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August 4, 2005.

THOMAS J. GRECO Plaintiff,

The opinion of the court was delivered by: THOMAS VANASKIE, Chief Judge, District


This tax refund litigation raises important questions concerning the impact of the loss of the Internal Revenue Service investigative file on its ability to obtain a judgment for allegedly unpaid taxes; the classification of workers in the entertainment, bar and restaurant business as independent contractors; the availability of relief under section 530 of the Internal Revenue Code with respect to the incorrect classification of workers as independent contractors; and the liability of a corporate officer under 26 U.S.C. § 6672 for the corporation's misclassification of workers and the failure to remit payments for withholding taxes. Plaintiff Thomas J. Greco contends that the IRS tax assessments at issue in this case are necessarily arbitrary and must be rejected because the IRS lost its investigative file and cannot substantiate the assessments. As to the merits, Greco argues that during 1993 bouncers, door persons and coat check persons were properly treated as independent contractors by Revel Railroad, Inc., a corporation over which he presided. Alternatively, he asserts that liability for improper treatment of these workers is not appropriate because they have always been considered independent contractors and there was a reasonable basis for doing so. He also maintains that Revel Railroad had no obligation to issue 1099 forms to entertainers performing at the establishments in question because the entertainers were either incorporated or did not earn more than the threshold amount that triggers the 1099 requirement. Finally, he asserts that he cannot be held responsible for the failure of his corporate entities, Revel Railroad and Norma Jeanes, Inc., to pay withholding taxes in 1995 and 1996 because he did not willfully or recklessly disregard the obligation to remit payments. Plaintiff has moved for summary judgment, and the government has moved for partial summary judgment. For the reasons set forth below, both motions will be denied, with the exception that Plaintiff has established as a matter of law that a coat check person was properly classified by Revel Railroad as an independent contractor.


  A. Overview of Revel Railroad and Norma Jeanes

  In 1988, Thomas Greco, Eric Kornfeld, and Mitchell Kornfeld took over an existing corporation named Revel Railroad, Inc. (Def's Statement of Material Fact ("SMF") ¶ 4.)*fn1 Mr. Greco was the president and a fifty percent shareholder of Revel Railroad. (Id.) Revel Railroad was located at the train station complex at 33 Wilkes Barre Boulevard, Wilkes-Barre, Pennsylvania. (Id. ¶ 6.) The train station complex was eventually renamed Market Street Square. (Id. ¶ 7.) Within the train station complex, Revel Railroad ran two restaurants and two bars. (Id.) The restaurants were BeBop Café and Norma Jeanes Restaurant. (Id.) The bars were Peanuts and Patio. (Id.) Norma Jeanes Restaurant closed in the mid-1990s. (Id. ¶ 8.) BeBop Café, Peanuts, and Patio remained in business until 2001. (Id.)

  In 1988, Mr. Greco and the Kornfelds also established a corporation by the name of Norma Jeanes, Inc., located at the same address as Revel Railroad. (Id. ¶ 9.) Mr. Greco was a shareholder and the president of Norma Jeanes. (Id.) Norma Jeanes ran a hotel and diner. (Id. ¶ 10.) The diner was called Palooka's, and was run by Norma Jeanes until 1995 or 1996. (Id.)

  In July of 1992, the Kornfelds resigned as officers and directors of Revel Railroad and Norma Jeanes. (Id. ¶ 11.) Mr. Greco was then the only officer and director of both corporations. (Id.)

  As an officer of both corporations, Mr. Greco had the authority to hire and fire employees. (Id. ¶ 12.) Mr. Greco hired Maureen McHale to head the accounting department in the summer of 1988. (Id.) Ms. McHale had an MBA in accounting from Notre Dame University and previous experience as a senior accountant from a large accounting firm. (Pl's SMF ¶ 20.) Mr. Greco was Ms. McHale's supervisor. (Def's SMF ¶ 14.) Mr. Greco also hired outside accountant Mark Belletiere. (Id. ¶ 13.) Mr. Belletiere had a degree in accounting and an MBA in finance from Wilkes University, as well as years of experience in preparing personal and corporate tax returns and financial statements for various entities. (Pl's SMF ¶ 21.)

  Both Norma Jeanes and Revel Railroad had financial problems since 1988. (Def's SMF ¶ 23.) Mr. Greco loaned money to Revel Railroad and Norma Jeans throughout the years because both corporations always lost money. (Def's SMF ¶ 18, 23.) Mr. Greco loaned approximately half a million dollars to Revel Railroad. (Id. ¶ 18.) In 1997, Norma Jeanes and Revel Railroad filed for bankruptcy under Chapter 7. (Id. ¶ 21.) As President of both corporations, Mr. Greco executed both bankruptcy petitions. (Id.)

  B. Employee vs. Independent Contractor Classifications

  Prior to and during 1993, Revel Railroad classified approximately twenty-four workers as independent contractors, as opposed to employees. (Pl's SMF ¶ 2; Pl's Aff. ¶ 5, Ex. F, Dkt. Entry 45.) Those classified as independent contractors served as, inter alia, security personnel/bouncers, door persons, coat check personnel, tour coordinators, and a hospitality consultant. (Gov't Ex. 5.) The following people classified as independent contractors worked as door persons at Revel Railroad: Sue Joyce Adams, Anthony Policare, Lori Williams, Kim Randolph, Claire Rosenberg, Debbie Peters, Teresa Hanchulak, Michaelene Coffee, and Christine Paul. (Id.) The following people classified as independent contractors worked as security guards or bouncers: Greg Justave, Bill Williams, Sammy Martin, Charles Earlywine, Todd Britton, James Mihal, and Michael Zeto. The following people and jobs also received independent contractor classifications from Revel Railroad: Doug Trusavage as an electrician; Kenneth Coombs on "mircros repair;" Dawn Maffei as a coat checker; Virginia McGuire as a cleaner; Patty Kishbaugh as the ski tour coordinator; Rusty Wren as a painter; August Genetti as a hospitality consultant; and Laurie Sperry as a tour coordinator. (Id.)

  Revel Railroad first issued Forms 1099 for the workers it classified as independent contractors in 1993. (Def's SMF ¶ 28.) According to bookkeeper Mary Tencza, workers that earned more than $600 were issued 1099s. (Tencza Dep. at 95, Pl's Ex. J, Dkt. Entry 45.) Workers that earned less than $600 were not issued 1099s. (Id.) The first year Revel Railroad prepared Forms 1099, some of the forms were incomplete and missing the worker's social security number. (Def's SMF ¶ 30.) Revel Railroad paid the workers in cash. (Id. ¶ 29.)

  1. Employee Rules and Conflict of Interest Guidelines

  Market Street Square provided Employee Rules of Conduct and Conflict of Interest Guidelines that were signed by the workers. The Conflict of Interest Guidelines provided as follows: "It is the policy of the Market Street Square ("Company") to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees and independent contractors must avoid activities which are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company." (Gov't Ex. 24 at 2.) The guidelines then provide the following "compromising or harmful situations" that must be avoided: (1) revealing confidential information to outsiders; (2) accepting or offering substantial gifts that may be deemed to constitute undue influence or otherwise be improper or embarrassing to the company; (3) initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or personal or social involvement, or appearance of a personal or social involvement; (4) initiating or approving any form of personal, sexual, or social harassment of employees, customers, suppliers, or anyone else; (5) investing in or holding an ownership interest or outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company; (6) borrowing from or lending to employees, customers, or suppliers; (7) acquiring real estate of interest to the company; (8) unlawfully discussing prices, costs, customers, sales or markets with competing companies or their employees; (9) making any unlawful agreement with distributors, competitors, or customers with respect to prices, territories, or products; (10) improperly using or authorizing the use of any property of the Company or any other thing or property that is owned by person or entity; (11) engaging in any conduct which is not in the best interest of the company; and (12) making any unlawful agreement with or payment to any domestic or foreign government official or corporate representative.

  The guidelines then state, "Each officer, employee and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning." (Id. at 3.) The form then provides a line for the "employee's signature."

  Revel Railroad also had forms addressing employee rules of conduct. The form provided as follows:
Market Street Square (the "Company") has established these General Rules of Conduct applicable to all employees. Other more specific rules may be enacted by the Company from time to time concerning more specific issues and areas of operation.
Clearly defined rules of conduct are necessary for the orderly operation of every company. Employees have a right to know what is expected of them. Each employee must familiarize himself or herself with all Company rules and regulations pertaining to their positions and duties.
The Company requires that each employee faithfully abide by these rules and regulations.
The following are rules of conduct of general application and are supplemented by local and departmental regulations which must also be observed. These rules may be modified at any time.
1. Employees shall maintain a presentable appearance at all times while on duty and shall wear clothing appropriate to their duties. Attention to good grooming and neatness is mandatory.
. . .
7. No employee shall engage in outside employment that is detrimental to the Company's interest or where such work is competitive or in conflict with the Company's interest. Employment outside the Company must be reported to the employee's supervisor.
8. Employees shall not reveal information in Company records to unauthorized persons. Employees shall not publish or broadcast material in which the Company is identified or Employee's connection with the Company is expressed or implied without first submitting such material to the appropriate Company officials for review and approval.
9. No employee shall knowingly submit inaccurate or untruthful information for, or on, any Company record, report or document.
10. Employee must avoid tardiness, absence, and departure from work early without the permission of their supervisors. Employees must observe time limitations on rest and meal periods. Every employee shall notify his or her supervisor or specified contact of an anticipated absence or lateness in accordance with Company and departmental procedures. Sleeping or loafing on the job is prohibited.
11. Employees shall not use Company equipment, materials or facilities for personal purposes.
12. No employee shall be on or about Company property soliciting funds or services, selling tickets, distributing petitions or literature for any purpose (except as otherwise provided by law) at any time without the prior consent of supervisor.
. . .
14. Every employee will comply with safety regulations and procedures.
15. Every employee has a duty to protect and safeguard Company property and the property of the customers and employees, and no employee shall occupy, use or operate any Company property without prior authorization.
16. No employee shall be in unauthorized possession of any property of the Company, its customers or employees or attempt to remove such property from Company premises.
17. Employees shall not bring their own or any other minor children to their place of work or elsewhere on Company premises during the employee's working hours when such accompaniment might interfere with the discharge of the employee's duties and responsibilities.
18. No employee shall be in possession of firearms (licensed or unlicensed) or other weapons while on Company premises. The rule applies to all knives not required for the performance of job duties.
Violation of any of these regulations may result in disciplinary action ranging from warning to discharge. The measure of discipline should correspond to the gravity of the offense as weighed by its potential effect on the Company as well as the seniority and work record of the employee involved, among other factors.
The Company reserves the right to make inspections of employee lockers, desks, lunch boxes, vehicles and other items of personal property located on Company premises in those instances where there is reason to believe that they contain evidence of a violation of these regulations. Any refusal to cooperate fully in such inspections or searches will be considered a serious form of insubordination.
The bottom of the form then provides for an "employee signature." (Gov't Ex. 41 at 17-19.) Mr. Martin, a bouncer classified by Revel Railroad as an independent contractor, signed the form. (Id. at 19.)
  Revel Railroad also had forms providing examples of conduct that would result in immediate termination as follows:
Examples of Conduct Resulting in Immediate Termination
Every business has basic guidelines of what is to be expected. These guidelines are here to let you know, up front and honestly, what is to be expected of you. The following are examples of conduct that can result in immediate termination.
* Employee rudeness to customers
* Failure to show up for a scheduled shift.
* Theft of money or property from company, fellow employees, or its guests.
* Falsifying company documents or information
* Insubordination * Lying to a manager
* Use, possession, or being under the influence of alcohol or a controlled substance while on company property.
* Giving away food or beverages without the prior consent of a manager
* Serving an underage or obviously intoxicated person
* Drinking underage on company property
* Intentional destruction or MISUSE of company property
* Absenteeism
(Gov't Ex. 32 at 3.) The forms then contain lines for the workers to sign. The following workers classified as independent contractors signed the above form: Theresa Hanchulak, Sammy Martin, August "Gus" Genettie, III, Laurie Sperry, and Bill Williams. (Gov't Ex. 32 at 3; Ex. 41; Ex. 42 at 13; Ex. 55 at 4; Ex. 56 at 35.)

  2. Bouncers, Door Persons, and Coat Checkers

  According to Mr. Greco, Revel Railroad did not advertise or seek applications from bouncers for hire. (Greco Dep. at 172.) If a person wanted to be a bouncer at Revel Railroad, Mr. Greco would have that person contact the "lead bouncer." (Id. at 316.) The bouncers that worked at Revel Railroad covered shifts at various places. (Id. at 172.) Revel Railroad would determine how many bouncers it needed a night and then the bouncers would schedule their shifts "amongst themselves." (Id. at 172-73.) Mr. Greco further testified that the schedule made among the bouncers "was always in flux." (Id. at 160.) The government presented evidence, however, of a Revel Railroad work schedule that established the shifts for the bartenders, bouncers, cocktail waitresses, doorgirls, and barbacks. (Def's Ex. 27A.) According to Mr. Greco, workers classified as employees had their uniforms chosen by management. (Greco Aff. ¶ 9, Pl's Ex. F, Dkt. Entry 45.) The bouncers at Revel Railroad determined among themselves what they would wear to work. (Tencza Dep. at 83, Pl's Ex. J, Dkt. Entry 45.) Mr. Greco wanted the uniforms to be consistent. (Greco Dep. at 314.) If the uniforms were not consistent, Revel Railroad would "frown on it" but the bouncers would still work their shifts. (Id.)

  According to Mr. Greco, Revel Railroad generally did not oversee the bouncers. (Greco Dep. at 165.) According to Ms. Tencza, bouncers were never considered employees of Revel Railroad or Norma Jeans and did not sign the Employee Rules of Conduct. (Tencza Dep. at 77, 93, Pl's Ex. J, Dkt. Entry 73.) Mr. Greco testified that the bouncers "called their own shots [and] did their own thing." (Greco Dep. at 321.) Revel Railroad did not permit the bouncers to admit a person under 21 into the bar or hit anyone. (Greco Dep. at 165, 321.) If a bouncer hit someone, Mr. Greco did not fire the bouncer because "they sort of policed themselves." (Id. at 429.)

  To receive compensation, the bouncers would inform Revel Railroad at the end of the night who came in to work that evening, and Revel Railroad would then pay the bouncers money in envelopes that would be distributed among themselves. (Id. at 160.) According to Ms. McHale, she did not believe the bouncers at Revel Railroad were ever on payroll. (McHale Dep. at 119.) The government presented evidence, however, that at least one bouncer, Mr. Williams, received payroll checks. (Gov't Ex. 55 at 12.)

  According to Mr. Greco, the door persons that worked at Revel Railroad were recruited in a manner similar to how the bouncers were recruited. (Greco Dep. at 186-87.) Revel Railroad did not accept applications for door persons. (Id. at 186.) Instead, a door person would recruit other door persons to work certain shifts. (Id.) The door persons chose and paid for their uniforms. (Randolph Dep. at 66, Pl's Ex. G.) The door persons were paid by shift. (McHale Dep. at 29, Pl's Ex. H.) According to Ms. Tencza, the door persons did not sign the Employee Rules of Conduct. (Tencza Dep. at 78, Pl's Ex. J.) The government presented evidence, however, that Theresa Hanchulak, a door person classified as an independent contractor, signed employee rules in August 1992. (Gov't Ex. 32 at 3.) The government also presented evidence that the door persons were on a work schedule. (Def's Ex. 27A.)

  The coat checker at Revel Railroad, Dawn Maffei, brought in her own hangers and check tickets. (Greco Dep. at 207-08, 424.) She worked for tips and was paid on a nightly basis after her shift. (Id. at 207-08.) Revel Railroad did not tell Ms. Maffei what time she had to be at work. (Id. at 425.) If she wanted to make her money, the incentive was to be there when the doors opened. (Id. at 425-26.) She worked during the cold times of year on Thursdays, Fridays, and/or Saturdays. (Id. at 426.) During Mr. Greco's deposition, he testified that he was not responsible for any complaints about the coats because Ms. Maffei was an "independent person." (Id. at 427.) He further testified that he did not hire her, and thus, would not fire her if coats were reported stolen by the customers. (Id. at 428.)

  According to Mr. Greco, "the success of the business did not depend to an appreciative degree upon the performance of [the workers classified as independent contractors]." (Greco Aff. ¶ 8.) The government disputes this assertion, pointing out that cover charges collected at the door was the second largest source of Revel Railroad's revenue. (Gov't Ex. 4 at 5; Greco Dep. at 192.)

  3. Treatment and Characterization of the Workers

  Mr. Greco asserts that the persons designated as independent contractors in 1993 were consistently treated as independent contractors. (Pl's Aff. ¶ 4.) Mr. Greco further asserts that such workers were treated as independent contractors at all times prior to, during, and subsequent to 1993. (Id. ¶ 5.)

  Thomas Wayslow was a janitor for Revel Railroad who filled out a form W-4 on August 20, 1991. (Gov't Ex. 57 at 4.) Although Revel Railroad treated Mr. Wayslow as an employee, it classified cleaner Virginia McGuire as an independent contractor in 1993. (Gov't Ex. 5.)*fn2 By letter dated February 9, 2000, Mr. Greco warned Ms. McGuire and Mr. Wayslow to stop feeding cats on the property. The salutation of the letter stated, "Dear Employees." (Gov't Ex. 57 at 8.) Revel Railroad kept employee files on various workers that it classified as independent contractors. For example, Mr. Martin's employee file contains an "employee warning report" dated June 18, 1993 for repeated tardiness. The report stated, "Employee was late for 2 prior shifts. Both violations were in excess of 1 hr. Verbal warnings were given both times. This is the first written statement." (Gov't Ex. 41 at 15.) The form contains a section titled, "employee's signature." (Id.) There is an illegible signature in the employee signature section. (Id.)

  Mr. Genetti's employment file contains a warning report for "un-acceptable performance" [sic], "lack of teamwork," and "cash over/short." (Gov't's Ex. 42 at 11.) Under the explanation section, the form states, "Gus has been showing a lack in his mgmt duties. Example: closing procedures in kitchen by sending dishwashers home." (Id.) The form provides for an "employees signature" which contains an illegible signature. (Id.)

  Mr. Williams's employment file contains a written warning dated June 3, 1993 for the theft of alcohol from the company. (Gov't Ex. 55 at 7.) He also received the written warning for being under the influence of alcohol while on company property. (Id.) The form provided for an "employee's signature" which was signed by Bill Williams. On July 13, 1993, Mr. Williams was written up again for drinking during his work shift. (Id. at 3.) The issues were reviewed with Mr. Wiliams and accepted. (Id. at 2.) He was also informed that he could not be eligible for unemployment due to his repeated violations of company policy. (Id.) On July 14, 1993, Mr. Williams gave Market Street Square and Thomas Greco permission to deduct $200.00 from his next payroll check to cover an advance in pay. (Id. at 12.)

  The government also presented other evidence pertaining to the classification of Revel Railroad workers. For example, on January 24, 1994, Ms. Sperry received an "employee warning report" for giving hotel rooms to unauthorized patrons without collecting a room fee. (Gov't Ex. 56 at 12.)

  4. Basis for the Independent Contractor Classifications

  The IRS performed an audit on Mr. Greco's personal tax return in the 1980s. (Pl's Aff. ¶ 13.) At the time of the audit, Mr. Greco held an interest in two nightclubs, The Factory and The Woodlands. (Id.) The disk jockeys, bands, bouncers, door persons, and other casual laborers were treated as independent contractors at both nightclubs. (Id.) After performing the audit, the IRS did not find any violations of the Internal Revenue Code. (Id.)

  After the IRS examined Revel Railroad in 1993, Mr. Greco met with Chief Accountant Ms. McHale, outside accountant Mark Belletiere, and Attorney Joe Lohin to address which workers could be classified as independent contractors under the IRS guidelines. (Belletiere Dep. at 35-36, Pl's Ex. I.) After the meeting, Mr. Greco continued to classify the workers as independent contractors. (Id. at 35-37.)*fn3 Mr. Greco testified during his deposition that he followed industry standard in treating the relevant workers as independent contractors in 1993. (Greco Dep. at 109, 155-56.) Mr. Greco's competitors in Luzerne and Lackawanna counties classified bouncers, admissions handlers, tour coordinators, and other casual laborers as independent contractors. (Pl's Aff. ¶ 10.) Mr. Belletiere testified that "based on [his] understanding from other similar businesses, nightclub[s], and bar businesses," it was common in the industry to classify such workers as independent contractors. (Belletiere Dep. at 53, Pl's Ex. I.) The government's expert, David Sherwyn, opined that there is no industry standard to classify bouncers, door people, tour coordinators, coat check people, and cleaning people as independent contractors. (Gov't Ex. 58 at 3.)*fn4 Mr. Sherwyn further stated that, in the vast majority of cases, such workers are employees. (Id.)

  C. Mr. Greco's Responsibility and Knowledge of Unpaid Taxes

  According to Mr. Greco, he delegated his authority to pay bills to Ms. McHale and the accounting office. He further testified that he did not touch the bills. The only time he and Ms. McHale would discuss the bills was when she had a question to ask him. (Greco Dep. at 99, 249-50.)

  According to Ms. McHale, she and Mr. Greco went over finances "all the time" after the Kornfelds left Revel Railroad in 1992. (McHale Dep. at 84-85.) From 1992 to 1997, Mr. Greco signed the checks to pay the creditors of Norma Jeans and Revel Railroad. (McHale Dep. at 65-66.) If Mr. Greco did not sign a check, either Ms. McHale or Ms. Tencza had permission to sign Mr. Greco's name. (Defs SMF ¶ 15.) With the exception of small or routine bills, Mr. Greco would have to approve the bills before Ms. McHale could sign the check. (McHale Dep. at 78.) When there was not enough money to pay the bills, Mr. Greco would inform Ms. McHale what bills to prioritize on occasion. ...

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