United States Of America v. Wallis

Filing 232

MEMORANDUM OPINION. Signed by Judge Norman K. Moon on March 8, 2017. (sfc)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
LYNCHBURG DIVISION
UNITED STATES OF AMERICA,

CASE NO. 6:14-cv-00005

Plaintiff,

MEMORANDUM OPINION

v.
WILLIAM WALLIS,

JUDGE NORMAN K. MOON

Defendant.

Defendant William Wallis has filed objections to a Report and Recommendation
(“R&R”) issued by United States Magistrate Judge Robert S. Ballou, which recommended that I
grant Plaintiff’s motion for entry of final judgment and dismissal of claims related to Nitti
Family Enterprises. The R&R recommends that I enter judgment against Wallis for unpaid
personal income taxes and trust fund taxes. (Dkts. 198, 228). Having reviewed the R&R and the
record, I will overrule all objections and adopt the R&R in full. Accordingly, Plaintiff’s Motion
for Entry of Judgment, (dkt. 198), will be granted, the remaining claims related to Nitti Family
Enterprises, Inc. will be dismissed, and judgment will be entered in favor of the Government
against Wallis as set forth below:
Personal income tax (Form 1040):
Tax Period Final Judgment Amount
1998
$17,341.60
1999
$15,098.88
2000
$13.700.36
2002
$10.445.64
Total:
$56,586.48
United American Holding, Inc. quarterly employee withholding tax:

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Tax Period Final Judgment Amount
03/31/1999
$19,443.81
06/30/1999
$21,448.24
09/30/1999
$21,298.73
03/31/2000
$18,096.06
06/30/2000
$52,887.56
09/30/2000
$39,858.94
12/31/2000
$47,047.05
03/31/2001
$37,047.05
06/30/2001
$44,453.55
09/30/2001
$41,120.10
Total:
$342,701.09
Boss Management Group, Inc. quarterly withholding tax:
Tax Period Final Judgment Amount
12/31/2000
$5,442.64
03/31/2001
$10,843.29
09/30/2001
$10,843.29
06/30/2002
$3,884.34
09/30/2002
$1,091.29
12/31/2002
$3,325.98
Total:
$35,430.83
I. FACTUAL AND PROCEDURAL HISTORY
I previously set forth the underlying facts of this case in my memorandum opinion of
February 1, 2016, granting the Government’s motion for summary judgment in part. See United
States v. Wallis, 2016 WL 411020 (W.D. Va. Feb. 1, 2016); (dkt. 185). As most of the facts are
not relevant at this stage of the case, they will not be repeated here. The main thrust is that the
Government alleges Defendant failed to pay trust fund taxes for three closely held companies
that he owned and operated: United America Holdings, Inc. (“United”), Boss Management
Group, Inc. (“Boss”), and Nitti Family Enterprises, Inc. (“Planet Pizza”).

In addition, the

Government is seeking payment of unpaid personal income taxes from the taxable years 1998,

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1999, 2000, and 2002.
On February 1, 2016, the Court granted partial summary judgment, finding Defendant
liable for the unpaid personal taxes as well as the unpaid trust fund taxes of United and Boss, but
the Court did not make a determination as to the amount of tax liability, nor did the Court grant
summary judgment regarding the claims related to Planet Pizza. Wallis, 2016 WL 411020 at
*11; (dkt. 185 at 22). The Government then moved for entry of final judgment under Rule
54(b). 1 (Dkt. 198). The motion asked the Court to dismiss the claims related to Planet Pizza and
enter final judgment in the following amounts: $56,586.48 related to personal income taxes,
$35,430.83 related to Boss, and $342,701.09 related to United, plus statutory interest, penalties,
and costs. (Id. at 4–6). The parties then filed briefs, and a hearing was held before Magistrate
Judge Robert S. Ballou. (Dkts. 198, 205, 206, 209). Judge Ballou’s R&R recommended that I
grant the Government’s motion in its entirety. (Dkt. 228). Plaintiff objected to portions of Judge
Ballou’s R&R on the grounds that the IRS inaccurately calculated the amount of unpaid taxes
and should not enjoy a presumption of correctness. (Dkt. 229).
II. STANDARD OF REVIEW
A district court may “designate a magistrate judge to conduct hearings, including
evidentiary hearings, and to submit . . . proposed findings of fact and recommendations.” 28
U.S.C. § 636(b)(1)(B). “[A]ny party may serve and file written objections to such proposed
findings and recommendations” within fourteen days after service. Id. at § 636(b)(1). The
district court is then required to “make a de novo review of those portions of the report . . . to
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Because the Government’s motion also asks the Court to voluntarily dismiss the claim
related to Planet Pizza, the judgment requested need not be pursuant to Rule 54(b). Following
dismissal of the Planet Pizza claims, the judgment requested resolves all of the pending claims.
Accordingly, this motion is in essence a Rule 56 motion for summary judgment as to damages,
not a Rule 54(b) motion.
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which objection is made.” Id.; see also Fed. R. Civ. P. 72(b). For those portions of the R&R to
which a party does not object, a district court “must ‘only satisfy itself that there is no clear error
on the face of the record in order to accept the recommendation.’” Diamond v. Colonial Life &
Accident Ins. Co., 416 F.3d 310, 315 (4th Cir. 2005) (quoting Fed. R. Civ. P. 72 Advisory
Committee’s Note).
III. DISCUSSION
Defendant lodges two objections to Judge Ballou’s R&R. First, Defendant argues that
estimated returns prepared by the IRS are incorrect because they employ a 20% withholding rate,
when 11% was the proper rate. (Dkt. 229 at 10). Second, Defendant argues that the presumption
of correctness typically afforded to the IRS is contradicted and undermined by discrepancies
between different documents filed by the IRS in the past year. (Id. at 21). Both of these
objections will be considered in turn and overruled.
A. The Withholding Rate
Defendant’s first objection to the R&R is that it overstates the amount of tax liability
related to United and Boss because the IRS used an improper withholding rate when preparing
estimated Form 941 returns (“941s”). (Dkt. 229 at 10). Because the IRS’s assessment receives a
presumption of correctness and Defendant has failed to provide substantial evidence that the
assessment is incorrect, this objection will be overruled.
We begin with the well-established principle that IRS tax assessments enjoy a
presumption of correctness, and these assessments can be used to establish a prima facie case.
United States v. Fior D’Italia, 536 U.S. 238, 242 (2002). Once a prima facie case has been
made, “the burden is upon the taxpayer to establish that the Commissioner’s determination was
erroneous” by providing “substantial evidence contrary to the Commissioner’s finding.” United
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States v. Pomponio, 635 F.2d 293, 296, 297 n.4 (4th Cir. 1980).
Defendant argues that he has presented substantial evidence that the IRS’s use of a 20%
withholding rate in creating its estimated 941 returns was “arbitrary and excessive.” Cebollero v.
Commissioner, 967 F.2d 986, 990 (4th Cir. 1992). As evidence for this claim, Defendant
presents W-3s from some of the years in question and 941s from other years that he believes
show a withholding rate of roughly 11%, as opposed to the 20% rate used by the IRS to create
estimated 941s for the years that Defendant failed to file. (Dkt. 229 at 3–6). While these
documents may appear compelling when packaged together and viewed in a vacuum, they are
contradicted by other evidence in the record, and thus they fail to qualify as “substantial
evidence” to rebut the presumption of correctness. Pomponio, 635 F.2d at 297 n.4.
Defendant uses cherry-picked documents in an attempt to construct the following
narrative: United and Boss consistently withheld 11% of their employees’ wages before, during,
and after the periods in question, so the IRS should have used an 11% withholding rate in their
estimated 941s. The problem, however, is that these documents are not as convincing as they
seem. First, the W-3s from the periods in question are directly contradicted by other wage
documents in the record, thus undermining their credibility. Specifically, the W-3s from the
years in question claim total wages that differ from other documents submitted during the
litigation. (See, e.g., dkt 138-3 at 1 (reporting $360,251 in wages in 2001); dkt. 126-52 at 1–2,
28–32 (reporting $335,616.27 in payroll expenses in 2001); dkt. 205 at 13 (reporting
$224,381.79 in wages to the Virginia Employment Commission in 2001)).

This kind of

inconsistency is hardly “substantial evidence.”
Second, Defendant’s 941s from other periods are poor indicators of the withholding rate
during the periods in question.

Personnel and wages change regularly, so 941s from one
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quarter—while somewhat predictive of other quarters—do not prove with certainty the
withholding rate during other timeframes. Defendant’s evidence amounts to nothing more than
theory, speculation, and conjecture—not substantial evidence. We may never know the proper
amount of tax withheld by Defendant during the periods in question, and Defendant has failed to
rebut the presumption of correctness.
The simple fact here is that Defendant repeatedly failed to file the required tax forms.
That is why this case is before the Court in the first instance, and that is why the IRS had to
prepare estimated 941s for the periods in question. Furthermore, Defendant failed to keep
adequate records as required by law, Wallis, 2016 WL 411020 at *7; (dkt. 185 at 15), so the IRS
had limited information available at the time of assessment. Wallis, 2016 WL 411020 at *7;
(dkt. 185 at 12). In order to undermine these estimates, Defendant has provided the Court with
cherry-picked documents and self-serving testimony. Such evidence is insufficient to rebut the
presumption of correctness or establish the estimate as arbitrary and excessive. Defendant
cannot be allowed to benefit from his own failure to pay taxes and maintain proper records. See
Jones v. Commissioner, 903 F.2d 1301, 1303 (10th Cir. 1990) (“[A] taxpayer who has
abandoned the advantage of mathematical precision by failing to keep adequate records cannot
complain that the [Service’s] assessment is based on estimates.”).
B. Presumption of Correctness
Defendant raises a second, broader objection to the R&R on the grounds that the “the
‘presumption of correctness’ of all the assessments is contradicted by the 7 other documents filed
by the IRS in the past year, stating that Wallis owes different amounts for the same tax periods.”
(Dkt. 228 at 21). Defendant argues that the IRS, through various filings in this and other courts,
has manipulated the nature and amount owed by Defendant to suit its needs, and thus should not
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enjoy the presumption of correctness. (Id. at 21–25). Defendant goes as far as to imply that IRS
officials have perjured themselves, and he accuses government counsel of lying to the magistrate
judge. (Id. at 22). Nevertheless, Defendant cites no statutory authority or case law in support of
his claim that the presumption of correctness should be rejected in this case. The Court sees no
legitimate reason why the well-established presumption of correctness should be discarded when
considering the IRS’s assessments. Fior D’Italia, 536 U.S. at 242. Accordingly, Defendant’s
second objection will be overruled.
IV. CONCLUSION
I have reviewed the record, considered the objections filed by Defendant and the
arguments made by the Government in response, reviewed the R&R for clear error, and made de
novo findings on the portions of the R&R to which Defendant objected. For the reasons stated
above, I will adopt and approve the findings and recommendations set forth in the R&R of the
United States Magistrate Judge, in full, and I will grant the Government’s Motion for Entry of
Final Judgment. An appropriate Final Judgment will issue.
The Clerk of the Court is hereby directed to send a certified copy of this Memorandum
Opinion to all counsel of record and to United States Magistrate Judge Robert S. Ballou.
8th
Entered this ____ day of March, 2017.

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