Don Johnson Motors, Inc. v. U.S.

• Decision Date: 21 December 2007
• Docket Number: Civil Action No. B-06-047.
• Citation: 532 F.Supp.2d 844
• Parties: DON JOHNSON MOTORS, INC., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Texas

532 F.Supp.2d 844

DON JOHNSON MOTORS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

Civil Action No. B-06-047.

United States District Court, S.D. Texas, Brownsville Division.

December 21, 2007.

COPYRIGHT MATERIAL OMITTED

Robert Bryan Perry, Attorney at Law, Dallas, TX, for Plaintiff:

Thomas M. Herrin, Dallas, TX, for Defendant.

MEMORANDUM OPINION AND ORDER

ANDREW S. HANEN, District Judge.

I. BACKGROUND

1. Don Johnson Motors, Inc. ("Plaintiff') is a car dealership operating in the Brownsville, Texas area. (Testimony of Don Johnson, Sr. ("Johnson"), Day 1).¹ The corporation formed in 1974. (Id.)

2. Plaintiff added Jeep vehicles to its dealership, which resulted in an increase in sales volume and required Plaintiff to hire more employees. (Johnson, Day 1).

3. Sometime prior to 1999, because of the increase in employees, the. Internal Revenue Service required Plaintiff to begin filing its taxes by Electronic Funds Transfer ("EFT"). (Johnson, Day 1). From that date forward, Plaintiff had to file its Form 940 annual federal unemployment taxes ("Form 940 taxes") and Form 941 quarterly employment taxes ("Form 941 taxes") electronically through the Electronic Federal Tax Payment. System ("EFTPS"). (See A. Carlos Barrera ("Barrera"), Day 1).

4. In prior years, Plaintiff completed its tax returns and filings by hand. (Johnson, Day 1). Johnson testified that he had signed all the tax returns and made sure the payments were deposited. (Id.) Johnson testified that he felt like he "lost control when they took [Plaintiffs tax obligations] out of his hands." (Id.)

A. The IRS Assessed Penalties Against Plaintiff for Failure to Timely File Returns and Pay its Taxes for Periods from 1999 to 2002

5. From 1999 through 2002, Plaintiff delegated payroll tax functions to an in-house accountant, Michael Ezequiel ("Ezequiel"). Ezequiel performed his role under the supervision of Plaintiffs office manager. (Pl.Ex. 6); (see Johnson, Day 1).

6. Plaintiffs office manager was responsible for oversight of the employment taxes and for signing Plaintiffs employment tax returns. (Pl.Ex. 6).

7. Plaintiff hired Ezequiel to handle, among other responsibilities, the actual electronic filing of its employment taxes. (Johnson, Day 1). Ezequiel prepared Plaintiffs employment tax returns and was also in charge of monitoring the payroll accounts and the information included in the Forms 940 and 941. (See Pl.Ex. 6). Johnson testified that Ezequiel was given "quite a bit of responsibility." (Id.)

8. At some point in 1999, for reasons not explained, Ezequiel stopped paying portions of Plaintiffs payroll taxes to the IRS. (See Johnson, Day 1); (Internal Revenue Service Revenue Officer Ricardo Sobrevilla ("Sobrevilla"), Day 2); (Pl.Ex. 3). As a result, Plaintiff made incomplete deposits to the IRS from 1999-2002. (Sobrevilla, Day 2); (Pl.Ex.3). Ezequiel also failed to make payments to Plaintiff's 401K plan. (Johnson, Day 1).

9. Plaintiff's incomplete deposits apparently masked the fact that Plaintiff was not fully complying with its tax obligations. (Sobrevilla, Day 2).

10. The executives of Plaintiff were unaware of any problems with its payroll accounts for the years 1999 through 2002 until Johnson began, an internal review of Plaintiffs financial reports in December of 2002. (Pl.Ex. 6). In December of 2002, Johnson began his yearly analysis of Plaintiffs November financial statement to determine what Plaintiff might be able to "write off." (Johnson, Day 1). Johnson noticed that the November financial statement reflected a "lot more cash than [he] usually had." (Id.)

11. Plaintiffs cash management savings account had gone from $200,000 to nearly $800,000. (Johnson, Day 1). This excess cash worried Johnson because Plaintiff "was not making that much money" and Plaintiffs "inventories weren't going down." (Id.)

12. Also approximately around this time, Plaintiff was notified that it had not paid its employees' portion of the 401K participation in several months. (Johnson, Day 1).

13. Johnson initially believed the imbalances were the result of a change in computer software Plaintiff underwent in August of 2002. (See Johnson, Day 1); (Pl. Ex. 6).

14. Nevertheless, because of the extent of the irregularities, Johnson called his accountant, A. Carlos Barrera ("Barrera"), a partner at Long & Chilton, L.L.P., to investigate the situation. (Johnson, Day 1); (see Pl.Ex. 6).

15. Barrera and another Long & Chilton employee, Sandra Hargis ("Hargis"), initially thought an employee might be stealing money from Plaintiff and began checking Plaintiffs bank accounts. (Johnson, Day 1).

16. During the pendency of this action and throughout trial, Plaintiff has never alleged or presented any evidence demonstrating that Ezequiel or any other employee embezzled funds from Plaintiff.

17. In March 2003, Plaintiff received a notice from the IRS stating that Plaintiff had not sent in a Form 941 return for a quarter in 2002 and had not paid its payroll tax for that quarter. (Johnson, Day 1); (see Pl.Ex. 3).

18. Barrera and Hargis then recreated the Form 941 returns for each quarter in 2002. (Johnson, Day 1). Through this process, Barrera and Hargis, discovered that, for some time, Ezequiel had not been paying portions of the payroll taxes and had been failing to make payments to Plaintiffs 401K plan for its employees. (Johnson, Day 1).

19. Barrera then consulted the IRS Taxpayer Hotline regarding the situation. (Barrera, Day 1). These consultations revealed that Plaintiffs failure to file Form 941 employment tax returns and pay Plaintiff's employment taxes extended beyond 2002 to periods in 1999, 2000 and 2001. (Id.)

20. Plaintiff filed late returns for tax periods in 1999-2002 in January, March and July of 2003. (See Def. Ex. 1 at pp. 10, 26, 35, 47, 60, 71, 82, 91, 101, 111, 119, 128, 135, 141). Plaintiff also paid at least some of the outstanding tax liabilities for those tax periods. (Id.)

21. The IRS assessed penalties against Plaintiff for its failure to file returns and timely pay taxes for periods in 1999 through 2002. (See Def. Ex. 1 at pp. 11, 28, 38, 52, 64, 75, 86, 94, 104, 112, 119, 128, 135, 141). Plaintiff received penalty notices for these tax periods beginning in 2003. (See, e.g., Def. Ex. 1 at pp. 15, 32); (see also Pl. Proposed Findings of Fact and Conclusions of Law [hereinafter Pl. Findings] at p. 19).² Johnson also testified that Plaintiff received penalty notices. (Johnson, Day 2).

22. Plaintiff requested an abatement of all penalties assessed for periods in 1999-2002 for reasonable cause. (See Barrera, Day 1); (Pl.Ex.6). The IRS denied this request. (Pl.Ex. 32). The denial stated in part:

Your request to abate ... does not conform to reasonable cause.... A prudent businessman would exercise caution in the training of specific responsibilities of each new employee. You mentioned the failure by both the in-house accountant and the supervising manager to perform these responsibilities and the concealment of those failures for those years is what caused the delinquency.

. . .

[O]verall, reasonable cause requirements state, "Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause". [sic]

. . .

This is your written notification that I have determined that your request for reasonable cause abatement was not met and I am denying abatement of all the penalties. (Id.)

23. Plaintiff appealed this denial of abatement. (Pl.Ex. 51). Plaintiffs appeal was also denied. (Id.)

24. Plaintiff has not paid the penalties and some accrued interest owed for the periods in 1999-2002. (See Johnson, Day 2); (Pl.Ex.78).

B. The IRS Also Assessed Penalties Against Plaintiff for Failure to Timely Pay and Deposit Its Taxes for Periods in 2003 and 2004

25. Since Plaintiff was required to use EFTPS to file its employment taxes, Plaintiff utilized the Automated Clearing House ("ACH") system to transmit payment of payroll taxes to the IRS through the EFTPS — Through a Financial Institution System during a period which included 2003 and 2004. (See Hargis, Day 2); DEPT. OF TREASURY, FINANCIAL INSTITUTION HANDBOOK FOR EFTPS, INTERNET VERSION [hereinafter HANDBOOK FOR EFTPS] 5 (2002), available at, http://www.fms.treas.gov/ eftps/eftpshandbook.pdf.

26. A taxpayer using the EFTPS-Through a Financial Institution system authorizes a financial institution, such as the taxpayer's bank, to initiate an ACH credit transaction to pay the IRS. HANDBOOK FOR EFTPS at p. 5. Plaintiff designated Texas State Bank (the "Bank") as its financial institution for purposes of making payments of employment taxes to the IRS through EFTPS. (See Barrera, Day 1); HANDBOOK FOR EFTPS at p. 5.

27. The Bank provided Plaintiff, with specific software to use when initiating EFTPS transactions. (Barrera, Day 1). Plaintiffs employee would use the software to instruct the Bank to transfer money from Plaintiffs account to an IRS account to cover Plaintiff's employment tax liability for a specified' tax period. (Id.); (Hargis, Day 2).

28. In June 2003, the Bank implemented a new software program for Plaintiff to use when electronically filing its employment taxes. (Pl.Ex. 9). The Bank was supposed to send two people to train Plaintiffs employees on' the new Bank software, however the Bank only sent one trainer. (Johnson', Day 1). It was later determined that this trainer had only worked for the Bank for two days. (Id.)

29. Two of Plaintiffs employees received this training from the Bank on the new Bank software. (Johnson, Day 1).

30. When utilizing the new Bank software, Plaintiffs employee would see a screen telling the employee to input the Plaintiffs tax identification information, Plaintiffs bank account number, and the amount the Plaintiff wanted to pay over to the IRS. (Hargis, Day 2).

31. The new software also required Plaintiffs employee to mark the tax period of the filing twice (e.g., First Quarter — 2004) in...