Tull v. US, Civ. No. S-90-0994 MLS.

• Decision Date: 25 January 1994
• Docket Number: Civ. No. S-90-0994 MLS.
• Court: U.S. District Court — Eastern District of California
• Parties: Jacklyn TULL, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

848 F. Supp. 1466

Jacklyn TULL, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. S-90-0994 MLS.

United States District Court, E.D. California.

January 25, 1994.

COPYRIGHT MATERIAL OMITTED

R. Todd Luoma, Weintraub, Genshlea & Sproul, Sacramento, CA, for plaintiffs.

G. Patrick Jennings, Trial Atty., Tax Div. U.S. Dept. of Justice, Washington DC, for defendant.

MEMORANDUM OF DECISION AND ORDER

MILTON L. SCHWARTZ, Senior District Judge.

I. Factual and Procedural Background.

Plaintiffs filed this action on August 1, 1990, seeking refund of taxes allegedly illegally and erroneously assessed against plaintiff Jacklyn Tull and collected from both plaintiffs by defendant, acting by and through the Internal Revenue Service ("IRS"). At all relevant times, plaintiff Jacklyn Tull was Secretary and Treasurer of Hatfield Trucking Company ("Hatfield") and plaintiff James Tull was her husband. The amounts assessed against plaintiff Jacklyn Tull ($203,904.32) constituted a "100% penalty" assessment against her pursuant to 26 U.S.C. § 6672(a).¹ The penalty arose out of plaintiff Jacklyn Tull's alleged willful failure to "collect, truthfully account for and pay over" Hatfield's federal payroll tax obligations for the first three quarters of 1989.²

Plaintiffs' complaint alleged that the penalty was wrongful because Hatfield had fully paid its trust fund tax liability via five separate federal tax deposits, certain cashier's checks and one auction proceeds check, thus completely extinguishing the basis upon which a 100% penalty could have been assessed against plaintiff Jacklyn Tull. Alternatively, plaintiffs contended that plaintiff Jacklyn Tull was not a responsible person required to collect, or truthfully account for and pay over Hatfield's payroll taxes and/or that her conduct was not willful, within the meaning of 26 U.S.C. § 6672. Finally, plaintiffs alleged that defendant had wrongfully levied upon the wages of plaintiff James Tull for payment against the 100% penalty, on the grounds that his wages were separate property that could not be used to satisfy his wife's alleged tax liabilities, or alternatively that the amount of the levy exceeded the community property interest of plaintiff Jacklyn Tull in plaintiff James Tull's wages. Plaintiffs prayed for judgment in the total amount of $10,669.03, plus interest and costs.

Both parties filed cross-motions for summary judgment on May 17, 1991, which were heard on June 14, 1991. Plaintiffs' motion for summary judgment was granted in part (as to the question whether defendant should have allocated the cashier's checks, in the amount of $69,591.31, to Hatfield's trust fund tax liabilities), and denied in part (as to the questions whether the five separate federal tax deposits and the auction proceeds check should have been allocated to Hatfield's trust fund tax liabilities). Defendant's motion for summary judgment (directed solely to the issue whether the auction proceeds check should have been allocated to trust fund tax liabilities) was denied in full. The court found that there were disputed facts concerning the federal tax deposits and the auction proceeds check payments.

On February 27, 1992, defendant filed a counterclaim against plaintiff Jacklyn Tull which sought to reduce to judgment its penalty assessment for the balance of the trust fund taxes allegedly owing (approximately $164,000, inclusive of statutory interest to June 8, 1992). Defendant also sought an award of attorney's fees and costs.

Subsequently, defendant conceded that Hatfield had paid certain percentages of four of the five disputed federal tax deposits to its trust fund tax liabilities (totalling $26,359.37). Accordingly, defendant reduced the 100% penalty and the amount of its counterclaim to $115,464.45 to reflect the court's granting of summary judgment with respect to the cashier's checks and to reflect defendant's concession with respect to the four federal tax deposits.³

On March 27, 1992, the court filed its Final Pretrial Order, which outlined the following remaining issues for trial:

(1) Were the payments received by defendant from Hatfield Trucking for the first three quarters of calendar year 1989 sufficient to cover all trust fund taxes owing for that period, without resort to plaintiffs' personal assets,⁴ and if not, what amount should have been assessed against plaintiff Jacklyn Tull?

(2) Was plaintiff Jacklyn Tull a "responsible person," within the meaning of the law, to collect and pay over to defendant the withheld income and FICA payroll taxes, and if so, were her actions "willful" so as to subject her to personal liability in the form of penalty assessments?

(3) If plaintiff Jacklyn Tull is determined to be a "responsible person" who "willfully" failed to collect and pay over the withheld income and FICA payroll taxes, at what point during the first three quarters of 1989 did plaintiff Jacklyn Tull become responsible and did her actions constitute willful conduct?

(4) If plaintiff Jacklyn Tull is determined to be a "responsible person" who "willfully" failed to collect and pay over the withheld income and FICA payroll taxes, may defendant collect the penalty assessment from the community wages of plaintiff James C. Tull?

Final Pretrial Order at 2:14-3:7 and Plaintiffs' Objections to Final Pretrial Order at 2:1-14.

A jury trial was held on January 4 through 14, 1993. During the jury instruction conference on January 12, 1993, the court determined, over plaintiffs' objection, that the question whether defendant should have allocated the auction proceeds check to Hatfield's trust fund tax liabilities was not appropriate for jury resolution.⁵ The court reasoned that, although the auction proceeds check issue might be considered a mixed question of law and fact, it became purely a question of law for the court to determine because there were no disputed underlying facts pertinent to resolution of the issue. In light of the court's ruling, it was agreed that the auction proceeds check issue would be resolved by way of post-trial briefs filed by both parties. It was also agreed that the community property issue and any other remaining unresolved legal issues would be decided in this manner as well. Accordingly, the jury instructions were limited to the federal tax deposit issue and the 100% penalty issues.

By special verdict filed January 14, 1993, the jury found that Hatfield had made a federal tax deposit on April 27, 1989, in the amount of $9,566.36.⁶ The jury also found that plaintiff Jacklyn Tull: (1) was a responsible person for all three quarters of 1989; (2) did not willfully fail to collect, or truthfully account for and pay over Hatfield's payroll taxes for the first quarter of 1989; but (3) did willfully fail to collect, truthfully account for and pay over Hatfield's payroll taxes for the second and third quarters of 1989. In light of the unresolved legal questions in the case, however, no judgment was entered on the jury's verdict.

After a significant delay during which the parties unsuccessfully attempted to settle the case, plaintiffs and defendant each timely filed opening and opposing post-trial briefs, pursuant to the court's instructions. Following an in-chambers meeting on August 13, 1993 and a telephonic conference call between the court and counsel for plaintiffs and defendant on August 19, 1993, both parties agreed to submit the matter for decision after additional supplemental briefing, without further oral argument. Both parties also agreed, by stipulations filed August 13, 1993 and January 11, 1994, as to the monetary effect of a ruling in favor of either party on the auction proceeds check issue and other post-trial issues, for purposes of entry of final judgment in this case.

II. Relevant Undisputed Facts.

The following is a narrative discussion of the undisputed facts set forth in Exhibit A to the Final Pretrial Order and the undisputed facts adduced at trial.

A. General.

Hatfield was incorporated in Sacramento, California in 1967 and operated continuously from the date of incorporation through the period at issue in this case (i.e. the first three quarters of 1989). In 1989, Hatfield began experiencing certain financial difficulties and failed to pay a portion of its federal payroll tax liability during the first three quarters of 1989. The fourth quarter federal payroll tax liability was fully paid. During the first quarter of 1989, Hatfield incurred a payroll tax liability of $116,056.20, the trust fund portion of which was approximately $83,934. During the second quarter of 1989, Hatfield incurred a payroll tax liability of $99,493.63, the trust fund portion of which was approximately $71,976. During the third quarter of 1989, Hatfield incurred a payroll tax liability of $81,006.38, the trust fund portion of which was approximately $59,028.

On November 22, 1989, Hatfield entered into an auction agreement with Western 11 Auctions ("Western") to sell some of Hatfield's assets. Plaintiff Jacklyn Tull advised the IRS of the auction on January 2, 1990. On January 8, 1990, the IRS served a notice of levy on Western with respect to Hatfield's payroll tax liabilities for the first two quarters of 1989. Pursuant to the auction agreement, the auction took place on January 18, 1990 on Hatfield's premises. On or about that same day, the IRS assessed a 100% penalty against plaintiff Jacklyn Tull in the amount of $203,904.32 for the allegedly unpaid trust fund portions of Hatfield's payroll tax liabilities for the first three quarters of 1989.⁷

On or about February 12, 1990, a Western representative delivered to Hatfield a check in the amount of $111,152.92, made payable jointly to Hatfield and the IRS. While the representative was present, plaintiff Jacklyn Tull designated on the face of the check that the monies should be applied against the trust fund portion of Hatfield's second and third quarter federal payroll tax...