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.
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
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.
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.
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
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
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
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
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
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
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
* 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
(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
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. ...