Babcock v. United States

• Decision Date: 22 December 2009
• Docket Number: No. CV 08–08467 SJO (FFMx).,CV 08–08467 SJO (FFMx).
• Citation: 807 F.Supp.2d 904
• Parties: Arthur BABCOCK, Plaintiff, v. UNITED STATES of America, Defendant,United States of America, Counterclaimant, v. Arthur Babcock; Dante Jumanan; and Thomas R. Soper, Counterclaimant-defendants,Dante Jumanan; and Thomas R. Soper; Counterclaimants, v. United States of America, Counterclaimant–Defendant.
• Court: U.S. District Court — Central District of California

807 F.Supp.2d 904

Arthur BABCOCK, Plaintiff,

v.UNITED STATES of America, Defendant,United States of America, Counterclaimant,

v.Arthur Babcock; Dante Jumanan; and Thomas R. Soper, Counterclaimant-defendants,Dante Jumanan; and Thomas R. Soper; Counterclaimants,

v.United States of America, Counterclaimant–Defendant.

No. CV 08–08467 SJO (FFMx).

United States District Court, C.D. California.

Dec. 22, 2009.

William M. Weintraub, Jeffer Mangels Butler and Marmaro, Los Angeles, CA, for Arthur Babcock.

Thomas Derrick Coker, Office of U.S. Attorney, Los Angeles, CA, for United States of America.

Dan P. Sedor, Jeffer Mangels Butler and Marmaro, Los Angeles, CA, for Arthur Babcock, Dante Jumanan and Thomas R. Soper.

AMENDED ORDER GRANTING MOTION FOR SUMMARY JUDGMENT IN FAVOR OF THE UNITED STATES OF AMERICA, DEFENDANT/COUNTERCLAIMANT AND AGAINST COUNTERCLAIM DEFENDANTS ARTHUR BABCOCK, DANTE JUMANAN, AND THOMAS R. SOPER

ORDER DENYING PLAINTIFF'S AND COUNTERCLAIMANTS' MOTION FOR SUMMARY JUDGMENT [Docket Nos. 15 and 19]

S. JAMES OTERO, District Judge.

This matter is before the Court on Defendant/Counterclaimant Defendant the United States of America's (“Defendant U.S.A.”) Motion for Summary Judgment, filed June 23, 2009, and Plaintiff Arthur Babcock and Counterclaimants Dante Jumanan and Thomas R. Soper's (collectively, “Taxpayers”) Motion for Summary Judgment, filed August 21, 2009. The respective parties filed Oppositions and Replies. The Court found this matter suitable for disposition without oral argument and vacated the two motions set for September 21, 2009. See Fed.R.Civ.P. 78(b). For the following reasons, Defendant U.S.A.'s Motion is GRANTED and Taxpayers' Motion is DENIED.

I. BACKGROUND

Arthur Babcock (“Babcock”), Dante Jumanan (“Jumanan”), and Thomas R. Soper (“Soper”) founded the AES Construction business in 1993. ( See Pl.'s & CounterClaimants' Notice of Mot. for Summ. J. (“Pl.'s Mot.”) 3; see Plaintiff & CounterClaimants' Statement of Uncontroverted Facts and Conclusions of Law (“Pl.'s Statement of Facts”) 2.) Taxpayers' business grew and was then incorporated as AES Construction Group, Inc. (“Construction”) in 1998, and as AES Management, Inc. (“Management”) in 2001. ( See Pl.'s Mot. 3; see Pl.'s Statement of Facts 2.) “Construction was engaged in the business of constructing commercial, industrial, and municipal construction projects.” (Pl.'s Statement of Facts 2.) “Between January 2002 and June 2003 (hereafter, the “Period at Issue”), the Taxpayers were shareholders, officers and employees of Construction.” (Pl.'s Statement of Facts 2.) Management was engaged in the business of operating a payroll service. ( See Pl.'s Mot. 3.) “The Taxpayers also were officers and employees of Management; Soper was a shareholder of Management.” (Pl.'s Statement of Facts 3.) Construction and Management (collectively, the “Companies”) are now defunct and have no assets. (Pl.'s. Mot. 3; Def.'s Mot. for Summ. J. Against Pl. and CounterClaim Defs. (“Def.'s Mot.”); Exs. Submitted in Supp. of Def.'s Mot. for Summ. J. Against Pl. & CounterClaimants (“Def.'s Exs.”) Ex. 101.)

During the Period at Issue, the Companies were required by federal law to make employment tax deposits electronically using the Electronic Federal Tax Payment System (“EFTPS” or “System”). (Pl.'s Statement of Facts 3; Def.'s Mot. 4.) The Companies enrolled in EFTPS and made certain employment tax deposits electronically for certain payroll tax periods, as they were required to do. (Def.'s Exs. Ex. 101.) “The EFTPS provided two interchangeable payment methods for employers to make federal tax deposits, namely EFTPS online (internet) and EFTPS by phone (Automated Voice Response System).” (Def.'s Exs. Ex. 101.) When using EFTPS, the Companies were required to provide specific information when prompted by the Automated Voice Response System. “Under the System, a taxpayer can specify the tax period for which deposits are made by entering the 2–digit tax year and 2–digit month of each payment. There is, however, no means by which a deposit made via the EFTPS can be designated between a corporation's non-trust fund and trust fund payroll tax liabilities.” (Def.'s Mot. 4; see Pl.'s Opp'n to Def.'s Mot. for Summ. J. (“Pl.'s Opp'n”) 2.)

A. Construction and Management Third and Fourth Quarters 2002 and Second Quarter of 2003

Construction did not make any payroll tax deposits for the last three payroll periods of the third quarter of 2002, namely the payroll periods for September 13, September 20, and September 27. (Def.'s Mot. 5; Def.'s Exs. Ex. 101.) For the fourth quarter of 2002, Construction did not make any payroll tax deposits for payroll periods in October, the fifth payroll period in November, or the four payroll periods in December. (Def.'s Exs. Ex. 101.) Additionally, “Construction did not submit to the IRS written instructions for the application of any partial payroll tax deposits made during 2002 and 2003.” (Def.'s Mot. 5.) Management did not make payroll tax deposits for payroll periods in September, October, November, or December 2002. (Def.'s Exs. Ex. 101.) Management did not make payroll tax deposits for the second payroll periods in May and June 2003, either. (Def.'s Exs. Ex. 101.) Like Construction, “Management did not submit to the IRS written instructions for the application of any partial payroll tax deposits made.” (Def.'s Mot. 6.)

As early as the first quarter of 2003, financial difficulties compelled the Taxpayers to “instruct the payroll accounting staff for both [C]ompanies to apply all funds available for payroll tax payments exclusively to the trust fund portion of the payroll taxes due.” (Def.'s Exs. Ex. 106, 6; Pl.'s Mot. 3.) The Companies' accounting personnel, including Cesar Santiago, “were unable to determine any way to so allocate the weekly payroll tax payments made through the [EFTPS] and conveyed this to [the] Taxpayers.” (Def.'s Exs. Ex. 106.) Mr. Santiago contacted the IRS, but it was “unable to provide [him] with an answer.” (Def.'s Exs. Ex. 106, 6–7.) Consequently, “any payments made by [the] Taxpayers through the [EFTPS] were automatically applied to both the trust fund portion and the employer's portion of the payroll tax obligation.” (Def.'s Exs. Ex. 106, 7.) The Taxpayers maintain that “[a]t the time that the Companies recommenced making payroll tax payments, [they] were cognizant of the fact that prior quarter payroll tax liabilities—including the trust fund portion of such liabilities—remained delinquent.” (Pl.'s Mot. 5.)

Taxpayers soon thereafter retained Karrie L. Bercik as legal counsel to instruct them with regards to designating payroll taxes, but after some discussion with IRS personnel, Ms. Bercik was unable to resolve the matter. (Def.'s Exs. Exs. 106, 107.) The Taxpayers contend that “the Companies' personnel responsible for making EFTPS payroll deposits were unable to determine any way to allocate the deposits exclusively to the trust fund portion of the current or delinquent payroll liabilities, and were given no guidance from the IRS in response to telephone inquiries.” (Pl.'s Mot. 6.) On July 6, 2004, after trust fund recovery penalties were assessed, Ms. Bercik “filed a formal written protest and appeal on behalf of one of the Taxpayers” against the IRS. (Def.'s Exs. Exs. 106, 107.)

B. Tax Assessments Against the Taxpayers

On July 6, 2006, the IRS entered assessments against the Taxpayers in the amounts of (1) $94,380.09, (2) $355,536.41, and (3) $53,375.74, with respect to income taxes and Federal Insurance Contribution Act (“FICA”) taxes withheld from wages and salaries of Management employees during the third and fourth quarters of 2002, and the second quarter of 2003, respectively, pursuant to 26 U.S.C. § 6672 (“ § 6672”).¹ ( See CounterClaimants' Answer to Def.'s CounterClaim ¶¶ 4, 7, 10, 13, 19, 22; see 26 U.S.C. § 6672.) The IRS also entered assessments against the Taxpayers in the amounts of (1) $72,174.23 and (2) $122,358.62, with respect to income taxes and FICA taxes withheld from wages and salaries of Construction employees during the third and fourth quarters of 2002, respectively, pursuant to 26 U.S.C. § 6672. ( See CounterClaimants' Answer to Def.'s CounterClaim ¶¶ 4, 7; see 26 U.S.C. § 6672.)

Principally, Taxpayers argue that the IRS' refusal to designate certain of the Companies' employment tax deposits to the trust fund portion of prior quarters' delinquencies is incorrect, improper,² and unfair.³ (Pl.'s Statement of Facts 5; FAC ¶ 12.) The Taxpayers contend that prior to this litigation, they “attempted to convince the IRS though administrative appeals to allow [them] to designate certain of the Companies' employment tax deposits solely to the trust fund portion of the prior quarters' delinquencies, [but] the IRS refused to so reallocate those [deposits].” (Pl.'s Statement of Facts 5.) The Taxpayers therefore, seek to designate “(a) the application of the Third Quarter 2002 EFTPS [deposits] entirely to the Trust Fund Portion of the Companies' Third Quarter 2002 payroll tax liabilities, and (b) the application of the Subsequent [deposits] entirely to the Delinquent Trust Fund Payments.” (Pl.'s Statement of Facts 5.) As such, Taxpayers claim that the IRS' disallowance of their claims has resulted in (a) overpaying trust fund recovery penalties in the amount of $1,846.95, and (b) unlawful assessment of trust fund recovery penalties in the amount of $166,554.32 (attributable to the 9/30/2002 payroll tax period) and $166,554.32 (attributable to the 12/31/2002 payroll tax period). (Pl.'s Statement of Facts 5.)

The Taxpayers therefore, argue that they are entitled to recover $1,846.95 from Defendant U.S.A., and that they “are further entitled to a determination that the assessment against [them] for trust fund recovery penalties in the amount of $166,554.32 (attributable to the 9/30/2002 payroll tax period) and $371,767.49 (attributable to the 12/31/2002 payroll tax period) are...