Kennedy v. U.S., 91-1657

• Decision Date: 08 June 1992
• Docket Number: No. 91-1657,91-1657
• Parties: -5032, 92-1 USTC P 50,307, Unempl.Ins.Rep. (CCH) P 16643A John T. KENNEDY, Plaintiff, v. UNITED STATES of America, Defendant, Third Party Plaintiff-Appellee, v. Harold C. GATEWOOD, Third Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 413

965 F.2d 413

70 A.F.T.R.2d 92-5032, 92-1 USTC P 50,307,

Unempl.Ins.Rep. (CCH) P 16643A

John T. KENNEDY, Plaintiff, v. UNITED STATES of America, Defendant, Third Party Plaintiff-Appellee, v. Harold C. GATEWOOD, Third Party Defendant-Appellant.

No. 91-1657.

United States Court of Appeals Seventh Circuit.

Argued Dec. 4, 1991.

Decided June 8, 1992.

Richard C. Clark, Kevin J. Young, Thomas H. MacAdam, Clausen, Miller, Gorman, Caffrey & Witous, Chicago, Ill., for plaintiff.

Eileen M. Marutzky, Asst. U.S. Atty., Office of U.S. Atty., Crim. Div., Chicago, Ill., Gary R. Allen, Jonathan S. Cohen, Sara S. Holderness (argued), Douglas W. Snoeyenbos, Dept. of Justice, Tax Div., Appellate Section, Washington, D.C., for defendant-appellee U.S.

John A. Simonetti (argued), Joel M. Friedman, Grossman & Friedman, Chicago, Ill., for defendant-appellant Harold C. Gatewood.

Before WOOD, Jr. ^* and CUDAHY, Circuit Judges, and GRANT, Senior District Judge. ^**

HARLINGTON WOOD, Jr., Circuit Judge.

The Internal Revenue Service assessed a 100-percent penalty against Harold C. Gatewood and John T. Kennedy as responsible persons of a corporation that failed to pay over federal withholding taxes from employee wages. As a result of a miscalculation, an Internal Revenue Service agent represented to Gatewood's attorney that Gatewood and Kennedy owed a lesser amount of taxes than the government now demands. Gatewood and Kennedy paid the lesser amount, but they refused to pay the total amount of the corrected assessment to the IRS. The government pursued its claim against Gatewood and Kennedy in federal district court after Kennedy brought a refund suit requesting the return of approximately $5,000 withheld from his 1988 tax return by the IRS. The district court granted a summary judgment motion in the government's favor for the full amount of the corrected 100-percent assessment. Kennedy then entered into a settlement agreement with the Internal Revenue Service, but Gatewood appeals the assessment imposed against him. Gatewood maintains that the doctrine of equitable estoppel prevents the government from collecting any more money from him. We affirm the judgment of the district court.

BACKGROUND FACTS

John T. Kennedy and Harold C. Gatewood were shareholders and officers in Data Mailers Midwest, Incorporated ("Data Mailers"). Data Mailers is no longer in business. It is undisputed that during the Although he had incorrectly affirmed Friedman's calculations of Data Mailers's payroll tax deficiency, Mullvihill advised Friedman by phone on January 25, 1989, that Data Mailers's total outstanding liability for the second quarter of 1988 was $23,382.20 and that Data Mailers owed nothing for the third quarter. Mullvihill also told Friedman the IRS would accept payments totalling $23,382.20 in satisfaction of all potential 100-percent penalties for the second quarter of 1988 and no penalties relating to the third quarter would be imposed. Mullvihill then sent Friedman an IRS Installment Agreement Form 433-D. After receiving the form, Friedman contacted Mullvihill to tell him that Form 433-D was unacceptable to effect settlement because it did not prohibit the IRS from assessing additional 100-percent penalties against Gatewood or Kennedy for further payroll tax withholding liabilities. Friedman requested a closing agreement and a guarantee relating to trust fund taxes for the quarters ending June 30, 1988, and September 30, 1988, which would protect Kennedy and Gatewood from any further 100-percent penalty assessments. In response Mullvihill told Freidman he would check with IRS Special Procedures Function about the necessity of a closing agreement. After consulting Special Procedures, Mullvihill called Friedman and passed on what he had learned from an IRS Special Procedures Function Advisor. Mullvihill informed Friedman that a closing agreement was not necessary, that a closing agreement was a long, drawn-out affair and that the quickest way to consummate a final binding assessment was by the issuance of an IRS Proposed Assessment of 100-Percent Penalty, Form 2751. Mullvihill also told Friedman there would be no additional 100-percent penalties or tax assessments relating to the second and third quarters of 1988 if the $23,382.20 was paid.

                second and third quarters of 1988 Data Mailers failed to pay over federal income and social security taxes withheld from employee wages.   The company's attorney, Joel Friedman, contacted the Internal Revenue Service ("IRS") in an attempt to resolve Data Mailers's outstanding tax liabilities.   Friedman calculated that Data Mailers owed $23,382.20 with respect to trust fund taxes, and he wrote a letter dated October 18, 1988, to IRS Agent Zinazeah proposing to settle for this amount.   Later, the case was assigned to another revenue officer, John Mullvihill, an IRS Revenue Officer who had worked on approximately one thousand payroll tax cases prior to the Data Mailers case.   Friedman again submitted the $23,382.20 figure as the amount of deficiency Data Mailers owed, and Mullvihill concurred after duplicating Friedman's calculations the next day.   It is now undisputed that these calculations were incorrect
                

When Friedman received Form 2751 from Mullvihill bearing the miscalculated assessment of Data Mailers's trust fund liability and referring only to tax liabilities for the second quarter of 1988, he made some modifications. First, Friedman added a line indicating zero liability for the third quarter of 1988. Then he inserted the following sentence on the form: "The above constitutes full and final assessment of the 100 percent penalties for the periods indicated." Both Kennedy and Gatewood signed the form, and Friedman returned the form to Mullvihill on February 7, 1989, with a cashier's check for $11,691.10, half the penalty. Friedman subsequently sent the IRS two cashier's checks in the amount of $3,897.03, representing two of three monthly installment payments, on February 17, 1989, and March 14, 1989.

Mullvihill's (and Freidman's) error in calculating Data Mailers's tax withholding assessment was discovered by a revenue officer aide who completed Data Mailers's penalty assessment process at Mullvihill's request. The aide recalculated the assessment in accordance with the Internal Revenue Manual; the correct assessment totalled $52,043.70. Mullvihill and Friedman had failed to first apply the federal tax deposits to the employer's share of FICA tax, which is not part of trust fund liability and cannot be collected from responsible persons. Mullvihill and Friedman subtracted the deposits from the total liability to On March 13, 1989, the aide sent another Form 2751 and a letter to Gatewood and to Kennedy informing them of the proposed assessment. Friedman immediately called Mullvihill after receiving the letter. Mullvihill explained that the new forms were sent because both Kennedy and Gatewood had signed one Form 2751 when they were required to sign separate forms. Friedman agreed to send Mullvihill two copies of Form 2751 for Gatewood and for Kennedy. Later on April 20, 1989, Friedman sent to the IRS the final installment on what he believed to be the full assessment of Data Mailers's tax withholding liability.

reach the erroneous assessment for the second quarter of 1988 and to conclude that there was no trust fund liability for responsible persons of Data Mailers for the third quarter.

On October 16, 1989, and on October 30, 1989, the IRS assessed a 100-percent liability against Gatewood and Kennedy respectively pursuant to 26 U.S.C. § 6672 for unpaid federal withholding taxes due for the second and third quarters of 1988. The assessment totalled $52,043.70. Section 6672 allows the IRS to assess a penalty against a "responsible person" who willfully fails to collect and pay over tax due under other provisions of the tax code. Both Kennedy and Gatewood refused to pay, averring that they had already sent in the full assessment as represented to them by Mullvihill.

Kennedy, on May 22, 1990, brought a refund suit in the United States District Court for the Northern District of Illinois requesting the return of $5,150.30 withheld from his tax return by the IRS for Data Mailers's unpaid withholding taxes and seeking abatement of the 100-percent penalty assessment against him. The United States filed an amended answer and asserted counterclaims against Kennedy for $46,893.40 plus interest and against Gatewood for $28,679.51 plus interest. In his answer to the government's counterclaim, Gatewood asserted two affirmative defenses, equitable estoppel and accord and satisfaction. The United States then moved for summary judgment against Gatewood for $45,370.89. In responding to the government's motion, Gatewood reasserted equitable estoppel and accord and satisfaction. Gatewood also questioned the government's assessment against him, which had risen from $28,679.51 to $45,370.89. The change in assessment came from a reallocation of the money Friedman sent to the IRS, money which Friedman believed to extinguish Gatewood's and Kennedy's tax liabilities. Originally, the entire $23,382.20 was credited to Gatewood's account. The new assessment against Gatewood reflected that half the $23,382.20, or $11,691.10, was credited to Gatewood's account and to Kennedy's account. The United States denied that a valid settlement existed and maintained that Mullvihill did not have the authority to enter into a settlement agreement. Gatewood's alleged reliance on Mullvihill's representations was, the government asserted, unreasonable by definition.

On December 27, 1990, the district court granted the government's motion for summary judgment. As to Gatewood's estoppel defense, which is at issue in this appeal, the court stated Gatewood's reliance on Mullvihill's representations regarding the satisfaction of the 100-percent liability with a $23,382.20 payment was unreasonable since Mullvihill was not...