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United States v. Rabinovici

March 23, 2007


The opinion of the court was delivered by: Hurley, Senior District Judge


On October 19, 2004, the Plaintiff, United States of America (the "Government") commenced this action pursuant to Section 7401 of the Internal Revenue Code (the "Code"), 26 U.S.C. § 7401, to reduce to judgment a trust fund recovery penalty assessed against defendant Steven Rabinovici ("Defendant" or "Rabinovici") pursuant to 26 U.S.C. § 6672 on February 8, 1993. Presently before the Court is Defendant's motion for summary judgment on the ground that the action is barred by the applicable statute of limitations. For the reasons set forth below the motion is DENIED.


This case arises out of a penalty assessed by the Internal Revenue Service ("IRS") against Rabinovici as a responsible officer of Veterinary Reference Laboratories Inc., also known as Intermountain Laboratories (hereinafter "Intermountain"). Pursuant to 26 U.S.C. §§ 3102(a), 3402(a) and 7501(a), employers are required to withhold federal social security and income taxes from their employees' wages and hold these taxes in trust for the Government. The withheld taxes (referred to as trust fund taxes) must be paid to the United States on a quarterly basis. See 26 C.F.R. § 31.6011(a)-4. Because the IRS credits employees for the trust fund taxes regardless of whether they are paid over by the employer to the Government, the Code provides that officers and certain specified employees of such employers can be held personally liable for the trust fund taxes if they are not paid when due. See 26 U.S.C. § 6672 (" Any person required to collect, truthfully account for, and pay over any tax payment imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax . . . shall . . . be liable to a penalty equal to the total amount of the tax . . . .); Schultz v. United States, 918 F.2d 164, 165 n.1 (Fed. Cir. 1990). Accordingly, any person required to collect, truthfully account for and pay the trust fund taxes and who willfully fails to do so is personally liable for a penalty (commonly referred to as a Trust Fund Recovery Penalty or "TFRP") in an amount equal to the amount of unpaid taxes.

The following relevant facts are taken from the parties' submissions on the motion and the stipulation of facts contained in the Joint Pre-Trial Orderand are uncontested unless noted otherwise.

On December 22, 1989 Animed, Inc. filed a petition under Chapter 11 of the U. S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of New York. At the time of filing Rabinovici was the president of Animed. According to Bankruptcy Schedule A-1, Intermountain owed payroll taxes as of December 31, 1989 totaling $84,619.20.*fn1

On March 8, 1990, Intermountain filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States District Court for the Eastern District of New York. At the time of filing, Rabinovici was the president of Intermountain. Thereafter, in June 1990, the bankruptcy cases of Animed and Intermountain were consolidated and, shortly thereafter, converted from Chapter 11 to Chapter 7. On July 5, 1990 and October 30, 1990, the Internal Revenue Service filed proofs of claim listing unpaid employment tax liabilities incurred by Intermountain which included the employment tax period ending December 31, 1989 in the amount of $86,038.95.

The IRS advised Rabinovici by letter dated September 9, 1992 that it intended to propose to assess a TFRP against him pursuant to 26 U.S.C. § 6672.*fn2 On February 8, 1993, the IRS did in fact assess a TFRP against Rabinovici. The Government has not produced the February 8, 1993 notice of assessment. Nor has the government submitted any evidence as to its normal practice concerning the content of a notice of assessment. Thus, it is unknown whether the notice received by Rabinovici contained a break down of the total assessment as is contained in IRS Form 2749 described below.*fn3

According to the IRS, the assessment totaled $1,567,162.07, representing the aggregate unpaid trust fund income and F.I.C.A. taxes withheld from wages paid to Intermountain's employees for the periods ending December 31, 1989 through December 31, 1991. Form 2749 delineates all of the corporate employment tax periods included in the $1,567,162.07. According to that form, the assessment consisted of the following:

Period endingTrust Fund Balance 12/31/89$86,038.95 3/31/90$185,140.39 6/30/90$185,140.39 9/30/90$185,140.39 12/31/90$185,140.39 3/31/91$185,140.39 6/30/91$185,140.39 9/30/90$185,140.39 12/31/91$185,140.39 Total trust fund portion outstanding to be assessed:$1,567,162.07

The record does not indicate whether Rabinovici received a copy of Form 2749. At the time the assessment was made, it was apparently the IRS's standard procedure to make one aggregate assessment when employment tax liabilities for consecutive quarters were not paid over to the Government and to identify the assessment using the last quarter in the series. Accordingly, the assessment against Rabinovici was identified as the December 31, 1991 civil penalty assessment.

Eight of the nine quarters included in the February 8, 1993 assessment, to wit all four quarters of both 1990 and 1991, were periods where Intermountain failed to file quarterly employment returns. For those eight quarters, the IRS prepared substitute returns predicated upon its erroneous belief that Intermountain continued operations though the fourth quarter of 1991. According to the IRS, when this factual assumption proved incorrect as Intermountain had closed operations before the end of 1991,*fn4 the IRS, in the latter part of 1993, abated the excess amounts. Of the original $1,567,162.07 assessment, $1,481,123.12 was abated, leaving an unabated TFRP of $86, 038.95, which happens to equal the amount of Intermountain's unpaid employment tax liabilities for the period ending December 31,1989. According to the IRS, the abatement was effectuated by first splitting the original aggregate assessment into two parts and reversing the portion to be abated. By splitting the abatement in this manner, the computer automatically reversed all assessed statutory interest liabilities attributable to the portion of the aggregate assessment abated.

Rabinovici, on the other hand, argues that the IRS' computer records refer to an original assessment on February 8, 1993 in the amount of $86,038.95 relating to the December 1989 tax liability and an additional assessment in the amount of $1,481,123.12 for the tax periods 1990 and 1991.

By notice dated January 29, 2001, the IRS issued to Rabinovici a "Final Notice - Notice of Intent to Levy and Notice of Your Right to A Hearing" (the "Levy Notice"). The Levy Notice referred to two separate tax liabilities, a "CIVPEN for the "Tax Period" ended December 31, 1991, an apparent reference to the civil penalty under Section 6672 of the Code, and a "1040" for the "Tax Period" ended December 31, 1997. The "1040" is not at issue here. The Levy Notice stated:

Form NumberTax PeriodUnpaid Amount from Prior NoticesAdditional Penalty & InterestAmount You Owe CIVPEN12/31/9184731.5577169.62161901.17 104012/31/9798505.4613159.92111665.38    Total:273566.55

By cover letter dated February 14, 2001 Rabinovici's tax representative submitted on his behalf "Form 12153," a Request for a Collection Due Process Hearing challenging the Levy Notice. The request was received by the IRS on February 27, 2001. The request states:

The Taxpayer disagrees with the Notice of Intent to Levy dated January 29, 2001. The Taxpayer believes that the liability is not a correct amount. The Taxpayer is not a responsible person liable for a civil penalty for the year 1991. We have filed a freedom of information act request to obtain information regarding this matter, but have not received such information. The taxpayer requests a hearing wherein, he may be able to provide information to correct this liability. This amount does not correspond with his records as the accurate tax liability for the years in question.

On or about October 10, 2002, the IRS issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the "Determination") sustaining the levy. The ...

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