Asher is liable to the Government for its damages, in the form of taxes an interest to the extent of the assets received from Red Stripe.
The Government is also entitled to receive a "failure to pay" penalty from defendants pursuant to I.R.C. § 6651-(a)(2).
I.R.C. § 6651(a)(2) states in pertinent part:
(a) Addition to the Tax - In case of failure . . .
(2) to pay the amount shown as tax on any return specified in paragraph (1) on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not are than 1 month, with an additional 0.5 percent for each additional month or fraction thereof, during which such failure continues, not exceeding 25 percent in the aggregate.
Defendants claim that a penalty is improper because their failure to pay was based on "reasonable cause." The burden of proving "reasonable cause" is on the taxpayer. Parkchester Beach Club Corp. v. Comm'r, 335 F.2d 478, 481 (2d Cir. 1964); Baasch v. U.S., 742 F. Supp. 65, 69 (E.D.N.Y. 1990); aff'd, 930 F.2d 911 (2d Cir. 1991).
"To demonstrate 'reasonable cause,' a taxpayer must show that he exercised 'ordinary business care and prudence.'" Denenburg v. United States, 920 F.2d 301, 303 (5th Cir. 1991) quoting Treas. Reg. § 301.6651-1(c)(1) (as amended 1973). "'Reasonable cause' is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken." United States v. Boyle, 469 U.S. 241, 250, 105 S. Ct. 687, 692, 83 L. Ed. 2d 622 (1985). Asher testified that his failure to pay was based on the advice of both his attorney and accountant that the tax liability would be assumed by Beatrice.
We find that Asher did not exercise "ordinary business care and prudence" when he relied on the advice of his tax advisors. While defendants cite to the Supreme Court's decision in Boyle, supra 469 U.S. at 250, 105 S. Ct. at 692, for the proposition that "reasonable cause" is established when a taxpayer relies on the advice of an attorney or an accountant concerning a question of law, the taxpayer must demonstrate that such reliance is reasonable.
Even the most generous reading of the Red Stripe-Beatrice assumption agreements reveal that it is unclear whether Beatrice agreed to assume the tax obligations in question. Asher, who claimed to be familiar with the assumption agreements, had to recognize that the tax assumption sections of the contracts were in conflict.
Ones duty to pay taxes cannot be circumvented merely by alleging that another party is contractually obligated to fulfill those responsibilities. Asher's lack of "ordinary business care and prudence" cannot be salvaged by claiming that he relied on the advice of his attorneys and accountants. A reasonably prudent businessperson would not have relied on the advice of his lawyer and accountant that an assumption of the tax liability by a third party would release him, as the taxpayer, from the payment of income taxes due the Government.
Defendants also argue that "reasonable cause" has been established because I.R.S. agents allegedly instructed him, during a meeting held in 1985, not to pay his taxes. This argument is without merit. Even if the agents had instructed Asher not to pay his taxes, the government cannot be estopped by the misinformation given by its employees. Heckler v. Community Health Services, 467 U.S. at 59-61, 104 S. Ct. 2223-24, 81 L. Ed. 2d 42 ; Schweiker v. Hansen, 450 U.S. at 788-89, 101 S. Ct. at 1471. Moreover, the alleged statements by the I.R.S. agents were not made until 1985, one and a half years after the assessment had been made. Assuming arguendo that Asher's meeting with the I.R.S. agents provided the basis for his failure to pay his taxes, it does not explain why he failed to make the tax payments in the year and a half prior to the meeting.
LIABILITY FOR TAX YEARS 1978 AND 1979
The Government concedes that the income tax deficiencies for the years 1978 and 1979 have been paid in full. (Plaintiff's Post-Trial Memo. at 21). The only remaining dispute for these years concern the interest that is due.
Defendants claim that an interest schedule provided by an IRS appellate officer (Exhibit A) states that $ 224.49 in interest is owed. The Government maintains that this schedule is "not a reflection of the actual statutory interest rate due." (Plaintiff's Post-Trial Memo. at 21). Since the Government has not presented any evidence to demonstrate that the interest schedule provided by the I.R.S. was calculated incorrectly, we find that the defendants owe the Government $ 224.49 in interest for tax years 1978 and 1979.
Ordered that judgment be entered in favor of the plaintiff, United States of America against defendants Red Stripe, Inc, f/k/a Asher Bros, Inc. and George Asher in the sum of $ 22,541.25 for the tax year ending June 30, 1975, the sum of $ 86,570.14 for the tax year ending June 30, 1976, and the sum of $ 349,508.14 for the tax year ending June 30, 1977 - the total sum of $ 458,619.53 together with interest and interest in the sum of $ 224.49 (for the tax years 1978 and 1979) together with penalty pursuant to I.R.C. § 6651(a)(2) from October 20, 1983.
The Government is directed to compute the interest and penalty on the sums due to the date of the memorandum and order and serve defendants' counsel with the copy of the computation. Defendants' counsel may challenge the Governments' computation within five (5) days of receipt of the same.
Entry of judgment is stayed pending determination of the sum due to date.