ROCHA v. U.S., (D.Or. 2003)

DENNIS JAMES HUBEL, United States Magistrate Judge

In this action by plaintiffs Steven Rocha ("Rocha"), Rocha Enterprises, Inc. ("REI") and Aloha Sheet Metal, Inc. ("ASM") against defendant United States Internal Revenue Service, plaintiffs sought a refund of payments made to the Internal Revenue Service and review of the total amount of taxes due. I have thoroughly described the underlying facts of this case in two previous opinions on summary judgment. Accordingly, I will not again recite the underlying facts here.

Previously I ruled on the first motion for summary judgment that Rocha was a responsible party pursuant to 26 U.S.C. § 6672. I further held that Rocha willfully failed to pay trust fund taxes and that because "the liability of a responsible person imposed by § 6672 is separate and distinct from [that] imposed upon the employer," Balzer v. United States, 2000 WL 1130075, *6 (N.D. Cal. 2000) (quotations omitted), "the IRS is not obligated to pursue the assets of the corporation before pursuing responsible persons." Id. Therefore, the IRS' alleged failure to levy on the assets of ASM before its assets were dissipated did not relieve Rocha of his liability. The IRS was not required to levy on the assets of ASM before or instead of seeking payment of the taxes from Rocha.

On the second motion for summary judgment, I held defendant presented evidence supporting plaintiff Rocha's tax liability in the amount of $71,376.06. However, I declined to grant defendant summary judgment on defendant's requested amount of $109,800.94. I found that defendant failed to explain how it calculated the penalties or interest on the amount of $71,376.06 to reach plaintiffs' alleged total owed of $109,800.94.

I made a number of other rulings including that: (1) designations such as "941-2" and "941-3" are not sufficient to require the IRS to allocate the payments bearing such designations to the tax liability only and not to statutory penalties; (2) plaintiffs failed to produce evidence creating a material issue of fact regarding whether IRS revenue officer Janssen accepted the assignment of a promissory note in satisfaction of the delinquent taxes of Rocha Industries; and (3) regarding the two checks written by Todd Construction levied upon by the IRS, the second check was properly apportioned, however, with respect to the first check, there was no evidence before the court regarding whether Todd Construction merely made a clerical error in placing PMC's Employer Identification Number ("EIN") on the check, or whether Todd Construction in fact owed the receivable at issue to PMC.

After these rulings only three issues remained for trial (1) whether defendant properly credited the second check from Todd Construction to PMC; (3) whether the IRS failed to properly credit plaintiff Rocha with $982 from a levy on his bank account; and (3) how the defendant calculated interest on the underlying tax debt to reach the total taxes and interest owed figure.

Both parties consented to the conduct of trial and entry of judgment by a Magistrate Judge. 28 U.S.C. § 636 (c)(1). Both parties waived a jury trial. I conducted a court trial on June 25 and June 26 of 2002. The parties informed the court that they were working on settling this case and requested that the court not enter its findings of fact and conclusions of law until those negotiations were completed. The parties contacted the court intermittently in October and November to inform the court that they were still working on settling the case. Finally, on January 14, 2003, defendant informed the court that the parties were not able to reach settlement. Accordingly, below are my findings of fact and conclusions of law. Fed.R.Civ.P. 52(a).

I. Todd Construction Check

In an effort to collect on plaintiffs' taxes due, the IRS levied ASM's accounts receivable, including accounts receivable due from Todd Construction. In response to the levy, Todd Construction made two receivables payments to the IRS. The first, on February 5, 1996, in the amount of $3,747.53 and the second on July 11, 1996, in the amount of $3,878.86.

The first check came attached to a description form stating that it was "For Portland Mechanical Corporation." Deft. Exh. 505. Accordingly, defendant applied the amount of the first check to outstanding tax delinquencies of Portland Mechanical Corporation rather than to the deficiencies of ASM. At trial, revenue officer Janssen testified that she applied the funds to PMC as designated on the check description because third parties, like Todd Construction, may make designations on payments to the IRS and defendant must honor those designations absent a statement from the third party that the designation was in error. There was no evidence at trial from any Todd Construction employee or officer stating that Todd Construction intended the first check to apply to ASM rather than to PMC.

Plaintiff contends that the first check should have been applied to ASM as the second check was. However, there is no evidence before the court that the second check arrived at the IRS with any designation. Unlike the first check, there is no evidence that the second check came with a statement that it was "For Portland Mechanical Corp." The designation on the first check differentiates it and its treatment from that of the second check. Accordingly, defendant properly applied the first check as designated, to PMC, rather than to ASM.

I note that even if defendant applied the first check from Todd Construction to ASM rather than to PMC as advocated by plaintiffs, as defendant demonstrated at trial, that designation would have had no effect on plaintiffs' trust fund tax liability. Officer Jensen testified that defendant would have applied the $3,747.53 to the third quarter of 1994's non-trust fund liability first. ASM's non-trust fund liability in the third quarter of 1994 was $4,118.10, which would not have been fully paid by the Todd Construction payment to ASM in question, much less leaving any surplus to apply to the trust fund taxes. It is the trust fund taxes for which Rocha is liable in this action. See Deft. Exh. 508. Therefore, even if the funds were allocated to ASM as plaintiffs desire, that allocation would result in no less trust fund tax liability for Rocha.

II. Levy on Rocha's Bank Account

Defendant levied on Rocha's bank account with Bank of America in June 1996. Plaintiffs contend that defendant failed to credit plaintiffs with $982.69 levied upon in Rocha's bank account. In support of their contention that Rocha is entitled to a credit in this amount, plaintiffs produced exhibit 9, a copy of a notice to Rocha from the Bank of America stating that it had received a levy, which required the Bank of America to place a hold on Rocha's bank account containing $982.69 on June 10, 1996. Pltfs. Exh. 8. However, plaintiffs produced no evidence at trial that the funds had actually been removed from Rocha's bank account or that the funds reached the IRS. Officer Janssen testified that Rocha had never produced a cancelled check, a copy of a check, or a bank statement to her demonstrating that these funds had been removed from Rocha's account. She further testified that she searched the IRS records and could find no record of the IRS receiving these funds. Accordingly, I find that although these funds may have been put on hold at one time, plaintiffs have not carried their burden of proof that the $982.69 was disbursed to the IRS and received by the IRS.

III. Interest on Tax Liability

The parties agreed at trial that there was no dispute about the interest rates applied by the government or the calculations used by the government to determine the interest on Rocha's total trust fund tax liability as demonstrated in defendant's exhibits 509, 510, and 511. The parties similarly agreed that March 18, 1996, was the date of notice to Rocha that he had been assessed a civil penalty with respect to ASM. However, Rocha alleges that he never received any notices of assessment with respect to REI. Defendant produced evidence that it sent Rocha notices of assessment for REI as well as for ASM on March 18, 1996. Deft. Exh. 501, 502, 503. The revenue code requires only that the IRS send notices of assessment, not that a party receive them. See 26 U.S.C. § 6330 (a)(2)(C); 26 U.S.C. § 6331 (d)(2)(C). The statute does not require that plaintiff receive or accept the notifications. See 26 U.S.C. § 6330 (a)(2)(C); 26 U.S.C. § 6331 (d)(2)(C). Accordingly, I find that defendant sent the statutory notices of assessment to Rocha with respect to ASM and REI, and that sending the notices was sufficient.

I further find that the interest rates and calculations used by defendant to come to Rocha's total interest due up to June 25, 2002, are appropriate and properly calculated.

In an action for refund and for collection of trust fund taxes pursuant to 26 U.S.C. § 6672, the Government bears an initial burden of proof. Oliver v. United States, 921 F.2d 916, 919-20 (9th Cir. 1990). That burden is satisfied by introduction of proof of assessment of the tax into evidence. Id. Once the Government's initial burden is satisfied, the burden shifts to the taxpayer, who has the burden of proof both with respect to his own claim for refund, if any, and with respect to the Government's counterclaim. Id.; see also, Jones v. United States, 60 F.3d 584, 589 (9th Cir. 1995).

Once an assessment has been introduced by the Government, the taxpayer has the burden of proving that the amount of the assessment is incorrect because of failure by the IRS to apply a credit in his or her favor or for any other reason. See Plett v. United States, 185 F.3d 216, 223 (4th Cir. 1999). On summary judgment, I've held that the assessments for trust fund taxes due by Rocha are correct.

Based on the findings of fact above, I conclude:

A. Plaintiffs are not entitled to a reduction of Rocha's trust fund tax liability as a result of the Todd Construction levy in the amount of $3,747.53. The Ninth Circuit has approved the IRS' policy to allocate undesignated payments in whatever way it desires pursuant to its policy.See Buffalow v. United States, 109 F.3d 570 (9th Cir. 1997). InBuffalow, the Ninth Circuit noted that the IRS "consciously and consistently" allocates nondesignated payment to non-trust fund liabilities before trust fund liabilities "because it maximizes tax collections." Id. at 574. The court noted "[t]he fact that [this allocation plan] also maximizes responsible person liability is unfortunately for [plaintiff], but it is a misfortune the company, and he, could easily have avoided by giving an allocation instruction to the IRS." Id.

B. Plaintiffs are not entitled to a credit against Rocha's trust fund tax liability in the amount of $982.69 due to the levy on Rocha's bank account.

C. The notices and demands of the IRS are correct and the interest properly calculated.

I conclude that as of June 25, 2002, the date of trial, Rocha owed $75,123.59 in trust fund taxes and $47,249.29 in interest on that trust fund tax liability in accordance with defendant's exhibits 509, 510, and 511.

I find in favor of defendant on all issues. I award defendant $75,123.59 in trust fund taxes and $47,249.29 in interest through 6 June 25, 2002, on Rocha's trust fund tax liability.

The parties shall confer and present a stipulated interest calculation forward to the present by February 20, 2003. If the parties cannot agree on the method of calculation and a final figure, they shall submit their competing figures by February 20, 2003.

IT IS SO ORDERED.