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July 23, 1990

ROBERT G. PETERSON, Plaintiff-Counterclaim-Defendant,
UNITED STATES OF AMERICA, Defendant, Counterclaimant, v. JOHN PETERSON, Additional Counterclaim-Defendant

Milton I. Shadur, United States District Judge.

The opinion of the court was delivered by: SHADUR


 This action was begun and has continued in the typical pattern followed by lawsuits dealing with withholding taxes: Robert Peterson ("Robert") initially sued for a refund of the small amount of such taxes that he had paid, and the United States then counterclaimed against him and his brother John Peterson ("John") for the much larger amount of withholding taxes unpaid by the brothers' corporation (asserting that each was a "responsible person" within the meaning of the relevant statute).

 This Court conducted a bench trial to deal with Robert's potential liability. *fn1" After the trial, each of the parties has submitted proposed findings of fact ("Findings") and conclusions of law ("Conclusions").

 Findings of Fact

 1. On November 24, 1986 each of John and Robert was assessed a 100% penalty in the amount of $ 41,336.40, pursuant to 26 U.S.C. § 6672, *fn2" as a result of the asserted willful failure of each of them to collect, truthfully account for and pay over to the government withheld federal income and Federal Insurance Contribution Act ("FICA") taxes due and owing from G & F Service and Supply, Inc. ("G & F") for the third and fourth quarters of 1983, all four quarters of 1984 and the third quarter of 1985.

 2. G & F and Chicago Heater, Inc. ("Chicago Heater") (collectively "Corporations") were treated as one entity for tax reporting purposes. Chicago Heater had no employees and consequently did not withhold federal taxes.

 3. Robert and John are brothers who purchased all the stock in Corporations in January 1982 with funds provided by their mother. G & F was in the business of installing and servicing water heaters, while Chicago Heater was in the business of buying and selling water heaters at wholesale.

 4. Before the purchase John had been living in Delaware with his family, while Robert had been engaged in the plumbing business in the Chicago area, the previous two years as a sole proprietor and for about 18 years before that as an employee of other plumbing contractors. Their mother, who was concerned over John's unemployment, found an advertisement in the Chicago Tribune want ads listing both Corporations as being for sale. She asked Robert to write to the owner, George Fancher ("Fancher"). Robert did that and then met with Fancher on several occasions before the purchase to "look over" the business and to satisfy himself that the business was "bona fide." After telephone discussions with their mother, John agreed that he would return to this area to carry out the business responsibilities referred to in Findings 5 and 6.

 5. Before the acquisition, Robert and John had discussed the businesses and the business functions each would perform on at least three occasions, as described in this and the next Finding. First they had such a conversation with their mother, who expressed satisfaction that John would have a job along the lines he was accustomed to and Robert would continue to work as a plumber. They had another conversation with their mother's lawyer, who handled the purchase of the businesses and outlined the roles of each of the brothers in the businesses: Robert would do the mechanical and plumbing work, while John would perform the bookkeeping, office and accounting work for the businesses. At the time of that meeting the attorney designated Robert as President only because he was the older brother, while designating John as Secretary-Treasurer. They were the only two corporate officers. However, the lawyer did not explain to Robert the role of the President. There were no corporate by-laws, nor did the brothers then or later follow formal corporate procedures.

 6. Before the purchase John and Robert also met with Ann Oliver ("Oliver"), who had been the accountant for Robert's sole proprietorship and who became the accountant for Corporations. Because of John's role of running the business, it was important for him to be comfortable with the accountant, with whom he would be in contact. At the meeting Oliver questioned John about his background and discussed the business roles of John and Robert: John would handle the paperwork and run the businesses and Robert would do the technical plumbing. It was decided that Oliver would work with John with regard to the handling of the business records, preparing monthly financial statements, payroll tax returns and all other tax returns for delivery to John.

 7. Oliver testified, and this Court credits his testimony, that accounting and book work were beyond Robert's capabilities and that she never explained the G & F accounting system to Robert. It is unquestionable that Robert did not know G & F's accounting system or whether G & F had cash receipts and disbursements journals, or how G & F kept track of accounts payable or how accounts receivable were handled on G & F's books and records. Robert did not understand accounting financial statements and could not explain them to anyone else.

 8. There was considerable testimony, all of which this Court credits, that Robert served as one of the two "bosses" at G & F, exercising the power to supervise and to hire and fire employees, and setting the prices charged customers for Corporations' goods and services. All those matters, however, have only indirect relevance to the matter at issue in this litigation: whether or not Robert had significant control or authority over Corporations' finances or general decisionmaking embracing that area of Corporations' activity. These Findings now turn to that subject.

 9. Each of Corporations had an account at Bank of Hillside in Hillside, Illinois and at Uptown National Bank in Chicago. Robert was authorized to sign checks on all four corporate accounts. Each account required only one signature for issuance of a check.

 10. Although Robert exercised his power to sign checks only to a limited extent, leaving that aspect of the business almost entirely to John's operation, Robert was aware of his ability to do so. Thus when the brothers' relationship had seriously deteriorated by 1984, John refused to sign Robert's dividend checks and told Robert to write out and sign his own. Robert did so, disbursing at least one $ 650 payment to himself in 1984 and at least 11 such payments in 1985. Robert testified that he did not get John's approval for any of the dividend checks that Robert wrote to himself except for the first, that ...

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