UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

UNITED STATES OF AMERICA,

Plaintiff,

Case No. 09-CV-11675

vs.

HON. GEORGE CARAM STEEH

PATRICK F. REARDON,

Defendant.

_____________________________/

ORDER DENYING DEFENDANT’S MOTION FOR PARTIAL

SUMMARY JUDGMENT [DOC. 37] AND GRANTING

PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT [DOC. 32]

Plaintiff, the United States, filed a complaint against defendant, Patrick F.

Reardon, on May 1, 2009, seeking judgment for three quarters of payroll tax liability for

1996 and two quarters for 1997. Defendant has been the only individual in charge of

handling paychecks in McRae Electric Company (hereinafter “McRae”) since 1972. 

Both parties’ summary judgment motions are pending before this court. Defendant

moved for partial summary judgment based on the ten year statute of limitations,

alleging that the Collection Statute Expiration Date (hereinafter CSED) has passed for

the three tax quarters in 1996. Plaintiff responded that the CSED has not passed

because of various events which toll the statute of limitations on tax collection. Plaintiff

moved for summary judgment on the basis that defendant willfully failed to discharge his

responsibility to pay taxes according to Internal Revenue Code Section 6672.

The parties have been before the court on two previous occasions to argue their

cross-motions for summary judgment. At the conclusion of those hearings, on July 1,

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2010 and January 27, 2011, the court reopened discovery and permitted the parties to

renew their motions for summary judgment. The case is back before the court on

plaintiff’s renewed motion for summary judgment and defendant’s renewed motion for

partial summary judgment.

FACTUAL BACKGROUND

McRae Electric Company was a corporation specializing in electrical estimation.

It was founded by defendant Patrick F. Reardon in 1971. (Reardon Dep. 5:5-6:1, May

5, 2010). Defendant was the sole owner and person-in-charge of McRae from 1972 to

1997 or 1998. (Id. 5:14-6:12). Defendant was “solely in charge of handling checks and

things of that nature.” (Id. 6:10-7:1). During the tax periods at issue, defendant had “a

couple of bad jobs”, and his creditor, Metro Bank, took control over McRae’s cash flow

by “lock-boxing” the company’s money. (Id. 7:14-7:17). Nevertheless, defendant was

still able to write paychecks to his employees and withhold employment taxes; he

admits that he did not pay the money withheld to the Internal Revenue Service. (Id.

7:24-8:22). 

In 1998, defendant was assessed by a delegate of the Secretary of the Treasury

for his tax liabilities for five quarters in years 1996 and 1997. The 1996 tax liability was

assessed on February 16, 1998 and the 1997 tax liability was assessed on July 20,

1998. The complaint in this case was filed on May 1, 2009, more than ten years after

the two assessments. The total amount of liability as of November 29, 2010 is

$298,379.65, plus interest and other statutory additions. (Diakite Decl. at ¶ 4). Of that

amount, $215,450.12 is attributed to the 1996 tax quarters and $82,929.53 to the 1997

tax quarters.

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There have been four events which could potentially statutorily extend the statute

of limitations in this case and permit the collection of the taxes assessed. First,

defendant made an Offer-in-Compromise (an administrative attempt at settlement) on

June 24, 2004. His offer was rejected on October 5, 2004, and he did not appeal. 

Second, defendant filed for Chapter 13 bankruptcy protection on August 21, 2007, and

the bankruptcy court dismissed the case on November 27, 2007. Third, defendant

submitted an installment agreement request, which was recorded in the electronic

system of the IRS on January 7, 2008. The request was denied on March 20, 2008,

and was denied again on appeal on May 5, 2008. Fourth, on January 7, 2009,

defendant requested a collection due process hearing, which was resolved on March

14, 2009.

None of the above stated facts is materially disputed by the parties. However, the

parties disagree over the computation of the statute of limitations based on these four

events. The parties further disagree whether defendant was a responsible person of

McRae Electric Company, who wilfully failed to collect, truthfully account for and pay

over the trust fund taxes to the United States for the periods at issue.

STANDARD FOR SUMMARY JUDGMENT

Federal Rule of Civil Procedure 56(c) empowers the court to render summary

judgment "forthwith if the pleadings, depositions, answers to interrogatories and

admissions on file, together with the affidavits, if any, show that there is no genuine

issue as to any material fact and that the moving party is entitled to judgment as a

matter of law." See Redding v. St. Eward, 241 F.3d 530, 532 (6th Cir. 2001). The

Supreme Court has affirmed the court's use of summary judgment as an integral part of

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the fair and efficient administration of justice. The procedure is not a disfavored

procedural shortcut. Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986); see also Cox

v. Kentucky Dept. of Transp., 53 F.3d 146, 149 (6th Cir. 1995).

The standard for determining whether summary judgment is appropriate is

"'whether the evidence presents a sufficient disagreement to require submission to a

jury or whether it is so one-sided that one party must prevail as a matter of law.'"

Amway Distributors Benefits Ass’n v. Northfield Ins. Co., 323 F.3d 386, 390 (6th Cir.

2003) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). The

evidence and all reasonable inferences must be construed in the light most favorable to

the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.

574, 587 (1986); Redding, 241 F.3d at 532 (6th Cir. 2001). "[T]he mere existence of

some alleged factual dispute between the parties will not defeat an otherwise properly

supported motion for summary judgment; the requirement is that there be no genuine

issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986)

(emphasis in original); see also National Satellite Sports, Inc. v. Eliadis, Inc., 253 F.3d

900, 907 (6th Cir. 2001).

If the movant establishes by use of the material specified in Rule 56(c) that there

is no genuine issue of material fact and that it is entitled to judgment as a matter of law,

the opposing party must come forward with "specific facts showing that there is a

genuine issue for trial." First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 270 (1968);

see also McLean v. 988011 Ontario, Ltd., 224 F.3d 797, 800 (6th Cir. 2000). Mere

allegations or denials in the non-movant's pleadings will not meet this burden, nor will a

mere scintilla of evidence supporting the non-moving party. Anderson, 477 U.S. at 248,

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252. Rather, there must be evidence on which a jury could reasonably find for the nonmovant. McLean, 224 F.3d at 800 (citing Anderson, 477 U.S. at 252).

ANALYSIS

Employers are required to withhold income, Social Security, and Medicare taxes

from employees’ compensation and timely remit those withheld taxes, held in trust for

the United States, to the IRS. When a corporate employer fails to pay those taxes to

the IRS, individuals who have had significant control of the financial affairs of the

corporation are held responsible for the loss, and so are held personally liable on a

dollar-for-dollar basis. Defendant testified he was “everything” in McRae, the one

individual “solely in charge of handling checks and things of that nature,” that he knew

of his obligation to pay over the withheld taxes, but did not do so during the default

periods, and that he paid other creditors instead of the taxes. While defendant claims

that the 1996 tax liability is barred by the 10-year CSED under 26 U.S.C. § 6502, he

does not raise any defense in regard to the 1997 tax liability. The issues presented are

whether the United States is entitled to judgment for the federal tax liabilities assessed

against defendant, and whether it timely filed this action.

I. Statute of Limitations

When an assessment on tax liability is duly made, the tax may be collected by

levy or by a proceeding in court, but only within 10 years after the assessment, plus any

time that statutorily suspends the running of the period of limitation. I.R.C. §§ 6502-

6503. The three 1996 tax quarters were assessed on February 16, 1998, so the initial

CSED was February 16, 2008. Plaintiff contends that at least three of the four events

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mentioned in the statement of facts would have extended the CSED to June 9, 2009,

which would make the complaint filed May 1, 2009 timely. 

Plaintiff’s Automated CSED Computation Worksheet correctly calculates the

Original CSED Date for the three 1996 quarters as February 16, 2008, and lists a New

CSED Date as May 2, 2009. The New CSED Date is calculated using an addition of

163 days due to defendant’s Offer-in-Compromise and 278 days due to defendant’s

bankruptcy. 

Internal Revenue Code Section 6331 provides that no levy or collection attempt

may be made during the period that an Offer-in-Compromise is pending with the

Secretary and during the 30 days thereafter if the Offer is rejected and not appealed.

I.R.C. § 6331(k)(1). Defendant made an Offer-in-Compromise on June 24, 2004, and it

was rejected on October 5, 2004. Defendant did not appeal, thus the tolling period

ended on November 4, 2004 – 30 days after the rejection. The period from June 24 to

November 4 is the time during which the Offer was pending plus the 30-day provision

after rejection, which amounts to a total of 133 days. Plaintiff’s CSED computation

worksheet incorrectly suspends the CSED by 163 days by adding the additional 30 day

period for a possible appeal twice. Plaintiff does not dispute that this error should be

corrected. Therefore, the Offer-in-Compromise suspends the statute of limitations and

extends the CSED by 133 days. 

Section 6503 of the Internal Revenue Code provides that the running of the

period of limitations shall be suspended in a case under Title 11 of the United States

Code, plus 6 months thereafter for the collection of tax liabilities. I.R.C. § 6503(h). 

Defendant commenced his bankruptcy proceeding on August 21, 2007, and it was

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dismissed on November 27, 2007. Therefore, the tolling period is from August 21, 2007

to May 26, 2008 – six months after the dismissal. Defendant’s bankruptcy proceeding

tolled the statute of limitations from August 21, 2007 to May 26, 2008, therefore

extending the CSED date by a total of 278 days. 

Internal Revenue Code Section 6331 provides that an installment agreement

suspends the running of the limitation period in a similar way as an Offer-inCompromise: the statute of limitations is tolled during the pending of such an

agreement, and during the pending of an appeal which is made within 30 days of denial.

I.R.C. § 6331(k)(2). Defendant proposed an installment agreement which was received

by the IRS in letter on January 10, 2008. The proposal was denied on March 20, 2008,

and defendant appealed on April 18, 2008. His appeal was denied on May 5, 2008. 

Therefore, the statute of limitations is tolled from January 10, 2008 to May 5, 2008,

which overlaps with the tolling period resulting from the bankruptcy proceedings (August

21, 2007 - May 26, 2008). 

The parties previously vigorously litigated the issue of whether defendant’s

request for an installment agreement extended the CSED because it overlapped with

the tolling period for his bankruptcy proceeding. Plaintiff now takes the position that for

purposes of defendant’s renewed motion for partial summary judgment the court does

not need to decide the issue. In other words, plaintiff is willing to concede that the

request for an installment agreement does not further toll the statute of limitations

because it completely overlaps with defendant’s bankruptcy. 

Internal Revenue Code Sections 6320 and 6330 provide that from the time a

timely request for a Collection Due Process (“CDP”) Hearing is made through its final

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determination, the IRS is prohibited from enforcing collection and the CSED is extended

by like period. Plaintiff raises a final potential event to extend the statute of limitations

and CSED, namely, the Request for Collection Due Process or Equivalent Hearing

submitted by counsel on behalf of defendant on January 7, 2009. 

The Internal Revenue Code provides that prior to any levy activity, the IRS must

provide a CDP Notice and afford a requesting taxpayer with the opportunity for a CDP

hearing to be held before its Appeals Division. I.R.C. §§ 6320(a), 6330(a). A CDP

hearing “must be requested during the 30-day period that commences the day after the

date of the CDP Notice.” Treas. Reg. § 301.6330-1(c)(1). A taxpayer who makes a

belated request at any point beyond this 30-day window is not statutorily guaranteed a

CDP hearing, though they may be afforded an Equivalent Hearing which addresses

many of the same issues.

In addition, a taxpayer is afforded only one opportunity for a CDP Hearing per

delinquent period. I.R.C. §§ 6320(b)(2), 6330(b)(2), Treas. Reg. § 301.6320-1(b)(1). 

Once a taxpayer has received a CDP Notice and has been afforded an opportunity for a

CDP Hearing, any subsequent requests regarding the same underlying tax periods are

treated as Equivalent Hearings. 

In this case, a tax lien was originally filed against defendant in 2004, and it

appears that defendant received a CDP Notice in 2004 related to that tax lien. (Exhibit

D, Case Activity Record). It is unclear whether defendant requested a timely CDP

Hearing in 2004. What is certain is that defendant’s CDP rights expired in 2004 after

the 30 day period lapsed following the filing of the original tax lien. The 2004 tax lien

was mistakenly permitted to lapse, so the IRS re-filed a Notice of Federal Tax Lien,

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covering the same tax period as the 2004 tax lien.

Defendant submitted a Request for a Collection Due Process or Equivalent

Hearing on January 7, 2009 addressing the duplicative lien. Defendant submits the IRS

Case Activity Record generated by Appeals Officer Mark L. Grzesiowski, the Appeals

Officer who received the request for hearing on February 9, 2009. The Officer noted

that the lien was not the first one filed for the tax period at issue, and concluded “the

taxpayer is not entitled to CDP rights if he received his CDP rights with the original [lien]

filing. [Taxpayer] appears to have received CDP rights in 2004, so neither CDP or [sic]

[Equivalent Hearing] rights available with recent filing.” (Exhibit D). A final

determination was made, resolving defendant’s request for a CDP hearing on March 14,

2009. No appeal was taken.

The Internal Revenue Code provides that if a CDP hearing is requested within

thirty days of being provided with notice, the CSED is suspended for the period in which

the hearing and any appeals therefrom are pending. I.R.C. §§ 6330(e)(1), 6320(c)

(making the suspension of the collection period in § 6330(e) applicable to CDP hearings

brought under § 6320). “In no event shall any such period expire before the 90th day

after the day on which there is a final determination in such hearing.” I.R.C. §

6330(e)(1). 

When addressing the tolling issue, defendant conflates the substantive rules with

the procedural. Substantively, as argued by defendant and found by the Appeals

Officer, defendant did not have a right to a CDP hearing for the re-filed Notice of

Federal Tax Lien because it covered the same tax period to which he previously had

notice of, and a right to, a CDP hearing. Procedurally, however, it was the timely

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request for a CDP hearing on January 7, 2009 that triggered the suspension of

collection by the IRS and suspension of the statute of limitations. 

. . . . if a hearing is requested under subsection (a)(3)(B), the levy actions

which are the subject of the requested hearing and the running of any

period of limitations under section 6502 (relating to collection after

assessment) . . . shall be suspended for the period during which such

hearing, and appeals therein, are pending. . . . 

I.R.C. §§ 6330(e)(1), 6320(c) (emphasis added).

The purpose for suspending collection and the CSED upon the filing of a timely

request for a CDP hearing is clear. The Revenue Officer forwards such requests to the

local IRS appeal office where an Appeals Officer reviews and resolves each request. 

During this time, the Revenue Officer suspends collection action, as was noted in

transcript of taxpayer account maintained by the IRS (Official Transcript, p. 8-9). The

substance of the final determination has no bearing on the issue of tolling, so long as a

timely request for a CDP hearing is made. In addition, the Request for Collection Due

Process or Equivalent Hearing itself, just above the requestor’s signature, states: “I

understand the CDP hearing and any subsequent judicial review will suspend the

statutory period of limitations for collection action. I also understand my representative

or I must sign and date this request before the IRS Office of Appeals can accept it.” 

Defendant’s request for a CDP hearing was made on January 7, 2009 and was

resolved by final determination by the Appeals Officer on March 14, 2009. The CSED

was tolled for the 66 day period. When 66 days are added to the April 4, 2009 CSED,

the new CSED becomes June 9, 2009, without taking into account the provision in

I.R.C. § 6330(e)(1) that the CSED shall not expire before the 90th day after the day on

which there is a final determination in the CDP hearing. (Ninety days from March 15,

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2009 would be June 13, 2009). The event of requesting a CDP hearing tolled the

CSED beyond the filing of the complaint on May 1, 2009. Defendant’s motion for partial

summary judgment as to the 1996 tax liability is therefore DENIED.

II. Responsible Person

A. Defendant had Exclusive Control over Tax Withholding

Defendant had exclusive control over the employment tax withholding in McRae

during the tax periods at issue, hence he is personally liable for the tax liability incurred.

In order to be personally penalized, one has to be the main person in charge of

employment tax withholding. I.R.C. § 6672 (a); Gephart v. United States, 818 F.2d 469

(6th Cir. 1987). The purposes of subjecting the employer to civil and / or criminal

penalty for failure to pay employment taxes are to ensure that the employer would

comply with his obligations, and to create a “trust fund” in favor of the United States. 

See Slodov v. United States, 436 U.S. 238, 247-248 (1978). In the Sixth Circuit, a

person having inherent or ultimate authority is a responsible person. Gephart, 818 F.2d

at 473. His liability is established so long as he has significant, as opposed to absolute,

managerial control over the expenditure of funds. Id.

McRae is defendant’s own company. Defendant has been the sole shareholder

since 1972, and he was the only one in charge of “handling checks and things of that

nature”. (Reardon Dep. 6:10-7:1, May 5, 2010). This is the maximum level of control

over a corporation’s finances that one can possibly have. Even during the time when

Metro Bank lock-boxed a portion of McRae’s money, defendant still had a sufficient

level of control so as to make payments to his employees, and to withhold employment

taxes without paying them to the Government. (Id. 7:24-8:9, May 5, 2010). Defendant

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maintained exclusive control over the company’s internal finances throughout, and such

control was technically sufficient for him to fulfill his tax liabilities. Undoubtedly,

defendant is the sole responsible person, and he can be held personally liable for tax

purposes. 

B. Defendant Willfully Evaded Taxes

Defendant has willfully evaded his tax liability because he had full knowledge of

the nature of his act, but still made the conscious choice of not making tax payments to

the United States. More than negligence is required for “willfulness”: there needs to be

conscious awareness or reckless disregard for obvious or known risks. Gephart, 818

F.2d at 475. Willfulness does not connote a malicious motive, but rather means that the

action is voluntary and intentional. Honey v. United States, 963 F.2d 1083, 1087 (8th

Cir. 1992); Collins v. United States, 848 F.2d 740, 742 (6th Cir. 1988).

Defendant made a conscious decision in not paying the employment taxes

because of the financial difficulties of his business. He was fully aware of his tax

liability, but he chose not to pay the tax to the Government because he wanted to keep

the cash so that his business could “keep going”. (Reardon Dep. 7:19-7:23, May 5,

2010). He intended to “make it up” at a later time, but undoubtedly there has already

been willful tax evasion. Id. 

C. Defendant does not have Legitimate Excuses to Exempt his Liability

Contrary to defendant’s assertion, defendant’s tax liability is not mitigated or

exempted due to his financial difficulties or his creditor’s control over McRae’s cash flow

by the lock-boxing protocol. Federal case law has consistently held that failure to pay

taxes due to the Government in order to please other creditors is a violation. See, e.g.,

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Burden v. United States, 486 F.2d 302, (10th Cir. 1973); Stake v. United States, 347 F.

Supp. 823 (D. Minn. 1972). Furthermore, the worsening financial situation of a

corporation is never a valid excuse for failure to pay federal tax. See Kubinski v. United

States, 285 F. Supp 849, 851 (D. Minn. 1968). Even if a corporation faces grave

financial difficulties and has to pay off debts to other creditors in order to survive, it is

still not a “reasonable cause” to discharge the corporation’s tax delinquencies. 

Baimbridge v. United States, 335 F. Supp.2d 1084, 1091 (S.D. Cal. 1994) (quoting

Sorenson v. United States, 521 F.2d 325 (9th Cir. 1975)). 

As dire and difficult as the defendant’s financial situation might have been, he

was still able to make paychecks and withhold taxes to his general business fund, even

during the time that Metro Bank allegedly controlled a large amount of McRae’s cash

flow. Even if the extent of control by Metro Bank is a factual question, it is immaterial as

a matter of law: liability to other creditors simply does not excuse defendant’s tax

evasion to the Government. The “scope of impact” of Metro Bank’s lock-boxing protocol

is an immaterial issue of fact that should not be factored into this court’s decision under

the summary judgment standard. 

CONCLUSION

Summary judgment is granted in favor of plaintiff with respect to the 1996 and

1997 tax quarters because there is no genuine issue of material fact with regard to

defendant’s tax liability and willful tax evasion. The amount owing by defendant on all

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of the tax quarters at issue is $298,379.65 plus interest and statutory additions from

November 29, 2010. 

Dated: September 12, 2011

S/George Caram Steeh 

GEORGE CARAM STEEH

UNITED STATES DISTRICT JUDGE

CERTIFICATE OF SERVICE

Copies of this Order were served upon attorneys of record on

September 12, 2011, by electronic and/or ordinary mail.

S/Josephine Chaffee

Deputy Clerk

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