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 [