William E. Schrambling Accountancy Corp. v. US, C 86-6483 AJZ.
| Decision Date | 18 April 1988 |
| Docket Number | No. C 86-6483 AJZ.,C 86-6483 AJZ. |
| Citation | 689 F. Supp. 1001 |
| Court | U.S. District Court — Northern District of California |
| Parties | WILLIAM E. SCHRAMBLING ACCOUNTANCY CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant. |
Joseph P. Russoniello, U.S. Atty., Jay R. Weill, Asst. U.S. Atty., Chief, Tax Div., George L. Bevan, Jr., Asst. U.S. Atty., San Francisco, Cal., for defendant.
Martin A. Schainbaum, San Francisco, Cal., for plaintiff.
On Application for Attorney's Fees April 18, 1988.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OF DECISION
1. Plaintiff, the William E. Schrambling Accountancy Corporation, (hereinafter the "corporation"), is a California corporation engaged in the business of public accounting. William E. Schrambling (hereinafter "Schrambling") is the president and sole owner of the corporation.
2. Beginning in December 1979, the Corporation became delinquent in paying its federal employment taxes, including trust fund taxes withheld from employee wages. As of June, 1982, assessments had been made against the Corporation for employment taxes in excess of $37,000 for periods in 1979, 1980, 1980, and for the first quarter of 1982. The Corporation was also delinquent in filing corporate income tax returns.
3. On three occasions in 1981 and 1982, the corporation filed quarterly employment tax returns, enclosing checks which were subsequently returned for insufficient funds:
Tax Date Check Amount of
Quarter Presented Check
9-30-81 11-04-81 $14,339.44
12-31-81 2-03-82 $ 5,528.35
6-30-82 8-04-82 $ 9,583.06
The Corporation did not subsequently satisfy these delinquencies.
4. On June 14, 1982, Howard J. Schwartz, a senior revenue officer, was assigned to collect the Corporation's delinquent taxes and to investigate the Corporation's delinquent tax returns. Schrambling represented to Schwartz that he would be able to pay the Corporation's tax liability from proceeds of an upcoming loan. Relying on this representation, Schwartz delayed filing federal tax liens or pursuing levy action until June 30, 1982, the agreed-upon date by which Schrambling would pay the delinquent taxes. Schwartz did not hear from Schrambling or receive funds to pay the delinquent taxes by July 1, 1982. On July 2, 1982, Schwartz issued two bank levies. He received $98.38 from these levies.
5. After the levies were issued, Schrambling spoke with Schwartz. Schrambling promised that he would file the delinquent tax returns shortly and that he would make federal tax deposits. Schrambling did not file the tax returns until August, 1984, and he did not make federal tax deposits.
6. After Officer Schwartz levied Schrambling's corporate accounts, Schrambling stopped using the corporate accounts and used his personal accounts to pay corporate bills.
7. On or about July 1, 1982, the Corporation formed a partnership with Jack Chu. Schrambling and Chu was a California general partnership engaged in the accounting business. When the partnership was formed, Schrambling transferred all of the assets and liabilities, except federal taxes, to the partnership. Schrambling did not inform Jack Chu that the Corporation was delinquent in filing tax returns or paying taxes.
8. In July, 1983, the partnership became delinquent in payroll taxes. Revenue officer Cheryl Matthews was assigned to collect the delinquent taxes. During the course of discussions with Matthews, Jack Chu provided her with a list of accounts receivable for the partnership. On the bottom of the list was a notation that the list was confidential and that the IRS was not authorized to contact any clients on the list without prior consent by Schrambling and Chu. Neither Matthews nor any other revenue officer agreed to be bound by the notation. Schrambling and Chu eventually paid the delinquent taxes.
9. In May, 1984, Cheryl Matthews was assigned to collect the Corporation's delinquent taxes and tax returns. She was the fourth officer assigned to the case. Although Matthews met with Schrambling several times to discuss methods of paying the delinquent taxes, Schrambling did not voluntarily pay the taxes.
10. On or about June 14, 1984, Matthews hand delivered a Final Notice and Demand to Schrambling. The notice covered the following tax periods:
Form Number Tax Period
941 06-30-81
941 06-30-81
941 12-31-81
941 03-31-82
941 06-30-82
941 12-31-82
11. In August, 1984, after Matthews issued a summons, Schrambling delivered fifteen delinquent tax returns to Matthews. Schrambling did not make any payments on the returns, however.
12. On October 4, 1984, the Corporation's case and the partnership's case were reassigned to revenue officer Charles Stegner.
13. Upon receiving the case files for the Corporation and the partnership, Stegner reviewed the files, including the histories maintained by the prior revenue officers assigned to the cases. He read that Schrambling had given the IRS checks to pay the Corporation's taxes which were returned for insufficient funds. He reviewed the past written demands for payment sent to Schrambling. He read about the transfer of corporate assets to the partnership. Stegner read that Schrambling had stated that he did not have a corporate bank account for the Corporation. Based on his experience as a revenue officer, Stegner thought that there probably was a corporate bank account. There was extensive evidence in the file indicating that revenue officers had been discussing and requesting payment from Schrambling for more than two years and that Schrambling had not followed through on commitments to pay the Corporation's taxes or to file its returns. Based on this information, Stegner formed the impression that contact with the taxpayer would not yield funds or financial information, and that levying would be an appropriate step.
14. On October 9, 1984, Stegner mailed out sixteen levies to banks, but he did not receive any funds.
15. After receiving no funds from the bank levies, Stegner decided to levy clients of Schrambling and Chu. Stegner used the accounts receivable list from the partnership file to determine who was to receive notices of levy. Stegner believed that the clients on the accounts receivable were possibly also clients of the Corporation. He based this belief on the close relationship between the partnership and the Corporation, the fact that Schrambling did not perform accounting services exclusively for the partnership, and the belief that there was possibly commingling of funds between the two entities. Schrambling and Chu did not authorize the IRS to contact these clients.
16. On or about October 31, 1984, Stegner discussed the possibility of issuing levies to clients of the partnership to collect Corporation taxes with his group manager, Curtis Chan. Chan approved of Stegner's decision to send out the levies.
17. On November 6, 1984, Stegner mailed notices of levy to the twenty-two largest accounts receivable on the partnership list. Since the partnership had not paid its delinquent taxes by this time, Stegner included levies for the partnership taxes in the same envelopes. Schrambling became aware of these levies prior to November 19, 1984.
18. On November 8, 1984, Jack Chu delivered payment for the partnership taxes to Stegner. Upon receipt of this payment, Stegner issued a Release of Levy to each of the persons who received the Notice of Levy for the partnership.
19. On November 16, 1984, a revenue officer who was handling another account for which Schrambling owed taxes informed Stegner that Schrambling was considering filing bankruptcy.
20. Although Stegner received no money from the November 6, 1984 levies, he received some written responses that indicated that some of the clients had recently paid funds to the Corporation.
21. On November 20, 1984, and November 21, 1984, Stegner mailed out Notices of Levy to the remaining fifty-five clients on the partnership accounts receivable list.
22. In issuing the Notices of Levy on October 9, 1984, November 6, 1984, November 20, 1984, and November 21, 1984, Stenger relied on the Notice of Final Demand issued by Cheryl Matthews on June 12, 1984.
23. The levies issued after November 19, 1984 covered the following tax periods that were not listed on the Notice of Final Demand issued June 12, 1984:
Form Number Tax Period
941 9/30/79
941 12/31/83
940 12/31/80
940 12/31/81
940 12/31/82
940 12/31/83
The IRS did not send a notice of final demand and intent to levy for these periods prior to November 19, 1984.
24. Plaintiff's tax delinquency did not constitute a jeopardy situation.
25. Subsequent to the issuance of the levies, Stegner received two $1,000.00 payments from Schrambling to be applied against the Corporation's tax liability. No other payments were received. In February, 1985, Stegner decided that the Corporation's tax liability was uncollectible from the Corporation, and that collection of the 100 percent penalty assessment should be pursued against Schrambling individually under 26 U.S.C. § 6672.
1. All federal tax returns and return information are confidential, and except as authorized by Title 26 of the United States Code, no officer of employee of the United States may disclose such information in any manner in connection with his official duties. 26 U.S.C. § 6103(b).
2. Internal Revenue officers or employees may disclose return information in connection with their official duties "to the extent that such disclosure is necessary in obtaining correct determination of tax, liability for tax, or the amount to be collected or with...
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