Barmes v. I.R.S., TH 97-287-C-T/F.
| Decision Date | 08 March 2000 |
| Docket Number | No. TH 97-287-C-T/F.,TH 97-287-C-T/F. |
| Citation | 116 F.Supp.2d 1007 |
| Parties | Marvin L. BARMES and Barbara J. Barmes, Plaintiffs/Counterclaim Defendants, v. INTERNAL REVENUE SERVICE, United States of America, Defendant/Counterclaim Plaintiff/Third-Party Plaintiff, v. Sandbar Real Estate Trust, Sandbar Wholesale Trust, established under instruments dated 10/12/95, as alter egos, nominees and/or transferees of Marvin L. Barmes and Barbara J. Barmes; and James Rabold, Kim Hall Barmes, and Susan Thomas Barmes, co-trustees of the Sandbar Real Estate Trust and the Sandbar Wholesale Trust, as nominees, agents, constructive trustees, and/or transferees of Marvin L. Barmes and Barbara J. Barmes, Third-Party Defendants. |
| Court | U.S. District Court — Southern District of Indiana |
Marvin L. Barmes, Barbara J. Barmes, Vincennes, IN, for Plaintiffs.
Gerald A. Coraz, Indianapolis, IN.
William M. Kostak, Trial Attorney, Tax Division, U.S. Dept. of Justice, Washington, DC, for Defendants.
Who really owns and operates "Barbara's Gift Shop"? That question is at the heart of this tax dispute, and the matter is now before the court upon cross-motions for summary judgment. The plaintiffs, Marvin Barmes and Barbara Barmes, filed their motion for summary judgment on March 4, 1998. The defendant, the United States of America, filed its motion for summary judgment on October 19, 1998.
The business commonly known as "Barbara's Gift Shop" began its operations in 1972 in Vincennes, Indiana. Over the years, the business ran a gift shop, manufactured novelty items like pipes and clocks, and conducted sales through mail order catalogues. Though jointly owned by the plaintiffs-Marvin Barmes and his wife, Barbara—the business was far from the "mom and pop" operation its name suggests, employing around 80 people. Employers like Barbara's Gift Shop are required to withhold federal taxes from employee wages. See 26 U.S.C. §§ 3102(a), 3402(a). When they do so, they hold the money in trust for the United States and must pay over the money by filing employee withholding tax returns on a quarterly basis. See 26 U.S.C. § 7501(a). The IRS keeps track of such employers by assigning each an Employer Identification Number ("EIN"). The IRS assigned EIN 35-1305131 to Barbara's Gift Shop.
At first, income tax returns and IRS records indicated that Barbara's Gift Shop was run by Marvin Barmes as a sole proprietorship. But in 1984 and 1985, Mr. and Ms. Barmes filed income tax returns as a partnership on Form 1065, U.S. Partnership Return of Income, again identifying the business with EIN 35-1305131. After 1985, Mr. and Ms. Barmes filed a joint income tax return on Form 1040 with a Schedule C, Profit (or Loss) From Business or Profession. While the Barmeses' income tax returns indicated that the business was a sole proprietorship after 1985, the business continued to file quarterly employee withholding returns with the same EIN. Since 1984, IRS records have indicated that EIN 35-1305131 was assigned to "Marvin L and Barbara J Barmes PTR."
On October 12, 1995, ownership of the business was transferred to an entity called "Sandbar Wholesale Trust" and employees of Barbara's Gift Shop were ostensibly discharged. In 1996, Barbara's Gift Shop continued its operations under the ownership of the trust, though its workers were purportedly "independent contractors" rather than employees. By letter dated May 24, 1996, the IRS informed the Barmeses that "[b]ased upon your information we agree that you are no longer required to file" quarterly tax returns for employee withholding. Accordingly, the business did not timely file its quarterly withholding returns in 1996.
Meanwhile, the IRS was in the midst of a covert, informal investigation to determine whether the business still retained employees for withholding purposes. On December 9, 1996, the IRS sent notices of deficiency to the business for the first two withholding quarters of 1996. The plaintiffs responded on December 12, 1996, by co-signing a letter stating that "[f]or the entire year 1996 I have not been an employer and have no employees." That same day, the Barmeses also submitted employer's withholding federal tax returns for the quarterly periods of March 31 and June 30, 1996. Both returns showed no money due because of the Barmeses' position that the business had no employees. The returns also had a box checked indicating that withholding returns did not need to be filed in the future. The business was identified on the returns with the same EIN; the name of the business was listed as "Marvin L and Barbara J Barmes PTR."
The IRS usually evaluates a tax return after it is received. If the return is deemed satisfactory, the IRS enters an assessment for the amount of tax that the taxpayer has calculated as owing. If the IRS disagrees, it can enter a different assessment—but only after it sends a notice of deficiency to the taxpayer and affords him/her the opportunity to challenge its findings in Tax Court. Once it makes an assessment, the IRS generally has 60 days to issue a notice and demand for payment to the taxpayer, and ten years to collect the assessed amount. 26 U.S.C. §§ 6303, 6502(a)(1). Refusal to pay the tax upon demand results in a lien in favor of the United States "upon all property and rights to property, whether real or personal," that the taxpayer owns. 26 U.S.C. § 6321. Such a lien is commonly called a "secret lien" because it is unknown by anyone except the IRS and the taxpayer. Collection of the tax may then be made through administrative (e.g., levies) or judicial (e.g., suits to foreclose liens and reduce assessments to judgment) procedures. See 26 U.S.C. §§ 6326, 7403.
In this case, the IRS disagreed with the plaintiffs' returns and sent a proposed assessment on February 21, 1997, against Barbara's Gift Shop for the first two quarters of 1996. On March 1, 1997, the plaintiffs both signed and sent a letter repeating that they had no employees and therefore had not withheld any money. Next, the IRS sent a series of assessment notices for each of the four 1996 quarterly tax periods, and for the Form 940 taxes for 1996. Form 940 is the employer's annual federal unemployment tax return. These notices were addressed to:
MARVIN L & BARBARA J BARMES
PTR
BARBARAS GIFT SHOP
120 MAIN ST
VINCENNES IN 47591-1234202
The IRS later sent final pre-levy notices to the business for these periods as well, which were also addressed like the assessment notices above. The IRS then filed notices of a federal tax lien with the County Recorder, Knox County, Indiana. The first tax lien notice was purportedly against "Martin L & Barbara J Barmes PTR, a Partnership," while the second listed the taxpayer as "Sandbar Real Estate Trust" as agent or alter ego of Marvin and/or Barbara Barmes.
On May 16, 1997, Mr. and Ms. Barmes filed an administrative claim for a refund from the four quarterly withholding periods of 1996 and from Form 940 taxes for 1996. In that claim, the plaintiffs asserted that Barbara's Gift Shop was not a withholding agent after its employees were discharged. The plaintiffs also submitted a money order for $400, which represented a partial payment under protest of the entire amount assessed. See Flora v. U.S., 362 U.S. 145, 162, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). By letter dated July 21, 1997, the IRS responded to the claim by saying it would contact the plaintiffs within 30 days. The IRS did not contact the plaintiffs again regarding their claim. In October 1997, the plaintiffs filed a supplement to their original claim, this time informing the IRS that it had wrongfully assessed taxes against a defunct partnership.
On July 17, 1997, the IRS issued a proposed assessment against the partnership for the first two quarterly withholding tax periods of 1997. Thereafter, the plaintiffs filed another administrative claim for a refund, tendered another $400 check, and directed that the amount be applied equally over the two quarterly periods. The plaintiffs asserted in the claim that they were entitled to a refund of $400 because the partnership was terminated and had no employees. The IRS denied the plaintiffs' claim. But on November 17, 1997, the IRS notified the Barmeses that—for reasons which remain mysterious-it had adjusted their account for the tax period March 31, 1997, to reflect no money due. The IRS further explained that it considered the second payment of $400 to be an overpayment that the IRS had applied to the Barmeses' tax debt from the assessment for March 31, 1996. Curious about the apparent abatement of the March 31, 1997 quarterly tax debt, the plaintiffs sent the IRS a letter explaining that the $400 payment was submitted under protest and that their administrative claim expressly directed the funds to be applied in equal amounts to each quarter at issue, March 31, 1997 and June 30, 1997. The IRS did not respond to that letter.
On November 2, 1997, the plaintiffs filed this action seeking: 1) a declaratory judgment that the liens stemming from the 1996 assessments are invalid; and 2) a refund for both $400 payments. The United States filed its counterclaims on January 26, 1998, seeking a judgment in the amount of the two unpaid assessments: 1) the first and second quarters of 1996 (totaling $255,936.64); and 2) the third and fourth quarters of 1996, plus federal unemployment taxes (totaling $341,083.63).1 Before the court are the plaintiffs' motion for summary judgment as to all pending claims and the government's cross-motion for summary judgment on the issue of the procedural correctness of the tax assessments.
A grant of summary judgment is appropriate when the pleadings and other submissions to the court "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R.CIV.P. 56(c). To determine whether a genuine...
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