Fiataruolo v. U.S.

Decision Date03 November 1993
Docket NumberNos. 969,1292,D,s. 969
Citation8 F.3d 930
Parties-6550, 93-2 USTC P 50,627, 39 Fed. R. Evid. Serv. 1298, Unempl.Ins.Rep. (CCH) P 17559A Angelo FIATARUOLO, Angelo Veno, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. ockets 92-6169, 92-6177.
CourtU.S. Court of Appeals — Second Circuit

Kenneth L. Greene, Washington, DC (James A. Bruton, Acting Asst. Atty. Gen., Albert S. Dabrowski, U.S. Atty., Gary R. Allen, Sara S. Holderness, Tax Div., Dept. of Justice, of counsel), for defendant-appellant U.S Kurt F. Zimmermann, New Haven, CT (Silverstein & Osach, P.C., Connecticut, of counsel), for plaintiff-appellee Angelo Veno.

Jeremiah Donovan, Old Saybrook, CT, for plaintiff-appellee Angelo Fiataruolo.

Before: VAN GRAAFEILAND, KEARSE, and CARDAMONE, Circuit Judges.

CARDAMONE, Circuit Judge:

It is our task on this appeal to decide who was in control of a construction contractor's finances. On the resolution of this issue hinges liability for the payment of federal withholding taxes. The government claims the two taxpayers before us had significant authority over the contractor's finances and should be held responsible for payment of the taxes due. Taxpayers insist they had no say in the family-run construction business, and that their only connection to it was as partners on jointly bid construction projects; whatever dominion they exercised, taxpayers continue, ended at the shoreline of the co-venture projects, never extending into the sea of the contractor's corporate finances.

In October 1989 Angelo Veno and Angelo Fiataruolo (taxpayers or appellees) brought suit in federal court seeking refunds of tax penalties assessed against them. Their case was tried before a jury in the United States District Court for the District of Connecticut (Daly, J.), and they were found not responsible for the federal withholding tax deficiency of a corporate employer. On the same day Judge Daly entered judgments in favor of Fiataruolo and Veno. The United States Internal Revenue Service (IRS, government or appellant) thereafter made timely motions for judgment notwithstanding the verdict on the ground that the taxpayers were legally responsible for the tax shortfall, and for a new trial due to perceived evidentiary errors. The district court denied these motions and entered final judgment for the taxpayers.

BACKGROUND

C & C Security Specialists, Inc. (C & C Security or contractor) was a construction firm that specialized in installing security systems, windows, and doors in various commercial and prison buildings. Founded in the late 1970s by Del Cernuda and Frank Cifuni, Sr., now deceased, the firm was operated by and employed various members of the Cifuni and Cernuda families. For example, Del Cernuda served as corporate president and managed the daily operations; Frank Cifuni's daughter Dian was the corporate secretary responsible for internal bookkeeping. Another Cifuni daughter, Francis, prepared quarterly employment returns, and together with Dian, computed the company's payroll. The contractor was located in New York State until 1986 when it moved to Westport, Connecticut.

In early 1985 Del Cernuda began looking for investors to provide C & C Security with additional capital so that the firm could bid on larger construction projects. To this end he made several financial presentations to two potential Connecticut-based investors, appellees Angelo Veno and Angelo Fiataruolo. Meetings among the three men culminated in the signing of a two-page "Co-Venture" letter on March 21, 1985.

This letter provided that after review and approval of each proposed co-venture construction job, Veno and Fiataruolo would make "occasional loans" to the contractor on a project-by-project basis. Loans made by Fiataruolo and Veno were to be repaid before any profit distributions. The Co-Venture letter also set out the responsibilities of the parties:

Cernuda and C & C Security Specialists, Inc. shall be responsible for field installations, including supervision of labor, purchase of materials, and job management. Veno and Fiataruolo shall be responsible for financial and general administrative functions, including payments and receipts from the various jobs undertaken by the co-venture....

The letter further provided that "more detailed documentation" defining the exact nature of the co-venture arrangement would be prepared and signed by the parties.

Such documentation followed on March 27, 1985. On that date A.J. Veno Construction Company, Inc. (Veno Construction), of which Veno was the president and sole shareholder The contract designated Veno Construction as the "Construction Finance Manager" and gave it responsibility for financial management of all jointly pursued projects. It was held responsible for, inter alia, (1) insuring "proper accounting, auditing and payment of all job costs"; (2) providing "for the proper disbursements and cost accounting in accordance with Contract requirements"; (3) performing "such audit functions as required to ensure validity of Project costs and operations"; and (4) "periodically up-dat[ing] the cash outflow requirements." In carrying out these obligations, Veno Construction was required to maintain its independence from C & C Security. Accordingly, Angelo Veno could neither "claim to be an officer or employee of the Contractor" nor "make any claim, demand or application to or for any right or privilege applicable to an officer or employee of the Contractor...."

                entered into a 16-page Construction Finance Management Contract (Finance Contract) with C & C Security.   According to the agreement, C & C Security would submit proposed projects to Veno Construction, and if Veno Construction wished to participate in the project it would advance to the contractor up to $250,000 in the form of a working capital loan that would be secured by a formal note and repaid at a rate set out in a schedule.   If, on the other hand, Veno Construction was not interested in the proposal, C & C Security could at its sole discretion pursue the work independently
                

The Finance Contract was signed by Del Cernuda on behalf of C & C Security and Angelo Veno for Veno Construction. Angelo Fiataruolo was not a signatory to the document and is not mentioned in it. Although Fiataruolo was not a stockholder, director, officer or employee of Veno Construction, the parties understood that his role was to assist Veno Construction in carrying out its financial and administrative functions under the accord.

The co-venture was, according to Fiataruolo, off and running almost immediately and an initial loan of $50,000 was advanced to C & C Security the day after the Finance Contract was signed. During the spring of 1985 Veno Construction loaned approximately $200,000 to the contractor by transferring money from Veno Construction's bank account in Connecticut to C & C Security's primary account in Nanuet, New York. Expenses for the co-venture's projects were then paid out of the Nanuet account either by Del Cernuda or one of the Cifuni sisters. Such disbursements were later reviewed by Veno and Fiataruolo.

As Veno Construction continued to extend more credit to the contractor, it sought to verify that the firm's money was being used solely for co-venture projects. Accordingly in March 1985 Fiataruolo and Veno hired Wayne Troy to work part-time in C & C Security's Nanuet office to review the contractor's books and records. In the early summer of 1985 Troy discovered that the contractor had failed to remit sufficient payroll withholding taxes to the IRS for the first two quarters of the fiscal year. He advised Fiataruolo and Veno of this problem; they informed Del Cernuda, who then remedied the matter.

In part to further tighten control over the disbursement of co-venture funds, Fiataruolo and Veno in July 1985 joined Cernuda in establishing an account in the name of C & C Security at the Connecticut Bank & Trust Co. in Westport, Connecticut. Veno, Fiataruolo, and Cernuda all had signature authority over this account; the checkbook was maintained by Fiataruolo and bank statements were sent to Veno Construction. Money deposited into the account consisted of both loan money from Veno Construction and funds collected by C & C Security from co-venture construction projects. Disbursements from the account were made according to lists provided by Dian or Francis Cifuni. The Cifunis generally prepared checks used to make payments for operating expenses, payroll, and payroll tax deposits, which were signed by one of the three signatories on the account.

Despite the opening of the Connecticut account, C & C Security continued to retain several other bank accounts over which Fiataruolo and Veno had no authority. For example, one active account was maintained at a branch of the Chemical Bank in New York City to disburse a large payroll on a

                New York-based construction job.   Because the workers' union required that pay checks be drawn on a New York account, the contractor could not make this payroll out of Connecticut.   Instead, money was wired to Chemical from Connecticut Bank and Trust on a regular basis to pay the union's wages
                
PRIOR PROCEEDINGS

With that background in mind, we come to the events that brought about the present litigation. C & C Security failed to pay withholding taxes to the federal government for the last two quarters of 1985 and the first two quarters of 1986. The IRS determined that Cernuda, Fiataruolo, and Veno were the persons responsible for the payment of these taxes. It brought suit against Cernuda in the United States District Court for the Southern District of New York and obtained a judgment against him. The IRS also assessed penalties against Fiataruolo and Veno in the amount of $170,439.92. Fiataruolo and Veno paid, respectively, $1,877 and $3,133 in partial satisfaction of the assessments and then filed separate suits in the ...

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