Reiff v. U.S.
| Decision Date | 26 October 2006 |
| Docket Number | No. 05 CIV. 6855 CM.,05 CIV. 6855 CM. |
| Citation | 461 F.Supp.2d 142 |
| Parties | Manfred REIFF Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Hugh Janow, Law Offices of Hugh Janow LLC, Pearl River, NY, for Plaintiff.
Melanie Robin Hallums, U.S. Attorney's Office, New York, NY, for Defendant.
DECISION AND ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
In May 2003, the Internal Revenue Service assessed a trust fund recovery penalty against Manfred Reiff ("Reiff') as a responsible person pursuant to 26 U.S.C. § 6672 for the unpaid withholding tax obligations of LuuLuu.com, Inc. ("LuuLuu"). Over the last two quarters of 2000 and the first quarter of 2001, LuuLuu failed to pay approximately $193, 571.00 in federal employee withholding taxes. In August 2005, plaintiff brought this action challenging the assessment against him and seeking a refund of the $10, 649 collected in partial satisfaction of the obligation, and the Government filed a counterclaim seeking to reduce to judgment the balance of the unpaid assessment. The plaintiff does not contest the amount of the IRS's assessment, but he does contest his liability as a responsible person. Although he concedes he was a responsible person for the first two quarters of 2000, he contends that he was ousted from this position upon the arrival of Gloria Gavin ("Gavin") as acting CEO of LuuLuu in July 2000 and should therefore not be liable for LuuLuu's unpaid withholding obligations.
The following facts are undisputed for purposes of this summary judgment motion:
In November 1999, Reiff and Jody Raida ("Raida") founded LuuLuu, an internet start-up company formed to design web based computer software. (Deposition of Manfred Reiff, dated January 5, 2006 ("Reiff Dep") at 49.) Reiff had developed the idea that led to LuuLuu's formation, which was to create a "fit and sizing" application for use by manufacturers who sold clothing to customers over the internet. (Id at 46-48.)
At all relevant times, Reiff was a member of LuuLuu's Board of Directors. In fact, from November 1999 until February 2001, Reiff and Raida were the company's only directors. (Id. at 93-94.) On November 23, 1999, Reiff was elected Vice-President of LuuLuu. (Written Consent of the Initial Board of Directors of LuuLuu.com, Inc. at 2.) Reiff also owned a "substantial amount" of shares in LuuLuu, approximately 40 percent. (Id. at 149.) Another company that Reiff had co-founded in 1996 or 1997, The Firm Creative, invested start-up money in LuuLuu. (Id. at 64.) From November 1999 until February 2000, Reiff and Raida operated LuuLuu out of the same office as The Firm Creative in Manhattan and were LuuLuu's only employees. (Id. at 67, 71.)
In February 2000, LuuLuu moved its business to San Francisco and Reiff followed, while Raida remained in New York where LuuLuu continued to maintain an office. (Id. at 25, 68, 77-78.) Reiff worked in the day-to-day operations of LuuLuu's San Francisco office as the Technical Director, in which capacity he oversaw the team of technical employees. (Id. at 72, 78.) Likewise in February 2000, LuuLuu hired David Laird ("Laird") as its office manager. (Id. at 81: Deposition of David Laird, dated April 19, 2006 ("Laird Dep.") at 14.) Laird was responsible for setting up accounts with vendors, ordering office supplies, paying bills, setting up payroll, and some human resources functions. (Id. at 15.) When Laird first started at LuuLuu, Reiff and Raida directed him regarding what bills to pay, where to send offers of employment, and "what to do to make the office function." (Id. at 21.)
In late May or June of 2000, Reiff learned from Raida that LuuLuu was out of money. (Reiff Dep at 150-51). Reiff and Raida then convened a tele-conference with LuuLuu's "key investors," Gloria Gavin ("Gavin") and Simon Khalaf, to inform them of LuuLuu's financial problems and subsequently met with Gavin, Gavin's husband and possibly two other investors in San Francisco. (Id. at 151-52). At the meeting, they discussed "how to move forward," and decided that "the only person who could move things forward was Gloria Gavin due to being the contact person for all the investors for the funding." (Id. at 153.) Gavin became the acting CEO of LuuLuu effective July 15, 2000. (Acting CEO Agreement for Gloria Gavin.)
In July 2000, LuuLuu stopped using its prior payroll service, ADP. (Laird Dep. at 30). Laird was instructed by Gavin and Raida to stop using ADP because LuuLuu did not have enough money to pay the withholding taxes. (Id. at 30, 32). Laird sent an e-mail message to several employees, including Reiff, informing them that LuuLuu would no longer be using ADP "[i]n an effort to cut back on some extraneous costs." (E-mail message from David Laird, dated July 27, 2000.) Laird later testified that this was a lie, and the real reason why LuuLuu stopped using ADP was that Gavin "didn't want to pay the taxes." (Laird Dep at 106.) As of July or August 2000, Reiff knew that his paychecks were being issued "in-house" rather than by ADP. (Reiff Dep. at 124.)
In the fall of 2000, Reiff allowed LuuLuu to use his credit card to pay for various expenses, and LuuLuu did not reimburse him for the majority of the charges. (Reiff Dep. at 158-60.) On several occasions during the same period, Reiff was not paid his salary. (Id. at 147, 209; Laird Dep. at 42, 44, 54.) Reiff was also aware that during the same period, LuuLuu was not paying Raida her salary and was failing to pay some of its creditors in a timely manner. (Reiff Dep. at 148, 210-11; Laird Dep. at 41, 61-62.)
In October 2000 George Neceti ("Noceti") took over as CEO because Gavin "felt somebody was needed to attract further funding." (Reiff Dep. at 114.) His efforts were apparently to no avail because by March 2001, LuuLuu had once again run out of funds. (Id. at 98.) In February or March 2001, Gavin and Noceti wanted to dismiss the employees of the company without pay for the last two weeks, but Reiff found this "ethically and morally completely wrong." Id. at 128. He spoke to either Laird or Noceti to find out how much money was required to cover payroll and wrote LuuLuu a check for $15,000. (Id. at 128-29.) Reiff further informed LuuLuu's technical employees that they were being dismissed. He "met with every single employee and explained to them that the company is out of funds and it can't continue." (Id.) Reiff was the person in charge of the technical shut-down of LuuLuu. (Id. at 131.) He asked the technical employees to deposit their work in a central computer server so that it could be accessible "in case there would be any future relevance." (Id.)
In March 2001, Reiff also "confronted" Noceti about the status of LuuLuu and the latter informed him of the company's outstanding employment tax obligations. (Id. at 154.) Reiff testified that he "had to basically force that meeting." (Id.) After meeting with Noceti in March 2001, Reiff did not discuss LuuLuu's reporting tax obligations with either Gavin or Noceti. (Id. at 178-78.) He testified that he "had a very difficult time with [Gavin] and did not confront her." As for Noceti, Reiff testified, "He had shown himself as not very useful to the company, and to be honest, I just felt I was on my own with a problem that was just mine because nobody had done anything and it was just the huge magnitude of a problem." (Id.) Shortly after, Reiff and Raida fired Gavin and Noceti at a board of directors' meeting. (Id. at 200.)
After the technical employees had been laid off, Reiff started "winding down the whole business" and "worked on opportunities to sell the company or sell the company's assets and looked at numerous possibilities." (Id. at 132, 162.) Reiff was by now the only one left in the San Francisco office. (Id. at 175-76.) Reiff testified, "When I finally started the cleanup, I to my great dismay discovered all documentation in complete disarray, no filings done anywhere, and I had not much knowledge of business and I just learned and said, I need to do something here to make sense of this mess." (Id. at 175-76.) He sought legal counsel and hired an accountant "because there were no official books at LuuLuu and any reasonable accounting." (Id.)
Kenneth Wang, an investor and a creditor of LuuLuu, acquired all of the company's assets, which included office furniture, computer equipment, the program code, and "all the work that had been done on the product." (Id. at 163.) In April 2001, Reiff approached potential investors about investing money in LuuLuu, but none did. (Id. at 164-65.) Between July and September 2001, Reiff was hired as CEO of Wang's company, Alvanon. In the fall of 2002 Reiff's title at Alvanon changed from CEO to technical director, and in the summer of 2003, he was fired from Alvanon. (Id. at 224-25, 228.)
LuuLuu failed to pay approximately $193, 571.00 in federal employee withholding taxes — $56,666 in the third quarter of 2000; $77, 837.50 in the fourth quarter of 2000; and $59, 067.50 in the first quarter of 2001. (Certificates of Assessment for the periods ending September 30, 2000, December 31, 2000, and March 31, 2001) On or about May 23, 2003, the IRS assessed a 100 percent penalty against Reiff. (Id.) The IRS identified him as a responsible person for purposes of Internal Revenue Code § 6672 liability. (Id.) Reiff concedes that he was a responsible person for the first two quarters of 2000. (Cplt. at 6.)
Unsurprisingly, the parties' disagreements center around the level of control Reiff exerted over LuuLuu's business affairs and his purported knowledge of LuuLuu's failure to pay employment withholding taxes during the periods for which unpaid taxes were assessed.
With respect to the first of these issues, the Government contends that in addition to his undisputed status as a member of...
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