Rizzuto v. US, 92 Civ. 1145 (BDP).

• Decision Date: 18 March 1995
• Docket Number: No. 92 Civ. 1145 (BDP).,92 Civ. 1145 (BDP).
• Citation: 889 F. Supp. 698
• Parties: Dennis RIZZUTO and Richard Katz, Plaintiffs, v. UNITED STATES of America, Defendant. UNITED STATES of America, Third Party Plaintiff, v. Edward WEISS and John Treglia, Third Party Defendants.
• Court: U.S. District Court — Southern District of New York

889 F. Supp. 698

Dennis RIZZUTO and Richard Katz, Plaintiffs, v. UNITED STATES of America, Defendant.

UNITED STATES of America, Third Party Plaintiff, v. Edward WEISS and John Treglia, Third Party Defendants.

No. 92 Civ. 1145 (BDP).

United States District Court, S.D. New York.

March 18, 1995.

COPYRIGHT MATERIAL OMITTED

Edward Weiss, Whitestone, NY, pro se.

John J. Gochman, Cronton-on-Hudson, NY, for plaintiffs.

Deborah Yeoh, U.S. Atty.'s Office, New York City, for defendant U.S.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PARKER, District Judge.

This Memorandum constitutes the findings of fact and conclusions of law of the Court after a bench trial on February 14, 15 and 21, 1995 in which the claims of the United States were tried against Edward Weiss.

1. On February 4, 1991, the Internal Revenue Service (the "IRS"), made an assessment against Richard Katz ("Katz") for a 100-percent penalty pursuant to 26 U.S.C. § 6672 (the "100-percent penalty") in the amount of $36,993.08 for unpaid Federal Insurance Contribution Act ("FICA"), and federal withholding taxes (also known as trust fund taxes) for the employees of Promo-Net, Inc. ("Promo-Net") for the first, second and third quarters of 1986 (the "Tax Period").

2. On February 4, 1991, the IRS made an assessment against Dennis Rizzuto ("Rizzuto") for a 100-percent penalty pursuant to 26 U.S.C. § 6672 in the amount of $36,993.08, for unpaid FICA and federal withholding taxes for employees of Promo-Net for the Tax Period.

3. On February 11, 1991, the IRS made an assessment against Edward Weiss ("Weiss") for a 100-percent penalty pursuant to 26 U.S.C. § 6672 in the amount of $36,993.08 for unpaid FICA and federal withholding taxes for employees of Promo-Net for the Tax Period.

4. The IRS mailed the proper notice of the assessment and a demand for payment to Weiss. Despite the notice of assessment and demand for payment, Weiss has failed to pay the assessed amount.

5. On September 18, 1989, the IRS made an assessment against John Treglia ("Treglia") for a 100-percent penalty pursuant to the 26 U.S.C. § 6672 in the amount of $36,993.08 for unpaid FICA and federal withholding taxes for employees of Promo-Net for the Tax Period.

6. Katz and Rizzuto filed this action on February 18, 1992, seeking a refund of the taxes collected and an abatement of the assessments pursuant to 26 U.S.C. § 6672.

7. On July 6, 1992, the Government filed a counterclaim against Katz and Rizzuto for collection for the unpaid portion of the 100-percent penalty that had been assessed against them. On the same date, the Government filed a third-party complaint against Weiss and Treglia for collection of the 100-percent penalty that had been assessed against them.

8. On September 3, 1993, the Government filed an amended third-party complaint against Weiss and Treglia for collection of the 100-percent penalty that had been assessed against them. On October 29, 1993, the Government filed an amended counterclaim and a motion for summary judgment.

9. In a Memorandum Decision dated January 24, 1994, the Court granted the Government's motion for summary judgment against Treglia and denied its motion against Katz, Rizzuto and Weiss. On February 14, 1995 Rizzuto and Katz entered into a stipulation of settlement and dismissal with the Government. Weiss proceeded to trial.

10. Promovision Video Displays Corp. ("Promovision") was formed in August 1983 by Weiss, Treglia and Gerald P. Broder ("Broder"). From the time of its inception, Weiss was Promovision's President and Chairman of its Board of Directors. Treglia was its Executive Vice President and a member of the Board of Directors.¹

11. Promovision was in the advertising business, placing monitors with scrolling advertisements for local advertisers and coupons dispersing machines in stores.

12. Weiss, Treglia, Katz, Rizzuto and others had discussions that led to the formation of Promo-Net as a wholly owned subsidiary of Promovision.

13. Before Promo-Net was formed, Rizzuto and Katz were principals and shareholders of Metrotech. Alvin Grubman ("Grubman") was its accountant. Because Metrotech's capabilities appeared to complement Promovision's needs, Weiss and Treglia sought to acquire Metrotech. After attempts to acquire Metrotech failed, Promo-Net was formed by Weiss and Treglia as a wholly-owned subsidiary of Promovision in December 1985. At that time Weiss appointed Katz to be President of Promo-Net and Grubman to be Vice President. He stated specifically that he did not want Rizzuto to be an officer at that time.

14. Katz, as President, Rizzuto, as Vice President, and Weiss, as Secretary, signed the bank certificate and signature cards for Promo-Net's bank account at Manufacturers Hanover Trust Co. in Whitestone, New York. The bank certificate includes a certification that: "the persons herein designated as officers of this corporation Promo-Net have been duly elected to and now hold the offices in this corporation set opposite their respective names, and that the following are the authentic, official signatures of said officers."

15. Promo-Net's operations were designed to provide technical support, including graphics and electronic work for Promovision. During the Tax Period, Weiss and Treglia comprised the executive, finance and auditing committee of the Promovision Board of Directors.

16. Weiss was instrumental in establishing Promo-Net. Weiss both hired Rizzuto and Katz and instructed them not to hire Metrotech employees. He also hired Grubman who served as its comptroller until he was fired by Weiss in February 1986. Promo-Net had 6 or 7 other employees.

17. In August 1986, Weiss and Treglia purchased all of Promo-Net's stock.

18. Weiss, through his control of Promovision, exercised, indirectly, significant control over Promo-Net. Promo-Net had no sources of income or credit independent of Promovision. Promo-Net never had its own billing system in place. When Promo-Net needed cash for operations, Rizzuto would prepare a list of payables and forward it to Promovision for review and approval by Treglia. Rizzuto and Katz understood that Weiss and Treglia's approval was needed for all expenditures. Although Rizzuto and Katz theoretically had check signing authority, in practice, pre-approval by Promovision of all checks, except net payroll checks was required. Rizzuto, for example, was not permitted to write himself checks for reimbursement for petty cash because Weiss instructed him to get pre-approval for such checks from Promovision.

19. Weiss directed Promo-Net to move into the former offices of Promovision in Jamaica, Queens. The lease was held in Promovision's name and Promovision paid the rent and utilities.

20. The managerial groups at Promo-Net and Promovision were small and informally run. The testimony of Katz and Rizzuto, which I credit, was that the officers and employees of Promo-Net understood that Weiss was in charge and that overall authority for the direction, operation and financial control of the company rested with Weiss and Treglia. Rizzuto and Katz further testified that Promo-Net's officers and employees further understood that to incur Weiss' displeasure was to risk discharge.

21. Weiss had access to Promo-Net's books and records which were maintained at Promovision's headquarters on Seaview Boulevard in Port Washington, New York where it performed accounting functions for Promo-Net. Bookkeeping and accounting functions for Promovision and its subsidiaries were done there under the supervision of Treglia. Abdin Aly worked under Treglia at Promovision. Among Aly's responsibilities was the preparation of tax returns for Promovision's subsidiaries including Promo-Net. These returns were signed by Aly and Treglia. Weiss rarely involved himself in decisions about which specific bills to pay, had no involvement in the daily operations of Promo-Net, and rarely if ever, visited its premises.

22. Katz, Weiss and Treglia were authorized to sign checks on Promo-Net's account beginning about December 19, 1985. Katz was authorized to sign checks up to $999; he could also sign checks with a co-signature for checks in excess of that amount. Weiss had, but never exercised, check co-signing authority at Promo-Net. Beginning on or about May 12, 1986, Rizzuto, like Katz, was authorized singly to sign checks up to $999 but needed a co-signature for checks in excess of that amount.

23. Katz and Rizzuto ran Promo-Net's operations on a daily basis and oversaw Promo-Net's employees. Rizzuto handled marketing and product development. Katz provided technical direction for the company, participated in discussions on technical matters and signed business letters on Promo-Net's behalf.

24. Katz was responsible for providing information as to the number of hours each employee had worked each week to Paychex, Inc., which prepared Promo-Net's employee paychecks. All of the checks were for amounts less than $999, and the funds were drawn from Promo-Nets bank account. Katz generally signed the paychecks. Katz also advised Promovision of the net payroll from a printout supplied by Paychex, Inc. Pay stubs accompanying the checks stated the amounts withheld for FICA and withholding taxes.

25. Grubman, Promo-Net's comptroller, wrote to Weiss on February 6, 1986 voicing serious concern over a number of unfulfilled promises apparently made by Weiss to induce Grubman to join Promo-Net. In addition, Grubman expressed his concern that Promo-Net was indebted to the IRS and New York State for approximately $18,000 in payroll taxes:

Of no small consequence, I am also very concerned that as of this writing, Promo-Net is indebted to the IRS and New York State for approximately $18,000 in payroll taxes. I cannot take this lightly because Richard Katz and myself are both officers of Promo-Net and face personal liability. (emphasis in original)

Katz and Rizzuto received copies of this letter on or about that date.

26. On February 10, 1986...