In re Quattrone Accountants, Inc.
| Decision Date | 12 July 1988 |
| Docket Number | Bankruptcy No. 86-2307,Motion No. 87-0246,88-1704. |
| Citation | 88 BR 713 |
| Parties | In re QUATTRONE ACCOUNTANTS, INC., Debtor. QUATTRONE ACCOUNTANTS, INC. and Phillip P. Quattrone, Plaintiffs, v. UNITED STATES of America, INTERNAL REVENUE SERVICE, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
Robert O. Lampl, Pittsburgh, Pa., for debtor/plaintiffs.
J. Alan Johnson, U.S. Atty., Pittsburgh, Pa., Michael J. Salem, U.S. Dept. of Justice, Washington, D.C., for defendant.
Presently before the Court is Debtor's Objection to the Claim of the Internal Revenue Service ("IRS"), and a Complaint to Determine Tax Liability of Debtor and Phillip P. Quattrone.1
Debtor disputes its identification, for tax assessment purposes, as a "responsible person" of the United Dairy Farmers Cooperative Association ("UDF"). Alternatively, Debtor contends that the IRS must first seek to satisfy the tax debt through UDF, and that Debtor should only be assessed, if at all, to the extent UDF is unable to cure the default. Debtor's principal, Quattrone, voices similar objections, and seeks this Court's determination that he is not obligated for UDF's delinquent trust fund taxes.
The IRS contends that Debtor is in fact a responsible party which willfully permitted UDF to become delinquent in its payment of trust fund taxes. Additionally, the IRS seeks dismissal of Quattrone's Complaint, asserting that this Court is without jurisdiction to decide the tax liability of a non-debtor, third party.
Based upon the testimony and arguments presented at trial, and the post-trial briefs submitted thereon, we find that Debtor is a responsible person, liable for trust fund taxes associated with UDF. We further find that this Court lacks jurisdiction to make a determination of the tax liability of Quattrone, a non-debtor, third party.
UDF was formed in 1965 as a dairy cooperative, owned and operated by member-volunteers. As it prospered, UDF found it needed professional accounting services, and hired the Debtor in that capacity in the late 1960's.
Ernest Hayes ("Hayes"), UDF's President, ran the day-to-day administration from its inception through 1981. His management responsibilities were delegated to him by the Board of Directors. The Board hired Debtor to handle all of the accounting and financial activities of UDF. Debtor was very important to the internal machinations of UDF, as it had no in-house bookkeeping and accounting staff, relying exclusively upon Debtor's operations. UDF constituted over fifty percent (50%) of Debtor's business, with as many as ten (10) of Debtor's twenty (20) employees working on the UDF account full time.
On a frequent, if not daily, basis Hayes and Debtor telephoned and/or met to discuss UDF's finances. Debtor was responsible for calculating payroll and distributing paychecks for all of UDF's 60-80 retail outlets. All of UDF's bills were sent directly to Debtor's offices; and all standard monthly bills were paid by Debtor automatically, by use of signature facsimile stamps prepared for Hayes and Helen Zitney.2 For special debts, outside the standard monthly payments, the decision to pay and when, was made by Hayes and Debtor jointly. Debtor was also responsible for the preparation and filing of UDF's federal, state and local tax returns. Said returns were similarly signature stamped at Debtor's offices. Finally, Debtor was authorized to procure and manage all of UDF's loans.
Each month UDF's Board of Directors held a general meeting. Hayes and Debtor always attended these meetings, at which time Debtor would make a complete financial presentation, advising the members regarding the previous month's revenues and expenses, including bills Debtor determined to pay and debts it left outstanding.
UDF maintained three (3) checking accounts. One was used as a "petty cash" fund, and was limited to disbursements of less than $1,000.00. The second account was used only for payment to the milk producers. These two checkbooks were kept at UDF's offices. The third checking account, the General Account, was used to collect all revenues and disburse all other expenses. This checkbook was maintained at Debtor's offices. Because Debtor's offices were not in the UDF facility, and as Debtor was responsible for distributing a very high volume of checks, the previously mentioned signature facsimile stamps for Hayes and Zitney were made and delivered to Debtor. Debtor used these facsimile stamps on all checks and tax returns.
This procedure worked very successfully until early in 1980 when a succession of events occurred, radically changing UDF's financial picture. Initially, the Department of Agriculture required UDF to modify its schedule of payments to its suppliers. As these payments constituted a substantial portion of UDF's monthly expenses, the radical change caused many payments to creditors to be untimely.
Shortly thereafter, Pittsburgh National Bank ("PNB") "called" an $800,000.00 loan, and froze UDF's accounts. UDF's Board of Directors held a special meeting, demanding an explanation. Debtor assured the Board that the bank had been paid, but the bank insisted that the loan was in default. Debtor advised the members that the loan could be paid a second time, until the problem was uncovered. This would be accomplished by the members lending UDF two-thirds of one month's milk receipts; the members agreed to do so, seeing no other means to obtain the release of their accounts. Upon information of same, the Department of Agriculture advised UDF that the members' loan would be characterized as an assessment; the Department brought suit against UDF, and obtained a $1.2 million judgment.
At this same time, the IRS began its investigation, because UDF was $50,000.00 overdue on its withholding tax deposits. Again, the Board of Directors called a special meeting to determine how to proceed. UDF was without sufficient funds to pay the taxes. The farmers could not use their milk receipts to assist, without creating another assessment by the Department of Agriculture. Banks would not lend UDF any money due to the $1.2 million judgment outstanding. Again, the Board of Directors turned to Debtor for guidance and assistance. Debtor sought out individual investors, including Quattrone, individually, forming a group called Professional Associates. UDF borrowed $250,000.00 from Professional Associates, specifically to pay presently due taxes and to bankroll the remainder for payment of withholding taxes anticipated for the following four (4) quarters. In return for this loan, UDF gave Professional Associates $3.5 million of equipment as collateral, while continuing to use same under a leaseback agreement.
During the course of the following year the Board of Directors and individual members consistently questioned Debtor about the quarterly tax payments, and Debtor consistently averred that same were paid. In the fall of 1981 the Board directed Debtor to produce deposit receipts to verify the tax payments. When Debtor's receipts did not correspond to the amounts due, Debtor was fired.
In October of 1982, UDF filed a Chapter 11 bankruptcy petition, and listed, in its scheduled debts, outstanding withholding taxes for the periods ending June 30, 1981 and September 9, 1981.
In an effort to collect these taxes the IRS assessed several parties pursuant to 26 U.S.C. § 6672 for payment of penalties associated with nonpayment of trust fund taxes. Those parties so assessed included Hayes, Quattrone, and Debtor. Said assessments now total $85,368.82, plus interest.
Initially we address Debtor's Objection to IRS Exhibits 1 and 10 as being hearsay. The IRS has argued that the documents in question, written records of telephone interviews conducted by an IRS agent, constitute admissible hearsay as business or public records, pursuant to 28 U.S.C. § 1732 and Federal Rule of Evidence 803(8). The criteria for both hearsay exceptions are essentially the same:
Bowman v. Kaufman, 387 F.2d 582 (2nd Cir.1967); United States v. Hickey, 360 F.2d 127 (7th Cir.) cert. denied 385 U.S. 928, 87 S.Ct. 284, 17 L.Ed.2d 210 (1966); Fraley v. Rockwell International Corp., 470 F.Supp. 1264 (S.D.Ohio 1979).
Once a report is conclusively shown to represent findings of a public agency made pursuant to an investigation authorized by law, the central issue becomes whether the report is trustworthy. Kehm v. Procter & Gamble Mfg. Co., 724 F.2d 613 (8th Cir. 1983). The burden of proving that the statement is untrustworthy falls on the party opposed to it. United States v. Paducah Towing Co., Inc., 692 F.2d 412 (6th Cir.1982); Revlon, Inc. v. Carson Products Co., 602 F.Supp. 1071 (S.D.N.Y.), aff'd. 803 F.2d 676 (2nd Cir.), cert. denied, 479 U.S. 1018, 107 S.Ct. 671, 93 L.Ed.2d 722 (1986). The person making the record, or supplying the information on which it is based, must have had no peculiarly powerful motive to misrepresent; such a motive, if it exists, must be relatively minimal and marginal. Hoffman v. Palmer, 129 F.2d 976 (2nd Cir.1942), aff'd. 318 U.S. 109, 63 S.Ct. 477, 87 L.Ed. 645 (1943).
The Tenth Circuit recently decided a case with similar factual background. In United States v. Bohrer,3 807 F.2d 159 (10th Cir.1987), the IRS agent telephoned the Defendant at a number obtained from directory assistance and conducted an information-gathering interview. The IRS noted the Defendant's responses on its form called a "contact card". The Court found that admission of the contact card was improper:
Admission under the business records exception is not available to documents prepared for ultimate purposes...
To continue reading
Request your trial