to 26 U.S.C. §6672, in connection with unpaid taxes of CSSI for the periods ending March 31, 1992 and June 30, 1992 .

After the assessment was made, the government provided a copy of its administrative file to Tarlow's attorney and identified Revenue Officer Zimmerman of the IRS as the individual with pertinent information respecting claims, defenses and damages. Zimmerman has since retired from the IRS and cannot be located.

Pursuant to a discovery request, plaintiff advised Tarlow that no individual other than Zimmerman had pertinent information respecting the claims, defenses or damages. Further, in response to defendant's request for submission of documents in the government's possession that would bear significantly on the claim (other than the documents already provided), government counsel advised Tarlow that it had "been informed by District Counsel ( IRS ) that the remainder of the administrative file cannot be located. We have requested that District Counsel continue to search for such file, and in the event we obtain additional documents, we will supplement this response accordingly." (Letter from Jennifer M. Blunt, Esq. to Bernard S. Mark, Esq. dated 3/17/97 at 3.) The government was unable to locate the additional documents relating to Tarlow's 100% assessment.

Tarlow's sole objection to the assessment rests on the grounds that it was based on a false premise (i.e., that he was one of two directors and a major stockholder during the liability period). Tarlow does not dispute the tax liability in any respect whatsoever.

Defendant requests that the court permit him to present documents from the government's administrative file, as well as correspondence between him and the IRS , to establish that the assessment was levied against him arbitrarily and erroneously. The government opposes the introduction of this evidence.

DISCUSSION

The evidence at issue in the case at bar consists of certain preassessment documents created by the IRS and Tarlow during the administrative process. The issue before the court is whether Tarlow is precluded from offering this proof to establish that the government's assessment is arbitrary and erroneous and therefore void. The government opposes the introduction of this evidence and relies on the legal maxim that the court may not generally "look behind" a tax assessment to evaluate, instead of its ultimate correctness, the thought processes of the IRS employees in making the assessment. See Ruth v. United States [87-2 USTC ¶9408], 823 F.2d 1091, 1093 (7th Cir. 1987).

It is well settled that the IRS 's tax assessments are entitled to a presumption of correctness. See United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440-41 (1976). In the Second Circuit, this presumption of correctness pertains not only to the amount of the assessment, but also extends to the "existence of the two elements, responsibility and willfulness, that underlie the imposition of this tax liability." United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 318 (2d Cir. 1994).

This presumption, however, is rebuttable. A taxpayer challenging the validity of the assessment bears the burden both of production and of persuasion in showing that the presumption is unwarranted. Id. at 318 (quoting Ruth [87-2 USTC ¶9408], 823 F.2d at 1093). To make such a showing in a §6672 case, the taxpayer must persuade the fact-finder that the government's assessment is "without rational foundation" and it is "arbitrary and erroneous." See United States v. Schroeder [90-1 USTC ¶50,250], 900 F.2d 1144, 1148 (7th Cir. 1990); Ruth [87-2 USTC ¶9408], 823 F.2d at 1094.

The leading case on rebutting the presumption of correctness in tax cases is United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433 (1976). In Janis, a bookmaker was raided by the police pursuant to a search warrant, and various wagering records were seized and delivered to the IRS . Based exclusively on its review of the evidence obtained by the police, the IRS assessed Janis for unpaid wagering taxes. Id. at 436-37. The search warrant was later quashed and the trial judge ordered the seized property to be returned. Id. at 437-38. Janis then brought suit in federal court for a refund. The district court found that illegal evidence could not support an assessment and ordered a refund. Id. Reversing the decision of the Court of Appeals for the Ninth Circuit, Justice Harry Blackmun wrote:

What we have is a "naked" assessment without any foundation whatsoever if what was seized by the Los Angeles police cannot be used in the formulation of the assessment. The determination of tax due then may be one "without rational foundation and excessive," and not properly subject to the usual rule with respect to the burden of proof in tax cases. Certainly, proof that an assessment is utterly without foundation is proof that it is arbitrary and erroneous.

Id. at 441-43.

Courts have held that an assessment is arbitrary and erroneous under limited circumstances. In Coleman v. United States [83-1 USTC ¶9288], 704 F.2d 326, 327 (6th Cir. 1983), the plaintiffs filed their 1963 and 1964 income tax returns late. At the direction of the IRS , the plaintiffs delivered their financial records to the IRS offices. Id. The IRS examined the records and notified the plaintiffs of a deficiency. Id. The taxpayers sought to determine the basis of the assessment, and the IRS admitted that it could not locate the financial records delivered by the plaintiffs, nor explain the assessment through any other records. Id. The Court of Appeals for the Sixth Circuit held that the assessment was arbitrary because the government explicitly admitted that it possessed no evidence to support it conclusions. The court wrote that it was "difficult to conceive of more direct evidence of a 'naked assessment without any foundation whatsoever' than the government's own concessions that it is without 'any reports, work papers and other documents' to support its conclusions." Id. at 329. The court also noted that its decision does not preclude the IRS of its ability to collect taxes in the absence of original records: "It has long been held that the Commissioner may estimate assessments by 'any reasonable method,' and such estimates will be accorded the full presumption of correctness, subject to being overturned only upon proof by the taxpayer that he is entitled to a specific refund." Id. (citing DeLorenzo v. United States [77-1 USTC ¶16,262 ], 555 F.2d 27 (2d Cir. 1977)).

Even if the amount assessed is incorrect, the court will not find that the assessment is void for want of a rational foundation. United States v. Schroeder [90-1 USTC ¶50,250], 900 F.2d 1144, 1149 (7th Cir. 1990); Curley v. United States [93-1 USTC ¶50,089], 791 F. Supp. 52, 54-55 (E.D.N.Y. 1992). It is only where "records supporting an assessment are excluded from evidence so that the basis upon which an assessment is calculated is beyond the knowledge of the court, the assessment is arbitrary and erroneous." Schroeder [90-1 USTC ¶50,250], 900 F.2d at 1149.

Here, the evidence presented does not reveal that the government imposed a naked assessment without a rational foundation. The government provided plaintiff with the documents that were available from its administrative file. The court is operating under the assumption that the government will offer a Certificate of Destruction or an affidavit from the IRS explaining the procedures taken in trying to locate the file and what was specifically done with the file as per the representation it made to plaintiff in 1997. (See Letter from Jennifer Blunt, Esq. to Bernard Mark, Esq. dated 5/12/97.) As long as a certificate or affidavit is presented, the court will not disturb the presumption of correctness held by the government as to the assessment. See McCombs [94-2 USTC ¶50,363], 30 F.3d at 318.

Plaintiff has not shown that the assessment was entirely arbitrary. Indeed, the documents presented by Tarlow in his offer of proof demonstrate that the government had a rational foundation when it imposed its assessment. Therefore, the court will not review whether Revenue Officer Zimmerman was correct in finding that Tarlow was a responsible person. Instead, the burden of persuasion and production rests with Tarlow to prove at trial that he was either not a responsible person or that he was not willful. See Hochstein v. United States [90-1 USTC ¶50,205], 900 F.2d 543, 546 (2d Cir. 1990). During the bench trial, if Tarlow wishes to present any of the documents prohibited by this order on the issue of whether he was in fact a responsible person under §6672, the court will entertain the issue at that time, but the court will not permit the documents to be used to attack the validity of the assessment itself.

SO ORDERED.

[96-2 USTC ¶50,684] James G. O'Callaghan, Plaintiff v. United States of America , Defendant

U.S. District Court, So. Dist. N.Y., 95 Civ. 10260 (HB), 10/17/96 , 943 FSupp 320

[Code Sec. 6672 ]

Trust fund recovery penalty: Responsible person: President: Shareholder: Willful failure to pay: Available funds: Bankruptcy.--A president and shareholder of a restaurant was liable for the trust fund recovery penalty because he was a responsible person who willfully failed to pay over the restaurant's withholding taxes. Although the shareholder had a limited role in the day-to-day management, he borrowed funds on behalf of the restaurant, was the sole authorized signatory on its primary bank account, and was involved in hiring and firing. After the shareholder learned of the delinquent payments, he failed to ensure that the government was paid before any other creditors. Moreover, the filing of a bankruptcy petition by the restaurant did not excuse nonpayment of withholding taxes.

[Code Secs. 6203 and 6672 ]

Trust fund recovery penalty: Assessment: Presumption of correctness.--An assessment of the trust fund recovery penalty against a president and shareholder of a restaurant was entitled to a presumption of correctness. The shareholder failed to establish that the assessment was erroneously calculated. BACK REFERENCES: 96 FED ¶38,514.27 and 96 FED ¶40,580.08

Gerald Padian, Tashjian & Padian, 120 E. 56th St. , New York , N.Y. 10022 , for plaintiff. Mary Jo White, United States Attorney, Jonathan A. Willens, New York, N.Y. 10007, for defendant.

OPINION AND ORDER

BAER, JR., District Judge:

Defendant , United States of America , has moved for summary judgment dismissing plaintiff's complaint and in favor of its counterclaim. For the reasons that follow, defendant's motion is GRANTED.

Background

This case involves employment withholding taxes owed by a company known as Cafe Society, Inc. Cafe Society was formed to operate a restaurant and cabaret located at 915 Broadway in New York City . Plaintiff, James O'Callaghan, first invested in Cafe Society in October 1986 when he purchased 100 shares for a 2.7% ownership stake. In April 1987, plaintiff became president of Cafe Society. In November 1987, he began to increase his investment. His investment ultimately totaled $1.5 million such that he owned 41% of the company.

In April 1987, Cafe Society retained 915 Broadway Restaurant Corporation to manage the restaurant. The plaintiff contends that 915 Broadway was hired by A.M. Stern, not him. PI. Rule 3(g) Statement at ¶9. However, plaintiff does not dispute that he signed the contract between Cafe Society and 915 Broadway on behalf of Cafe Society. See O'Callaghan Dep. Ex. F. In January 1991, Cafe Society terminated the management agreement with 915 Broadway based on its suspicions that the management firm was stealing from the restaurant. Della-Man Security Inc. ("Dellaman") was then hired to manage Cafe Society. In his Rule 3(g) Statement, plaintiff contends that Cafe Society hired Dellaman. Pl. Rule 3(g) Statement at ¶10. Again, however, it is undisputed that the letter agreement between the two firms was executed by O'Callaghan on behalf of Cafe Society. O'Callaghan Dep. at 52, Ex. 1. Under this contract, Dellaman could not incur any expenses greater than $500 without O'Callaghan's approval. Pl. Rule 3(g) Statement at ¶11.

Plaintiff apparently had no responsibility for the day-to-day management of Cafe Society. All of this was handled by Dellaman and Cafe Society's employees hired by Dellaman. With the exception of three checks written in 1987, plaintiff did not execute any checks drawn on Cafe Society bank accounts. O'Callaghan, however, was the sole authorized signatory on Cafe Society's primary operating account maintained at Merchants Bank. Checks issued by Cafe Society were signed using a facsimile rubber stamp of O'Callaghan's signature. In addition, in July 1987 plaintiff obtained a $500,000 loan on behalf of Cafe Society. ¹

In August 1992, plaintiff learned that Cafe Society had not paid all of the employee withholding taxes that were due to the Internal Revenue Service. On August 20, 1992, Cafe Society filed for bankruptcy under Chapter 11 of the Bankruptcy Code. At this time, Cafe Society's bookkeeper, Carol Trouche, informed plaintiff that Cafe Society's tax liability was at least $40,000. On August 18, the IRS filed a Notice of Federal Tax Lien against Cafe Society reflecting an unpaid assessment of $319,279.43.

Cafe Society was closed from July 1992 to September 28, 1992, when it reopened and operated until December 31, 1992. Upon learning of the tax problem, plaintiff asked Cafe Society's bankruptcy attorney, William Kaye, to ensure that the tax liabilities were paid. Plaintiff claims that Kaye repeatedly assured him that the payments were being made.

The IRS issued a tax assessment of $98,363.50 against O'Callaghan on January 2, 1995 for unpaid employee tax withholdings. This assessment differs from the August 18, 1992 assessment against Cafe Society in part because a payment had been made to reduce the withholding tax liability and in part because the corporation was liable for certain taxes for which O'Callaghan was not responsible. Plaintiff paid $21.42 of this assessment on September 29, 1995. Subsequently he brought this action seeking a refund and a declaratory judgment and injunction to abate the IRS assessment. The United States counterclaimed seeking the unpaid taxes and interest from January 2, 1995. The defendant has now moved for summary judgment.

Discussion

I. Summary Judgment

Summary judgment is appropriate where there are no disputed issues of material facts and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc. 477 U.S. 242 (1986); Tomka v. Seiler Corp., 66 F.3d 1295, 1313 (2nd Cir. 1995). The "party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] ... which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once "a properly supported motion for summary judgment is made, the adverse party 'must set forth specific facts showing that there is genuine issue for trial.' " Anderson, 477 U.S. at 250. In determining whether there is a genuine issue of material fact, the court must resolve all ambiguities and draw all factual inferences in favor of the non-moving party. Tomka, 66 F.3d. at 1304.

II. Statutory Background

Under the Internal Revenue Code, employers are required to withhold federal income and social security taxes from their employees' wages. Employers must keep the withheld funds "in trust for the United States ," 26 U.S.C. §7501(a) , and pay them to the IRS on a quarterly basis. Fiataruolo v. United States [93-2 USTC ¶50,627 ], 8 F.3d 930, 938 (2d Cir. 1993).

An employer who fails to pay the withheld funds is liable for their payment. In addition, an individual who is responsible for the tax delinquency may be held personally liable. 26 U.S.C. §6672(a) provides that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat such tax or the payment thereof, shall ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

"Under this section, a party may be held liable for unpaid taxes if: first, he is the 'responsible person' for collection and payment of the employer's taxes, and second, he 'willfully' failed to comply with the statute." Fiatruolo [93-2 USTC ¶50,627 ], 8 F.3d at 938 (citation omitted). An individual against whom the IRS has issued an assessment has the burden of proving, by a preponderance of the evidence, that either he was not a responsible person or that he did not willfully fail to cause the tax payments to be made. United States v. Rem [94-2 USTC ¶50,537 ], 38 F.3d 634, 643 (2d Cir. 1994) Fiatruolo [93-2 USTC ¶50,627 ], 8 F.3d at 938. Summary judgment is appropriate where there are no questions as to either of these issues. Rem [94-2 USTC ¶50,537 ], 38 F.3d at 644.

A. Responsible Person

The determination of whether an individual qualifies as a responsible person "is based upon the individual's 'status, duty and authority' to insure compliance with the employer's tax withholding obligations." Fiatruolo [93-2 USTC ¶50,627 ], 8 F.3d at 939 (quoting Raba v. United States [93-1 USTC ¶50,039 ], 977 F.2d 941, 943 (5th Cir. 1992)). "[C]ourts generally take a broad view of who qualifies as a responsible person." Id. The court's focus is on " 'whether the individual has significant control over the enterprise's finances.' " Id. (quoting Hochstein v. United States [90-1 USTC ¶50,205 ], 900 F.2d 543, 547 (2d Cir. 1990), cert. denied, 504 U.S. 985 (1992)). A party has "significant control" if he is " 'connected closely enough with the business to prevent the [tax] default from occurring.' " Id. (quoting Bowlen v. United States [92-1 USTC ¶50,098 ], 956 F.2d 723, 728 (7th Cir. 1992). Mere technical authority or titluar designation is insufficient to warrant a finding of responsibility. Id.

There may be several responsible parties within a given business. The proper inquiry looks to whether an individual had sufficient authority in the company such that he could have avoided the tax delinquency. Thus, delegation of responsibility will not relieve an otherwise responsible person of liability. Id.; Barnett v. Internal Revenue Service [93-1 USTC ¶50,269 ], 988 F.2d 1449, 1455 (5th Cir.), cert. denied, 510 U.S. 990 (1993).

To decide if an individual had significant control over a company, courts consider whether the individual:

(1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check signing authority.

Fiatruolo [93-2 USTC ¶50,627 ], 8 F.3d at 939; see also Rem [94-2 USTC ¶50,537 ], 38 F.3d at 642. The determination must be made in light of the totality of the circumstances; no single factor is dispositive. Id. at 642.

Under this analysis, I conclude that O'Callaghan was a responsible person as a matter of law during all of the relevant tax periods. He has failed to demonstrate the existence of a genuine issue as to whether he is a responsible person.

First, he was president of Cafe Society and owned 41% of the firm. Next, it is undisputed that O'Callaghan obtained a $500,000 loan on behalf of Cafe Society. This authority to borrow indicates that O'Callaghan was a responsible person. See Jenson v. United States [94-1 USTC ¶50,212 ], 23 F.3d 1393, 1395 (8th Cir. 1994). In addition, O'Callaghan was the sole authorized signatory on Cafe Society's primary operating bank account and all checks were executed using a facsimile rubber stamp of his signature. Further, he was involved in the firing of 915 Broadway and the hiring of Dellaman as management firms for Cafe Society. This demonstrates that O'Callaghan had authority to hire and fire employees, even though he apparently never involved himself in the employment decisions regarding individual employees. Finally, the fact that he told Kaye, the bankruptcy attorney, to ensure that all tax liabilities were paid indicates that he had the authority to determine which creditors should be paid and in what order.

O'Callaghan had but a small role in the day-to-day management of Cafe Society and did not exercise daily control over Cafe Society's bank accounts. However, the agreement with Dellaman gave O'Callaghan some control over the expenses incurred by Dellaman. In addition, plaintiff's minor role in the actual management of Cafe Society cannot avoid his liability. Purcell v. United States [93-2 USTC ¶50,460 ], 1 F.3d 932 (9th Cir. 1993), is instructive on this issue. In Purcell, the Ninth Circuit affirmed a directed verdict against the plaintiff where he was the company's president, sole shareholder and only authorized signatory on the company's checking account. Id. at 937. It was undisputed Purcell had delegated all responsibility for financial matters to an associate. According to the court, however, "[t]hat an individual's day-to day function in a given enterprise is unconnected to financial decision making or tax matters is irrelevant where that individual has the authority to pay or to order the payment of delinquent taxes." Id.

Plaintiff's reliance on Kittlaus v. United States [94-2 USTC ¶50,616 ], 41 F.3d 327 (7th Cir. 1994), is misplaced. Kittlaus was a general partner in a partnership organized to acquire and operate a motel. The partnership hired a management firm to run the motel. Unlike this case, however, the management agreement in Kittlaus precluded the partnership from involvement in the day-to-day affairs of the motel and limited its access to the funds used to pay the employees. Further, Kittlaus had no signature authority over any of the motel's accounts. The Seventh Circuit found that the management firm was the employer responsible for payment of withholding taxes, not the partnership.

Drawing all inferences in O'Callaghan's favor, as I must on this motion, I find that the management agreements here did not completely derogate O'Callaghan's authority as in Kittlaus. In contrast to Kittlaus, O'Callaghan retained check writing authority and all Cafe Society checks were signed using a facsimile rubber stamp of his signature. Further, O'Callaghan was not precluded from all day-to-day involvement with the Cafe Society; that was his choice.

I conclude that O'Callaghan has failed to demonstrate a genuine issue for trial as to whether he was a responsible person during any of the relevant tax periods.

B. Willfulness

To be held liable under §6672 , a responsible person's failure to ensure that withholding taxes are paid must have been willful. Willfulness in this context does not require an " 'evil motive or intent to defraud.' " Rem [94-2 USTC ¶50,537 ], 38 F.3d at 643 (quoting Kalb v. United States [74-2 USTC ¶9760 ], 505 F.2d 506, 511 (2d Cir. 1974), cert. denied, 421 U.S. 979 (1975)). Rather, willfulness only requires a "voluntary, conscious, and intentional act." Barnett [93-1 USTC ¶50,269 ], 988 F.2d at 1457; Kalb [74-2 USTC ¶9760 ], 505 F.2d at 511. "The principal component of willfulness is knowledge: a responsible person acted willfully within the meaning of §6672(a) if he (a) knew of the company's obligation to pay withholding taxes, and (b) knew that company funds were being used for other purposes instead." Rem [94-2 USTC ¶50,537 ], 38 F.3d at 643. Withholding taxes are to be held in trust for the government and may not be used to finance the company. The government cannot be forced to act as a business partner with a delinquent taxpayer and bear the risk of nonpayment of trust funds. See Thibodeau v. United States [87-2 USTC ¶9620 ], 828 F.2d 1499, 1506 (11th Cir. 1987); Kalb [74-2 USTC ¶9760 ], 505 F.2d at 510.

Where a responsible person was unaware that the company failed to pay withholding taxes as they accrued, he may still be held liable if, after he learned of the delinquency, the company had liquid assets with which to pay the taxes. Rem [94-2 USTC ¶50,537 ], 38 F.3d at 643. The burden of proving a lack of liquid assets rests on the responsible individual because it is part of the larger willfulness inquiry. Barnett [93-1 USTC ¶50,269 ], 988 F.2d at 1458.

Here, it is undisputed that O'Callaghan learned of Cafe Society's tax liability in August 1992. Therefore, after this point, O'Callaghan "had a duty to ensure that the taxes were paid before any payments were made to other creditors." Barnett [93-1 USTC ¶50,269 ], 988 F.2d at 1457; see also Muck v. United States [93-2 USTC ¶50,592 ], 3 F.3d 1378, 1381 (10th Cir. 1993) ("[O]nce he learned of the delinquency, plaintiff was obligated to apply unencumbered funds to pay the tax liabilities for the two delinquent quarters as well as any future quarters."). The record establishes that O'Callaghan failed to satisfy this obligation. Instead of ensuring that the government was paid before any other creditors, O'Callaghan permitted the business to continue to operate through December 1992.

O'Callaghan first argues that he told Kaye, Cafe Society's bankruptcy attorney, to monitor the tax payments and that Kaye assured him that the taxes were in fact being paid. O'Callaghan Aff. at ¶18. In addition, O'Callaghan testified at his deposition that he told Troche, the bookkeeper, that it was important that the taxes be paid. O'Callaghan Dep. at 79-80. The record is unclear whether Kaye was instructed to pay both past due as well as current tax liabilities, or just to keep current with newly accrued liabilities. Drawing all inferences in plaintiff's favor, I conclude, based on the current record, that O'Callaghan instructed Kaye to pay all tax liabilities. See also O'Callaghan Dep., Ex. V, at 5.

The flaw in O'Callaghan's argument, however, is that he knew that the actual responsibility to pay the taxes remained with the same managers and bookkeepers that had previously failed to pay the trust funds. See O'Callaghan Dep. at 79. Indeed, plaintiff argues that given the financial condition of Cafe Society, it would have been imprudent to change management. Pl. Mem. at 19. Further, plaintiff claims that he "had no involvement in the paying of creditors or the allocation of revenues." Id. at 21. Even drawing all inferences in his favor, this argument supports the proposition that plaintiff took no additional action beyond his conversations with Kaye and Troche.

In such circumstances, his failure to take more affirmative steps to ensure payment of taxes before any other creditors constitutes willfulness as a matter of law. As the Second Circuit held in Kalb, "[w]illful conduct ... includes failure to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the Government." Kalb [74-2 USTC ¶9760 ], 505 F.2d at 511. "Once a responsible person becomes aware that withholding taxes have not been remitted, he may not fulfill his obligation to address the delinquency by delegating the task to someone who has already proven unreliable or untrustworthy." Finley v. United States [96-1 USTC ¶50,245 ], 82 F.3d 966, 973 (10th Cir. 1996). See also id. (" 'Should the "responsible person" continue to delegate, without taking appropriate measures to assure that the delegated person will not repeat the dereliction in the future, the subsequent willfulness of the delegatee in once more failing to pay taxes will be imputed to the "responsible person." ' " (quoting Thomsen v. United States [89-2 USTC ¶9575 ], 887 F.2d 12, 19 (1st Cir. 1989))); In re Gadoury, No. 95-1872, 1996 WL 83894, at *2 (1st Cir. Feb. 26, 1996 ) (per curiam) ("As to willfulness, Gadoury admitted that he was aware the taxes were not paid, that he urged them to be paid, but that he failed to take any steps to see that they were in fact paid. There is no more to be said.").

Next, O'Callaghan contends that he believed Cafe Society had no funds to pay any creditors, including the United States . To support this, he notes that he personally paid Kaye with his own funds. He also notes that of the approximately $3 million of assets listed on Cafe Society's bankruptcy petition, only $17,500 were liquid assets. Pl. Rule 3(g) Statement at ¶28. These arguments fail to raise a genuine issue of fact as to O'Callaghan's willfulness. First, O'Callaghan has submitted no competent proof as to the exact financial state of Cafe Society in August 1992. Plaintiff's Rule 3(g) Statement does not cite anything in the record as support for its assertion that only $17,500 in assets were liquid. More importantly, plaintiff's Rule 3(g) Statement constitutes an admission that Cafe Society had at least $17,500 in assets that could have been used to reduce its tax liability. The use of these funds to run the business rather than pay the Government constitutes willfulness.

Finally, O'Callaghan claims that he was precluded under the bankruptcy laws from paying the tax liabilities after the bankruptcy petition was filed in August 1992. Although neither party cited to Kalb for this proposition, in that case the Second Circuit considered and rejected this argument. The court held that the filing of a Chapter 11 bankruptcy petition does not excuse nonpayment of withholding taxes. As the court explained:

Herold argues that [after the bankruptcy petition was filed] payment of a preexisting debt was impermissible as a matter of law. However, withholding taxes are not simply a debt. They are part of the wages of the employee, held by the employer in trust for the government. 26 U.S.C. 7501(a) (1970). In paying the taxes over to the government the employer merely surrenders that which does not belong to him. We know of no rule prohibiting such payments by a petitioner under Chapter XI.

Kalb [74-2 USTC ¶9760 ], 505 F.2d at 509.

O'Callaghan has failed to raise a genuine issue as to whether he was either a responsible person or that his failure to ensure payment of withholding taxes was willful. Accordingly, the defendant is entitled to summary judgment that O'Callaghan is liable for the tax assessment.

III . Amount of Liability

O'Callaghan also challenges the Government's assessment against him as erroneously calculated. The United States submitted the tax assessment as part of the record on this motion. See Declaration of Jonathan A. Willens. This assessment is entitled to a presumption of correctness and a taxpayer bears the burden of proving that the assessment is incorrect. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d 310, 318 (2d Cir. 1994). The taxpayer must prove both that the assessment is erroneous and the correct amount of his tax liability. United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 440 (1976); DeLorenzo v. United States [77-1 USTC ¶16,262 ], 555 F.2d 27, 29 (2d Cir. 1977). To create a genuine issue as to the amount of his tax liability, O'Callaghan must point to "specific evidence" that demonstrates the proper amount of his tax liability. See LaBow v. Commissioner [85-1 USTC ¶9442 ], 763 F.2d 125, 131 (2d Cir. 1985). Mere "conclusory denials and bald assertions," all that we have here, are insufficient to avoid summary judgment. Schiff v. United States [89-2 USTC ¶9551 ], No. N-86-354 (WWE), 1989 WL 119410, at *4 (D. Conn. Sept. 6, 1989 ), aff'd [90-2 USTC ¶50,591 ], 919 F.2d 830 (2d Cir. 1990), cert. denied, 501 U.S. 1238 (1991).

O'Callaghan first seeks to create an issue of fact by pointing to a discrepancy between the assessments against him and against Cafe Society. As the United States notes, however, the employer is liable for certain taxes that O'Callaghan is not. Next, plaintiff points to a discrepancy between a February 24, 1994 letter from the IRS to him indicating a zero balance for the period ending June 30, 1991 and a May 25, 1994 letter from the IRS to him indicating an outstanding balance of $2,406.86 for the same period. Plaintiff, though, did not submit any evidence that demonstrates that the $2,406.86 balance for the June 30, 1991 period was incorrect. The fact that at an earlier time the United States had not claimed the $2,406.86 does not, by itself, create an issue for trial as to the validity of the final assessment. Finally, plaintiff claims that the assessment must be reduced because undeclared tips were improperly included in the withholding tax calculation. This allegation is insufficient to create a question of fact because it is not supported by any evidence as to the precise amount of the claimed error.

Conclusion

For the foregoing reasons, defendant's motion is GRANTED. The Clerk is directed to enter judgment in favor of the defendant in the amount of $98,363.50 less the amount of $21.42 paid on September 29, 1995, plus interest from January 2, 1995.

SO ORDERED.

¹ Plaintiff disputes the United States ' assertion that he personally guaranteed this loan, but not that he obtained it in his capacity as president of Cafe Society. See Pl. Rule 3(g) Statement at ¶8.

[93-2 USTC ¶50,562] In re George M. Dewberry, Debtor. George M. Dewberry, Plaintiff v. United States of America , Defendant

U.S. Bankruptcy Court, West. Dist. Mich. , HG 93-80051, 9/21/93, 158 BR 979.

[Code Secs. 6303 and 6672 ]

Failure to collect: Responsible person: Notice and demand.--

An officer of a corporation who was a responsible person for purposes of the 100 percent penalty for willful failure to collect, account for and turn over withholding taxes for employees unsuccessfully challenged the assessment against him. Although the initial notice and demand for payment was not shown to have been sent to the individual's last-known address, proper notice and demand for payment was subsequently sent to him. Also, proper notice and demand for payment was sent, the assessment was made within the statute of limitations, and the procedure followed by the IRS did not violate its own internal requirements. Neither the lack of a document locator number nor the entry of the notice date out of sequence rebutted the presumption of validity of the certificate of assessment. In addition, the IRS was not required to produce the original form reflecting the assessment of the penalty taxes against the officer. However, interest on the assessed penalty that accrued prior to the mailing of notice and demand to the officer's last-known address was abated. .

OPINION ON MOTION FOR SUMMARY JUDGMENT

HOWARD, Bankruptcy Judge:

This matter is before the court on the motion for the Plaintiff, George M. Dewberry, for summary judgment. The following procedural and factual history appears to be uncontroverted from the pleadings, affidavits, exhibits and admissions of the parties.

The Plaintiff commenced this adversary proceeding against the United States challenging the assessment under 26 U.S.C. §6672 of a 100% penalty against him as a responsible person for willful failure to collect, account for and turn over withholding taxes for the employees of Pennaco Resources Corporation. At one time, the Plaintiff was an officer, director and 50% shareholder of the corporation.

The employee withholding taxes at issue were for the first and second quarters of 1983. The original unpaid balance allegedly assessed against the Plaintiff appears to be $91,124.92.

The Plaintiff does not challenge the determination of responsible person liability under §6672 , but rather objects, procedurally, to the assessment of the taxes against him. As a remedy, the Plaintiff seeks an abatement and refund of the penalty taxes assessed and subsequently collected.

Originally, the Plaintiff filed his complaint in the United States District Court for the Western District of Michigan. The complaint includes a demand for a jury trial.

While discovery was pending, and after submitting his dispositive motion to the district court, the Plaintiff filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on January 6, 1993 . Noting the onset of the Plaintiff's bankruptcy, Judge Enslen, sua sponte, signed an order on January 19, 1993 , transferring this proceeding to the bankruptcy court under W.D. MICH. LOCAL RULE 57.

After a preliminary status conference held on March 2, 1993 , the Plaintiff filed a motion with the district court for withdrawal of reference. An order was signed denying this motion on April 13, 1993 . At a second status conference I advised the parties of the procedural posture of this case in light of the Plaintiff's jury demand, and took the motion for summary judgment under advisement.

At this time there has been no objection to the jurisdiction of this court over the adversary proceeding up until the time of trial, nor has the IRS asserted any claim of sovereign immunity.

Most recently, the Plaintiff brought a motion in limine for the exclusion of evidence under FED . R. CIV . P. 37(b), namely, the government's production of official Form 23C reflecting the assessment of the penalty taxes against the Plaintiff. In a prior bench opinion this motion was denied.

The Plaintiff's motion for summary judgment is made pursuant to FED . R. BANKR. P. 7056 which incorporates FED . R. CIV . P. 56. Summary judgment is appropriate under FED . R. CIV . P. 56(c) when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

[I]f one party moves for summary judgment and, at the hearing, it is made to appear from all the records, files, affidavits and documents presented that there is no genuine dispute respecting a material fact essential to the proof of movant's case and that the case cannot be proved if a trial should be held, the court may sua sponte grant summary judgment to the non-moving party.

Cool Fuel Inc. v. Connett [82-2 USTC ¶9559 ], 685 F.2d 309, 311 (9th Cir. 1982).

The Plaintiff asserts the following three arguments against the validity of the government's assessment of §6672 tax liability:

1. Proper notice and demand for payment was not sent as provided in §6303 ;

2. The assessment was not made within the limitation period prescribed by law;

3. The procedure followed by the IRS violated its own internal requirements.

Sections 3102 and 3402 of the Internal Revenue Code require employers to withhold social security and income taxes imposed on employees from the employees' wages. Fernandez v. United States (In re Fernandez) [91-2 USTC ¶50,476 ], 130 B.R. 757, 761 (Bankr. W.D. Mich. 1991). The withheld taxes are held in trust for the benefit of the United States . Slodov v. United States [78-1 USTC ¶9447 ], 436 U.S. 238, 243 (1978). "Section 6672 provides that when a . . . person charged with collecting, accounting for and paying over withholding taxes, 'willfully' fails to do so, he is liable for a penalty equal to the amount of the unpaid taxes." Cline v. United States [93-2 USTC ¶50,403 ], 997 F.2d 191, 194 (6th Cir. 1993). Although referred to as a penalty, the statutory liability imposed by §6672 is civil in nature and reflects personal liability assessed and collected in the same manner as other taxes. 26 U.S.C. §6671 ; Collins v. United States [88-1 USTC ¶9386 ], 848 F.2d 740, 742 (6th Cir. 1988).

A tax assessed under §6672 is presumptively valid and the burden is on the taxpayer to prove its invalidity by a preponderance of the evidence. Collins [88-1 USTC ¶9386 ], 848 F.2d at 742; Henry Vlietstra Plastering & Acoustical Co. v. I.R.S. [75-2 USTC ¶9598 ], 401 F.Supp. 829, 832 (W.D. Mich. 1975). The presumption disappears upon the introduction of evidence sufficient to overcome it. Id.

Section 6203 of the Internal Revenue Code provides that assessment shall be made by recording the liability of the taxpayer in accordance with rules or regulations promulgated by the Secretary. Pertinent treasury regulations provide that assessment shall be made by an officer signing the summary record of assessment. 26 C.F.R. §301.6203-1 (1993). This summary record is the document known as Form 23C. Geiselman v. United States [92-1 USTC ¶50,200 ], 961 F.2d 1, 5 (1st Cir. 1992), cert. den. 113 S.Ct. 261 (1992). The summary record, through supporting documents, shall provide: (1) the identity of the taxpayer; (2) the character of the liability assessed; (3) the taxable period, if applicable; and (4) the amount of the assessment. 26 C.F.R. §301.6203-1 (1993); Planned Investments, Inc. v. United States [89-2 USTC ¶9470 ], 881 F.2d 340, 343 (1989). The date of the assessment is the date the summary record is signed.

Section 6303 provides that the Secretary shall, as soon as practicable and within 60 days after making an assessment, send a notice and demand for payment to the individual liable for the unpaid tax. Such notice shall be left at the dwelling or usual place of business of such person, or shall be mailed to such person's last known address. "A taxpayer's last known address is that on his most recent return, unless the taxpayer communicates to the IRS 'clear and concise' notice of a change in address." United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808, 810 (9th Cir. 1984), cert. den. 469 U.S. 830 (1984).

Generally courts are liberal in finding that an assessment has been properly made and technical defects are ignored in the absence of prejudice. Planned Investments [89-2 USTC ¶9470 ], 881 F.2d at 344.

Even if the IRS fails to comply with the requirements of §6303 , the assessment itself is not invalidated and the government is free to collect the full amount by instituting a civil action against the taxpayer. The IRS is precluded, however, from proceeding administratively to collect the assessment. United States v. Berman [87-2 USTC ¶9460 ], 825 F.2d 1053 (6th Cir. 1987); United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015 (11th Cir. 1989), cert. den. 493 U.S. 975 (1989).

In complying with the notice requirements of §6303 , the notice sent by the IRS must, at a minimum, contain a statement of the amount of the penalty and a demand for payment. Planned Investments [89-2 USTC ¶9470 ], 881 F.2d at 344.

In his complaint, the Plaintiff first argues that the IRS failed to properly assess the penalty tax against him within the sixty day period as required under §6303 .

In support the Plaintiff raises several arguments. To begin with, the Plaintiff attacks the validity of the certificate of assessment produced by the IRS based on its lack of document locator numbers, and the entry, out of sequence, of the date notice and demand was made. On evidentiary grounds, the Plaintiff contends that the certificate lacks a sufficient foundation and constitutes hearsay failing to qualify for the exception under FED . R. EVID. 803(6). Finally, the Plaintiff contends that he failed to receive any notice and demand letter and the IRS has been unable to produce a copy of one.

In response, the IRS argues correctly that it need not produce the original Form 23C in order to prove that an assessment has been validly made and noticed. Nor must the IRS produce an original demand letter. A certificate of assessment establishes presumptive proof of the assessment and that notice and demand has been made. Gentry v. United States [92-1 USTC ¶50,225 ], 962 F.2d 555 (6th Cir. 1992); Geiselman [92-1 USTC ¶50,200 ], 961 F.2d at 6; United States v. McCallum [92-2 USTC ¶50,448 ], 970 F.2d 66, 71 (5th Cir. 1992).

As to the Plaintiff's argument that a demand letter was never received, a recent case decided in this district held that actual receipt is not necessary to comply with the requirements of §6303 . It is sufficient that the notice be sent to the taxpayer's last known address. Parker v. United States [93-2 USTC ¶50,399 ], No. 4:92-CV-28, 1993 WL 300184, at 4 (W.D. Mich. May 10, 1993 ).

The Plaintiff objects to the veracity of the certificate of assessment, but neither the lack of a document locator number nor the entry of the notice date out of sequence sufficiently rebut the presumption of validity. Additionally, the IRS no longer relies solely on the certificate but has also produced the Form 23C. Both the certificate of assessment and the form 23C establish that the assessment was properly made against the Plaintiff on September 3, 1986 .

As to any evidentiary objection, I find the documents would meet the hearsay exception under FED . R. EVID. 803(6) and are sufficiently reliable.

Accordingly, I now conclude that the penalty tax was properly assessed against the Plaintiff. In so far as the motion for summary judgment seeks to rebut the actual assessment it is denied and judgment is granted in favor of the United States .

But inquiry into the notice sent by the IRS as it concerns the assessment does not end here. One of the Plaintiff's notice arguments requires discussion in more detail. Attached to his brief the Plaintiff has included his own affidavit and exhibits purporting to show that notice and demand of the assessment was not properly mailed to his last known address. Rather, notice was mailed improperly to the business address of Pennaco Resources.

As I noted in the discussion of the law, lack of proper notice and demand does not void the assessment entirely, but rather, prevents the IRS from utilizing administrative collection efforts. Blackston v. United States [91-2 USTC ¶50,507 ], 778 F.Supp. 244 (D. Maryland 1991). Additionally, the Plaintiff argues correctly, that interest on an assessed penalty does not begin to run until notice and demand is made. 26 U.S.C. §6601(e)(3) ; 26 C.F.R. §301.6601-1(f)(3) (1993).

Examining the pleadings and exhibits submitted by the parties, there is at least a disputed material factual issue as to whether notice was sent to the Plaintiff's last known address. Ordinarily, I would deny summary judgment on this issue.

The IRS , however, admits this point stating in their response, "[t]he United States concedes that although a notice and demand for payment was made on September 3, 1986 , it was probably not made to the Plaintiff's last known address." (United States Response of 11/23/92 at 2). Further, in the concluding paragraph, the IRS provides that notice and demand was not made until a later letter was sent to the Plaintiff on January 25, 1990 . (Id. at 9). Finally, in response to the Plaintiff's request for admissions, the IRS avers that notice and demand was first made on January 25, 1990 . (United States Response to Debtor's requests for Admissions 33 at 11).

Taken together, there appears to be no dispute that notice and demand was not made until January 25, 1990 , at the earliest.

The Plaintiff goes on to object to the letter arguing against its sufficiency, but I do not find much weight in the protestations. The letter evidences a clear intent to levy and states the amount then owed on the assessment. Although the document does not refer to both quarters for which the assessment was made, that does not affect its sufficiency as it does at least alert the Plaintiff of the penalty assessment and its time period. Taken as a whole, I conclude that the letter dated January 25, 1990 constitutes a proper notice and demand for payment in conformance with the holdings of this circuit. See, e.g., Planned Investments [89-2 USTC ¶9470 ], 881 F.2d at 343-345.

With notice and demand not made until this later date, the Plaintiff's motion for summary judgment should be granted in seeking an abatement of interest. But, a factual hearing will have to be held to determine the amount of interest which improperly accrued during this period. Further, examination will need to be made into whether the collection efforts of the IRS were valid.

Turning to the remaining arguments of the Plaintiff, first is the contention that the assessment was made outside the three year limitations period imposed by 26 U.S.C. §6501(a) . Both parties agree that this period started running on April 15, 1984 in accordance with §6501(b)(2) .

Based on my earlier holding that Form 23C and the certificate of assessment conclusively establish the date of assessment as September 3, 1986 , the United States is not barred by the statute of limitations. The averments made do not rebut the presumptive proof of the attested documents before me. The Plaintiff's motion for summary judgment is denied as to this claim and granted in favor of the Defendant.

Finally, the Plaintiff argues for abatement and refund based on the IRS ' failure to follow its own internal procedures in making the assessment.

Revenue Procedure Rule 84-78 sets forth updated procedures for 100% penalty assessments under §6672 of the Internal Revenue Code. This procedural rule states that:

[w]hen, at the conclusion of an investigation to determine whether liability for the 100-percent penalty has been incurred, assessment of the penalty is proposed, the taxpayer will be so informed by notice from the District Collection Division and will be given an opportunity to execute an agreement form.

The Plaintiff contends that he was never given notice of the proposed assessment nor was he afforded an opportunity to enter into an agreement. As a result of this neglect, the Plaintiff asks for the assessment to be invalidated. In support, the Plaintiff relies on case law stressing an agency's obligation to follow its own procedural rules. Scott v. Heckler, 768 F.2d 172, 179 (7th Cir. 1985).

In response, the IRS relies on a Sixth Circuit case observing that circuit's [sic] have consistently held that the Internal Revenue's Statement of Procedural Rules and Revenue Procedures are directory and not mandatory. Estate of Jones v. Comm'r of Internal Revenue [86-2 USTC ¶13,675 ], 795 F.2d 566, 571 (6th Cir. 1986).

As a matter of law, it appears the IRS ' argument is correct. Revenue Procedure 84-78 is more properly viewed as directory. Further, as already discussed, it is evident that notice was mailed to the Plaintiff, it was just sent to an outdated address. Accordingly, the Plaintiff's motion for summary judgment is denied as to this claim.

To conclude, the motion for summary judgment is denied as it seeks to invalidate the assessment entirely, but granted in so far as it seeks an abatement of interest. Trial will proceed on the remaining issues.

 [

93-1 USTC ¶50,089] Margaret A. Curley, Plaintiff v. United States of America, Defendant

U.S. District Court, East. Dist. N.Y., CV 89-1361 (ASC), 3/25/92, 791 FSupp 52, 791 F.Supp. 52

[Code Sec. 6672 ]

100% penalty: Assessments: Burden of proof.--The IRS 's assessment against the majority shareholder and former president of a printing corporation was presumed to be valid and she bore the burden of proving at trial that she was not liable for a failure to collect and pay over withheld taxes. Technical defects in the notice of assessment that was sent to the shareholder were inconsequential and did not invalidate the assessment. Alleged failures to adhere to provisions in the Internal Revenue Manual did not make the assessment procedurally invalid because the Internal Revenue Manual does not have the force and effect of law. Further, the IRS 's failure to accord her an administrative appeal before seizing her property was not a denial of her due process rights. Although the IRS placed a lien on her property before the 30-day appeal period had run, it did not proceed with a sale before her appeal was heard

Robert F. Hermann, Hermann & Bateman, 53 Cardinal Dr., Westfield, N.J. 07091, for plaintiff. Eugene J. Rossi, Peter Sklarew, Department of Justice, Washington, D.C. 20530, for defendant.

MEMORANDUM AND ORDER

CHREIN, United States Magistrate Judge:

By stipulation of the parties, this case is to be tried before the undersigned on April 6, 1992. At this juncture, plaintiff has moved to dismiss the tax assessment levied against her as invalid and void ab initio; or, in the alternative, to shift the burden of proof at trial to the United States.

I. FACTUAL BACKGROUND

Plaintiff, Margaret Curley, is the seventy year old widow of Arthur Curley, Sr., who died on February 25, 1979. In the mid-1970s, Mr. Curley founded ARCO Advertising Service, Inc. (ARCO). ARCO was in the business of printing commercial advertising.

Upon her husband's death, Mrs. Curley became the majority shareholder in ARCO. Margaret Curley obtained 86% of the shares of ARCO stock. The remaining 14% of the shares was split evenly among the couple's seven children. The plaintiff alleges that both prior and subsequent to her husband's death, she played no active role in the operations and business of ARCO. However, Mrs. Curley was at one point designated as the president of the company. She later was replaced by her son, William Curley.

Pursuant to the requirements of §6203 of the Internal Revenue Code an Internal Revenue Service (" IRS ") assessment officer signed and filed a Summary Record of Assessments (Form 23-C) on April 9, 1986 . This summary was based on ARCO's alleged failure to pay certain taxes. The plaintiff was also informed that she was being assessed a so-called "100% penalty" under Code §6672 for the willful failure to collect, account for, and pay over to the United States, the withholding taxes or trust fund taxes of the employees of ARCO. This form identified: 1) the plaintiff by name; 2) the plaintiff's social security number; 3) the plaintiff's address; 4) the name of the corporation; 5) the type of tax; 6) the amount of tax; and 7) the taxable period involved.

Plaintiff received a form letter from the IRS dated April 14, 1986. The letter was captioned "Final Notice" and stated that Mrs. Curley was being assessed $130,430.59 for the tax period ending September 30, 1985. Apparently, though, this figure actually represented an assessment for fourteen tax periods previous to and including the period ending on September 30, 1985. These periods included: the first, third, and fourth taxable quarters of 1981; the four quarters of 1982; the first, second, and fourth quarter of 1983; the first and second quarter of 1984; and the second and third quarters of 1985. This notice sent by the IRS , though, did not provide a period by period breakdown of the assessment.

The plaintiff asserts that prior to this "Final Notice" she had received no notice of the IRS 's intention to assert a penalty against her.

On May 5, 1986, the IRS sent the plaintiff another letter stating that it proposed to assess a penalty against her for unpaid withholding taxes due from ARCO for the fourteen quarterly periods detailed in an attachment to the letter. In that attachment, the IRS provided plaintiff with the specified amounts due for the fourteen periods. The May 5, 1986 letter also advised the plaintiff of her right to appeal the proposed assessment. Mrs. Curley was informed that if no such appeal was filed within 30 days, the assessment would be made.

Seventeen days later, on May 22, 1986, the IRS issued levies and on May 23, 1986 served plaintiff with notices of seizure for her properties at 645 and 659 Metropolitan Avenue.

Plaintiff filed an appeal of the proposed assessment on or about June 3, 1986. The IRS did not go forward with the sale of the properties at that time. The Appeals Office sustained the assessment on May 11, 1988.

Plaintiff requested a further hearing; however, on October 4, 1988, before any decision was rendered on the plaintiff's request, the IRS issued Mrs. Curley a final notice stating that it would levy her property unless the money allegedly due for the tax period ending September 30, 1985 was paid within 10 days.

This notice indicated that the balance of tax due was $103,439.59 (as opposed to the $130,439.59 mentioned in the IRS 's initial letter) and there was an accumulated interest and penalty of $28,940.40 resulting in a total due and owing of $132,379.99. On November 21, 1988, the IRS , after receiving no payment from the plaintiff, seized the property at 659 Metropolitan Avenue. Plaintiff now seeks judicial review of the assessment, seizure, and procedure.

II. DISCUSSION

The plaintiff, Mrs. Curley, attacks the validity of the tax assessment against her by asserting: 1) that the legal assessment document was defective and thus invalid; 2) that no adequate notice of the assessment was provided; and, 3) that the appeals process provided her was inadequate.

A. VALIDITY OF THE LEGAL ASSESSMENT DOCUMENT

Plaintiff argues that the assessment should be dismissed because the legal assessment document, Form 23-C, contained technical defects and was not supported by documentation. It is well settled that the IRS 's tax assessments are presumed to be correct and it is the taxpayer who must rebut this presumption. See United States v. Schroeder [90-1 USTC ¶50,250 ], 900 F.2d 1144, 1148 (7th Cir.1990) (hereinafter, Schroeder). Only in rare cases can this presumption be overcome by destroying the assessment's foundation. Id. Generally, a court will not look behind an assessment "to evaluate the procedure and evidence used in making the assessment." Ruth v. United States [87-2 USTC ¶9408 ], 823 F.2d 1091, 1094 (7th Cir.1987). As long as the procedures and evidence upon which the government relies to determine the assessment have a rational foundation, "the inquiry focusses on the merits of tax liability, not on the IRS procedures." Id.; see also Oliver v. United States [91-1 USTC ¶50,010 ], 921 F.2d 916, 920 (9th Cir.1990).

Where there are records, documents, and other foundational items upon which a correct determination of liability may be made, there is no need to void the assessment. Schroeder [90-1 USTC ¶50,250 ], 900 F.2d at 1149. Plaintiff claims that there are no such documents because the IRS destroyed part of its file on ARCO and, therefore, that the assessment is without any rational foundation. The IRS claims that this additional collection file was disposed of pursuant to normal IRS procedures unrelated to the commencement of this action.

Plaintiff has not shown that the assessment was entirely arbitrary. The government has produced its own investigative history sheets, affidavits of the revenue officers involved and various corporate checks. Additionally, it is undisputed that plaintiff was an 86% shareholder in ARCO and president of the corporation at one time. Therefore, it cannot be said that this assessment is wholly without rational foundation.

Treasury regulations require that the Form 23-C contain the taxpayer's name, social security number and address, the name of the corporation, the character of the liability assessed, the amount of tax, the taxable period involved, and the signature of a responsible officer. 26 C.F.R. 301.6203 -1. Although the amount of tax listed on the Form 23-C was incorrect, this will not invalidate the assessment. For an assessment to be void, it must be "arbitrary in the sense that the calculation has no support and the true amount of tax is incapable of being ascertained." Schroeder [90-1 USTC ¶50,250 ], 900 F.2d at 1149. Such is not the case here, as the incorrect figure was merely the result of a transpositional error.

Plaintiff also objects to the failure of the government to separately list the fourteen quarterly tax periods on the Form 23-C. Instead, the document reads, "tax period ending September 30, 1985." The government claims this is standard practice.

Plaintiff relies heavily on Brafman v. United States [67-2 USTC ¶12,494 ], 384 F.2d 863 (5th Cir.1967), where an assessment was invalidated due to the lack of a signature on the 23-C Form. This defect, however, was a significant violation of the regulation. It is not clear, though, that providing "tax period ending September 30, 1985" is insufficient to satisfy the identification of the tax period requirement under the statute. A signature requirement protects the taxpayer by ensuring that a responsible officer has approved the assessment. Separately listing each tax period, though, is less crucial, particularly where the tax periods are not at issue and plaintiff is otherwise notified as to the applicable periods.

Since there has been no showing that the assessment was arbitrary, without foundation, or so technically flawed as to amount to a violation of due process, the assessment's presumption of correctness will stand. For this reason; the Legal Assessment Document will be considered valid.

B. INTERNAL REVENUE MANUAL

Plaintiff relies heavily on the Internal Revenue Manual (" IRM ") in her argument that the assessment is procedurally invalid. However, the IRM does not have the force and effect of law. United States v. New York Telephone Co. [81-1 USTC ¶9306 ], 644 F.2d 953, 959 n. 10 (2d Cir.1981). Since the IRM is not law, any alleged failure to adhere to its provisions will not necessarily result in an invalid assessment. See Foxman v. Renison [80-2 USTC ¶9512 ], 625 F.2d 429, 432 (2d Cir.1980), cert. denied, 449 U.S. 993, 101 S.Ct. 530, 66 L.Ed.2d 290 (1980), reh. den. 449 U.S. 1119, 101 S.Ct. 932, 66 L.Ed.2d 848 (1981); Kopunek v. Director of Internal Revenue [81-2 USTC ¶9716 ], 528 F.Supp. 134, 137 (S.D.N.Y.1981).

However, failure to adhere to agency regulations may amount to a denial of due process if the regulations are required by the constitution or a statute. See Arzanipour v. Immigration & Naturalization Service, 866 F.2d 743, 746 (5th Cir.1989), cert. denied, 493 U.S. 814, 110 S.Ct. 63, 107 L.Ed.2d 30 (1989). To invalidate an assessment, the government's action must also substantially prejudice the complaining party. Calderon-Ontiveros v. Immigration & Naturalization Service, 809 F.2d 1050 (5th Cir.1986). This is not the case in this matter.

C. ADEQUACY OF NOTICE

Plaintiff claims that notice of the assessment was inadequate because: 1) she did not timely receive a Notice of Proposed Assessment from the IRS , 2) the amount specified as due on the notice provided was different than what she was actually assessed, and 3) the notice provided only identified the tax period ending 9/30/85 as the subject of the assessment.

Providing the taxpayer with the Notice of the Proposed Assessment is required by the IRM only. As set forth above, the IRM is not law and thus any failure to adhere to its provisions does not in itself invalidate the assessment.

Even assuming that a "procedural" defect exists because the IRM provisions were not followed, the defect does not necessarily implicate a violation of due process. The Constitution requires notice before the taking of property. Cleveland Bd. of Education v. Loudermill, 470 U.S. 532, 105 S.Ct. 1487, 84 L.Ed.2d 494 (1985). There is no constitutional requirement that notice be provided more than once.

Plaintiff was clearly notified of the assessment by the April 14, 1986 letter. Hence, Mrs. Curley was apprised of the assessment prior to any seizure taking place. Further, the fact that a Notice of Proposed Assessment was not served prior to service of the Final Notice did not prejudice the plaintiff since she did receive adequate notice before seizure and had ample time to prepare an appeal.

The fact that the amount due on the notice was different than the actual assessment does not invalidate the assessment. Notices containing technical defects are invalid only if the taxpayer has been prejudiced or misled by the error. Planned Invest., Inc. v. United States [89-2 USTC ¶9470 ], 881 F.2d 340, 344 (6th Cir.1989); Sanderling, Inc. v. Commissioner [78-1 USTC ¶9284 ], 571 F.2d 174, 176 (3rd Cir.1978). To the extent that any discrepancy in the amount owed is misleading, the plaintiff has failed to show that she suffered any prejudice because of this discrepancy. ¹

As to the time periods being assessed, there is no statutory requirement for the listing of tax periods in the notice sent to the taxpayer. Such a statutory requirement applies, if at all, only to the Form 23-C. However, it is unclear, as previously stated, that this requirement even applies to the Form 23-C statement.

Even if due process required such a listing, the IRS 's failure to delineate the periods on the April 14, 1986 notice was subsequently cured by the second notice sent to plaintiff dated May 5, 1986. Therefore, Mrs. Curley was aware of the tax periods for which she was being assessed prior to her appeal.

In sum, the technical defects in the notice of assessment if any, were inconsequential. Thus they did not rise to the level of a due process violation, and as a result they fail to invalidate the assessment.

D. INADEQUACY OF THE APPEAL PROCESS

The plaintiff was not accorded an administrative appeal prior to the seizure. Plaintiff alleges that under the IRM , a pre-seizure appeal is required. Although the IRS placed a lien on her property before the 30 day appeal period had run, the IRS did not proceed with a sale before Mrs. Curley's appeal was heard. It appears that the IRM guidelines were not followed. However, as previously stated, the provisions of the IRM are not law and do not create any substantive rights in plaintiff.

The plaintiff argues that the procedural irregularities in this assessment amount to a denial of her due process rights. However, a post-deprivation hearing satisfies due process when revenue collection is at issue; hence, there is no right to a hearing prior to collection efforts. Phillips v. Commissioner [2 USTC ¶743 ], 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289 (1931); Todd v. United States [88-1 USTC ¶9381 ], 849 F.2d 365 (9th Cir.1988). Plaintiff has failed to show how she was prejudiced by a post-deprivation appeal.

E. PRESUMPTION OF CORRECTNESS

Plaintiff requests that if the assessment is not dismissed as invalid per se, the government should bear the burden of proof on its claim at trial. In §6672 penalty tax cases, the party against whom the penalty is assessed has the burden of proving that he is not a responsible officer or that he did not willfully fail to pay. Schwinger v. United States [87-1 USTC ¶9174 ], 652 F.Supp. 464 (E.D.N.Y.1987).

As previously stated, the presumption of correctness can be overcome by destroying the foundation of the assessment only in rare cases where it is shown to be without rational foundation or arbitrary and erroneous. United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 441, 96 S.Ct. 3021, 3026, 49 L.Ed.2d 1046 (1976), reh. den., 429 U.S. 874, 97 S.Ct. 196, 50 L.Ed.2d 158 (1976). For the reasons set forth in this opinion, plaintiff has not proven that this is one of those rare cases. As such, the burden at trial will remain fixed on the plaintiff to prove she was not a responsible officer of ARCO or did not willfully fail to pay the taxes in issue.

III . CONCLUSION

For the foregoing reasons, the Internal Revenue Service's assessment is hereby presumed to be valid. The burden of proof at trial will remain with the plaintiff.

So Ordered.

¹ It should be noted that the Government is not pursuing a recovery of the $130,430.59 it considers to be the correct amount of the assessment. Rather, the Government has chosen only to seek the $103,430.59 appearing on the assessment. This results in a situation where the plaintiff is claiming prejudice by being assessed $27,000.00 less than what the IRS considers as due and owing.

[92-1 USTC ¶50,069] In re Russell Schwartz, Linda Schwartz, Debtors. Russell Schwartz, Linda Schwartz, Appellants v. United States of America, Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 90-35830, 1/22/92 , Reversing a Bankruptcy Appellate Panel decision, 90-2 USTC ¶50,533 , 119 BR 207

[Code Sec. 6672 ]

Penalties, civil: Failure to withhold or pay over taxes: Bankruptcy.--An IRS assessment of the 100% penalty for failure to collect and pay over withholding taxes against the president of a corporation when the corporation and the president had already filed a Chapter 11 bankruptcy petition violated the Bankruptcy Code's automatic stay of proceedings. In light of the automatic stay's purpose of protecting debtors from all collection efforts while they attempt to regain their financial footing, the assessment was found to be void rather than voidable. It was recognized that certain authorities have found automatic stay violations to be voidable on the grounds that (1) the bankruptcy court has the power under the Bankruptcy Code to annul an automatic stay or (2) the trustee's bankruptcy law duty to bring an action to void an unauthorized transfer is inconsistent with violations of the stay being void rather than voidable. Nevertheless, the reasoning of such authorities was determined to be erroneous. Consequently, the president's failure to challenge the assessment in the Chapter 11 proceedings was irrelevant and the assessment was not enforceable in a subsequent Chapter 13 proceeding involving the president.

Joseph L. Koplin, Moschetto and Koplin, Bellevue, Washington, for debtors-appellants. Gary R. Allen, Department of Justice, Washington, D.C. 20530, for appellee.

Before: WRIGHT, BEEZER and WIGGINS, Circuit Judges.

OPINION

WIGGINS, Circuit Judge:

Debtors Russell and Linda Schwartz appeal from a Bankruptcy Appellate Panel ( BAP ) decision that an IRS tax penalty assessed in violation of the Bankruptcy Code's automatic stay provision is voidable but not void. We reverse the judgment of the BAP .

BACKGROUND

The essential facts of this case are not in dispute. On February 25, 1983 , the Schwartzes and their corporation, R.H. Schwartz Construction Specialties, Inc., filed a Chapter 11 bankruptcy petition. On October 8, 1984 , the IRS , apparently unaware of the bankruptcy filing, assessed a 100% tax penalty, totaling $65,819.25, against Russell Schwartz pursuant to 26 U.S.C. §6672 (1988). The Schwartzes did not challenge the tax assessment within the Chapter 11 bankruptcy and stipulated to their dismissal from the Chapter 11 bankruptcy on March 27, 1985 .

In August 1987, the IRS filed a Federal Tax Lien with the King County Auditor pursuant to the penalty assessment. The IRS claimed that the penalty had increased to $86,296.60. On October 8, 1987 , the Schwartzes filed a Chapter 13 bankruptcy petition. The IRS filed a Proof of Claim in the Chapter 13 bankruptcy on February 19, 1988 , alleging that the Schwartzes owed the IRS $90,787.67 for the 1984 tax assessment.

The Schwartzes objected to the IRS claim. They argued that the tax assessment, which originally occurred during their prior Chapter 11 bankruptcy, violated the automatic stay provision of the Bankruptcy Code and was therefore void. The bankruptcy court agreed and ruled that the IRS tax assessment was void and without effect. The government appealed to the BAP , which rejected the Schwartzes' argument and reversed the judgment of the bankruptcy court. In re Schwartz [90-2 USTC ¶50,533 ], 119 B.R. 207 (1990). The BAP held that acts in violation of the automatic stay are voidable, not void. Because the tax assessment was not affirmatively challenged by the Schwartzes in the original Chapter 11 bankruptcy, the BAP held that the assessment was valid and enforceable in the subsequent Chapter 13 bankruptcy. This appeal followed.

DISCUSSION

The sole issue before us is whether creditor violations of the Bankruptcy Code's automatic stay provision are void or simply voidable. If violations of the automatic stay are void, the IRS tax assessment made against the Schwartzes in the Chapter 11 bankruptcy is without effect. If, however, such violations are merely voidable, the assessment is valid because the Schwartzes made no attempt to have the assessment voided in the Chapter 11 bankruptcy. The issue in this appeal is one of law; we review the BAP 's conclusions of law de novo. In re Taylor, 884 F.2d 478, 480 (9th Cir. 1989); In re 268 Ltd., 877 F.2d 804, 805 (9th Cir. 1989).

It is undisputed that the IRS tax assessment violated the Bankruptcy Code's automatic stay provision. 11 U.S.C. §362(a)(4)-(6) (1988). ¹ The Ninth Circuit has stated generally that violations of the automatic stay are "void". See, e.g., In re Shamblin, 890 F.2d 123, 125 (9th Cir. 1989) ("Judicial proceedings in violation of [the] automatic stay are void."); In re Stringer, 847 F.2d 549, 551 (9th Cir. 1988) ("Any proceedings in violation of the automatic stay in bankruptcy are void."). Although Shamblin and Stringer suggest that violations of the automatic stay are void and not merely voidable, the void/voidable distinction was not dispositive in those cases, and the Ninth Circuit has not directly addressed the precise issue presented in this appeal. See Shamblin, 890 F.2d at 124-26 (debtor affirmatively challenged and litigated potential automatic stay violation); Stringer, 847 F.2d at 550 (same).

Our decision today clarifies this area of the law by making clear that violations of the automatic stay are void, not voidable. See In re Williams, 124 B.R. 311, 316-18 (Bankr. C.D. Cal. 1991) (recognizing that the Ninth Circuit adheres to the rule that violations of the automatic stay are void and criticizing the BAP decision in this case).

Before addressing the interplay between various Code sections, we must emphasize that the automatic stay plays a vital role in bankruptcy. It is designed to protect debtors from all collection efforts while they attempt to regain their financial footing. As Congress stated:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his [or her] creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97 (emphasis added).

In light of the automatic stay's purpose, the issue before us requires some analysis of the relevant policy considerations. Either the debtor must affirmatively challenge creditor violations of the stay, or the violations are void without the need for direct challenge. If violations of the stay are merely voidable, debtors must spend a considerable amount of time and money policing and litigating creditor actions. If violations are void, however, debtors are afforded better protection and can focus their attention on reorganization.

Given the important and fundamental purpose of the automatic stay and the broad debtor protections of the Bankruptcy Code, we find that Congress intended violations of the automatic stay to be void rather than voidable. Nothing in the Code or the legislative history suggests that Congress intended to burden a bankruptcy debtor with an obligation to fight off unlawful claims. The position championed by the IRS in this case would impose severe hardships on debtors trying to regain their financial footing.

The district court in In re Garcia, 109 B.R. 335 (N.D. Ill. 1989), explained that if violations of the automatic stay were merely voidable, creditors would be encouraged to violate the stay:

[T]he fundamental importance of the automatic stay to the purposes sought to be accomplished by the Bankruptcy Code requires that acts in violation of the automatic stay be void, rather than voidable. Concluding that acts in violation of the automatic stay were merely voidable would have the effect of encouraging disrespect for the stay by increasing the possibility that violators of the automatic stay may profit from their disregard for the law, provided it goes undiscovered for a sufficient period of time. This may be an acceptable risk to some creditors when measured against a delayed prorata distribution.

Id. at 340 (footnote omitted). Like the court in Garcia, we will not reward those who violate the automatic stay. The Bankruptcy Code does not burden the debtor with a duty to take additional steps to secure the benefit of the automatic stay. Those taking post-petition collection actions have the burden of obtaining relief from the automatic stay. See In re Williams, 124 B.R. at 317-18.

Our conclusion is supported by the great weight of authority. The majority of courts have long stated that violations of the automatic stay are void and of no effect. See, e.g., Kalb v. Feuerstein, 308 U.S. 433, 438 (1940); Ellis v. Consolidated Diesel Elec. Corp., 894 F.2d 371, 372-73 (10th Cir. 1990); In re 48th St. Steakhouse, 835 F.2d 427, 431 (2d Cir. 1987), cert. denied, 485 U.S. 1035 (1988); Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982). Indeed, many courts have specifically held that violations of the automatic stay are void and not merely voidable. In re Advent Corp., 24 B.R. 612, 614 (Bankr. 1st Cir. 1982); Richard v. Chicago, 80 B.R. 451, 453 (N.D. Ill. 1987); In re Coleman Am. Cos., 26 B.R. 825, 831 (D. Kan. 1983); In re Pettibone Corp., 110 B.R. 848, 853 (Bankr. N.D. Ill. 1990), aff'd sub nom. Pettibone Corp. v. Baker, 119 B.R. 603 (N.D. Ill.), vacated on other grounds sub nom. Pettibone Corp. v. Easley, 953 F.2d 120 (7th Cir. 1991); In re Miller, 10 B.R. 778, 780 (Bankr. D. Md. 1981), aff'd, 22 B.R. 479 (D. Md. 1982).

The courts which have found the automatic stay voidable rather than void have relied primarily on sections 362(d) and 549 of the Bankruptcy Code to support their conclusion. See, e.g., Sikes v. Global Marine, Inc., 881 F.2d 176, 178-79 (5th Cir. 1989) (concluding that violations of the automatic stay are voidable); In re Oliver, 38 B.R. 245, 248 (Bankr. D. Minn. 1984). These courts have reasoned that (1) the court's power under section 362(d) to annul an automatic stay and (2) the trustee's duty under section 549 to bring an action to void an unauthorized transfer are inconsistent with violations of the stay being void and thus demonstrate that violations of the automatic stay are merely voidable. We find this reasoning erroneous.

Section 362(d)

Section 362(d), a subsection of the automatic stay provision, gives the bankruptcy court the power to grant creditors relief from the stay. It provides in part:

On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay . . .

11 U.S.C. §362(d) (1988). Thus, section 362 gives the bankruptcy court wide latitude in crafting relief from the automatic stay, including the power to grant retroactive relief from the stay. 2 Collier on Bankruptcy, §362.07 (15th ed. 1984). Some courts have reasoned that the power to grant retroactive stay relief means that actions which violate section 362(a) cannot be absolutely void, for if they were, section 362(d) would be meaningless. See, e.g., Sikes, 881 F.2d at 178-79; Oliver, 38 B.R. at 248.

However, section 362(d) is not inconsistent with the conclusion that any action in violation of the automatic stay is void and of no effect. Section 362(d) outlines the bankruptcy court's authority to make exceptions to the general operation of the stay. If a creditor obtains retroactive relief under section 362(d), there is no violation of the automatic stay, and whether violations of the stay are void or voidable is not at issue.

The Sikes and Oliver courts read far too much into the meaning and operation of section 362(d). The power to grant relief, even retroactively, simply does not mean that violations of the stay must be merely voidable rather than void. As was explained by the court in In re Garcia, 109 B.R. at 339, "that Congress saw fit to include specific exceptions to the automatic stay does not require the conclusion that actions in violation of the automatic stay are merely voidable." It is entirely consistent to reason that, absent affirmative relief from the bankruptcy court, violations of the stay are void.

Statements from leading authorities on bankruptcy generally support this conclusion: "The use of the word 'annulling' [in §362(d)] permits the [court's] order to operate retroactively, thus validating actions taken by a party at a time when he was unaware of the stay. Such actions would otherwise be void." 2 Collier on Bankruptcy §362.07 (emphasis added). With that understanding, section 362(d) gives the court the power to ratify retroactively any violation of the automatic stay which would otherwise be void. Simply put, there is nothing remarkable or inconsistent about the normal operation of the automatic stay being subject to a specific statutory exception such as that found in section 362(d). See Sikes, 881 F.2d at 180 (Johnson, J., dissenting) (noting that although violations of the automatic stay are void, "a bankruptcy court may validate an otherwise void filing in violation of the automatic stay").

Section 549

The more important potential conflict with interpreting the automatic stay as voiding violations is provided by section 549 of the Code. See, e.g., Sikes, 881 F.2d at 179 (court determining that §549 is inconsistent with automatic stay voiding violations). Section 549 allows the bankruptcy trustee to avoid certain authorized transfers and all unauthorized transfers of estate property. ² Section 549 includes a statute of limitation which requires the trustee to commence an action to void a transfer either within two years of the transfer or before the close of the case, whichever is earlier. 11 U.S.C. §549(d). The Code's definitions dictate that section 549 can apply to a wide variety of transactions. "Transfer" is defined as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property. . . ." 11 U.S.C. §101(50) (1988). Further, "property of the estate" includes all legal interests in property. 11 U.S.C. §541 (1988).

The supposed conflict between section 549 and section 362 can be explained by the following reasoning. First, the expansive definition of "transfer" means that sections 362 and 549, at times, cover the same transactions. Second, section 549 implies that some of these overlapping transactions will be valid unless affirmatively challenged by the trustee. Therefore, some argue that section 362 cannot be interpreted to void these overlapping transactions, for doing so would render section 549 moot. See, e.g., Sikes, 881 F.2d at 179.

On the surface, this conflict appears troublesome. However, a straightforward analysis of section 549 reveals that it is not intended to cover the same type of actions prohibited by the automatic stay nor rendered moot by section 362 's voiding of all automatic stay violations. Section 549 applies to unauthorized transfers of estate property which are not otherwise prohibited by the Code. Garcia, 109 B.R. at 338-40; In re R & L Cartage & Sons, 118 B.R. 646, 650-51 (Bankr. N.D. Ind. 1990) (adopting Garcia analysis). In most circumstances, section 549 applies to transfers in which the debtor is a willing participant. See Garcia, 109 B.R. at 339. For example, in a transfer unrelated to any antecedent debt, the debtor may sell a portion of the estate's property to a third person. The trustee has the power to avoid such a transfer under section 549.

Sections [sic] 362's automatic stay does not apply to sales or transfers of property initiated by the debtor. Thus, section 549 has a purpose in bankruptcy beyond the potential overlap with section 362 . In other words, the automatic stay can void any violation and still leave section 549 with a valid and important role in bankruptcy. Section 549 exists as a protection for creditors against unauthorized debtor transfers of estate property. Although there are circumstances where section 362 overlaps section 549 and renders it unnecessary, this overlap falls far short of rendering section 549 meaningless.

Similarly, subsection 549(c)'s protection of good faith purchasers carves out an extremely specific and narrow exception to the automatic stay when section 362 overlaps subsection 549(c). There is no reason to infer from this narrow exception that violations of the automatic stay are not void. See Garcia, 109 B.R. at 339-40. It is disingenuous to argue that the general rule must be invalid simply because there is a narrow exception to the rule. If violations of the automatic stay are not void because there is a narrow exception under subsection 549(c), then by the same reasoning the rest of section 549 would be invalid because subsection 549(c) creates an exception to the trustee's power to avoid postpetition transfers.

Indeed, subsection 549(c) sheds no light on the void/voidable distinction. Subsection 549(c) is an exception to section 362 regardless of whether violations of the automatic stay are void or merely voidable. Congress did not draft subsection 549(c) to demonstrate that violations of the automatic stay are merely voidable; Congress drafted subsection 549(c) to protect good faith purchasers where the sale would otherwise be subject to avoidance under section 549 or void under section 362 .

Our prior decisions also support this interpretation of the Bankruptcy Code. In Shamblin, we addressed an Illinois tax sale which occurred during the debtors' Chapter 11 bankruptcy. After stating the general rule that violations of the automatic stay are "void", we found the tax sale void under section 362 . 890 F.2d at 125. The appellants argued that section 549 covered the sale as well and that the sale should therefore stand despite the violation of the automatic stay because no action was timely brought to avoid the transfer. We held that the tax sale was not a transfer of property of the estate under section 549, reasoning that the sale created only a lien on the property and did not actually transfer the property itself for purposes of section 549. Id. at 127. We noted that the automatic stay "fully protected" debtors such that section 549 need not cover the tax sale. Id. at 127 n.7.

Shamblin is strong support for the general proposition that sections 362 and 549 usually apply to a different set of transactions. At a minimum, our decision in Shamblin implies that section 549 picks up where the automatic stay leaves off, and that the sections are therefore not in conflict. The law in this circuit is that violations of the automatic stay are void and that section 549 applies to transfers of property which are not voided by the stay.

Finally, the government argues in the alternative that its violation of the automatic stay falls within the narrow exception for technical violations of the automatic stay carved out by In re Brooks, 79 B.R. 479 (Bankr. 9th Cir. 1987), aff'd, 871 F.2d 89 (9th Cir. 1989). See also In re Wingo, 89 B.R. 54, 57 (Bankr. 9th Cir. 1988). In Brooks, the BAP held that a minor technical violation of the stay--the rerecording of a deed to correct a property description mistake--was voidable rather than void. However, on appeal we did not address the void/voidable issue and instead decided the case on the issue of standing, 871 F.2d at 90, and we expressed no opinion on the validity of the exception recognized by the BAP in Brook. Because the BAP 's Brook reasoning is not dispositive in this case, we again refrain from addressing the validity of the Brook exception.

In this case it is sufficient to recognize that the IRS 's violation of the automatic stay does not fall within the narrow Brook exception. A tax assessment is a substantive violation of the automatic stay which creates a lien on all of the debtor's property. It is not simply a minor correction to a lien that already existed. Thus, even if the narrow Brook exception is valid, a tax assessment does not fall within the exception.

CONCLUSION

Because violations of the automatic stay are void, we REVERSE the decision of the BAP . The bankruptcy court's order granting the Schwartzes' objection to the IRS 's penalty assessment is correct and should not be disturbed.

¹ Section 362 reads in pertinent part:

(a) . . . a petition filed under . . . this title . . . operates as a stay, applicable to all entities, of--

. . .

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

11 U.S.C. §362(a)(4)-(6) (citations omitted).

² Section 549 reads in part:

(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate--

(1) that occurs [made] after the commencement of the case; and

(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or

(B) that is not authorized under this title or by the court.

11 U.S.C. §549(a) (1988).

[89-1 USTC ¶9299] United States of America, Plaintiff-Appellee v. John A. Chila, Defendant-Appellant

(CA-11), U.S. Court of Appeals, 11th Circuit, 88-3564, 4/27/89 , 871 F2d 1015, Affirming an unreported District Court decision

[Code Secs. 6203 and 6303 ]

Assessment of tax: Sufficiency: Notice and demand: Penalties, civil: Failure to collect and pay: Assessment of penalty.--The taxpayer, having been assessed for delinquent taxes as a person responsible for the payment of corporate tax liabilities, was liable for a 100 percent penalty. The assessment was validly made and the taxpayer had been provided with the pertinent parts of the record of the assessment, setting forth the taxpayer's name, the date of assessment, the character of the liability assessed, the taxable period and the amounts assessed. J. Dixon, DC Ala., 87-2 USTC ¶9485 , 672 FSupp. 503 followed. Notice and demand for tax from the IRS was not required because the filing of the collection action allowed sufficient time for the taxpayer to consider and pay any tax that was due before any judgment or lien could be made against his property. Further, the taxpayer did not deny that a notice had been sent, only that he had received such notice.

Dorothea Beane, Assistant United States Attorney, Jacksonville, Fla., William S. Rose, Jr., Assistant Attorney General, Gary R. Allen, George T. Rita, William S. Estabrook, Janet A. Bradley, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Lisa S. Odom, Lloyd T. Asbury, Asbury, Lloyd T., P.A., 301 W. Bay St., Jacksonville, Fla. 32202-4435, for defendant-appellant.

TUTTLE, Senior Circuit Judge:

This is an appeal from a summary judgment granted in favor of the United States in an action brought against a "responsible person" for a 100 percent penalty provided under Section 6672 of the Internal Revenue Code. ¹

I. STATEMENT OF THE CASE

On August 11, 1980 , the Internal Revenue Service undertook to assess John A. Chila, as a responsible person of professional Concrete Services, Inc. for the total amount of $39,702.76 pursuant to Section 6672 of the IRC for the third and fourth quarters of 1979. On August 6, 1986 , the United States brought suit pursuant to Section 7401 of the Internal Revenue Code seeking to reduce the outstanding federal tax liabilities against him to judgment. Following the filing of respective motions for summary judgment by the United States and taxpayer, the parties stipulated as to the undisputed issues. In such stipulation, Chila made the following concession: "John A. Chila was a person required to collect, truthfully account for, and pay over the federal withholding and Social Security taxes of Professional Concrete Services, Inc. for the third and fourth quarters of 1979."

Moreover, Chila did not contest the amount of such taxes. The stipulation identified three documents as having been furnished by the United States to Chila:

(1) Certificate of Assessments and payments dated October 29, 1987 relating to John A. Chila.

(2) Form 23 C, Assessment Certificate, Summary Record of Assessments dated 8/11/80 .

(3) Form TY 53, account card.

The taxpayer contended that Chila's liability would depend upon a proper assessment by the IRS and that the alleged assessment was faulty in this case because of the failure of the IRS to comply with the requirements of Section 6203 and the regulations pursuant thereto. ²

The defendant contends that the government's assessment of the 100 percent penalty in this case is invalid because the government failed to supply the "pertinent parts of the record" as required by this regulation.

Chila also attacked the validity of the lawsuit on the ground that he had not received the "notice and demand" provided for under Section 6303(a) of the Code.

The trial court granted the government's motion for summary judgment, holding that the assessment was validly made and that the Section 6303(a) notice requirement does not apply to a situation in which the United States files a civil action, but applies only where the United States proceeds to make the collection through administrative means.

II. DISCUSSION

1. Validity of Assessment

There can be no question but that the documents presented by the United States in support of its assessment clearly met the requirement of the statute that "the summary record (Form 23 C) through [the] supporting records," a Certificate of Assessments and Payments and the Account Card, provided all the information called for in the statute, i.e., identification of the taxpayer, the character of the liability assessed, the taxable period, and the date and amount of the assessment. These documents equally satisfied the requirements of the regulation 26 C.F.R. §301.6203-1 , which precisely track the language of the statute as to what is to be provided to the taxpayer by way of information. The requirement by the regulation that the government provide "the pertinent parts of the assessment" is satisfied by providing any part of the records of the government that supplies the "pertinent information" that both regulation and statute require. This Court has already decided in a case involving the validity of an assessment that the documents here provided by the government met the requirements of the statute and regulation. In United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503 (M.D.Ala.1987), subsequently affirmed by a per curiam opinion of this Court, 849 F.2d 1478 (11th Cir.1988), the taxpayer claimed that the absence of a Form 23 C prevented the assessment from being valid. The Court held that by supplying a "Certificate of Assessments and Payments" signed by an IRS officer certifying that it was a true transcript of all the assessments, penalties, interest, and payments on record for the defendant, showing that the defendant was audited and assessed a deficiency and which recorded a "23 C date" was sufficient evidence that 23 C was duly signed on that date. Having decided that the Form 23 C had been duly signed, this Court stated:

Accordingly, this Court accepts the document "Certificate of Assessments and Payments" submitted by the government as presumptive proof of a valid assessment. Given that the defendant has produced no evidence to counter this presumption, the Court is satisfied that the government has established that the claimed tax liability was properly assessed against the defendant.

672 F.Supp. at 506.

This Court affirmed the judgment in Dixon by an unpublished order which stated: "We affirm the summary judgment for the government for the reasons set forth in the district court's memorandum opinion. United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503 (M.D.Ala.1987)."

The appellant concedes in his brief that the district court judgment in Dixon "does stand for the proposition that a Certificate of Assessments and Payments is presumptive proof of a valid assessment." However, appellant suggests that we are not bound by Dixon because it was wrongly decided. As noted above, however, this Court affirmed Dixon expressly "for the reasons set forth in the district court's memorandum opinion." We, of course, are bound by this precedent.

2. The Notice and Demand

The appellant also attacked the government's position in this action by claiming that he had not received the notice and demand required by Section 6303(a) of the Internal Revenue Code, which provides that: "The secretary or his delegate shall . . . within 60 days after the making of an assessment of a tax pursuant to Section 6203 , give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. . . ." In his answer, Chila denied having received such notice. He did not deny its having been sent. The trial court, without considering whether the notice had actually been given by the IRS , concluded that it was unnecessary for it to decide because the court concluded that the requirement of notice was for the protection of a taxpayer only in case the IRS used the summary administrative remedies to collect the tax that are available to it. The Court held that such notice is not required as a prerequisite to filing a civil action, because the filing of the action allows sufficient time for the taxpayer to consider and pay any tax that is due before any judgment or lien can be made against his property. The Court noted that nothing in the Internal Revenue Code suggests that notice of an assessment and demand for payment is a prerequisite to a collection suit. On the other hand, the provisions of the Code authorizing administrative collections expressly indicate that the giving of notice and demand for payment of an assessment is a prerequisite to such collection methods. For instance, Section 6321 of the Code provides that a lien shall arise if a "person liable to pay a tax neglects or refuses to pay the same after demand." (Emphasis supplied.) Also, Section 6331 of the Code authorizes the Internal Revenue Service to collect by levy only where a taxpayer fails to pay a tax "within 10 days after notice and demand." (Emphasis supplied.)

There is much authority for the position taken by the IRS with respect to this notice and demand. See Security Indus. Ins. Co. v. United States [87-2 USTC ¶9578 ], 830 F.2d 581, 587 (5th Cir.1987) (dictum); United States v. Berman, 325 F.2d 1053, 1060 (6th Cir.1983); Marvel v. United States, 719 F.2d 1513-1514 (10th Cir.1983).

We refer particularly to the language of the court's opinion in Security Indus. Ins. Co. v. United States, supra:

Thus, absent any legislative history to the contrary, we find that section 6303(a) , like its predecessor statute under the 1939 Code, only requires notice to those individuals against whom the government can proceed administratively. As a result, the government's failure to provide [defendant] Jersey Shore [Bank] with a copy of the notice of assessment and demand for payment sent to Pennmount [the taxpayer] does not bar its suit to collect the bank's liability under §3505 . [U.S. v.] Jersey Shore State Bank [86-1 USTC ¶9151 ], 781 F.2d [974] at 981 [3rd Cir.1986]. (emphasis in original).

830 F.2d 581, 587. Although the Supreme Court affirmed on different grounds Jersey Shore State Bank v. United States [87-1 USTC ¶9131 ], 479 U.S. 442, 107 S.Ct. 782, 93 L.Ed.2d 800 (1987), it did not decide the precise issue here before the court. It decided, however, that no notice was required before a suit was filed against a third party lender under Section 3505 of the Code. Nevertheless, we agree with the language of the Court of Appeals for the Fifth Circuit in Security Indus. Ins. Co., supra, that: "Language in the Supreme Court's decision certainly reenforces the view that the lack of notice under Section 6303(a) deprives the government of administrative remedies only." 830 F.2d at 587. As the Fifth Circuit pointed out, the court clearly emphasized the distinction between an employer and the third party lender, saying that an employer should have notice because the government could use its summary administrative methods of collecting the penalty against an employer whereas such methods are not available against a third party lender. The precise language is as follows: "An employer therefore has a far greater need for an assessment notice than third party lenders, who are not subject to summary collection procedures." 479 U.S. at 447, 107 S.Ct. at 785.

We conclude that the trial court correctly interpreted the requirements of Section 6303 as applying only in the case of a summary enforcement procedure.

Moreover, the judgment of the trial court is due to be affirmed on the alternative basis that the proper notice was sent even though such notice may not have been required under Section 6303 . The Certificate of Assessment and Payments certified that the first notice and the final notice had been sent on August 11, 1980 . Appellant did not deny on the record that the notice was sent. He denied only that he had received it. We hold that since the appellant failed to establish affirmatively that the notice was not sent, it is clear that the government has shown that it was sent, see Dixon, supra, at 506, whether required by the statute and regulations or not.

The judgment is AFFIRMED.

¹ Section 6672 states in pertinent part:

(a) General Rule--Any person required to collect, truthfully account for, and pay over any tax imposed by this Title who willfully fails to collect such tax, or truthfully account for and pay over such tax . . . shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. . . .

² Section 6203 of the Internal Revenue Code, 26 U.S.C. §6203 , states in relevant part that an assessment;

shall be made by recording the liability of the taxpayer in the office of the secretary in accordance with the rules or regulations prescribed by the secretary. Upon request of the taxpayer, the secretary shall furnish the taxpayer a copy of the record of the assessment.

Pursuant to this statute, the Secretary of the Treasury promulgated the following regulation, which is found at 26 C.F.R. §301.6203-1 .

The assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessments. . . . If the taxpayer requests a copy of the record of assessment, he shall be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of liability assessed, the taxable period, if applicable, and the amount

[81-1 USTC ¶9299]Roger W. Payne, Plaintiff v. United States of America Defendant and Third-Party Plaintiff v. Billy James, Third-Party Defendant

U. S. District Court, Dist. Colo., Civil Action No. 79-C-284, 500 FSupp 571, 10/20/80

[Code Sec. 6672]

Failure to collect and pay over withholding taxes: Genuine issue of material fact: Responsible person: Wilfulness: Allocation of payments: Variance.--Motions for summary judgment by both the taxpayer and the government as to whether the taxpayer was a responsible person who could be assessed for 100% of the withholding taxes owed by a corporation of which he was a director, officer and shareholder were denied. As to the first quarter of the taxable year, a genuine issue of material fact existed as to whether a third party defendant made the decisions regarding payment of creditors. As to the second quarter of the taxable year, there was a genuine issue regarding the wilfulness of the taxpayer's failure to pay over the taxes owed. Further, because he failed to give the IRS any instructions regarding allocation between the first and second quarters of the payments he made on the corporation's tax liability, the taxpayer had no legal basis to complaint of the allocation made by the IRS . Finally, the government's motion to dismiss the complaint was granted as to those contentions contained in the complaint that were not raised in the taxpayer's claim for refund and denied as to those contentions on which there was no variance between the claim for refund and the complaint.

Arnold C. Wegher, Wegher & Fulton, 2300 First National Bank Bldg., Denver, Colo. 80293, for plaintiff. Angelo I. Castelli, Department of Justice, Washington, D. C. 20530, for defendant and third-party plaintiff.

Memorandum Opinion and Order

I.

CARRIGAN, District Judge:

This is an action to recover penalties wrongfully assessed. Roger W. Payne was assessed a 100% penalty as a person responsible for willful failure to pay withholding taxes owed for the first and second quarters of 1974. The authority for such an assessment is granted by 26 U. S. C. §6672. The government has moved for summary judgment against Payne pursuant to Rule 56, F. R. Civ. Proc., arguing that there is no issue of material fact, and that, as a matter of law, he is a "responsible person" who may be assessed for 100% of the withholding taxes owed by Intermountain Truck Brokers, Inc. ("Intermountain").

Payne also has moved for summary judgment pursuant to Rule 56. He argues that there is no genuine issue of material fact as to his liability for the first quarter of 1974, and that, as a matter of law, he may not be assessed for 100% of the withholding taxes owed for that first quarter. As to his liability for the second quarter, Payne argues that there is a genuine issue of material fact.

Payne and the government agree to certain facts. During 1973, Payne was a director, officer, and shareholder of Intermountain. Early in April of 1974, he was authorized to sign checks for Intermountain. On April 29, 1974 , in his capacity as Intermountain's vice-president, he signed the corporation's quarterly return reporting withholding taxes owed for the first quarter of 1974. At a special meeting of Intermountain's Directors held April 30, 1974 , Payne was elected president of the corporation and became its chief executive officer. Intermountain was declared bankrupt on or about June 27, 1974 , and was discharged in bankruptcy on or about March 9, 1976 .

II. Liability for the First Quarter of 1974.

Both parties have moved for summary judgment on the question of Payne's liability for Intermountain's failure to pay withholding taxes for the first quarter of 1974. Cross-motions for summary judgment are to be treated separately; denying one does not require granting the other. Buell Cabinet Co., Inc. v. Sudduth, 608 F. 2d 431, 433 (10th Cir. 1979).

The government argues that Payne's signing of the first quarter withholding tax return on April 29, 1974 , coupled with his status on that date as an officer (vice-president), director, and shareholder, establishes that he had sufficient control over the decision not to pay the withholding taxes to render him subject to assessment for 100% of the taxes.

The government has cited no authority which holds that the presence of these attributes establishes, as a matter of law, that Payne is a "responsible person" under Section 6672. Actually, the government is asking this Court to draw from these facts an inference that Payne had sufficient control of Intermountain during the first quarter to be held to a 100% assessment. That inference is certainly permissible, but it is not the only possible or reasonable inference. Since more than one inference may be drawn from the facts, a genuine issue of material fact remains.

Payne's deposition testimony also shows that a genuine issue of material fact exists. In deposition, Payne stated that the third-party defendant, Bill James, controlled Intermountain and made the decisions regarding payment of creditors until Payne became president and chief executive officer on April 30, 1974 . (Payne dep., pp. 27-30.) The question of who had the "final word" during that first quarter is critical in deciding whether the plaintiff is a "responsible person." Maggy v. United States [77-2 USTC ¶9686], 560 F. 2d 1372, 1374 (9th Cir. 1977), cert. denied, 439 U. S. 821 (1978). A genuine issue of material fact on that question makes summary judgment inappropriate.

As to the plaintiff's cross-motion for summary judgment, it is true that Payne's deposition testimony might be sufficient to sustain a jury verdict in his favor. However, that is not the standard applied to a motion for summary judgment. The evidence which the government sets forth in support of its motion for summary judgment at least establishes that there is a genuine issue of material fact as to Payne's responsibility for Intermountain's failure to pay over its withholding funds. Also, the evidence Payne offers in his deposition must be evaluated for its credibility, a function difficult to perform by perusing the cold transcript of a deposition, The jury demanded in this case is a superior instrument for evaluating the credibility of testamony. The determination of the plaintiff's liability should be left to that fact-finder. Therefore, both motions for summary judgment as to Payne's liability for the first quarter's unpaid withholding taxes must be denied.

III . Liability for the Second Quarter of 1974.

The government has moved for summary judgment on the question of Payne's liability for withholding taxes owed by Intermountain for the second quarter of 1974. The government argues that, as a matter of law, Payne was a responsible person who willfully failed to pay over those funds. Plaintiff opposes this motion, arguing that there is a genuine issue of material fact.

Payne concedes that he is a "responsible person" at least as to part of the second quarter. However, he argues that he cannot be held responsible for the entire quarter since he did not become president and chief operating officer until April 30, 1974 . Further he contends that he did not "willfully" refuse to pay over the withholding taxes, asserting in explanation that Intermountain did not have enough funds to pay the amount due the government when he began his tenure as president.

The government has offered Intermountain's bank records to prove that funds were available to pay the withholding taxes. However, Payne had testified in deposition that Intermountain was a broker and held, in its accounts, funds which belonged to its clients. (Payne dep., pp. 48-49). From this evidence, it appears that there is a genuine issue of material fact regarding the willfulness of the plaintiff's failure to pay over the taxes owed, or at least a portion of them. Therefore, the government's motion for summary judgment as to Payne's liability for the second quarter of 1974 must be denied.

IV. Allocation of Payments.

The government has also moved for partial summary judgment on the issue of damages. A total of $32,397.90 was assessed against Payne by the IRS . However, $7,143.55 of this amount was paid by the bankruptcy trustee for Intermountain. The remainder was paid by Payne. Payne does not seek recovery of the $7,143.55 paid by the trustee, but claims that this Court has authority to allocate between the first and second quarter of 1974 the payments already made.

Payne relies on Revenue Ruling 73-305. That ruling states as a general policy, when no applicable instructions are given by the taxpayer, that the IRS will apply the earliest payment to the oldest debt, whether tax, penalty, or interest, then owed. He claims that the IRS has not followed this policy in his case. However, the final paragraph of Revenue Ruling 73-305 expressly states that it does not apply to withheld employment taxes. Therefore, this ruling provides no support for Payne's position.

The government argues that, at least as far as Section 6672 penalties are concerned, the IRS has discretion to apply payments to the portion of the tax liability least likely to be collected, unless the taxpayer has made an explicit request that payment be allocated to a particular quarter. This clearly is the law in the Fifth Circuit. Liddon v. United States [71-2 USTC ¶9591], 448 F. 2d 509, 513 (5th Cir. 1971), cert. denied, 406 U. S. 918 (1972). Cases in the Third, Eighth, and Ninth Circuits also seem to support this proposition, at least by inference. Emshwiller v. United States [77-2 USTC ¶9744], 565 F. 2d 1042, 1046 (8th Cir. 1977); Pacific National Insurance Co. v. United States [70-1 USTC ¶9238], 422 F. 2d 26, 33 (9th Cir.), cert. denied, 398 U. S. 937, rehearing denied, 400 U. S. (1970); Gates v. United States [69-1 USTC ¶15,889], 409 F. 2d 1320, 1322, (9th Cir. 1969); Datlof v. United States [67-1 USTC ¶9167], 370 F. 2d 655, (3rd Cir. 1966), cert. denied, 387 U. S. 906 (1967).

It is uncontroverted that neither Payne nor the trustee in bankruptcy gave the IRS any instructions regarding allocation of the payments each made on the Intermountain tax liability. Under the rule of the Liddon case, payne has no legal basis to complain of the allocation made by the IRS . Since the only grounds for bringing before this Court the $7,143.55 paid by the trustee is the question of allocation, the government should be granted summary judgment on this issue.

V. Variance.

At oral argument on these motions, counsel for the government raised the issue of variance between Payne's claim for refund of the assessment against him for the second quarter of 1974 and his complaint in this suit for refund. With the Court's permission, the government filed a supplementary memorandum of law on this issue. This document is styled a "Motion for Partial Dismissal." The government contends that Payne may not challenge the IRS assessment for the second quarter since Payne did not state in his claim for refund that he was not a "responsible person" for that quarter. ¹

A review of the pleadings in this case indicates that Payne's challenge to the second quarter assessment is based on two contentions. The first is that Payne, though in control of the corporation for most of the second quarter, did not become president and chief executive officer until April 30, 1974 , the final day of the first month in that quarter. Payne argues that he should not be held liable for that first month, since Bill James still controlled Intermountain until the last day of that month. There is, however, nothing in Payne's claim for refund for the second quarter to indicate that Payne bases his claim on these facts. Therefore, a variance exists between the claim and the complaint as to this theory of non-liability. This Court has no jurisdiction to hear evidence attempting to prove this theory. United States v. Felt & Tarrant Manufacturing Co. [2 USTC ¶708], 283 U.S. 269, 271-72 (1931); Herrington v. United States [69-2 USTC ¶9650], 416 F. 2d 1029, 1032 (10th Cir. 1969).

Payne's second contention is that his failure to pay was not "willful" since Intermountain did not have sufficient funds to pay the withholding obligations. His claim for refund does allege facts that would give the IRS the opportunity to consider and dispose of this contention. Herrington v. United States, 416 F. 2d at 1032.

The government's motion to dismiss the complaint is granted as to Payne's contention that he was not "responsible" for the entire second quarter of 1974. The motion to dismiss is denied as to Payne's contention that his failure to pay was not "willful."

IT IS ORDERED that the defendant's motion for partial summary judgment is granted. Plaintiff's claim for allocation of the $7,143.55 paid to the defendant by the trustee in bankruptcy is hereby dismissed.

IT IS FURTHER ORDERED that the defendant's motion for partial dismissal is granted. Plaintiff's claim that he was improperly assessed for the second quarter of 1974 may not be proven by evidence that he did not control Intermountain Truck Brokers, Inc. during part of that second quarter.

¹ Payne's claim for refund, attached as Exhibit "D" to the government's Motion for Summary Judgment, reads in part:

"1. Upon information and belief I state that the amount of the Section 6672 penalty is mathematically incorrect because some of the payroll checks upon which the penalty was computed were never honored, even though presented for payment several times.

2. Upon information and belief I state that there was no way of borrowing money with which to pay Inter-Mountain's alleged liability, and there were no unencumbered assets to pledge as security."