Werner v. United States, Civ. No. 14783.

Decision Date17 April 1974
Docket NumberCiv. No. 14783.
Citation374 F. Supp. 558
CourtU.S. District Court — District of Connecticut
PartiesHoward M. WERNER, Plaintiff, v. UNITED STATES of America, Defendant and Third-Party Plaintiff, v. Frank ALESI and Robert Smith, Third-Party Defendants.


Howard M. Werner, West Hartford, Conn., for plaintiff.

Daniel Dinan, Asst. Chief, Refund Trial Section #1, Tax Div., Dept of Justice, Washington, D. C., Stewart H. Jones, U. S. Atty., Henry S. Cohn, Asst. U. S. Atty., Hartford, Conn., for United States.

Joseph Neiman, Newington, Conn., for Robert Smith.

James J. Gadarowski, Newington, Conn., for Frank Alesi.


BLUMENFELD, District Judge.

The United States assessed plaintiff for a 100% civil penalty in lieu of federal income taxes withheld from the wages of employees of Hugo's Continental Restaurant, Inc. (Hugo's), but never paid to the United States. The basis of the assessment is 26 U.S.C. § 6672, which makes liable to a 100% civil penalty "Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof ...." Since plaintiff contends he is not a person subject to such liability within the meaning of § 6672, he paid $100 of the total assessment of $11,975.50 and has brought this action for a refund.1 The United States has counterclaimed for the balance of the assessment, the amount of which is not in dispute. The United States has also filed third party complaints against three other persons who it contends are jointly and severally liable for portions of Hugo's tax arrears and hence are subject to penalty assessments under § 6672. The United States has obtained a default judgment against one of these third party defendants, Ugo Bua, and seeks judgments against the other two third party defendants, Frank Alesi and Robert Smith. The Court has jurisdiction over the entire action under 28 U. S.C. §§ 1340 and 1346(a)(1).

Burden of Proof

"The two elements necessary to make § 6672 applicable to a taxpayer are: (1) the individual person had the authority to direct or control the payment of corporate funds and (2) such a responsible person willfully failed to comply with the tax withholding statutes." Stake v. United States, 347 F. Supp. 823, 826 (D.Minn.1972). It is well established that in an action for a refund of a penalty assessment under § 6672, the taxpayer has the burden of proving by a preponderance of the evidence "that he was not a person whose duty it was to pay over withholding and social security taxes or that he did not willfully fail to comply with that duty." Melillo v. United States, 244 F.Supp. 323, 326 (E.D.N.Y.1965). See Lawrence v. United States, 299 F.Supp. 187 (N.D. Tex.1969). Plaintiff bears this burden of proof both on his claim for a refund and on the Government's counterclaim for the balance still outstanding on the penalty assessment, providing only that the Government offers into evidence the certification of its assessment against plaintiff. Psaty v. United States, 442 F.2d 1154, 1158-1160 (3d Cir. 1971). The certification of assessments against them also places the burden of proof on the third party defendants. Lesser v. United States, 368 F.2d 306, 310 (2d Cir. 1966); Melillo v. United States, supra. In the instant case, the Government put in evidence certifications of assessments against plaintiff and against both of the remaining third party defendants, Alesi and Smith.

Findings of Fact

Viewed from this perspective, the conflicting evidence adduced at trial established the following: plaintiff and two others, Messrs. Kerin and Kaplan, acting as joint venturers provided financial backing for Ugo Bua's purchase of 75 per cent of the stock in Hugo's, which was formerly known as Camelot, Inc. Since the holder of 25 per cent of the stock in Camelot, Inc. has apparently disappeared, the 75 per cent of the Camelot, Inc. stock purchased by Bua conferred total control over the acquired corporation, i. e., Hugo's, and was treated by Bua and plaintiff as all of the outstanding stock in the corporation. The joint venturers, informally known as KKW, provided operating funds for Hugo's by endorsing Hugo's notes to two banks totalling over $27,000. KKW also provided Bua personally with funds for his purchase of the business, secured by a mortgage (subsequently foreclosed) on Bua's home. In return for KKW's backing, Bua gave KKW an option to acquire 51 per cent of his stock in Hugo's for $1,000 at any time within two years from Bua's purchase of Hugo's in March 1967.

At the time Bua acquired Hugo's the restaurant had over $29,000 in outstanding liabilities. Despite KKW's optimism about Bua's ability to make the restaurant a success, it continued to operate at a loss. Beginning in May 1967, plaintiff began to involve himself actively in the affairs of Hugo's. Third party defendants Alesi and Smith were brought into the business as entertainers at plaintiff's instigation. As the summer progressed plaintiff became more and more involved in the day-to-day management of Hugo's. Plaintiff's office was near Hugo's, and he would stop in at Hugo's almost every day after work to discuss the business with Bua and to advise Bua on its conduct. Plaintiff had Alesi and Smith assume assistant managerial roles together with Bua and himself in the conduct of the business.

Plaintiff directed an audit to be conducted of Hugo's books in November 1967, in order to determine precisely the financial condition of Hugo's as of October 31, 1967. The audit revealed that Hugo's was still deeply in debt, and at a meeting to discuss the audit on about November 20, 1967, plaintiff expressed exasperation at the continued drain imposed by Hugo's on the resources of KKW, which apparently had been extending additional credit to Hugo's from time to time since its initial backing of Bua in his acquisition of Hugo's. At plaintiff's direction in the course of this meeting to discuss the audit, the management of Hugo's was reorganized to increase Smith's responsibilities and to decrease Bua's, including Bua's power to write checks on Hugo's account.

The audit showed that Hugo's owed over $9,000 in withholding taxes through the first ten months in 1967. Bua, an alien, was concerned lest he be deported for failure to pay these taxes. Plaintiff, ostensibly out of concern for Bua and his family, arranged for KKW on November 21, 1967 to give Hugo's about $11,500 in return for an assignment of Hugo's accounts receivable, which then totalled about $12,500. At plaintiff's direction Bua and Smith visited the local Internal Revenue Service office, where they were told that they would be contacted later regarding Hugo's back taxes. Ultimately only $1,300 of the November 21 proceeds of KKW's purchase of Hugo's accounts receivable was paid to the IRS. The balance was at plaintiff's direction applied in satisfaction of other debts, including back state taxes and liquor bills. Plaintiff was particularly concerned lest unpaid liquor bills should lead to suspension of Hugo's liquor license.

After a disastrous holiday season, Bua was excluded from a meeting of the principals of KKW at Hugo's on New Year's Eve, December 31, 1967. Bua became enraged at this treatment and ejected the principals from the premises. Thereafter Bua reassumed active management of the restaurant, and plaintiff never again entered the premises. However, KKW through plaintiff exerted pressure on Bua to repay KKW for its investment in Hugo's. This led to an agreement between Bua and KKW signed on March 15, 1968, under which Bua acknowledged a debt of $30,000 to KKW plus the value of as yet uncollected accounts receivable assigned to KKW in November 1967 and by the agreement reassigned to Hugo's. The agreement specified that it was a consolidation of all previous obligations owed by Bua to KKW. KKW agreed not to exercise its option to acquire the stock of Hugo's in consideration for Bua's entering into the agreement, and agreed to release Bua from the option at the time Bua's debt to KKW was paid off. By the terms of the contemporaneous note for $30,000, Bua was to pay KKW $200 per week toward the amount owed to KKW. Bua made several such weekly payments thereafter, before the final collapse of Hugo's.

Persons Responsible for the Payment of Taxes

The liability imposed by § 6672 is not confined to persons who are officially responsible as officers or employees for the payment of corporate taxes. "The term `person' as defined in § 6671 for the purposes of § 6672 does include officer and employee, but certainly it does not exclude all others. ... The section must be construed to include all those so connected with a corporation as to...

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