The opinion of the court was delivered by: Hon. Anthony J. Battaglia U.S. District Judge
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This is an action for refund by Robert A. and Joan M. Politte (hereinafter the "Polittes") and TRKSS, LLC pursuant to 26 U.S.C. § 7426(a)(4) of the Internal Revenue Code that came before the Court for a bench trial on September 26 to October 5, 2011.*fn1 The Polittes request the refund of $343,987.03, plus interest as provided by law, which the IRS required the Polittes to pay as a condition precedent to discharge the Polittes' two residential condominium units in San Diego from Federal Tax Liens. The federal tax liens were filed on or about May 23 and May 24, 2007, for the employment tax liabilities of RAJMP, Inc.*fn2 TRKSS, LLC requests the refund of $1,305,209.90 and $44,115.60, plus interest as provided by law, which was paid as a condition precedent to the IRS discharging TRKSS's assets from Federal Tax Liens filed by the IRS on or about May 23 and May 24, 2007, for the employment tax liabilities of RAJMP, Inc.
This Court has jurisdiction with regard to these requests for refund pursuant to 28 U.S.C. § 1346(e), and 26 U.S.C. §§ 7426(a)(4) and venue is properly in this Court because a substantial part of the events or omissions giving rise to Plaintiffs' claims occurred, and a substantial part of the property that is the subject of the action was situated, within the Southern District of California.
Based upon the testimony and exhibits received into evidence at trial, and after full consideration of the legal arguments of all parties, and by a preponderance of the admissible evidence, the Court issues the following Findings of Fact and Conclusions of Law pursuant to Fed. R. Civ. P. 52(a).
1. Robert A. and Joan M. Politte are husband and wife. They have five children together: Ted, Robin, Kelly, Shelly, and Sean. Robert Politte also had four children with a previous wife: Robert Jr., Dale, Patricia, and Terry. The Polittes personal residence is located at 186 Poco Calle, Golden, Colorado, 80401.
2. RAJMP, Inc. is a California S-corporation. During the periods at issue, RAJMP operated between six and ten Midas franchise shops in the San Diego area. Robert and Joan Politte collectively own 74% of the issued and outstanding shares of RAJMP. The remaining shareholders of RAJMP are all Politte family members, including their children. Robert Politte is RAJMP's Chief Executive Officer ("CEO") and its Director, and Joan Politte is RAJMP's Secretary. Richard Evans was RAJMP's Chief Financial Officer ("CFO") until November of 2005 when Ted Politte took over as its CFO.
3. TRKSS, LLC, is a limited liability corporation that operates three Midas franchise shops north of the San Diego area. The Polittes are the sole members of TRKSS. Robert Politte is TRKSS's CEO and Richard Evans was its CFO until November of 2005. The Board of Governors of TRKSS includes the Polittes and also included, up until November of 2005, Richard Evans.
4. The Polittes formed both RAJMP and TRKSS for the purpose of operating Midas franchises in and around the San Diego, California and TRKSS and RAJMP both have their principal
of business located at 3136 Kurtz St., San Diego, California, 92110.
5. TRKSS and RAJMP had the same management team. Victor Anderson was the Director of Operations, Pete Gaalaas was the General Manager, Dale Politte, and later Bill Frantz, were the Human Resources Directors, and Jay Hale was the Payroll Clerk. Richards Evans was the CFO (or comptroller) for both entities. Nevertheless, Robert Politte, not Richards Evans, would communicate with the Midas Accounting Department directly to discuss matters pertaining to the shops.
6. Although Robert Politte did not live in San Diego, he was heavily involved in the management of RAJMP and TRKSS. Robert Politte called the Midas offices two to three times each day to speak with his store managers. He spoke with Mr. Evans on a daily basis. Robert Politte set the salaries for the employees, regularly signed corporate checks, wrote the policies and procedures manual for the shops, helped create the budgets for the stores, decided how to allocate shared expenses between RAJMP and TRKSS, administered the companies' employee education program, negotiated and obtained loans on behalf of the entities, made hiring and firing decisions, and oversaw the management team for RAJMP and TRKSS.
7. Although Richards Evans was, by title, the CFO of RAJMP and TRKSS, Robert Politte often directed Richard Evans' actions. Robert Politte would often write Richards Evans instructions on how to account for and expense certain business expenses and would often include instructions regarding capital costs, accrual methods, and depreciation for purposes of their federal tax treatment. Robert Politte gave instructions to Richards Evans regarding the payment of rent, taxes, and expenses
RAJMP for other Politte-owned entities, and expenses paid by RAJMP for non-RAJMP matters. Robert Politte also advised Richards Evans on employment, salary, and bonus matters for RAJMP and TRKSS employees.
8. Richards Evans always followed the instructions given to him by Robert Politte, and did not challenge any of Robert Politte's characterizations of business expenses. Some of these business expenses included Robert Politte taking his family on what was characterized as "business trips" to Hawaii and Australia. Robert Politte also characterized paying for season tickets to the Denver Nuggets and Colorado Avalanche, both teams which play in Denver where Robert and Joan Politte reside as "business expenses," despite the fact that RAJMP only did business in the San Diego area. Robert Politte also directed Richard Evans to pay expenses to vendors in Colorado and elsewhere outside of California with RAJMP funds.
9. Robert Politte wrote the operations manual that governed operations for both TRKSS and the RAJMP. The operations manual made no distinction between shops operated by RAJMP and those operated by TRKSS and further provided that employees, parts, and supplies could be transferred between any of the RAJMP and TRKSS shops, and such transfers occurred on a regular basis.
10. Robert Politte would conduct monthly meetings with all the shop managers at the RAJMP/TRKSS headquarters. Joan Politte would often speak at the meetings as well. At these meetings, no distinction was made between shops operated by RAJMP and those operated by TRKSS.
11. RAJMP financed the operations of TRKSS and would transfer funds to TRKSS without a written agreement, terms, or consideration and, for the most part, without repayment. In 1998, RAJMP transferred a total of $275,000 to TRKSS. The money was exchanged without any written documentation of the agreement, its terms for repayment or recourse. RAJMP's financial records indicated that in 2001, TRKSS had only paid back $65,000 and no interest was charged. In 2004 alone, RAJMP transferred $50,000 to TRKSS on March 23; transferred another $25,000 to TRKSS on September 15; and transferred an additional $7,500 to TRKSS on September 17.
12. TRKSS had no employees, instead TRKSS "leased" its employees from RAJMP. This arrangement was also made without a written agreement, without repayment terms, and without recourse. There was no due date for payment for the employee services, and although TRKSS would often neglect to pay RAJMP for its lease of the RAJMP employees, RAJMP never sought recourse against TRKSS for failure to pay.
13. TRKSS and RAJMP shared the same American Express account. TRKSS allowed its customers to pay with an American Express card and those funds were deposited into RAJMP's account with American Express. The CFO would adjust accounts thereafter, altough precision in this regard was lacking.
14. Advertising for all of the Midas franchise shops owned by TRKSS and RAJMP was done collectively.
15. While TRKSS did obtain loans in its name, the address provided on the loan documents was not the corporate headquarters of TRKSS, instead it was the Polittes' personal address in Colorado. On at least one occasion, RAJMP was a guarantor for a TRKSS loan.
16. TRKSS purchased several timeshare condos in Hawaii from RAJMP by waiving a $25,000 debt owed to it by RAJMP. Likewise, RAJMP assigned its rights under a purchase agreement of a Midas store located in Oceanside, CA, to TRKSS for the nominal sum of one dollar ($1.00). RAJMP's financial records reflect that between 1998 and 2001, TRKSS owed RAJMP between $210,000 and $275,000.
17. The Polittes used RAJMP corporate funds to finance extensive remodeling of their home in Golden, Colorado. The Polittes signed RAJMP corporate checks totaling over $828,000 for this purpose. The Politte's rationalized the disbursement's as "home" office expense and money otherwise owed them by RAJMP, however, this was done with a total lack of corporate formality, arms length dealing, or documentation.*fn3
18. The Polittes used more than $50, 000 of RAJMP corporate funds to pay for their children's college tuition. The Polittes also used TRKSS corporate funds in excess of $145,000 for this purpose. RAJMP funds were also used to pay for the accommodations of some of the Politte children while they were in college. However, the only written corporate policy called for reimbursement to employees, not direct payment to institutions. Allegedly this policy was amended orally by Robert Politte.*fn4
19. The Polittes used RAJMP funds to pay for expenses incurred by various other entities that they owned that conducted business in Colorado, Nevada and Hawaii. More than $500,000 of RAJMP funds were used for this purpose. The Polittes also used $130,000 of RAJMP funds to finance the operations of an entity with their son, Ted Politte.
20. The Polittes used more than $85,000.00 in RAJMP funds to pay for luxury vehicles for Mrs. Politte's use in Colorado.
21. Although RAJMP did not own any real property, between 2000 and 2005, RAJMP frequently paid the personal property taxes for property owned by the Polittes or ...