                                         T.C. Memo. 2012-330



                                 UNITED STATES TAX COURT



                  LINDA J. ROMANO-MURPHY, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 27236-09L.                                         Filed November 29, 2012.



        Linda J. Romano-Murphy, pro se.

        Kimberly A. Daigle, for respondent.


                                                CONTENTS

FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.      Formation and Operation of Nurses PRN, LLC (i.e. NPRN) . . . . . . . . . . . . 6

2.      The Timing of NPRN’s Deposits of Its Employment Taxes . . . . . . . . . . . . 10

3.      NPRN’s Payments of Employment Taxes Before First Quarter 2005
        (Including Alleged Overpayments for Fourth Quarter 2003 and Fourth
        Quarter 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
                                                      -2-

[*2] 4.        NPRN’s Temporary Merger With Nurses Staffing, LLC,
               in June 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

5.    NPRN’s August 2004 Negotiations With PRN Health Services, Inc. . . . . . 16

6.    December 2004 Letter of Intent From Medical Staffing Solutions, Inc.
      (i.e. MSSI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

7.    NPRN’s January 2005 Securities Exchange Agreement With MSSI . . . . . 20

8.    Alleged Overpayment of NPRN’s Taxes for First Quarter 2005 . . . . . . . . 20

9.    NPRN’s Employment-Tax Liability for Second Quarter 2005 as
      Subdivided Into the Three Categories of Employment Taxes . . . . . . . . . . . 20

10.   NPRN’s Semiweekly Deposits for Second Quarter 2005 . . . . . . . . . . . . . . 24

11.   NPRN’s June 16, 2005 Asset-Purchase Agreement With MSSI and
      Nurses PRN Acquisition Corp. (i.e., NAC) . . . . . . . . . . . . . . . . . . . . . . . . 25

12.   Completion of the Sale of Assets to MSSI . . . . . . . . . . . . . . . . . . . . . . . . . 36

13.   The Agreement Between NPRN and the IRS Regarding the
      Application of the $1.6 Million Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 36

14.   The Alleged Letter to Gary Greene Regarding the Application of the
      $1.6 Million Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

15.   The Application of the $1.6 Million Payment by the IRS . . . . . . . . . . . . . . 38

16.   Whether the IRS’s Application of $740,712.89 of the $1.6 Million
      Payment Caused a Tax Overpayment for First Quarter 2004 . . . . . . . . . . . 42

17.   The Form 941 for Second Quarter 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 43

18.   Romano-Murphy’s Awareness of NPRN’s Employment-Tax Liability
      for Second Quarter 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
                                                          -3-

[*3] 19.          NAC Begins Operations; Renamed NOC . . . . . . . . . . . . . . . . . . . . 44

20.      The $70,000 of Payments by NOC of NPRN’s Taxes That Were
         Applied by the IRS Against Fourth Quarter 2003, First Quarter 2004,
         and Second Quarter 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

21.      After 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

I.       Applicable Legal Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

         A.       Collection-Review Hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

         B.       An Employer’s Liability for Employment Taxes and FUTA
                  Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

II.      The Unpaid Amount of NPRN’s Trust-Fund Taxes for Second Quarter
         2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

         A.       Application of the $189,316.63 in Semiweekly Deposits . . . . . . . . . 71

         B.       Application of the $73,783.00 Payment . . . . . . . . . . . . . . . . . . . . . . 81

         C.       Application of the Supposed $17,866.99 Overpayment From
                  First Quarter 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

         D.       The $70,000 in Payments by NOC That Were Applied by the
                  IRS Against Tax Liabilities for Fourth Quarter 2003, First
                  Quarter 2004, and Second Quarter 2004 . . . . . . . . . . . . . . . . . . . . . 86

         E.       Alleged Overpayments of $12,009.07 From Fourth Quarter
                  2003, Fourth Quarter 2004, and First Quarter 2005 . . . . . . . . . . . . . 86

III.     Romano-Murphy Is a Responsible Person Under Section 6672 . . . . . . . . . 87

IV.      Willfulness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
                                                  -4-

[*4] A.     Romano-Murphy Acted Willfully in Refusing To Pay Trust-Fund
            Taxes to the Federal Government . . . . . . . . . . . . . . . . . . . . . . . . . . 91

      B.    Romano-Murphy Did Not Make Reasonable Efforts To Pay
            NPRN’s Unpaid Trust-Fund Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 98

            1.       NPRN’s June 2004 Temporary Merger With Nurses
                     Staffing, LLC, and Its August 2004 Negotiations With
                     PRN Health Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

            2.       The Alleged Assumption by NAC of NPRN’s Second
                     Quarter 2005 Trust-Fund-Tax Liability . . . . . . . . . . . . . . . . . 99

            3.       Whether Romano-Murphy’s Refusal To Pay the Trust-
                     Fund Taxes Was Justified by the Subsequent Payment of
                     $1.6 Million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

            4.      Romano-Murphy’s Efforts To Sell NOC’s Assets in 2006 . . 103

            5.      Romano-Murphy’s Filing of a Proof of Claim in the
                    Bankruptcy of MSSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

            6.      Accurate Reporting and Cooperation With the IRS . . . . . . . 105

      C.    Alleged Errors Made by the Appeals Office Regarding
            Willfulness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106


            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: Linda J. Romano-Murphy petitioned the Court under

section 6330(d)(1) to review the determination of the IRS Appeals Office
                                           -5-

[*5] sustaining a proposed levy and filing of notice of federal tax lien to collect a

section 6672 penalty assessed against her. Unless otherwise indicated, all

references to sections are to the Internal Revenue Code of 1986, as amended. The

issue for decision is whether Ms. Romano-Murphy is liable for penalties assessed

against her for failing to pay over the income taxes and Federal Insurance

Contribution Act (FICA) taxes that were withheld from the wages of employees of

Nurses PRN, LLC, for the second quarter of 2005.

                                FINDINGS OF FACT1

      The parties entered into a stipulation of facts, which was supplemented twice.

We adopt the stipulation of facts, as supplemented, as our findings of fact unless

otherwise noted.

      For the convenience of the reader, we note below abbreviations that are used

for some of the entities relevant to this dispute:




      1
       This report, see sec. 7459(a), is divided into subdivisions of FINDINGS OF
FACT and OPINION. However, the FINDINGS OF FACT contain not only
findings of fact but also some of the reasoning underlying some of the findings of
fact. Also, some findings of fact are set forth in the OPINION rather than the
FINDINGS OF FACT. These are generally (1) findings of fact that synthesize or
depend on other findings of fact or (2) findings of fact that are more easily explained
in conjunction with the applicable legal standards governing the resolution of this
case.
                                         -6-

     [*6]                      Table of abbreviations
       Abbreviation                              Entity
            NPRN                           Nurses PRN, LLC
            Webbank            Webbank/Rockland Credit Finance, LLC
            MSSI                    Medical Staffing Solutions, Inc.
            NAC                     Nurses PRN Acquisition Corp.
            NOC                           Nurses Onsite Corp.

1.    Formation and Operation of Nurses PRN, LLC (i.e. NPRN)

      Nurses PRN, LLC, was formed in July 2002 by three persons: Aftab

Adamjee, Robert Murphy, and Linda J. Romano-Murphy. Linda J. Romano-

Murphy was known as Linda J. Romano until June 2005, when she married Robert

Murphy. We refer to her as Romano-Murphy. We refer to Nurses PRN, LLC, as

NPRN.

      NPRN was in the business of health-care staffing. It employed nurses and

arranged for them to work at hospitals that wished to hire nurses as needed rather

than permanently. The hospitals would remit payment (to NPRN’s factor, as

discussed below) for the nurses’ services. NPRN paid wages to the nurses.

      NPRN offered the nurses the option of receiving their wages immediately

after the end of each work shift. Without a factoring arrangement, this method of

payment would have posed a potential timing problem for NPRN because it would
                                         -7-

[*7] have had to make its wage payments to the nurses before it received its own

fees from the client hospitals. To match the timing of its cashflows to the timing of

its wage payments, NPRN had a factoring arrangement with its factor, Webbank/

Rockland Credit Finance, LLC (“Webbank”). The arrangement worked as follows:

Whenever NPRN billed a hospital for services, Webbank would advance to NPRN

90% of the amount billed. Webbank deposited the advances into NPRN’s bank

account at Suntrust Bank. The parties stipulated that this was the only bank account

used by NPRN. With the money in the bank account, NPRN would make wage

payments to the nurses. The wage payments took into account the requisite federal

trust-fund taxes, meaning that the wage payments were reduced by NPRN to reflect

that it was withholding (1) employees’ income taxes and (2) the employees’ share of

FICA taxes. Later, when a hospital paid its bill, it would make its payment to

Webbank rather than NPRN. When Webbank received the payment from the

hospital, it would deposit in NPRN’s bank account an amount equal to (a) 10% of

the payment it received from the hospital, minus (b) Webbank’s fee.

      In 2005 NPRN had 10 staffing locations in 6 states and provided medical

staffing services to over 250 clients. It employed over 1,000 nurses and 25
                                         -8-

[*8] administrative and management staff. The company was based in West Palm

Beach, Florida.

      From the time it was formed in July 2002 until its corporate assets were sold

on July 1, 2005, NPRN’s stock ownership was as follows:

                   Aftab Adamjee                    50%
                   Robert Murphy                    25%
                   Linda J. Romano-Murphy           25%

      Aftab Adamjee had provided $1 million in funding to the company.

      Robert Murphy was the chief executive officer and president of NPRN from

July 2002 through June 30, 2005.

      Romano-Murphy was the chief operating officer and secretary of NPRN from

July 2002 through June 30, 2005. As the parties have stipulated, Romano-

Murphy’s job was to manage “all the branches” of NPRN and to manage “the

Payroll, Accounting, and Accounts Receivable Departments” of NPRN. She

“controlled NPRN’s finances, wrote and signed checks to creditors, and signed all

federal income and employment tax returns for NPRN.” The record contains

copies of 164 checks that the parties stipulated are “checks issued on NPRN’s

bank account at Suntrust Bank * * * during the period from April 1, 2005 through

June 16, 2005.” All 164 checks bear Romano-Murphy’s signature (either an

original or a stamp). The record also contains copies of 68 checks that the parties
                                          -9-

[*9] stipulated are “checks issued on NPRN’s bank account at Suntrust Bank * * *

during the period from May 2, 2005 through June 30, 2005.” All 68 checks bear

Romano-Murphy’s signature (either an original or a stamp). None of the checks in

the first group of 164 are also in the second group of 68.

      The parties have stipulated that Romano-Murphy “was paid a salary during

the period from January 1, 2005 through June 30, 2005 at a rate of $120,000 per

annum.” On brief, Romano-Murphy objects to the Court’s adopting this statement

as a finding of fact. She contends that for the second quarter of 2005, she received

only $4,615.38 in salary, which is far less than the $30,000 she would have

received for the quarter if she had been paid at a $120,000 annual rate. A party is

not permitted to contradict a stipulation, except where justice so requires. Tax Ct.

R. Pract. & Proc. 91(e). The trial record contains evidence of only $4,615.38 in

salary payments to Romano-Murphy during the second quarter of 2005. It is

apparent, however, that not all of NPRN’s payments are reflected in the trial

record. Had the IRS known that Romano-Murphy would deny receiving the

amount of salary that she stipulated to have received, the IRS might have

introduced evidence at trial to show that Romano-Murphy received a salary at a
                                        -10-

[*10] $120,000 annual rate. To permit Romano-Murphy to contradict the stipulation

would unfairly prejudice the IRS. Furthermore, the stipulated statement is not

contrary to the record. Therefore, we adopt the stipulated statement in question.

2.     The Timing of NPRN’s Deposits of Its Employment Taxes

       Employers are required to make deposits of their employment taxes. See

infra part I.B. The term “employment taxes” as used here refers to (1) the employer

share of FICA tax (which we refer to as the “employer share of FICA”), (2) the

employer’s obligation to withhold the employee share of FICA tax (which we refer

to as “employee FICA withholding”), and (3) the employer’s obligation to withhold

the employee’s income tax (which we refer to as “income-tax withholding”). The

term does not refer to an employer’s obligation to pay its federal unemployment tax

liability.

       Employment taxes must generally be deposited in an authorized financial

institution by employers. See infra part I.B. Each employer who is required to

make deposits of employment taxes is classified by regulation either as a monthly

depositor or a semiweekly depositor. See infra part I.B. A monthly depositor

must make deposits monthly. A semiweekly depositor must make deposits

semiweekly. The parties have stipulated that “Employment taxes withheld by
                                        -11-

[*11] NPRN were to be deposited on a semiweekly basis with a financial

institution that is an authorized depository for federal taxes.” The stipulation means

that NPRN was required to make semiweekly deposits of employee FICA

withholding and income-tax withholding. These types of taxes are “withheld”--the

word used by the parties in the stipulation. As to the employer share of FICA,

which is not withheld, the stipulation is seemingly silent as to whether NPRN was a

semiweekly or a monthly depositor. We conclude that NPRN was required to

deposit all three types of employment taxes semiweekly. The required frequency of

deposits is the same for all three employment-tax obligations. The applicable

regulation, 26 C.F.R. sec. 31.6302-1(a) (2005), states: “An employer must

generally deposit employment taxes [a term defined to include all three types of

employment taxes] under one of two rules: the Monthly rule * * * or the Semi-

Weekly rule”. Although this regulation was amended by T.D. 9239, 2006-1 C.B.

401, the amendment does not change the rule about the timing of deposits. Also, the

amendment became effective on January 1, 2006, and is therefore inapplicable to

deposits of taxes for the second quarter of 2005. Because all three types of

employment taxes must be deposited on the same schedule (semiweekly or

monthly), see 26 C.F.R. sec. 31.6302-1(a) (2005), it follows that an employer that is

a semiweekly depositor for employee FICA withholding and for income-tax
                                           -12-

[*12] withholding is also a semiweekly depositor for the employer share of FICA.

This conclusion is consistent with the Form 941, Employer’s Quarterly Federal Tax

Return, filed by NPRN for the quarter at issue (the second quarter of 2005). The

form states that NPRN is a semiweekly depositor. All three types of employment-

tax liability were reported by NPRN on the Form 941. The Form 941 is designed by

the IRS for the reporting of all three types of employment-tax liability. It is

sometimes referred to as the quarterly employment-tax return. Thus, NPRN’s Form

941 is consistent with the conclusion that NPRN was a semiweekly depositor for all

three types of employment-tax liability.

      NPRN used its bank account at Suntrust to pay its operating expenses,

including its employment taxes.

3.    NPRN’s Payments of Employment Taxes Before First Quarter 2005
      (Including Alleged Overpayments for Fourth Quarter 2003 and Fourth
      Quarter 2004)

      From its formation in 2002, NPRN experienced financial losses. It reported

nearly $90,000 in losses on its 2002 income-tax return, over $1.3 million in losses

on its 2003 income-tax return, over $1.2 million in losses on its 2004 income-tax

return, and nearly $780,000 in losses on its 2005 income-tax return. (NPRN filed

its income-tax returns as a partnership. Its annual income was therefore reported
                                        -13-

[*13] on Form 1065, U.S. Return of Partnership Income.) NPRN fell behind in

paying its employment and federal unemployment taxes.

      For the fourth quarter of 2003, NPRN reported on its Form 941 that its

employment-tax liability was $898,102.13. Its semiweekly deposits fell short of this

liability. NPRN made additional payments against its liability for the quarter. The

payments and the deposits amounted to $900,067.12, which comprised:

      •      $540,067.12 in deposits,

      •      a $75,000 payment with the return, and

      •      $285,000 in payments after the return was filed.

In addition to these payments and deposits of $900,067.12, the IRS recorded a

$6,453.70 payment on July 23, 2005. Romano-Murphy’s position is that by the

time of the July 23, 2005 payment, NPRN had settled its employment-tax liability

for the fourth quarter of 2003, and therefore the $6,453.70 payment should not

have been applied against that quarter and should have been applied against the

second quarter of 2005 instead. We explain infra part 13 why this view is

incorrect. Romano-Murphy also contends that, even setting aside the $6,453.70

payment, the $900,067.12 in payments and deposits resulted in a $1,982.38

overpayment that should have been applied by the IRS against the second quarter

of 2005. According to the IRS, however, Romano-Murphy underestimates
                                        -14-

[*14] NPRN’s employment-tax-related liability for the fourth quarter of 2003

because she does not include interest on the employment taxes and penalties. The

IRS’s view is supported by the trial record. The Form 4340, Certificate of

Assessments, Payments, and Other Specified Matters, for the fourth quarter of 2003

shows, for example, that the IRS assessed a $75,203.51 federal-tax-deposit penalty

against NPRN. Romano-Murphy did not account for this penalty in her calculation

that there was a $1,982.38 overpayment. We conclude that there was no

overpayment for the fourth quarter of 2003.

      For the fourth quarter of 2004, NPRN reported an employment-tax liability of

$1,224,496. Romano-Murphy contends that the payments and deposits for this

quarter resulted in a $27.47 overpayment for the quarter that the IRS should have

applied against the second quarter of 2005. Again, the IRS responds that her

calculation does not include federal-tax-deposit penalties and interest. The IRS’s

views are supported by the Form 4340 for this quarter. We agree with the IRS that

there was no overpayment for the fourth quarter of 2004.

      Because there were no overpayments for the fourth quarter of 2003 and the

fourth quarter of 2004, NPRN’s employment-tax liability for the second quarter of

2005 should not be reduced by $1,982.38 and $27.47. See infra part II.E.
                                             -15-

[*15] In December 2004, the IRS Collection Division in Deerfield Beach, Florida,

initiated an investigation to collect the past-due employment taxes of NPRN for the

fourth quarter of 2003, the first quarter of 2004, and the second quarter of 2004.

The IRS would later file notices of lien to collect these taxes (and to collect past-due

employment taxes for the third quarter of 2004). The notices are summarized in the

table below:

                        Federal tax liens filed against NPRN
          to collect employment-tax liabilities for quarters before 2Q 2005
        Date of filing of federal tax lien      Employment tax quarter affected
                  Jan. 7, 2005                             4Q 2003
                                                           1Q 2004
                  Feb. 4, 2005                             2Q 2004
                  May 11, 2005                             3Q 2004

4.    NPRN’s Temporary Merger With Nurses Staffing, LLC, in June 2004

      In June 2004, Romano-Murphy and Robert Murphy oversaw a temporary

merger of NPRN with Nurses Staffing, LLC, which had a preexisting business

relationship with NPRN. Although the details of this merger are sketchy, it appears

that the merger was contingent on an additional $1 million contribution by Adamjee,

the third member of NPRN. When Adamjee failed to make the required

contribution, the operations of the two companies were separated.
                                         -16-

[*16] Romano-Murphy thinks that if NPRN’s merger with Nurses Staffing, LLC,

had been successful, the combined company would have achieved the financial

success necessary to make ongoing timely payments of its employment taxes. She

thinks that NPRN lost half of its business because of the disruption caused by the

failed merger, thus impairing its ability to make ongoing timely payments of its

employment taxes. We need not determine whether we agree with Romano-

Murphy’s opinions on these matters, i.e., that a successful merger would have

resulted in timely payments of employment taxes and that the failure of the merger

impaired NPRN’s ability to make timely payments of employment taxes. Even if

Romano-Murphy is correct, our conclusions would not change.

5.    NPRN’s August 2004 Negotiations With PRN Health Services, Inc.

      At some time during 2004, the three members of NPRN decided to attempt to

sell the company. In August 2004, they received an offer from PRN Health

Services, Inc., to purchase a 60% interest in NPRN for $850,000. The stipulation

states that the “offer contemplated that $750,000 of the $850,000 payment would be

applied to prior payroll tax liabilities.” Adamjee rejected the offer because the deal

would have resulted in a payment to him of only $100,000. No deal was

consummated.
                                          -17-

[*17] 6.     December 2004 Letter of Intent From Medical Staffing
             Solutions, Inc. (i.e. MSSI)

      Toward the end of 2004, NPRN began negotiating a deal whereby its

members would sell their interests to Medical Staffing Solutions, Inc. (“MSSI”).

MSSI was represented in the negotiations by its president, Dr. Brajnandan B. Sahay.

A draft letter of intent dated November 18, 2004, was presented by MSSI to NPRN.

The parties have stipulated that the draft letter was “a draft copy of a letter of intent

for MSSI to acquire NPRN.” The draft letter stated:

             Medical Staffing Solutions, Inc. (“MSSI”), would like to present
      Nurses PRN Inc. (“Nurses PRN”) and the shareholders of Nurses
      PRN: Robert Murphy, Linda Romano and Aftab Adamjee
      (collectively, the “Shareholders”) with the following proposal to issue
      and deliver to the Shareholders shares of common stock of MSSI
      (“MSSI Common Stock”) in exchange for all of the issued and
      outstanding common stock of Nurse PRN [sic] (the “Nurses PRN
      Common Stock”). This letter of intent (“LOI”) outlines the principal
      terms of the proposed transaction; the final terms and conditions would
      be evidenced by a definitive written agreement (the “Agreement”)
      acceptable to the parties. Among other things, it is contemplated that
      the Agreement would provide for the following:

             1. Cash at Closing: At closing, MSSI will pay the Shareholders,
      collectively, $1,600,000 in cash.

            2. Subsidiary Status: Upon the closing of this transaction,
      Nurses PRN shall become a 100% wholly-owned subsidiary of MSSI.

            3. Share Exchange: The transaction contemplates that the
      Shareholders would exchange with, and deliver to MSSI, the Nurses
      PRN Common Stock, and in exchange therefore, MSSI would issue,
                                  -18-

[*18] and deliver, to the Shareholders MSSI Common Stock. The total
number of shares of MSSI Common Stock to be issued to the
shareholders shall have a value of $960,000. * * *

              *      *        *       *       *       *       *


      4. Retained Long-Term Liabilities: As part of this transaction,
Nurses PRN, as a wholly-owned subsidiary of MSSI, will retain the
following only the following debts [sic] (MSSI will not assume any
debts of Nurses PRN directly):

     a. the $420,000 note payable issued to Jeff Dowling by Nurses
PRN, which shall be payable solely out of Nurses PRN’s cashflows.

      b. a $250,000 note payable to Aftab Adamjee by Nurses PRN,
which shall be guaranteed by MSSI. The note will be issued at closing
and requires settlement of all liabilities per the current Nurses PRN
approx. $1,000,000 note to Aftab Adamjee. The note will have a 12
month term with semi-annual payments of $125,000 payable at the end
of 6 months and one year.

      c. Nurses PRN will settle prior to closing all liabilities per the
current Nurses PRN approx. $1,000,000 note held by Aftab Adamjee.

      d. a liability on Nurses PRN balance sheet of no more than
$220,000 related to current operations.

        5. Tax Liabilities. As a condition to closing, Nurses PRN must
have paid in full all taxes due and owing, including the payment of tax
liabilities owed to the IRS by Nurses PRN for past due liabilities,
interest and penalties and all other past due taxes.

             *      *     *       *       *       *       *

      10. Conduct Prior to Closing: Nurses PRN agrees that until this
LOI is terminated a) Nurses PRN will not engage in any
                                        -19-

      [*19] transactions out the ordinary course of business between the date
      hereof and closing * * * b) the business will be operated in the normal
      course consistent with past practices, including with respect to all cash
      management practices; * * *.

                   *      *     *      *       *     *      *

             15. Non-Binding Effect: This letter is only a list of the
      proposed principal points that may become part of an eventual
      Agreement between the parties and does not contain all matters on
      which agreement must be reached in order for a transaction to be
      consummated. This LOI does not constitute a binding contract and the
      parties do not intend to be legally bound, except as provided by the
      terms and conditions of the Agreement, when and if executed and
      delivered, and nothing stated herein expressly or by implication would
      impose any obligations on the parties; provided, however, that the
      parties to this LOI agree to be legally bound by the terms of paragraph
      12 through 18.

             16. Termination: This letter will expire at 5:30 PM EST on
      December 01, 2004 and MSSI will permanently withdraw its intention
      to pursue a transaction with the [NPRN] Shareholders and Nurse PRN
      [NPRN] unless a fully executed copy of this letter is exchanged by
      such time.

      On December 6, 2004, MSSI and NPRN signed a letter of intent for MSSI

to acquire NPRN. The record does not contain a copy of the letter of intent. Thus

we do not know whether it contained the same terms as the draft letter of intent

above.
                                         -20-

[*20] 7.     NPRN’s January 2005 Securities Exchange Agreement
             With MSSI

      A securities exchange agreement to sell NPRN stock to MSSI was drafted in

January 2005. The draft agreement was not signed. Under the terms of the draft

agreement, all ownership interests in NPRN would be sold to MSSI by February 28,

2005. The parties do not contend that our findings of fact should be influenced by

the existence of the draft securities exchange agreement or its terms, and therefore

we do not discuss it any further.

8.    Alleged Overpayment of NPRN’s Taxes for First Quarter 2005

      For the first quarter of 2005, Romano-Murphy contends that NPRN made an

overpayment of $9,999.22. The IRS responds that her calculations are wrong

because they do not include a federal-tax-deposit penalty. The IRS’s views are

confirmed by the Form 4340 for this quarter. We agree with the IRS that there was

no overpayment for the first quarter of 2005. Thus, as we conclude infra part II.E.,

NPRN’s employment-tax liability for the second quarter of 2005 should not be

reduced by $9,999.22.

9.    NPRN’s Employment-Tax Liability for Second Quarter 2005 as
      Subdivided Into the Three Categories of Employment Taxes

      Paragraph 59 of the stipulation states: “The total Form 941 employment tax

liability of NPRN for the period ended June 30, 2005 was $609,832.01.” An
                                         -21-

[*21] employer’s employment-tax liability is composed of three categories of taxes.

Paragraph 59 of the stipulation does not reflect how NPRN’s employment-tax

liability is distributed among the three categories. For reasons explained below, we

find that the $609,832.01 employment-tax liability is composed of the following

liabilities: $206,812.50 for the employer share of FICA, $206,812.51 for employee

FICA withholding, and $196,207.00 for income-tax withholding.

      The IRS’s view of the amounts of each type of employment-tax liability is

reflected in paragraph 74 of the stipulation. Paragraph 74 of the stipulation states

that the IRS determined that NPRN owed the following amounts before payments:

              Type of liability                       IRS determination
          Employer share of FICA                       $206,812.50
          Employee FICA withholding                      206,812.51
          Income-tax withholding                         196,207.00
           Total                                         609,832.01

Romano-Murphy’s view of NPRN’s employment-tax liability is seemingly set forth

in paragraph 75 of the stipulation. Paragraph 75 states that Romano-Murphy

“alleges” that NPRN owed the following amounts before payments:

              Type of liability                 Romano-Murphy’s allegation
          Employer share of FICA                       $205,811.23
                                         -22-

          [*22] Employee FICA                           205,811.23

          withholding
          Income-tax withholding                        196,316.26
           Total                                        607,938.72

There is an inconsistency between paragraph 75 and paragraph 59 of the stipulation.

Paragraph 75 states that Romano-Murphy alleges that NPRN’s employment-tax

liability for the second quarter of 2005 is $607,938.72. But paragraph 59 reflects

Romano-Murphy’s agreement that the liability is $609,832.01, an amount that

exceeds $607,938.72 by $1,893.29. The inconsistency between paragraphs 75 and

59 is resolved in Romano-Murphy’s brief. In her brief, Romano-Murphy concedes

that NPRN’s liability for employment taxes was correctly reported by NPRN on its

Form 941 for the quarter. The return reported that $413,624.58 was the combined

amount of NPRN’s liabilities for (1) the employer share of FICA and (2) employee

FICA withholding. Because these two FICA liabilities are equal by law, see infra

part II.B, each liability alone would be half of $413,624.58, or $206,812.29. The

return also reported that NPRN was liable for $196,207.43 of income-tax

withholding. The total employment-tax liability reported on the return--i.e.,

employer share of FICA, employee FICA withholding and income-tax
                                         -23-

[*23] withholding--was $609,832.01. Thus, the following table represents the

information reported on the Form 941:

              NPRN’s employment-tax liability for second quarter 2005,
                           as reported on Form 941:
                Type of liability                          Return
   Employer share of FICA (derived by
    halving the total FICA tax
   reported)                                            $206,812.29
   Employee FICA withholding
    (derived by halving the total FICA
   reported)                                              206,812.29
   Income-tax withholding (as actually
   reported)                                              196,207.43
      Total                                               609,832.01

The return reported that $403,019.72 was owed in trust-fund taxes, i.e., employee

FICA withholding and income-tax withholding. This is 21 cents more than the

IRS’s determination ($403,019.51). Because Romano-Murphy has not

demonstrated that she has been or will be prejudiced by the minor 21-cent

difference, we decline to consider whether to resolve this difference in Romano-

Murphy’s favor.

      Given that (1) paragraph 75 of the stipulation conflicts with paragraph 59, (2)

Romano-Murphy made the concessions in her brief described above, and (3) we

decline to resolve in Romano-Murphy’s favor the 21-cent difference between
                                        -24-

[*24] the IRS’s determination and Romano-Murphy’s position on brief, we hold that

NPRN’s employment taxes for the second quarter of 2005 consist of the amounts

asserted by the IRS: i.e., $206,812.50 for the employer share of FICA, $206,812.51

for employee FICA withholding, and $196,207.00 for income-tax withholding, for a

total employment-tax liability of $609,832.01.

10.   NPRN’s Semiweekly Deposits for Second Quarter 2005

      NPRN’s failure to remit employment taxes continued into the second quarter

of 2005. For this quarter, NPRN made 11 semiweekly deposits--totaling

$189,316.63--towards its employment-tax liability. The IRS applied these 11

deposits against NPRN’s employment-tax liability for the quarter

      An IRS internal record, a Form 4340, recorded the following information

about the deposits that were applied against NPRN’s employment-tax liability for

the second quarter of 2005:

                         Date                        Amount
                    Apr. 29, 2005                   $7,842.37
                      May 3, 2005                   16,675.97
                    May 11, 2005                    19,078.28
                    May 24, 2005                    15,678.00
                    May 27, 2005                    10,000.00
                      June 1, 2005                  29,186.26
                                         -25-

                 [*25] June 3, 2005                   15,832.57
                         June 14, 2005                13,531.67
                         June 15, 2005                20,000.00
                         June 21, 2005                13,337.99
                         June 29, 2005                28,153.52
                         Total                       189,316.63

      These deposits are also reflected on NPRN’s bank statements.

      NPRN made five deposits in April 2005 that were not reflected on the Form

4340 for the second quarter of 2005 because they were applied against the first

quarter of 2005. These five deposits are instead reflected on the Form 4340 for the

first quarter of 2005.

      The trial record does not directly explain why the deposits are not at

semiweekly intervals, i.e., twice per week. We surmise that NPRN failed to comply

with the required semiweekly schedule.

11.   NPRN’s June 16, 2005 Asset-Purchase Agreement With MSSI and
      Nurses PRN Acquisition Corp. (i.e., NAC)

      On June 16, 2005, an asset-purchase agreement was signed by the following

entities: (1) NPRN, (2) MSSI, and (3) Nurses PRN Acquisition Corp. (“NAC”).

Nurses PRN Acquisition Corp. is referred to in the asset-purchase agreement as
                                          -26-

[*26] “the Purchaser”, and is referred to in this opinion as NAC. NAC is a

subsidiary of MSSI.

      The asset-purchase agreement imposed various obligations on the parties to

the agreement. Paragraph 1.8 required the parties to consummate all transactions

contemplated by the agreement. The consummation of the transactions was defined

in the agreement as the “Closing”. Under paragraph 1.8, the date of the closing was

to be no later than June 16, 2005, or “such other date as mutually agreed to by the

parties”.

      Paragraph 1.1 of the agreement obligated NPRN to transfer all of its “assets”

and “properties” to NAC at the closing.

      As part of the consideration for NPRN’s assets, NAC agreed to cause MSSI

to issue 9,500,000 new shares of MSSI common stock to the members of NPRN.

The new stock was to be distributed--and was eventually distributed--as follows:

                  Recipients of newly issued MSSI common stock
                   Recipient                        Number of shares
            Aftab Adamjee                                   -0-
            Robert Murphy                              4,750,000
            Linda Romano-Murphy                        4,750,000
                                         -27-

[*27] Paragraph 1.6(a) of the agreement required NAC to make a payment of $1.6

million as partial consideration for NPRN’s assets. It stated:

      In addition to the Share Consideration [i.e. the 9,500,000 newly issued
      shares of common stock], the Purchaser [NAC] shall pay the Company
      [NPRN] One Million Six Hundred Thousand Dollars ($1,600,000) in
      cash (the “Cash Consideration”), which shall be used to pay or satisfy
      its outstanding Tax Liabilities (as defined below) and, at the direction
      of the Members, shall be paid directly to the Internal Revenue Service
      (the “IRS”).

                   *       *     *     *        *    *       *

      For purposes of this Agreement, “Tax Liabilities” shall mean
      unsatisfied federal employment taxes for purposes of Form 941, and all
      interest and penalties related thereto for periods prior to June 16, 2005.

Romano-Murphy and the IRS stipulated that paragraph 1.6(a) required that:

      members of NPRN would receive * * * $1.6 million in cash which was
      to be paid over to the Internal Revenue Service to pay back taxes for
      all periods ending before June 16, 2005.

      Paragraph 1.4 of the asset-purchase agreement required NAC to assume

specific liabilities of NPRN referred to as “Assumed Liabilities”:

      The Purchaser [NAC], after the Closing, shall assume the following
      debts and liabilities (collectively, the “Assumed Liabilities”) (it being
      expressly understood by the parties to this Agreement that the
      Purchaser [NAC] will not assume any other debts or liabilities except
      for those debts or liabilities set forth below and MSSI shall not assume
      any debts whatsoever of the Company [NPRN]):
                                  -28-

      [*28] (a) a * * * $365,487.50 * * * note payable (“Dowling Note”)
      issued to Jeff Dowling (“Dowling”) by the Purchaser [NAC], which
      shall be payable solely out of the Purchaser’s cashflows and which
      shall be secured by Robert Murphy (“Murphy”) and Linda Romano’s
      (“Romano”) interest in 3,166,666 MSSI Shares (as defined below)
      (“Dowling Security Shares”), and guaranteed by MSSI to the extent
      the total value of the Dowling Security Shares at the Closing is less
      than the principal and accrued interest on the Dowling Note, in
      exchange for Dowling releasing the guaranty of Aftabe [sic]
      Adamjee (“Adamjee”) with respect to the Dowling Note;

      (b) a * * * $250,000 * * * note payable to Adamjee (“Adamjee”)
      by the Company (“the “Adamjee Note”), guaranteed by MSSI,
      which shall be issued to Adamjee in exchange for Adamjee
      releasing the Company and the Purchaser from any obligations
      due to him under a * * * $1,000,000 * * * note payable issued by
      the Company to Adamjee (the “Note Payable”); and

      (c) the general payables specifically set forth in Schedule 1.4
      hereto.

             *      *     *      *       *     *      *

Except for the Assumed Liabilities, the Purchaser [NAC] is not
assuming any liability or obligation of the Company [NPRN] (or any
predecessor owner of all or part of the Purchased Assets) and will not
pay, discharge, perform or otherwise be liable for any liabilities,
indebtedness or obligations which relate to the Company [NPRN] or
the Purchased Assets existing on the Closing Date or arising out of any
transactions entered into, or any state of facts existing, on or prior to
the Closing Date (collectively, the “Excluded Liabilities”). All such
Excluded Liabilities and obligations shall be retained by and remain
obligations and liabilities of the Company [NPRN] or the Members, as
the case may be.
                                           -29-

[*29] Paragraph 1.8 of the agreement required NAC to execute an agreement

“transferring” from NPRN to NAC “all responsibility for the Assumed Liabilities in

a form reasonably acceptable to the Parties and duly executed by the Company”.

Neither Romano-Murphy nor the IRS has asserted that the agreement required by

paragraph 1.8 was actually entered into.

      As can be seen in the text reprinted above, paragraph 1.4 defined “Assumed

Liabilities” to include “the general payables specifically set forth in Schedule 1.4”.

Schedule 1.4 is headed “SCHEDULE 1.4 General Payables”. Schedule 1.4 is

subdivided into two parts: (1) a part entitled “TAXES” and (2) a part entitled

“General Payables”. The first part of schedule 1.4, the part entitled “TAXES”, is

reproduced below:

                                      “TAXES”
                                                    2004                 2005
    EDD--State of California                       $8,975               $5,701
    Georgia Dept. of Revenue                         ---                22,150
    Internal Revenue Services [sic]                   ---             174,300
    Louisiana Dept. of Revenue                        ---               10,815
    MA Dept. of Revenue                             5,056                 ---
    PA Dept. of Revenue                             9,588                 ---
    Rhode Island Division of Taxation              11,041                 ---
    State of New Jersey                            22,560                 ---
                                          -30-

    [*30] US Treasury FUTA                          64,000                  ---
     Total taxes due                               121,220              212,966

The second part of schedule 1.4, the part entitled “General Payables”, comprises an

alphabetical list of NPRN’s creditors and the amount owed by NPRN to each

creditor. The total of these debts is given as $163,569.13. Because both schedule

1.4 and the first part of schedule 1.4 bear the same label (“General Payables”), it is

not immediately clear whether the reference in paragraph 1.4 to “the general

payables specifically set forth in Schedule 1.4” is a reference to schedule 1.4 in its

entirety or the first part of schedule 1.4. It is unnecessary for us to resolve this

ambiguity. See infra part IV.B.2.

      The parties made the following stipulations regarding the significance of

schedule 1.4:

      61. Schedule 1.4 General Payables of the Asset Purchase Agreement
      reflects that $174,300.00 of the $335,261.00 of scheduled 2005 taxes
      would be assumed by MSSI, together with specified obligations to
      general creditors. The Schedule also reflects that certain funds would
      be available to apply to the obligations of NPRN which MSSI was
      assuming, leaving a nominal balance slightly in excess of $5,000.00.

      62. The Asset Purchase Agreement does not specifically state which
      federal tax liabilities were to be assumed and paid with the
      $174,300.00 stated in Schedule 1.4 of the Asset Purchase Agreement.
                                          -31-

[*31] The $335,261.00 amount referred to in paragraph 61 of the stipulation is the

sum of $174,300 and $160,961. The $174,300 amount is the debt listed on

schedule 1.4 as a debt owed to the IRS by NPRN for 2005. As discussed below,

the $160,961 is a debt listed on schedule 3.7 of the asset-purchase agreement as a

debt owed to the IRS by NPRN for 2005.

       It is not readily apparent why the parties stipulated that it was MSSI that

assumed the liabilities of NPRN. Paragraph 1.4 of the agreement provided that the

enumerated liabilities would be assumed by the “Purchaser”, which was defined as

NAC.

       Paragraph 3.7 of the agreement provided:

       Liabilities. Except as set forth on Schedule 3.7 hereto and the
       Assumed Liabilities, to the knowledge of the members of the Board of
       Managers of the Company [NPRN], the Company has no debts,
       liabilities or other obligations which are material to the business of the
       Company.

Schedule 3.7 is reproduced below:

                “SCHEDULE 3.7 - LIABILITIES NOT ASSUMED”
                     “State Taxes other than withholding”
                                          2004                         2005
 Commonwealth of
 Massachusetts                           $6,882                          ---
 Connecticu [sic]
  Dept. of Labor                           ---                           ---
                                              -32-

[*32] EDD-State of                           21,999               $7,338
California
Florida U.C. Fund                             ---                 20,558
Georgia Dept. of Labor                        4,860               10,796
Internal Revenue
 Services [sic]                               ---                160,961
Louisiana Dept. of Labor                      3,441                6,725
MA--Division of
 Unemployment                                 2,285                ---
PA UC Fund                                    4,532                ---
PA City of Philadelphia                      14,106                ---
RI Employer Tax Section                       2,685                ---
State of Nevada--
 Employment Security
Div                                           ---                 11,873
State of Nevada--
 Dept. of Taxation                            ---                  2,602
State of New Jersey--
Division of Taxatio
[sic]                                         2,545                ---
State of New Jersey--NJ
927                                           3,313                ---
Texas Workforce
 Commission                                   ---                  5,189
1
    Total taxes due =                    2                   3
     $296,699                                68,652              228,047

        1
            This total probably should have been $292,690.
                                          -33-

[*33] 2This total appears to be $2,004 too high. The actual total of the amounts in
the column is $66,648.
       3
         This total appears to be $2,005 too high. The actual total of the amounts in
the column is $226,042.

It is unclear why the subheading to schedule 3.7 is “State Taxes other than

Withholding” given that one of the liabilities listed in the schedule is to the IRS, a

federal agency. The parties made the following stipulation regarding Schedule 3.7:

      Schedule 3.7 - Liabilities Not Assumed of the Asset Purchase
      Agreement lists “state tax liabilities other than withholding” which
      MSSI was explicitly not assuming. That schedule identifies the amount
      of $160,961.00, a portion of the $335,261.00 of scheduled 2005 taxes,
      as an amount that MSSI was not assuming.

      Paragraph 3.11 of the agreement provides in part:

      Taxes. Except as set forth on Schedule 3.11 hereto, the Company
      [NPRN] has duly filed all federal, provincial, and material local and
      foreign tax returns and reports, and all returns and reports of all other
      governmental units having jurisdiction with respect to taxes imposed on
      it or on its income, properties, sales, franchises, operations or
      employee benefit plans or trusts, all such returns were complete and
      accurate when filed, and all taxes and assessments payable by the
      Company have been paid to the extent that such taxes have become
      due. Except as set forth on Schedule 3.11 hereto, all taxes accrued or
      payable by the Company [NPRN] for all periods through the Closing
      have been accrued or paid in full, whether or not due and payable and
      whether or not disputed. Except as set forth on Schedule 3.11 hereto,
      the Company [NPRN] has withheld proper and accurate amounts from
      its employees for all periods in full compliance with the tax
      withholding provisions of applicable foreign, federal, state and local
      tax laws.
                                      -34-

[*34] Schedule 3.11 of the agreement is reproduced below:

                            “SCHEDULE 3.11 - TAXES”
                                     2004                    2005
 Commonwealth of
 Massachusetts                       $6,882                   ---
 Connecticu [sic]
  Dept. of Labor                       ---                    ---
 EDD-State of California             30,974                 $13,039
 Florida U.C. Fund                     ---                   20,558
 Georgia Dept. of
  Revenue                              ---                   22,150
 Georgia Dept. of Labor               4,860                  10,796
 Internal Revenue
  Services [sic]                  1,518,350                 335,261
 Louisiana Dept. of Labor             3,441                   6,725
 Louisiana Dept. of
  Revenue                              ---                   10,815
 MA-Division of
  Unemployment                        2,285                   ---
 MA-Dept. of Revenue                  5,056                   ---
 PA Dept. of Revenue                  9,588                   ---
 PA UC Fund                           4,532                   ---
 PA City of Philadelphia             14,106                   ---
 RI Employer Tax Section              2,685                   ---
                                              -35-

 [*35] State of Nevada-                                                      11,873
  Employment Security                          ---
  Div
 State of Nevada-Dept.
  of Taxation                                  ---                            2,602
 State of New Jersey-
  Division of Taxatio
  [sic]                                       2,545                           ---
 State of New Jersey-NJ
  927                                        25,873                           ---
 State of Rhode Island-
  Division of Taxat [sic]                    11,041                           ---
 Texas Workforce
  Commission                                   ---                            5,189
 US Treasury FUTA                            64,000
 1
     Total taxes due =                 2                                3
      $2,149,234                           1,708,221                        441,013

         1
         This total probably should have been $2,145,226.
         2
         This total appears to be $2,003 too high. The actual total of the amounts in
the column is $1,706,218.
       3
         This total appears to be $2,005 too high. The actual total of the amounts in
the column is $439,008.

The parties made the following stipulation regarding Schedule 3.11:

         The Asset Purchase Agreement scheduled out NPRN’s state and
         federal tax liabilities. Schedule 3.11--Taxes reflects a total tax liability,
         state and federal, of $2,149,234.00, of which $1,917,611.00 were
         federal tax liabilities. The listed federal tax liabilities were
         $1,582,350.00 for 2004 and $335,261.00 for 2005.

(The sum of $1,518,350 and $64,000 is $1,582,350.)
                                       -36-

[*36] The asset-purchase agreement required NAC to employ both Robert Murphy

and Romano-Murphy. NAC signed an employment agreement with Romano-

Murphy on June 16, 2005. Under the agreement, Romano-Murphy was employed

as Vice President of Operations of NAC (later renamed Nurses Onsite Corporation

or “NOC”) for the period July 1, 2005 through December 26, 2006. The

employment agreement provided that she would be paid $90,000 per year.

12.   Completion of the Sale of Assets to MSSI

      Although the asset-purchase agreement was signed on June 16, 2005, the

purchase of assets was not completed until July 1, 2005. From June 16, 2005,

through June 30, 2005, NPRN operated as it had before June 16, 2005. It continued

to operate its business using its own managers, including Romano-Murphy.

13.   The Agreement Between NPRN and the IRS Regarding the
      Application of the $1.6 Million Payment

      Paragraph 57 of the stipulation states that NPRN and the IRS agreed that the

$1.6 million payment made to the IRS under paragraph 1.6(a) of the asset-purchase

agreement would be applied against NPRN’s employment-tax liabilities for the first

quarter of 2004 and the second quarter of 2004. As the stipulated paragraph states:
                                         -37-

[*37] NPRN and the Internal Revenue Service reached an agreement wherein
      the $1.6 million paid pursuant to the Asset Purchase Agreement was
      applied to the employment tax liabilities of NPRN for the periods
      ended March 31, 2004 and June 30, 2004 [i.e., the first and second
      quarters of 2004].

Romano-Murphy contends that the agreement described in paragraph 57 of the

stipulation also effected a compromise of all the existing tax liens on NPRN’s

property. In the words of her brief: “The settlement agreement entered into

between Nurses PRN, LLC and the Internal Revenue Service provided a $1.6

million payment in exchange for discharge of all outstanding tax liens.” The text of

the agreement referred to in paragraph 57 is not in the record. The agreement is

described by paragraph 57 of the stipulation only as an agreement on how the IRS

would apply a particular payment. The stipulation does not describe the agreement

as one in which tax liens were to be discharged or tax liabilities would be settled.

We reject Romano-Murphy’s contention that the agreement effected a discharge or

compromise.

14.   The Alleged Letter to Gary Greene Regarding the Application of the
      $1.6 Million Payment

      Romano-Murphy contends that an unnamed lawyer for NPRN wrote a letter

to IRS Revenue Officer Gary Greene directing the IRS to apply the $1.6 million

payment against the trust-fund portion of the employment-tax liability, i.e., to
                                          -38-

[*38] income-tax withholding and employee FICA withholding. The alleged letter

is not in the record. The only evidence in the record directly concerning the letter is

Romano-Murphy’s testimony. She testified:

              I do remember very specifically that when the $1.6 million
              was drafted, there was a specific letter that told the
              government exactly how the money was to be applied,
              and the money was to be applied to the trust fund portion
              of the taxes first because we did realize there were some
              employer portion taxes that were included in that.

Our views as to the existence and content of the alleged letter are set forth infra part

II.B.

15.     The Application of the $1.6 Million Payment by the IRS

        Pursuant to paragraph 1.6(a) of the asset-purchase agreement, NAC (or

perhaps MSSI on behalf of NAC) made a payment of $1.6 million. It is unclear

whether the payment was made directly to the IRS, or whether it was made to

NPRN, which in turn paid the IRS.

        Romano-Murphy proposes that the Court make various findings of fact

regarding how the IRS applied the $1.6 million it received. The IRS does not object

to the adoption of those proposed findings of fact. We discuss each of her proposed

findings below.
                                          -39-

[*39] First, Romano-Murphy proposes that we find that the IRS applied

$740,712.89 of the $1.6 million payment against the first quarter of 2004. The IRS

does not object to this proposed finding. The proposed finding is supported by the

record. The IRS record for this quarter reflects an entry on July 1, 2005, for a

$740,712.89 payment. The entry is labeled:

      SUBSEQUENT PAYMENT
      TRUST FUND

The “TRUST FUND” entry seemingly indicates that the IRS applied the

$740,712.89 against the trust-fund liabilities of NPRN, as opposed to other

employment-tax-related liabilities, such as the employer share of FICA. The entry

thus might support a more specific finding with respect to the application of the

$740,712.89 than that proposed by Romano-Murphy. However, Romano-Murphy

did not propose a more specific finding. Her proposed finding of fact is consistent

with the documentary evidence; we adopt it and find that $740,712.89 of the $1.6

million payment was applied by the IRS against NPRN’s employment-tax liability

for the first quarter of 2004 (or to the associated interest and penalties).

      Second, Romano-Murphy proposes that we find that $785,504.11 of the $1.6

million payment was applied against the second quarter of 2004. The IRS

does not object to this proposed finding. The proposed finding is supported by the
                                         -40-

[*40] record. The IRS record for this quarter reflects an entry on July 1, 2005, for a

$785,504.11 payment. The entry is labeled:

      SUBSEQUENT PAYMENT
      TRUST FUND

The “TRUST FUND” entry seemingly indicates that the IRS applied the

$785,504.11 against the trust-fund liabilities of NPRN, as opposed to other

employment-tax-related liabilities, such as the employer share of FICA.

Furthermore, the $785,504.11 amount is equal to the trust-fund liability, minus

payments, reported by NPRN on its Form 941 for the second quarter of 2004. The

trial record thus might support a more specific finding with respect to the application

of the $785,504.11 than that proposed by Romano-Murphy. However, Romano-

Murphy did not propose a more specific finding. Because her proposed finding of

fact is consistent with the documentary evidence, we adopt it and find that

$785,504.11 of the $1.6 million payment was applied by the IRS against NPRN’s

employment-tax liability for second quarter of 2004 (or to the associated interest

and penalties).

      Third, Romano-Murphy proposes that we find that $73,783.00 of the $1.6

million payment was applied against the second quarter of 2005. The IRS does not

object to this proposed finding, but the parties have already agreed on a more
                                        -41-

[*41] specific statement in the stipulation: “The amount of $73,783.00 was applied

to NPRN’s employment tax liability for the period ended June 30, 2005.” The

stipulated statement is more precise than Romano-Murphy’s proposed finding of

fact because it specifies that the $73,783.00 was applied only against NPRN’s

employment-tax liability for the second quarter of 2005, as opposed to the

associated penalties and interest. We adopt this stipulated statement as a finding of

fact rather than the less precise finding of fact proposed by Romano-Murphy. The

stipulated statement is not inconsistent with the trial record. The Form 4340 for the

quarter shows that a $73,783.00 payment was made on July 1, 2005. The entry for

the payment bears the following notation:

      SUBSEQUENT PAYMENT
      MISCELLANEOUS PAYMENT

      This concludes our discussion of the findings of fact proposed by Romano-

Murphy regarding the IRS’s application of the $1.6 million payment. In addition

to finding that $73,783.00 was applied against NPRN’s employment-tax liability

for the second quarter of 2005, we also find that (1) the $73,783.00 amount was

combined by the IRS with the $189,316.63 of semiweekly deposits made by

NPRN for the second quarter of 2005 for the purpose of applying both amounts

against NPRN’s liabilities, (2) of the $263,099.63 combined amount, the IRS
                                         -42-

[*42] applied $206,812.50 against NPRN’s employer share of FICA for the second

quarter of 2005, and (3) the IRS applied the remaining $56,287.13 of the

$263,099.63 combined amount against employee FICA withholding for the second

quarter of 2005. This additional finding is supported by a memo that was authored

by IRS Revenue Officer Greene on May 18, 2006. That memo shows $263,099.63

in payments being applied in the manner described above. The memo is unclear as

to whether it is describing how the IRS actually applied the payments or how it

should have applied the payments. Although one might argue that the memo reflects

the IRS’s determination of how the payments should have been applied rather than

how the IRS actually applied them, Romano-Murphy does not make this argument.

Instead she concedes that the IRS applied the $73,783.00 in payments against the

employer share of FICA first, which amounts to a concession that the IRS applied

the payments in a manner generally consistent with the Greene memo.

16.   Whether the IRS’s Application of $740,712.89 of the $1.6 Million
      Payment Caused a Tax Overpayment for First Quarter 2004

      The parties disagree on whether the IRS’s application of $740,712.89 of the

$1.6 million payment against NPRN’s tax liabilities for the first quarter of 2004

created an overpayment that the IRS should have credited to NPRN against its
                                         -43-

[*43] second quarter 2005 employment-tax liability. Romano-Murphy contends that

NPRN’s unpaid balance for the first quarter of 2004 was only $722,845.90. (For

clarity, we note that the $722,845.90 is calculated before accounting for $43,546.30

of payments from NOC, as NAC would be renamed, that was applied by the IRS

against NPRN’s employment-tax liability for the first quarter of 2004. As we note

elsewhere, Romano-Murphy argues that this $43,546.30 should not have been

applied against this quarter because, she claims, NPRN had already settled its

liability for the first quarter of 2004. See supra part 13, infra part II.D. Romano-

Murphy contends that the application of the $740,712.89 against the unpaid balance

for the first quarter of 2004 created an overpayment of $17,866.99 ($740,712.89 -

$722,845.90). The IRS contends that the unpaid balance for that quarter was

$722,845.90 in employment taxes and $127,654.96 in penalties and interest. We

agree with the IRS. The IRS record for NPRN’s first quarter of 2004 reflects that

the federal-tax-deposit penalty alone was $103,376.88. We thus conclude that the

application of the $740,712.89 against NPRN’s liabilities for the first quarter of

2004 did not create an overpayment.

17.   The Form 941 for Second Quarter 2005

      NPRN filed a quarterly employment-tax return, Form 941, for the second

quarter of 2005. The return, which was dated July 29, 2005, was signed by
                                       -44-

[*44] Romano-Murphy as NPRN’s chief operating officer. We discussed this return

supra part 9 in the context of Romano-Murphy’s concessions regarding NPRN’s

employment-tax liability. As noted above, the return reported a total employment-

tax liability of $609,832.01.

18.   Romano-Murphy’s Awareness of NPRN’s Employment-Tax Liability
      for Second Quarter 2005

      As the parties have stipulated, Romano-Murphy was aware that employment

taxes were due from NPRN for the second quarter of 2005. The parties have also

stipulated that she was never advised by a lawyer or an IRS employee that

employment taxes for NPRN were not due for the second quarter of 2005.

19.   NAC Begins Operations; Renamed NOC

      As noted above, NAC’s purchase of NPRN’s assets was not completed until

July 1, 2005. See supra part 12. On July 1, 2005, NPRN’s assets and employees,

including Romano-Murphy, were transferred to NAC. Sometime afterwards, NAC

was renamed Nurses Onsite Corp. We use the acronym NOC to refer to Nurses

Onsite Corp. From July 1 through December 31, 2005, Murphy was president of

NOC. From July 1, 2005 through August 7, 2006, Romano-Murphy was the vice

president of operations of NOC. Romano-Murphy ceased her employment with

NOC on August 7, 2006.
                                        -45-

[*45] 20.   The $70,000 of Payments by NOC of NPRN’s Taxes That
            Were Applied by the IRS Against Fourth Quarter 2003,
            First Quarter 2004, and Second Quarter 2004

      Following its purchase of NPRN’s assets, NOC made $70,000 in payments of

NPRN’s employment taxes (or related penalties or interest). The following

table lists the amount of each payment, the date on which each payment

was applied by the IRS, and the quarter against which each payment was applied:

                         $70,000 of payments by NOC of
                           NPRN’s employment taxes
                         (or related interest and penalties)
 Date payment applied     Quarter and year against
                          which payment applied                Amount of payment
      July 26, 2005                4Q 2003                         $6,453.70
      July 26, 2005                1Q 2004                          3,546.30
     Aug. 24, 2005                 1Q 2004                         10,000.00
       Oct. 3, 2005                1Q 2004                         10,000.00
     Nov. 21, 2005                 1Q 2004                         10,000.00
      Dec. 28, 2005                1Q 2004                         10,000.00
       Feb. 7, 2006                1Q 2004                         10,000.00
      Feb. 27, 2006                2Q 2004                         10,000.00
         Total                                                     70,000.00
                                          -46-

[*46] Earlier, we discussed why we reject Romano-Murphy’s contention that

NPRN had already settled its tax liabilities for these quarters by the time the above

payments were made. See supra part 13.

21.     After 2005

        On July 11, 2006, Resolve Staffing, Inc., a contingent-staffing firm, signed a

letter of intent to acquire the assets of NOC for $800,000. The letter would have

required the $800,000 to be used to satisfy four “specific unpaid liabilities” of

MSSI. One of these liabilities was “The unpaid IRS liability of Nurses on Site,

Inc.’s [NOC’s] predecessor corporation Nurses PRN, LLC [NPRN] and of the

predecessor’s Principals now delinquent under the purchase agreement between

Nurses PRN, LLC and MSSI.” MSSI did not sign the letter of intent. An attorney

for MSSI opposed the sale on the grounds that none of the proceeds would have

gone to Cornell Capital Partners, a hedge fund that owned preferred shares of

MSSI.

        The parties have stipulated that on July 26, 2006, the IRS “issued” a “levy”

to MSSI in order to collect the federal employment taxes due from NPRN for the

second quarter of 2005.

        On July 26, 2006, the IRS mailed a Letter 1153, Trust Funds Recovery

Penalty Letter, to Romano-Murphy stating that $346,732.38 was the amount of
                                         -47-

[*47] NPRN’s unpaid trust-fund liabilities for the second quarter of 2005. This

$346,732.38 amount is consistent with IRS’s determination that Romano-Murphy

was liable for the $206,812.51 employee portion of FICA plus $196,207.00 in

income-tax withholding minus the $53,287.13 portion of the $263,099.63 in

deposits and payments that the IRS had applied against the second quarter of 2005.

See infra part II, table. The letter stated that the IRS proposed to assess that amount

against Romano-Murphy as a section 6672 penalty. The letter stated that Romano-

Murphy could appeal the proposed assessment by mailing a written appeal to the

IRS within 60 days.

      On August 6, 2006, a letter of intent was drafted that contemplated the

merger of the operations of the following entities:

      •Day Holding, LLC, a company, that, like NAC, provided nurses to hospitals

      and other medical facilities;

      •RealTime Services, Inc., a company that provided payroll services and

      administrative services to Day Holding, LLC; and

      •NAC.

The letter of intent stated that the operations of the companies would be merged

and each company would become the subsidiary of a new holding company. The

letter of intent stated that it was understood “that any payroll tax delinquencies
                                         -48-

[*48] will be discussed and resolved with the Internal Revenue Service” before the

closing of the transaction. The letter of intent was never signed by Day Holding,

LLC, RealTime Services, Inc., NAC, MSSI, or Cornell Capital Partners.

      On September 6, 2006, Romano-Murphy responded to the Letter 1153 by

writing a letter to IRS Revenue Officer Gary Greene. She requested a hearing to

appeal the proposed assessment. The IRS did not grant her request.

      On September 6, 2006, John Quirk, the president and chief executive officer

of General Healthcare Resources, Inc., wrote a letter to Dr. Sahay, the chief

executive officer of both MSSI and NOC. In the letter, General Healthcare

Resources, Inc., offered to purchase the assets of NOC for $2,850,000. Paragraph 4

of the letter stated that General Healthcare Resources, Inc., would not assume any

of NOC’s liabilities. MSSI did not sign the letter of intent.

      On November 30, 2006, a letter of intent was drafted to be signed by (1)

Peter Hietpas, the president of PRN Health Services, Inc., and (2) Dr. Sahay,

chairman and chief executive officer of MSSI. The letter of intent contemplated that

PRN Health Services, Inc., would acquire all of the assets of NOC for $1 million

cash. Cornell Capital Partners (the hedge fund that owned preferred shares in

MSSI) would not approve the offer.
                                         -49-

[*49] On December 12, 2006, the IRS filed a notice of federal tax lien in Palm

Beach County, Florida, against NPRN’s property to collect NPRN’s unpaid federal

employment taxes for the second quarter of 2005. On December 26, 2006, the IRS

filed a notice of federal tax lien in Palm Beach County, Florida, against the property

of NOC, as successor to NPRN, to collect NPRN’s unpaid employment taxes for

the second quarter of 2005.

      The parties stipulated that on December 27, 2006, three separate chapter 11

bankruptcy petitions were filed in the U.S. District Court for the Eastern District of

Virginia by MSSI, its subsidiary NOC, and another MSSI subsidiary.

      On April 24, 2007, Romano-Murphy filed a proof of claim in MSSI’s

bankruptcy case on behalf of NPRN.

      On October 15, 2007, the IRS assessed a trust-fund-recovery penalty of

$346,732.38 against Romano-Murphy for NPRN’s unpaid trust-fund taxes for the

second quarter of 2005.

      The United States filed a proof of claim in MSSI’s bankruptcy case. It

claimed that MSSI owed trust-fund taxes of $346,732.38 for the second quarter of

2005. MSSI objected to this proof of claim. On December 10, 2007, the United

States responded to MSSI’s objection. It made three separate arguments. First, it

argued: “Nurses Onsite Corporation [NOC] is liable for the tax debts of Nurses
                                        -50-

[*50] PRN LLC [NPRN] under the de facto merger doctrine.” Second, it argued:

“Nurses Onsite Corporation is a continuance of Nurses PRN LLC with a common

identity and thus liable for Nurses PRN LLC’s tax debts.” Third, it argued:

“Debtor [MSSI], pursuant to an asset purchase agreement, expressly assumed

$174,300 of the 2005 withholding-tax liabilities in the amount of $346,732.38.” A

bankruptcy trustee was appointed. The trustee withdrew MSSI’s objection to the

United States’ proof of claim, according to the bankruptcy court, for “cost benefit

reasons”.

      On August 25, 2008, the IRS served Romano-Murphy a notice of intent to

levy to collect the trust-fund-recovery penalty for NPRN’s trust-fund taxes for the

second quarter of 2005.

      On September 5, 2008, Romano-Murphy was served a notice of federal tax

lien filing to collect the trust-fund-recovery penalty of $346,668.23 for NPRN’s

trust-fund taxes for the second quarter 2005. The record does not explain why this

$346,668.23 amount is less than the amount assessed on October 15, 2007.

      On September 9, 2008, Romano-Murphy mailed a timely request for a

collection-review hearing via Form 12153, Request for a Collection Due Process or

Equivalent Hearing. The request was received by the IRS Office of Appeals on

September 12, 2008. The request contested the following collection actions
                                         -51-

[*51] against Romano-Murphy: (1) the August 25, 2008 proposed levy against

Romano-Murphy, and (2) the September 5, 2008 notice of federal tax lien filing

against Romano-Murphy. The request also contested a notice of federal tax lien

filing issued to Robert Murphy on June 17, 2008, but the request (which was

cosigned by Robert Murphy) was untimely with respect to Robert Murphy’s notice.

The request stated its grounds as follows:

      Tax liability assumed by another company via asset purchase
      agreement.

and

      Liability assumed by other entity. Proof of claim filed U.S. I.R.S.
      Attorney supports claim in position paper provided to courts.

The parties agree that the Form 12153 “challenged the assessment of the TFRP

[trust-fund-recovery penalty] and sought a lien discharge on the basis that the debt

was assumed by another entity.”

      On February 24, 2009, a face-to-face hearing was conducted between

Romano-Murphy and the IRS Office of Appeals.

      The IRS Office of Appeals mailed a notice of determination to Romano-

Murphy on November 20, 2009. The notice of determination stated in part:

                     Relevant Issues Presented by the Taxpayer

      In the Form 12153 you indicated disagreement with the Notice of
      Federal Tax Lien filed and the Final Notice of Intent to Levy. You
                                  -52-

[*52] requested a Lien Discharge, citing “Tax liability assumed by
another company via asset purchase agreement.” The reason for
disagreement states in part “Liability assumed by other entity. Proof of
claim filed. US IRS Attorney supports claim in position paper
provided to courts.”

During the hearing of 2/24/09 you raised the liability assessed and
stated that you had requested an appeal on the proposed assessment,
however you did not get the opportunity of an appeal. You also
indicated that you had filed an 843 Claim in order to have the liability
reviewed by the Service. Your issue of protest is that the liability of
Nurses PRN LLC which generated the employment liability for the
quarter in question is not responsible for the tax. You indicated that
the tax should have been absorbed through the sale of Nurses PRN
LLC to Nurses Onsite Corporation thru an asset purchase agreement.
However, the sale did not materialize and the buyer filed bankruptcy.
The SO agreed to obtain the Trust Fund Package in order to review the
assessment. However, if it was determined that the proposed
assessment had been reviewed by Appeals, it would be precluded from
being raised again. We discussed that while the Trust Fund Package
was being secured we agreed that a collection alternative should be
consider [sic] and you agreed to provide the financial information
necessary for consideration of a collection alternative.

On 10/28/2009 a telephone conference was held. During the
conference you were advised that the Trust Fund Package for the
assessment of the Civil Penalty had been reviewed and based on the
information contained in the package you were determined to be a
responsible person for the payment of the Trust Fund Tax for the
period in question. You were also advised that review of records
showed that the tax period in question was not part of the settlement
you addressed in your issues of protest but rather had accrued
subsequent to the settlement being raised. You were also advised that
your financial information had been reviewed, and that the total liability
could be paid within the collection statute including a 1 year
adjustment of actual expenses. The payment plan discussed was for
$4,575.00 per month. We additionally discussed an Offer in
Compromise to resolve the liability, not only for the Civil Penalty, but
                                         -53-

      [*53] for a joint income tax liability period ending 12/2006. At that
      time you indicated you would work with the Revenue Officer to try to
      obtain a lower payment plan. You were advised that the Notice of
      Federal Tax Lien filed 9/5/2008 and the Final Notice of Intent to Levy
      would be sustained.

The notice of determination sustained the notice of federal tax lien and the notice of

intent to levy. The notice does not say what the Appeals Office determined to be

the correct amount of Romano-Murphy’s liability for the trust-fund-recovery

penalty. However, the parties have stipulated that “Respondent’s determination of

the amount of the trust-fund-recovery penalty for the 2005/06 period [after

payments] is * * * $346,732.38” Thus, the parties treat the Appeals Office as

having determined that the unpaid liability was $346,732.38. Like the parties, we

consider the Appeals Office to have determined that the unpaid liability was

$346,732.38. When she filed her petition challenging the notice of determination,

Romano-Murphy resided in Florida.

                                      OPINION

I.    Applicable Legal Principles

      A.     Collection-Review Hearing

      The IRS filed a notice of federal tax lien to collect the trust-fund-recovery

penalty it had assessed against Romano-Murphy. The IRS also served on

Romano-Murphy a notice of intent to levy to collect the assessment. Both the lien
                                          -54-

[*54] notice and the levy notice gave Romano-Murphy a statutory right to a

collection-review hearing with the IRS Appeals Office. See secs. 6320(a)(1) (notice

of filing of lien), 6330(a)(1) (levy notice). Romano-Murphy requested such a

hearing. At a collection-review hearing, a taxpayer is entitled by statute to

challenge the existence and amount of the underlying tax liability if he or she did not

have a prior opportunity to dispute the tax liability. Secs. 6320(c), 6330(c)(2)(B).

Because Romano-Murphy had not had a prior opportunity to dispute the trust-fund-

recovery penalty assessed against her, the Appeals Office allowed Romano-Murphy

to contest the penalty. The Appeals Office determined that she was liable for the

assessed amount.

      The Tax Court has jurisdiction to review determinations of the Appeals

Office to sustain a levy or the filing of a notice of federal tax lien. Secs. 6320(c)

(lien cases), 6330(d)(1) (levy cases). With respect to the disputed liability, the

Court’s scope of review is de novo. 535 Ramona Inc. v. Commissioner, 135 T.C.

353, 357-358 (2010), aff’d, 461 Fed. Appx. 567 (9th Cir. 2011). This means that

with respect to the disputed liability, we review the evidence in the trial record, not

just the administrative record. Id.

      Where, as in this case, the underlying tax liability was properly at issue at the

hearing before the Appeals Office, the standard of review is de novo. Goza v.
                                       -55-

[*55] Commissioner, 114 T.C. 176, 181-182 (2000). Under a de novo standard of

review we do not accord deference to the determination of the Appeals Office. The

IRS concedes that the aspects of the notice of determination challenged by Romano-

Murphy are subject to a de novo standard of review.

      Our findings are based on the preponderance of the evidence. Therefore, we

need not determine which party--Romano-Murphy or the IRS--has the burden of

proof. See Mason v. Commissioner, 132 T.C. 301, 323 (2009).

      B.    An Employer’s Liability for Employment Taxes and FUTA
            Taxes

      An employer is subject to federal taxes on wages paid to employees. An

employer must pay a tax equal to 6.2% of wages for the Social-Security portion of

the tax and 1.45% for the Medicare portion of the tax. Sec. 3111(a) and (b).

Another tax, computed at the same rates (6.2% and 1.45%), falls on employees.

Sec. 3101(a) (6.2% Social-Security tax on wages received by employees) and (b)

(1.45% Medicare tax on wages received by employees). Both the tax on employers

and the tax on employees are referred to as the FICA, “Federal Insurance

Contributions Act”, tax. See McDonald v. S. Farm Bureau Life Ins. Co., 291 F.3d

718, 721 (11th Cir. 2002). In addition, an employer must withhold

the employee share of FICA from the wages paid and must pay the withheld
                                         -56-

[*56] amount to the IRS. Sec. 3102(a) (the employee share of FICA must be

collected by the employer by deducting and withholding the amount of tax from

wages as paid) and (b) (every employer required to deduct the employee share of

FICA is liable for payment of the employee share of FICA). Moreover, an employer

is obligated to withhold from wages amounts for the income taxes owed by its

employees and must pay the withheld amount to the IRS. Secs. 3402(a)(1) (“every

employer making payment of wages shall deduct and withhold upon such wages a

tax determined in accordance with tables or computational procedures prescribed by

the Secretary [of the Treasury]”), 3403 (every employer that is required to deduct

income tax is liable for payment of the deducted amount). Once net wages are paid

to the employee, the IRS credits the employee with the taxes withheld, even if the

employer does not pay over the withheld amount to the IRS. See Slodov v. United

States, 436 U.S. 238, 243 (1978). The term “employment taxes” refers to all three

of the employer’s obligations that we have just discussed: (1) employer share of

FICA, (2) employee FICA withholding, and (3) income-tax withholding. See supra

part 2. The term “trust-fund taxes” refers to the last two obligations. See Pollack v.

Commissioner, 132 T.C. 21, 25 n.10 (2009).
                                         -57-

[*57] Each calendar quarter, an employer must file a Form 941 reporting its

employment-tax obligations for the quarter. 26 C.F.R. secs. 31.6011(a)-4(a)(1)

(2005) (income-tax withholding), 31.6011(a)-1 (2005) (FICA). With some

exceptions that are not applicable to NPRN, the Form 941 is generally due one

month after the end of the quarter. 26 C.F.R. sec. 31.6071(a)-1(a)(1) (2011). The

employment taxes must be paid on or before the date the Form 941 is to be filed.

See sec. 6151(a) (a taxpayer who is required to file a tax return must pay the tax at

the time and place fixed for filing the return). Thus, the taxes are due one month

after the end of the quarter. If the taxes are not paid by the date payment is due, the

employer is liable for a late-payment penalty. See sec. 6651(a)(2) (failure to pay

the amount of tax shown on the return results in a penalty of up to 25% of the

amount of tax shown on return).

      Another federal tax on wages is the federal unemployment tax (“FUTA

tax”). See sec. 3301(1). This is a 6.2% excise tax imposed on each employer with

respect to wages paid to its employees. Id. Generally, the wages subject to the tax

include “all remuneration for employment” that does not exceed $7,000 for the

calendar year. Sec. 3306(b)(1). The employer must report its unemployment-tax

liability on a Form 940, Employers’ Annual Federal Unemployment Tax Return.

26 C.F.R. sec. 31.6011(a)-3(a) (2011). The Form 940 is generally due a month
                                        -58-

[*58] after the end of the calendar year. 26 C.F.R. sec. 31.6071(a)-1(c) (2005).

Even though the FUTA tax is imposed on wages, we do not use the term

“employment taxes” to refer to the FUTA tax.

      In addition to its quarterly obligation to pay its employment taxes a month

after the quarter has ended, an employer must make deposits of its employment

taxes throughout the quarter. 26 C.F.R. sec. 31.6302-1(a) (2005). Employment

taxes for purposes of the deposit requirement are defined by 26 C.F.R. sec.

31.6302-1(e)(1) (2005) to include (1) “The employer tax under section 3111”, that

is, the employer share of FICA, (2) “The employee portion of the tax withheld under

section 3102”, that is, employee FICA withholding, and (3) “The income tax

withheld under sections 3402 and 3405, that is, income-tax withholding. FUTA

taxes are not included in this definition of employment taxes. Employers are

classified by regulation as either monthly depositors or semiweekly depositors. 26

C.F.R. sec. 31.6302-1(a) (2005). A monthly depositor must make deposits monthly.

26 C.F.R. sec. 31.6302-1(c)(1) (2005). A semiweekly depositor must make

deposits semiweekly. 26 C.F.R. sec. 31.6302-1(c)(2) (2005). The schedule for

making semiweekly deposits is set forth in the regulation as follows:

      An employer that is a semi-weekly depositor for a calendar year must
      deposit its employment taxes in an authorized financial institution on or
      before the dates set forth below:
                                        -59-

          [*59] Payment dates/semi-weekly
                     periods                          Deposit date


        Wednesday, Thursday and/or              On or before the following
        Friday.                                 Wednesday
        Saturday, Sunday, Monday and/or         On or before the following
        Tuesday.                                Friday

26 C.F.R. sec. 31.6302-1(c)(2)(i) (2005). As explained supra part 2, NPRN is a

semiweekly depositor.

      Unless specifically exempted, taxpayers who deposit more than $200,000 a

year in employment taxes and certain other taxes must use electronic funds transfer

to make deposits of these taxes. This requirement is set forth by regulation:

      Unless exempted under paragraph (h)(5) of this section, a taxpayer that
      deposits more than $200,000 of taxes described in paragraph (h)(3) of
      this section during a calendar year beginning after December 31, 1997,
      must use electronic funds transfer (as defined in paragraph (h)(4) of
      this section) to make all deposits of those taxes that are required to be
      made for return periods beginning after December 31 of the following
      year and must continue to deposit by electronic funds transfer in all
      succeeding years. * * *

26 C.F.R. sec. 31.6302-1(h)(2)(ii) (2005). The taxes “described in paragraph (h)(3)

of this section” include an employer’s employment-tax liability. 26 C.F.R. sec.

31.6302-1(h)(3) (2005) (electronic funds transfer requirement applies for taxes

required to be deposited under 26 C.F.R. sec. 31.6302-1). “[P]aragraph
                                         -60-

[*60] (h)(5) of this section” (i.e., 26 C.F.R. sec. 31.6302-1(h)(5) (2005)) provides

that

       If any categories of taxpayers are to be exempted from the requirement
       to deposit by electronic funds transfer, the Commissioner will identify
       those taxpayers by guidance published in the Internal Revenue Bulletin.
       ***

26 C.F.R. sec. 31.6302-1(h)(2)(iii) (2005) provides that even a taxpayer that is not

required by paragraph (h)(2)(ii) to make electronic deposits of the taxes described

by paragraph (h)(3) may voluntarily make the deposits by electronic funds transfer.

An electronic funds transfer is defined as “any transfer of depository taxes made in

accordance with Revenue Procedure 97-33 * * * or in accordance with procedures

subsequently prescribed by the Commissioner.” 26 C.F.R. sec. 31.6302-1(h)(4)(i)

(2005). Rev. Proc. 97-33 states:

       ELECTRONIC FUNDS TRANSFER (EFT). An “EFT” is any
       transfer of funds, other than a transaction originated by check, draft, or
       similar paper instrument, which is initiated through an electronic terminal,
       telephonic instrument, computer, or magnetic tape so as to order, instruct, or
       authorize a financial institution or other financial intermediary to debit or
       credit an account.
                                          -61-

[*61] Rev. Proc. 97-33, sec. 3.06, 1997-2 C.B. 371, 372.2 As we explain infra part

II.A, we find NPRN was required to make its deposits of employment taxes by

electronic funds transfer.

      In 1996, the Treasury Department established the Electronic Federal Tax

Payment System (“EFTPS”). See IRS Information Release 2001-77, 2001 IRB

LEXIS 313, at *1-*2 (Sept. 6, 2001). EFTPS is the system for making electronic

funds transfers. Rev. Proc. 97-33, sec. 2.02, 1997-2 C.B. at 371. All taxpayers

who make federal tax deposits or federal tax payments by electronic funds transfer

must use EFTPS. See id. There are two primary payment options under EFTPS:

(1) Automated Clearing House debit entry, and (2) Automated Clearing House

credit entry. Id. The Automated Clearing House is a funds transfer system that

“provides for the interbank clearing of electronic entries for participating financial

institutions.” Id. An Automated Clearing House debit entry is “a transaction in

which one of the Treasury Financial Agents, upon instructions from a taxpayer,

instructs the taxpayer’s financial institution to withdraw funds from the taxpayer’s

account for an FTD or FTP [federal tax deposit or federal tax payment] and to

      2
       Rev. Proc. 97-33, sec. 9.03, 1997-2 C.B. 371, 374, was modified by Rev.
Proc. 98-32, secs. 11.04 and 23, 1998-1 C.B. 935, 940, 942. None of our
determinations involve Rev. Proc. 97-33, sec. 9.03. Rev. Proc. 98-32, supra, was
modified and superseded by Rev. Proc. 2012-33, 2012-34 I.R.B. 272. Rev. Proc.
2012-33, supra, does not mention Rev. Proc. 97-33, supra.
                                         -62-

[*62] route the FTD or FTP to the appropriate [Department of the] Treasury account

through the ACH [Automated Clearing House] system.” Id. sec. 3.04. (A Treasury

Financial Agent is a financial institution that has been designated an agent of the

Treasury Department. Id. sec. 3.11, 1997-2 C.B. at 372.) An Automated Clearing

House credit entry is a “transaction in which a financial institution, upon instructions

from a taxpayer, originates an FTD or FTP [federal tax deposit or federal tax

payment] to the appropriate Department of the Treasury * * * account through the

ACH [Automated Clearing House] system.” Id. sec. 3.03. The third payment

option under EFTPS is electronic tax application. Id. sec. 2.05. Electronic tax

application, also referred to as “Same Day Payment”, is “a subsystem of EFTPS

[the Electronic Federal Tax Payment System] that receives, processes, and

transmits an FTD or an FTP [federal tax deposit or federal tax payment] and the

related tax payment information for taxpayers that make same day payments

through Fedwire value transfers, Fedwire non-value transactions, and Direct

Access transactions [three types of electronic payments]. Id. sec. 3.07. Fedwire is

the funds-transfer system owned and operated by Federal Reserve banks. See

Rev. Proc. 94-48, sec. 6.11, 1994-2 C.B. 694, 696. It does not include the

Automated Clearing House System. Id. A taxpayer must submit an enrollment

form before participating in EFTPS. Rev. Proc. 97-33, secs. 4.01, 4.05, 1997-2
                                        -63-

[*63] C.B. at 372. When the enrollment process is completed, a Treasury Financial

Agent notifies the taxpayer of enrollment in the system by sending the taxpayer a

confirmation form, an information booklet, and a personal identification number. Id.

sec. 4.04. It appears that taxpayers can make electronic transfers of funds without

using EFTPS. IRS Information Release 2004-52, 2004 IRB LEXIS 166, at *1 (Apr.

9, 2004) (“There are three ways taxpayers can let technology help them pay their

taxes: by authorizing withdrawals from their savings or checking accounts, through

the Electronic Federal Tax Payment System (EFTPS) or by charging it to certain

charge cards.”). However, electronic transfers outside EFTPS would presumably

not qualify as electronic funds transfers for the purpose of 26 C.F.R. sec. 31.6302-

1(h)(2)(ii) (2005). As we conclude infra part II.A., NPRN was required to make its

federal tax deposits by using EFTPS. Furthermore, NPRN did make its federal tax

deposits using EFTPS.

      In 2001, the Treasury Department established EFTPS-OnLine. IRS

Information Release 2001-77, 2001 IRB LEXIS 313, at *1. This system is the

internet version of EFTPS. See IRS Information Release 2003-90, 2003 IRB

LEXIS 320, at *1 (July 21, 2003). A taxpayer can participate in EFTPS without

participating in EFTPS-OnLine. See IRS Information Release 2001-77, 2001 IRB

LEXIS 313, at *4 (“EFTPS-Online has been in its pilot stage since October 2000.
                                          -64-

[*64] Like other methods of EFTPS, the online option is a service offered free to

taxpayers by the U.S. Department of Treasury.” (Emphasis added.)). As we

explain infra part II.A., we conclude that NPRN was not required to make its federal

tax deposits through EFTPS-OnLine. Additionally, we conclude that NPRN did not

make its federal tax deposits through the electronic federal tax payment system

online. See infra part II.A.

      An employer who is required by law or regulation to deposit employment

taxes, and who fails to do so, is liable for a penalty under section 6656(a). The

amount of the penalty is a percentage of the underpayment. Id. An underpayment is

defined as the amount of tax required to be deposited minus the amount of tax

actually deposited on or before the date the deposit was required to be made. Sec.

6656(b)(2). The percentage of the penalty depends on the length of the taxpayer’s

delay in making the deposit. See sec. 6656(b)(1). At least one court has concluded

that an employer who is required to make deposits by electronic funds transfer, but

who instead makes the deposits through a nonelectronic transfer, is liable for the

failure-to-deposit penalty. F.E. Schumacher Co. v. United States, 308 F. Supp. 2d

819, 828 (N.D. Ohio 2004).

      A deposit of a tax is treated as a payment of a tax made on the due date of the

relevant tax return, determined without regard to extensions, or, if later, the
                                          -65-

[*65] date the deposit was made. 26 C.F.R. sec. 31.6302-1(i)(6) (2005). Thus, an

employer’s deposit of employment tax is relevant to determining not only the

penalty for failing to deposit employment taxes, see sec. 6656(a), but also the

penalty for failing to pay employment taxes, see sec. 6651(a)(2).

      Should an employer fail to withhold and pay trust-fund taxes, section 6672

authorizes the government to collect an equivalent amount from the employer’s

officers or employees who are responsible for collecting the taxes. Such persons are

commonly referred to as “responsible persons.” Slodov, 436 U.S. at 245-246 n.7.

The penalty imposed by section 6672 is referred to as the “trust fund recovery

penalty.” See Weber v. United States, 138 T.C. __, __ (slip. op. at 16) (May 7,

2012). The IRS determined that Romano-Murphy was a “responsible person” of

NPRN who willfully failed to pay over its trust-fund taxes. It assessed against her

the penalty for trust-fund taxes that were not paid over.

II.   The Unpaid Amount of NPRN’s Trust-Fund Taxes for Second Quarter
      2005

      If Romano-Murphy was a responsible person who willfully failed to pay

over NPRN’s trust-fund taxes for the second quarter of 2005 (and we do conclude

that she was a responsible person, see infra part III, who willfully failed to pay

over the trust-fund taxes, see infra part IV), the amount of her liability is equal to
                                               -66-

[*66] NPRN’s unpaid trust-fund taxes for the second quarter of 2005. See Slodov,

436 U.S. at 244-245 (“[T]he officers or employees of the employer responsible for

effectuating the collection and payment of trust-fund taxes who willfully fail to do so

are made personally liable to a ‘penalty’ equal to the amount of the delinquent

taxes.”). The parties disagree as to the amount of these unpaid trust-fund taxes.

The IRS stands by the determination of its Appeals Office that NPRN’s unpaid

trust-fund taxes for the second quarter of 2005 are $346,732.38. The $346,732.38

amount results from the following computations:

                                             IRS position
                       Unpaid trust-fund taxes of NPRN for second quarter 2005

                              (2) Employee                            (4) Total
             (1) Employer         FICA         (3) Income-tax     employment tax =    (5) Trust-fund
             share of FICA     withholding      withholding         (1)+(2)+(3)      taxes = (2)+(3)

 Amount
  owed       $206,812.50      $206,812.51        $196,207.00         $609,832.01     $403,019.51

 Amount
  paid        206,812.50        56,287.13               0.00          263,099.63         56,287.13

   Balance          0.00       150,525.38         196,207.00          346,732.38       346,732.38


       We now explain Romano-Murphy’s position, which is that NPRN’s unpaid

trust-fund taxes are $40,044.03. Paragraph 75 of the stipulation of facts states that

Romano-Murphy alleges that $139,027.86 is the correct computation of the balance

of the trust-fund taxes owed by NPRN for the second quarter of 2005. By

comparison, the IRS’s computation is $346,732.38. Paragraph 75 reflects that
                                          -67-

[*67] Romano-Murphy’s computation of the $139,027.86 amount deviates from the

IRS’s computation in three respects. First, Romano-Murphy’s position in paragraph

75 assumes that total employment taxes (before accounting for payments) were only

$607,938.72. As explained supra part 9, this assumption is inconsistent with

paragraph 59 of the stipulation and has been abandoned by Romano-Murphy in her

brief. Second, Romano-Murphy contends that NPRN’s $189,316.63 in semiweekly

deposits during the second quarter of 2005 should have been applied by the IRS

entirely against trust-fund taxes for that quarter, rather than against the employer

share of FICA. This contention is also still maintained by Romano-Murphy. Third,

she contends that the $73,783.00 portion of the $1.6 million payment that was

applied by the IRS against NPRN’s employment taxes for the second quarter of

2005 should have been applied entirely against trust-fund taxes rather than against

the employer share of FICA. This contention is also still maintained by Romano-

Murphy.

      In paragraph 26 of her brief, Romano-Murphy substitutes $139,920.09 for the

$139,027.86 amount that was reflected in paragraph 75 of the stipulation. The

$139,920.09 amount, which she refers to in her brief as the “preliminary outstanding

trust fund balance”, appears to be based on computations that we illustrate in the

chart below:
                                                 -68-

 [*68]                                 Romano-Murphy’s position
                         Unpaid trust-fund taxes of NPRN for second quarter 2005
                              “preliminary outstanding trust fund balance”

                                (2) Employee                            (4) Total
              (1) Employer       FICA with-       (3) Income tax    employment tax =     (5) Trust-fund
              share of FICA        holding         with-holding       ((1)+(2)+(3))     taxes = (2)+(3)

 Amount
  owed         $206,812.29        $206,812.29       $196,207.43           $609,832.01      $403,019.72

 Amount
  paid                 0.00          ---                ---                263,099.63       263,099.63

   Balance             0.00          ---                ---                346,732.38       139,920.09


The reason four of the entries in the chart are blank is that, unlike the IRS,

Romano-Murphy does not explain how the $187,316.63 in semiweekly deposits or

the $73,783.00 portion of the $1.6 million payment should be divided between

employee FICA withholding and income-tax withholding.

         Paragraph 26 of Romano-Murphy’s brief takes the position that NPRN owed

only $139,920.09, a calculation that seems to take into account only the application

of the $189,316.63 in semiweekly deposits and the application of the $73,783.00

amount from the $1.6 million payment. But it is apparent from other parts of

Romano-Murphy’s brief that she contests more than just the IRS’s application

of the $189,316.63 of semiweekly deposits and the $73,783.00 from the $1.6

million payment against employment-tax liabilities other than trust-fund taxes.

She contends that the IRS failed to apply amounts against second quarter
                                            -69-

[*69] 2005 trust-fund taxes in five different ways. Even though these five errors

alleged by Romano-Murphy are not reflected in paragraph 75 of the stipulation,

which purportedly shows what she “alleges” to be “the amount of the trust fund

recovery penalty”, the IRS does not contend that her agreement to paragraph 75 of

the stipulation bars her from pressing her contentions about the five alleged errors.

The five alleged errors are described below.

      First, Romano-Murphy contends that NPRN’s payments and deposits for the

fourth quarter of 2003 resulted in a $1,982.38 overpayment of the employment taxes

for that quarter. See supra part 3, infra part II.E. She contends that this $1,982.38

overpayment should have been applied against the second quarter of 2005, and, in

particular, against the trust-fund taxes.

      Second, Romano-Murphy contends that NPRN had a $27.47 overpayment of

the employment taxes for the fourth quarter of 2004. See supra part 3, infra part

II.E. She contends that this $27.47 overpayment should have been applied against

the second quarter of 2005, and, in particular, against the trust-fund taxes.

      Third, Romano-Murphy contends that a combination of NPRN’s deposits for

the first quarter of 2004 and the application of $740,712.89 of the $1.6 million

payment against liabilities from that quarter resulted in a $17,866.99 overpayment

for that quarter. See supra part 16, infra part II.C. She contends that this alleged
                                          -70-

[*70] $17,866.99 overpayment should have been applied against the second quarter

of 2005, and, in particular, against the trust-fund taxes.

      Fourth, Romano-Murphy contends that $70,000 of payments made by NOC

against NPRN’s employment taxes (or related penalties or interest) should not have

been applied against NPRN’s employment taxes for the fourth quarter of 2003, the

first quarter of 2004, or the second quarter of 2004. See supra part 20, infra part

II.D. She claims that by the time the payments were made, the IRS had

compromised or settled NPRN’s liabilities for these three quarters. See supra part

13. Thus, she claims, the $70,000 in payments should have been applied against

NPRN’s employment taxes for the second quarter of 2005, and, in particular,

against the trust-fund taxes.

      Fifth, Romano-Murphy contends that there was a $9,999.22 overpayment for

the first quarter of 2005 and that this overpayment should have been applied against

NPRN’s employment taxes for the second quarter of 2005, and, in particular,

against the trust-fund taxes. See supra part 8, infra part II.E.

      We summarize Romano-Murphy’s computations in the table below. For the

convenience of the parties, we note the corresponding paragraph numbers of

Romano-Murphy’s brief:
                                         -71-

 [*71]              Amounts used in Romano-Murphy’s brief
             to calculate her position that NPRN’s trust-fund liability
                  for the second quarter of 2005 was $40,044.03
    Description of amount used by
    Romano-Murphy in computing             Paragraph
   NPRN’s trust-fund liability for the     number of
       second quarter of 2005                brief                Amount
 NPRN’s trust-fund taxes (before                           $403,019.72 (the
  payments)                                              difference between
                                                           $609,832.01 and
                                          Para. 24             $206,812.29)
 Semiweekly deposits                      Para. 25             (189,316.63)
 Portion of $1.6 million payment                                (73,783.00)
  allocated by IRS to 2Q 2005             Para. 25
  Running total                           Para. 26              139,920.09
 1Q 2004 alleged overpayment              Para. 35              (17,866.99)
 Payments from NOC                        Para. 46             (70,000.00)
  Running total                           Para. 47               52,053.10
 4Q 2003 alleged overpayment              Para. 48                (1,982.38)
 4Q 2004 alleged overpayment              Para. 48                   (27.47)
 1Q 2005 alleged overpayment              Para. 48                (9,999.22)
   Total                                  Para. 49               40,044.03

      A.     Application of the $189,316.63 in Semiweekly Deposits

      The parties agree that NPRN deposited $189,316.63 toward its employment-

tax liability for the second quarter of 2005. They disagree on how the deposits

should have been applied.
                                          -72-

[*72] As explained before, in applying the $189,316.63 of semiweekly deposits

against NPRN’s second quarter 2005 employment-tax liability, the IRS grouped the

deposits together with a $73,783.00 payment that was made on July 1, 2005. See

supra part 15. The resulting $263,099.63 amount was applied by the IRS first

against NPRN’s $206,812.50 employer share of FICA liability for the quarter,

resulting in the complete elimination of the $206,812.50 employer share of FICA

liability. The remaining $56,287.13 (i.e., $263,099.63 minus $206,812.50) was

applied by the IRS against employee FICA withholding.

      Romano-Murphy disagrees with the way in which the IRS applied the

$189,316.63 of semiweekly deposits. She contends that the IRS should have

applied the entire $189,316.63 amount against trust-fund taxes. In particular, she

contends that $5,093.56 of the $189,316.63 should have been applied against

employee FICA withholding and $184,223.07 of the $189,316.63 should have been

applied against income-tax withholding.

      Romano-Murphy argues that the application she urges is correct because, she

says, NPRN directed the IRS to apply the deposits for the quarter against the trust-

fund portion of the taxes first. She contends that Rev. Proc. 2002-26, sec. 3.01,

2002-1 C.B. 746, required the IRS to apply the payments in accordance with

NPRN’s directions.
                                         -73-

[*73] In response, the IRS makes three arguments. It first argues:

      There are no means by which a tax deposit made via the EFTPS can be
      designated between a company’s non-trust fund and trust fund payroll
      tax liabilities. Babcock v. United States, No. CV 08-08467, Amended
      Order Granting Motion for Summary Judgment in Favor of the U.S. at
      3, (C.D. Cal. December 22, 2009). Providing taxpayers the ability to
      designate employment taxes in this manner would permissibly shift loss
      to the Government and implicitly disregard I.R.C. § 6672. Babcock,
      No. CV 08-08467 at 12-13.

Second, the IRS contends that Rev. Proc. 2002-26, supra, does not govern the

application of the deposits because, it says, Rev. Proc. 2002-26, supra, allows a

taxpayer to direct the application of payments only, not deposits. Third, the IRS

argues that Rev. Proc. 2002-26, supra, is not controlling because, even if NPRN

could have directed the application of the deposits, NPRN made no “specific written

directions” with respect to the $189,316.63 of semiweekly deposits. See Rev. Proc.

2002-26, sec. 3.01 (IRS will apply payment in accordance with taxpayer’s “specific

written directions as to the application of the payment”).

      We agree with the IRS’s third argument. As we explain, we do not

believe that NPRN gave the IRS any directions--written or otherwise--regarding

how to apply the semiweekly deposits to trust-fund taxes. We do not address the

IRS’s first and second arguments, except that we conclude that a taxpayer

cannot in practice instruct the IRS through EFTPS or EFTPS-OnLine to apply
                                                    -74-

[*74] employment-tax deposits to trust-fund taxes. This finding is a partial adoption

of the IRS’s first argument. In arriving at the conclusion that NPRN did not give the

IRS any directions regarding how to apply the semiweekly deposits to trust-fund

taxes, we resolve a series of subsidiary factual disputes between the parties about

the alleged directions. The parties’ views on these subsidiary factual issues are

reproduced verbatim in the chart below:

    Findings of fact proposed in
      Romano-Murphy’s brief                 IRS’s answering brief             Romano-Murphy’s reply brief
        filed Feb. 16, 2011                  filed Apr. 22, 2011                  filed June 1, 2011

 13. Tax deposits were made           13. Respondent objects to the         13. Petitioner objects to
 through the Internal Revenue         proposed finding of fact as it is     Respondent’s objection as
 Service’s EFTPS online system as     uncorroborated and not supported      documentary evidence shows that
 required.                            by the evidence. (Entire Record).     Petitioner used the Electronic
                                      Petitioner failed to provide any      Federal Tax Payment System
                                      documentation to show that NPRN       (“EFTPS”) (Ex. 9-J, p. 10, 15).
                                      made tax deposits using the
                                      Electronic Federal Tax Payment
                                      System (“EFTPS”). (Entire
                                      Record).

 14. The EFTPS system allows          14. Respondent objects to the         14. No objection.
 taxpayers to either pay a lump sum   proposed finding of fact as it is
 or designate payment to              inaccurate and there is no evidence
 Withholding, Social Security         of record to support the finding.
 and/or Medicare taxes.               (Entire Record).

 15. Via the EFTPS system, Nurses     15. Respondent objects to the         15. Petitioner objects to
 PRN, LLC instructed that the         proposed finding of fact as it is     Respondent’s objection as evidence
 partial tax deposits made in the     uncorroborated and not supported      of payments are documented on a
 2005/06 tax period be applied to     by the evidence. (Entire Record).     company payroll record (Ex. 34-P).
 Withholding taxes, which are         Petitioner failed to provide any
 100% trust fund taxes.               documentation to show that NPRN
                                      made tax deposits using the EFTPS
                                      and designated deposits to
                                      withholding taxes. (Entire
                                      Record).
                                          -75-

[*75] One dispute between the parties is whether NPRN made its federal tax

deposits through EFTPS. It is through that system, Romano-Murphy contends, that

NPRN delivered its instruction to the IRS that its deposits should be applied against

the trust-fund taxes first.

       In considering whether NPRN made federal tax deposits through the

electronic federal tax payment system, we first consider whether NPRN was

required to do so. This is a relevant question because a taxpayer who is required

to participate in EFTPS might be more likely to do so than one motivated only by

practical considerations. In addition, the parties have raised the question of

whether NPRN was required to make deposits electronically. Romano-Murphy’s

brief makes the assertion that “Tax deposits were made through the Internal

Revenue Service’s EFTPS online system as required.” (Emphasis added.) Because

EFTPS-OnLine is a version of EFTPS, her assertion implies that NPRN was

required to use EFTPS to make its federal tax deposits. In response to her

assertion, the IRS generally “objects to the proposed finding of fact as it is

uncorroborated and not supported by the evidence.” NPRN’s deposits of

employment taxes alone--without considering other types of taxes--were greater

than $200,000 in 2004. Unless specifically exempted, taxpayers who deposit more

than $200,000 in employment and certain other taxes are required to use electronic
                                         -76-

[*76] funds transfer to deposit those taxes. See 26 C.F.R. sec. 31.6302-

1(h)(2)(ii)(2005). There is no evidence in the record that NPRN was specially

exempted from the electronic-funds-transfer requirement. The only authorized

means of making electronic funds transfers is through EFTPS. See Rev. Proc. 97-

33, sec. 2.02. Therefore we conclude that NPRN was required to use EFTPS to

make its deposits of federal taxes.

      We also conclude that NPRN actually used EFTPS to make its deposits of

employment taxes. As Romano-Murphy points out, a letter from the IRS to NPRN

dated August 9, 2004, contains a list of all of NPRN’s employment-tax deposits

for the first quarter of 2004. The list contains a notation, corresponding to each

deposit, under the heading “Pymt Type”. For all deposits this notation is “EFT”,

except for two deposits for which the notation is “PMT”. The abbreviation EFT is

an acronym for electronic funds transfer. There is also an October 4, 2004 letter

from the IRS to NPRN containing a list of all deposits of employment taxes for the

second quarter of 2004. The list also contains an entry for each deposit under the

heading “PYMT TYPE”. For all deposits, this entry is “EFT”. Although the

August 9 and October 4, 2004 IRS letters describe deposits made in 2004, not the

second quarter of 2005, the record does not suggest that NPRN changed its

method of making deposits between 2004 and 2005. NPRN’s Suntrust bank
                                        -77-

[*77] statements also support the notion that NPRN made its deposits by electronic

funds transfers during the second quarter of 2005. A Suntrust bank statement shows

that on April 5, 2005, $16,944.21 was debited from NPRN’s bank account. The

transaction was described as “ELECTRONIC”:

      ELECTRONIC/ACH DEBIT
          IRS                          USATAXPYMT 270509500721362

Including the $16,944.21 debit, there are 16 similar entries during the three months

of April, May, and June 2005:

                      Date                        Amount of Payment
                     Apr. 5                           $16,944.21
                     Apr. 7                            29,363.00
                     Apr. 12                           29,408.78
                     Apr. 18                             9,001.18
                     Apr. 21                           40,153.02
                     Apr. 29                             7,842.37
                     May 3                             16,675.97
                     May 11                            19,078.28
                     May 24                            15,678.00
                      May 27                           10,000.00
                     June 1                            29,186.26
                     June 3                            15,832.57
                     June 14                           13,531.67
                                        -78-

                     [*78] June 15                     20,000.00
                     June 21                           13,337.99
                     June 29                           28,153.52

The notations in the two IRS letters and the Suntrust bank statement suggest that

NPRN was making its deposits by electronic funds transfers. Although not all

electronic transfers must be made through EFTPS, see IRS Information Release

2004-52, 2004 IRB LEXIS 166, at *1, we believe that it is more likely than not that

NPRN made its deposits through EFTPS. We agree with Romano-Murphy that

NPRN made its employment-tax deposits for the second quarter of 2005 through

EFTPS.

      Romano-Murphy contends that NPRN was required to use EFTPS-OnLine to

make its federal tax deposits and that NPRN actually did use this system. Romano-

Murphy cites no authority for the proposition that NPRN was required to use

EFTPS-OnLine. Aside from Romano-Murphy’s testimony, there is no proof in the

record that NPRN actually used EFTPS-OnLine. The lack of corroborating

evidence is peculiar. We reject her contentions that NPRN was required to use

EFTPS-OnLine and that NPRN actually used it.

      We next address the question of whether EFTPS in practice permitted

taxpayers to direct the IRS to apply their employment-tax deposits to trust-fund
                                          -79-

[*79] taxes (i.e., employee FICA withholding and income-tax withholding) instead

of the employer share of FICA. Although Romano-Murphy testified that the system

permitted such directions, her testimony is uncorroborated. There is little in the trial

record on the mechanics of EFTPS. We find, on the basis of the record, that EFTPS

did not in practice permit taxpayers to direct their deposits toward trust-fund taxes.

      We next consider whether NPRN directed the IRS through EFTPS to apply

its employment-tax deposits for the second quarter of 2005 against trust-fund taxes.

As noted above, we find that the system does not in practice permit a taxpayer to

direct the IRS to apply deposits to trust-fund taxes. This is sufficient by itself to

end the inquiry. If no such directions can be made using the system, then no

directions could have been provided through the system. As proof that NPRN

directed the IRS to apply its deposits against trust-fund taxes, Romano-Murphy

points to a spreadsheet that was marked for identification as Exhibit 34-P.

The spreadsheet reflects that NPRN made $189,316.63 of employment-tax

deposits for the second quarter of 2005; on the spreadsheet, this amount is all

allocated to trust-fund taxes. Romano-Murphy contends that the spreadsheet

demonstrates that directions that were given by NPRN to the IRS that the amounts

should be applied as they were allocated on the spreadsheet, i.e., against trust-fund
                                         -80-

[*80] taxes. However, the stipulation describes the spreadsheet only as a document

reflecting Romano-Murphy’s allegations. It says: “Petitioner provided a schedule

of alleged payments of employment taxes for the 2005/06 tax period attached as

Exhibit 34-P.” Although Romano-Murphy testified that the spreadsheet was a

payroll record, nothing in the record establishes that the document was given to the

IRS contemporaneously with the deposits. And nothing in the record establishes

that the document reflects directions actually given to the IRS. Under the

circumstances, we do not believe that Exhibit 34-P reflects directions to the IRS to

apply NPRN’s employment-tax deposits against trust-fund taxes.

      Romano-Murphy contends that NPRN gave the alleged directions to the IRS

through EFTPS. She does not allege, and we do not consider, whether NPRN gave

the alleged directions through some other means, such as a letter or telephone call.

      We find as a matter of fact that NPRN did not give directions through EFTPS

that its employment-tax deposits were to be applied against trust-fund taxes. Thus,

the IRS was not required to apply the deposits against trust-fund taxes.
                                         -81-

[*81] B.     Application of the $73,783.00 Payment

      Of the $1.6 million payment made to the IRS, $73,783.00 was applied by the

IRS against NPRN’s employment-tax liability for the second quarter of 2005. The

IRS combined the $189,316.63 in semiweekly deposits for that quarter and the

$73,783.00 payment and applied that amount first against the employer share of

FICA tax, eliminating the entire $206,812.50 employer share of FICA tax liability.

The IRS applied the remainder, $56,287.13, against employee FICA withholding.

Romano-Murphy contends that the entire $73,783.00 amount should have been

applied against NPRN’s trust-fund tax liability for the second quarter of 2005. She

contends that NPRN directed the IRS that the $73,783.00 payment should be

applied against the trust-fund portion of the taxes first. She contends that under

Rev. Proc. 2002-26, sec. 3.01, the IRS was required to apply the payments in

accordance with NPRN’s instructions.

      In response the IRS contends that a taxpayer cannot direct that a payment be

applied against a payment of a particular tax under Rev. Proc. 2002-26, supra,

unless the payment is made after assessment of the particular tax. The IRS asserts

that the $73,783.00 payment was made on July 1, 2005 and that the second-quarter

2005 employment taxes were assessed after the date of the payment, on July 31,
                                          -82-

[*82] 2005. We need not reach the merits of this argument because, as we explain,

we find that NPRN gave no directions with respect to the $73,783.00 payment.

      Romano-Murphy argues that the asset-purchase agreement constitutes such a

direction. We disagree for five reasons. First, the asset-purchase agreement is

a private agreement among NPRN, MSSI, and NAC. Second, the provision of the

agreement relating to the use of the $1.6 million is directed at these private parties,

not the IRS. The provision states that NAC “shall pay” NPRN $1.6 million, “which

shall be used to pay or satisfy its outstanding Tax Liabilities (as defined below) and,

at the direction of the Members, shall be paid directly to” the IRS. The provision

thus governs how the money was to be “used” by NPRN and NAC, not the IRS.

Third, although Romano-Murphy contends that the IRS had a copy

of the asset-purchase agreement when it applied the $73,783.00 payment, mere

possession of the agreement by the IRS does not turn this agreement into a direction

to the IRS. In any event, the record does not support the proposition that the IRS

had a copy of the agreement. Fourth, even if the provision could be considered a

direction to the IRS, the provision requires only that the payment

be applied against employment-tax liability (and perhaps interest and penalties).

It does not require that the payment be applied against trust-fund taxes, i.e.,
                                         -83-

[*83] employee FICA withholding and income-tax withholding. Fifth, even if the

provision directed that payments be applied against trust-fund taxes, it is not

apparent that the second quarter of 2005 is one of the quarters toward which the

payment must be directed. The phrase “Tax Liabilities” is defined in the asset-

purchase agreement as “unsatisfied federal employment taxes for purposes of Form

941, and all interest and penalties thereto for periods prior to June 16, 2005.” If the

phrase “for periods prior to June 16, 2005” modifies “unsatisfied federal

employment taxes” and not just “all interest and penalties thereto”, then the second

quarter of 2005 is excluded from “Tax Liabilities”. In the stipulation of facts the

parties agree that the second quarter of 2005 is excluded from the scope of “Tax

Liabilities”, as defined in the asset-purchase agreement. This resolves any

ambiguity regarding the quarters included in “Tax Liabilities” and undercuts

Romano-Murphy’s contention that the asset-purchase agreement constituted a

direction to the IRS that the $1.6 million payment be allocated to the trust-fund

taxes for the second quarter of 2005. In summary, we find that the asset-purchase

agreement was not a direction to the IRS to apply the $73,783.00 payment against

NPRN’s trust-fund taxes for the second quarter of 2005.

      Romano-Murphy also argues that NPRN’s lawyer wrote a letter to IRS

Revenue Officer Greene directing that any payments out of the $1.6 million should
                                         -84-

[*84] be applied toward trust-fund taxes. See supra part 14. However, the letter is

not in the record. Id. Any direction governing the application of the $1.6 million

payment would have had to be fairly complicated given that NPRN and the IRS had

another agreement with respect to the application of the $1.6 million. See supra part

13. This other agreement is described in the stipulation as follows:

       NPRN and the Internal Revenue Service reached an agreement wherein
       the $1.6 million paid pursuant to the Asset Purchase Agreement was
       applied to the employment tax liabilities of NPRN for the periods
       ended March 31, 2004 and June 30, 2004 [i.e., the first and second
       quarters of 2004].

The alleged letter to Greene would necessarily have had to be coordinated with the

agreement described in the stipulation. Another reason the letter would have needed

to be detailed is that it supposedly directed the payment of $1.6 million to various

types of tax liabilities for various tax periods. Romano-Murphy explained none of

these details in her testimony about the letter. See supra part 14. Without more

specific proof, we are reluctant to assume the existence of a letter directing the IRS

to apply the $73,783.00 amount against the trust-fund liabilities for the second

quarter of 2005. We believe that Romano-Murphy is mistaken about the content of

the letter.

       The IRS’s records describe $740,712.89 of the $1.6 million payment as a

trust-fund payment applied against the first quarter of 2004, and $785,504.11 of
                                         -85-

[*85] the $1.6 million payment as a trust-fund payment applied against the second

quarter of 2004. See supra part 15. Neither party suggests that this notation bears

on the question of whether NPRN submitted directions to the IRS to apply a portion

of the $1.6 million payment against the trust-fund taxes for the second quarter of

2005. We ourselves draw no such conclusion.

      We find that NPRN did not direct the IRS to apply the $73,783.00 payment

against the trust-fund portion of NPRN’s employment-tax liability for the second

quarter of 2005.

      B.     Application of the Supposed $17,866.99 Overpayment From
             First Quarter 2004

      Romano-Murphy argues that NPRN’s unpaid employment-tax liability for the

first quarter of 2004 was only $722,845.90 when the IRS applied $740,712.89 of

the $1.6 million payment against NPRN’s employment-tax liabilities for that quarter,

resulting in an overpayment of $17,866.99 for the quarter. She argues that the IRS

should have applied the alleged $17,866.99 overpayment against the second quarter

2005 trust-fund taxes. As we have found, however, there was no overpayment for

the first quarter of 2004. See supra part 16.
                                         -86-

[*86] D. The $70,000 in Payments by NOC That Were Applied by the IRS
         Against Tax Liabilities for Fourth Quarter 2003, First Quarter 2004,
         and Second Quarter 2004

      NOC made $70,000 in payments that the IRS applied against NPRN’s

employment taxes (or related interest or penalties) for the fourth quarter of 2003, the

first quarter of 2004, and the second quarter of 2004. See supra part 20. Romano-

Murphy argues that by the time of the payments, the IRS had already compromised

or settled NPRN’s employment-tax liabilities for these three quarters. Therefore,

she argues the IRS should have applied the $70,000 in payments against NPRN’s

trust-fund taxes for the second quarter of 2005. As we have discussed, the record

contains no evidence that the IRS compromised NPRN’s tax liabilities for these

three quarters. See supra part 13. We therefore reject Romano-Murphy’s argument

that the IRS should have applied the $70,000 in payments against NPRN’s trust-

fund taxes for the second quarter of 2005.

      E.     Alleged Overpayments of $12,009.07 From Fourth Quarter 2003,
             Fourth Quarter 2004, and First Quarter 2005

      Romano-Murphy argues that NPRN overpaid its tax liabilities for the fourth

quarter of 2003, the fourth quarter of 2004, and the first quarter of 2005. As we

have found, there were no overpayments for these three quarters. See supra part 3

(fourth quarter 2003 and fourth quarter 2004), part 8 (first quarter 2005). We
                                          -87-

[*87] therefore reject Romano-Murphy’s argument that overpayments from these

quarters should be applied against NPRN’s employment-tax liability for the second

quarter of 2005.

III.   Romano-Murphy Is a Responsible Person Under Section 6672

       A responsible person is “Any person required to collect, truthfully account

for, and pay over” taxes such as trust-fund taxes. Sec. 6672(a); Thibodeau v.

United States, 828 F.2d 1499, 1503 (11th Cir. 1987). Whether a person is a

responsible person is a “matter of status, duty and authority, not knowledge.”

Thibodeau, 828 F.2d at 1503. Indicators that a person is a responsible person

include “the holding of corporate office, control over financial affairs, the authority

to disburse corporate funds, stock ownership, and the ability to hire and fire

employees.” Id.

       Romano-Murphy was the chief operating officer of NPRN. She was in

charge of NPRN’s finances. She wrote checks to NPRN’s creditors. She was

therefore a responsible person under section 6672.

       Romano-Murphy claims that she did not control NPRN’s finances, and was

therefore not a responsible person, because she owned only a 25% interest in

NPRN. But her ownership percentage is not dispositive. In Thibodeau, 828 F.2d at

1504, the corporation’s president was held to be a responsible person even
                                         -88-

[*88] though 100% of the stock of the corporation was owned by someone else and

the president effectively reported to that stockholder.

      Romano-Murphy also argues that she was not a “responsible person”

because, she claims, most checks were signed with a facsimile of her signature by

lower-level managers. But some of the checks were signed by Romano-Murphy

personally. See Liddon v. United States, 448 F.2d 509, 513 (5th Cir. 1971) (former

Fifth Circuit held that a corporate officer could be found to be a responsible person

even though he was one of two corporate agents at the corporation’s home office

who could sign checks); Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.

1981) (en banc) (Eleventh Circuit adopted as binding all decisions of the former

Fifth Circuit issued on September 30, 1981 and earlier). And if she was displeased

with the way in which the lower-level managers were issuing the other checks, she

could have withdrawn their check-writing authority. See Mazo v. United States,

591 F.2d 1151, 1156 (5th Cir. 1979) (former Fifth Circuit held that one of the

managers of a corporation was a responsible person because he could have refrained

from signing payroll checks until the IRS was paid and he could have directed the

controller to make the payments to the IRS).

      Romano-Murphy also claims that she did not have authority to permit

NPRN to pay its trust-fund taxes because paying the taxes would have caused
                                         -89-

[*89] NPRN to go out of business. She claims that the failure of NPRN to

continue to operate would have placed NPRN in violation of its letter of intent

with MSSI and its asset-purchase agreement with MSSI and NAC, and that such

violations would have prevented it from finalizing the asset sale that resulted in

the $1.6 million payment of its employment-tax liability. In effect, Romano-

Murphy is arguing that NPRN had to default on its trust-fund taxes in the short

term in order to pay them in the long term. Courts have rejected such arguments in

the context of determining whether a responsible person acted willfully in

refusing to pay over trust-fund taxes to the United States. See, e.g., Thibodeau,

828 F.2d at 1506; Davis v. United States, 961 F.2d 867, 871 (9th Cir. 1992)

(responsible person argued that he did not act willfully because he “deferred

payments to the IRS in an attempt to resuscitate * * * [the corporation] and

thereby maximize the chances that the taxes would be repaid in full over time”).

We do not adopt the argument in this context of determining whether Romano-

Murphy is a responsible person. Nor do we accept Romano-Murphy’s underlying

premise that payment of the trust-fund taxes would have breached NPRN’s

obligations to MSSI. First, we consider the letter of intent, which was signed on

December 6, 2004. See supra part 6. The terms of the letter of intent are not in the

record, but even if its terms are identical to the terms of the November 18, 2004
                                          -90-

[*90] draft letter of intent (which is in the record), its provisions would not have

required NPRN to default on its trust-fund obligations. Romano-Murphy relies on

paragraph 10 of the November 18, 2004 draft letter of intent. This paragraph

required NPRN to operate its business “in the normal course consistent with past

practices, including with respect to cash management practices”. To construe

paragraph 10 to have required NPRN to use the trust fund for its own benefit would

conflict with paragraph 5, which required NPRN to pay all of its taxes as a

condition of closing. Paragraph 10 cannot reasonably be so construed. As for the

asset-purchase agreement, no provisions in the agreement required NPRN to default

on its federal trust-fund taxes. See supra part 11. Regardless, a contractual

provision that required a party to violate federal tax laws would be void whether

found in the letter of intent or the asset-purchase agreement. See McBrearty v.

United States Taxpayers Union, 668 F.2d 450, 451 (8th Cir. 1982).

      Romano-Murphy also argues that Rev. Rul. 2004-41, 2004-1 C.B. 845, bars

the IRS from asserting that she owes the trust-fund-recovery penalty. The revenue

ruling states: “If under state law the members of the LLC are not liable for the

debts of the LLC, then absent fraudulent transfers or other special circumstances,

the IRS may not collect the LLC’s employment tax liability from the members,

including by levy on the property and rights to property of the members.” Id.
                                          -91-

[*91] 2004-1 C.B. at 846. But the revenue ruling also states that “depending on the

facts of a particular case, a member may be liable for the trust-fund recovery penalty

under I.R.C. § 6672.” Id. Here, the IRS is not attempting to collect NPRN’s

employment taxes from Romano-Murphy in her capacity as a member of NPRN.

Rather, it is attempting to collect the trust-fund-recovery penalty because it alleges

that she is a responsible officer. This theory of liability is consistent with Rev. Rul.

2004-41, supra.

IV.   Willfulness

      A.     Romano-Murphy Acted Willfully in Refusing To Pay Trust-Fund
             Taxes to the Federal Government

      Romano-Murphy argues that she is not liable for the section 6672 penalty

because she did not act willfully in failing to pay over the trust-fund taxes.

      Once a person is demonstrated to be a “responsible person”, the burden is on

that person to disprove willfulness. Malloy v. United States, 17 F.3d 329, 331 (11th

Cir. 1994). A responsible person acts willfully if he or she “has knowledge of

payments to other creditors” after becoming “aware of the failure to remit the

withheld taxes.” Thosteson v. United States, 331 F.3d 1294, 1300 (11th Cir. 2003).
                                          -92-

[*92] There are a variety of times during and after a quarter when a payment to a

creditor and a failure to remit taxes can establish that the responsible officer acted

willfully. For example:

      •      When wages are being paid. See Newsome v. United States, 431 F.2d

             742, 746 (5th Cir. 1970) (“[A] corporate officer or agent has a duty to

             see that withheld funds are properly collected from the employees, are

             maintained during the quarter, and are paid over to the government at

             the end of the quarter. This duty, for purposes of section 6672

             liability, is a continuing one which arises when the federal income and

             social security taxes are withheld from employees’ wages and ends

             when such funds are paid over to the United States.” (Emphasis

             added; fn. ref. omitted.)); Davis, 961 F.2d at 873 (“[L]iability as a

             responsible person attaches each time salaries are paid during the

             course of a quarter.”); Juan F. Vasquez, Jr., & Peter A. Lowy,

             Responsible Person and Lender Liability for Trust Fund

             Taxes--Sections 6672 and 3505, 639-3rd Tax Management (BNA),

             sec. II.H.1, at A-28 (“Because liability first attaches at the time wages

             are paid, not at some subsequent time when payment is due or the

             return is to be filed, responsibility can attach from the time of
                                    -93-

[*93] withholding through the payment due date and beyond.” (Fn. ref.

      omitted.)).

•     When semiweekly deposits are due. Brown v. United States, 591 F.2d

      1136, 1141 (5th Cir. 1979) (“However, as we have already pointed

      out, Treasury regulations require withheld funds to be deposited during

      the quarter and do not merely impose a duty to pay them at the end of

      the period. * * * [The corporate officer’s] failure to make the

      withholding deposits required was itself ‘willful.’”).

•     When the quarterly employment-tax payment is due. See id. at 1140-

      1142 (corporate officer took exclusive control over Sibwin, Inc.’s

      affairs on April 10, 1972; the court held that even if he was not a

      responsible officer when trust-fund taxes had been collected from the

      employees’ wages during the first quarter of 1972, he was a

      responsible officer when payments of the trust-fund taxes became due

      on April 30, 1972; therefore the court held that he had a duty to pay

      over the trust-fund taxes and was liable for the penalty because he

      willfully failed to do so).

•     After the quarterly payment date. See Newsome, 431 F.2d at 745 (“In

      many of these cases, a responsible officer’s ‘willfulness’ is
                                          -94-

[*94] established by the knowing preference of other corporate creditors over the

United States after the due date for the corporation to remit the withheld taxes.” (Fn.

ref. omitted.)).

       There is authority for the proposition that a failure to remit trust-fund taxes to

the United States is not willful where the responsible person made a reasonable

effort to remit the funds but was thwarted by circumstances outside that person’s

control. Feist v. United States, 607 F.2d 954, 961 (Ct. Cl. 1979); Finley v. United

States, 123 F.3d 1342, 1348 (10th Cir. 1997) (en banc). This is referred to as the

reasonable-cause defense. Thosteson, 331 F.3d at 1301. An example of the

reasonable-cause defense is when a responsible person made arrangements to pay

the trust-fund liability through a bank only to find that the bank kept the payment

for its own use instead of turning the payment over to the IRS. See Rykoff v.

United States, 40 F.3d 305, 306 (9th Cir. 1994). A limitation on the reasonable-

cause defense is that the efforts of the responsible person to pay trust-fund taxes

to the IRS are irrelevant if the person also decided to make payments to other

creditors despite knowing that the trust-fund taxes had not been paid. See

Thosteson, 331 F.3d at 1301 (stating without resolving whether the reasonable-

cause defense exists under the law of the Eleventh Circuit, that such an exception

is not applicable to a responsible person who “consciously decided to make
                                          -95-

[*95] payments to creditors other than the government even though he knew that the

withholding taxes had not been paid”); Feist, 607 F.2d at 961, 962 (reasonable-

cause defense available only because corporate treasurer did not “prefer other

creditors”).

      A successful attempt to pay trust-fund taxes can also affect a responsible

person’s liability for the trust-fund-recovery penalty. If the tax is actually paid,

there is no liability. See Brown, 591 F.2d at 1141 (corporate officer’s “use of the

withholding trust funds for other purposes in the interim made him liable for a

Section 6672 penalty if the tax was not in fact paid” (emphasis added)). However,

there is a timing question: how late can the tax payment be for the responsible

person to be relieved of liability? In Newsome, the former Fifth Circuit suggested

that a payment made by the quarterly payment deadline--a month after the end of the

quarter--could be sufficient to absolve the responsible person of liability. 431 F.2d

at 746 (“Of course, the officer is only liable under 6672 if the corporation does not

pay over the withheld taxes at the date prescribed in the regulations.”). In this case,

the IRS acknowledges that remittances made by the dates that the semiweekly

deposits were due would have been sufficient to absolve Romano-Murphy of

liability. The acknowledgment to which we refer is found on page 57 of the IRS’s

answering brief.
                                         -96-

[*96] In summary:

      •      A responsible person who knows that other creditors are being paid

             while the trust-fund taxes have not been paid is subject to liability for

             the penalty. See Thosteson, 331 F.3d at 1300.

      •      There may be a “reasonable-cause defense” if the responsible person

             took reasonable efforts to make a payment to the United States and,

             because of circumstances outside the person’s control, the payment

             was not made. See Feist, 607 F.2d at 961; Finley, 123 F.3d at 1348.

             However, reasonable efforts at payment are to no avail if the

             responsible person pays other creditors. See Thosteson, 331 F.3d at

             1301.

      •      In any event, a successful attempt to pay the trust-fund taxes, if made

             soon enough, relieves the responsible person of liability under section

             6672. Brown, 591 F.2d at 1141; Newsome, 431 F.2d at 746.

      With these principles in mind, we find that Romano-Murphy knew that

NPRN was using the taxes withheld from its employees’ wages for corporate

purposes instead of reserving them for payment of its trust-fund taxes. During

the entire second quarter of 2005 (the quarter for which the trust-fund-recovery

penalty was assessed), Romano-Murphy knew that the trust-fund taxes were not
                                         -97-

[*97] being remitted to the IRS by NPRN. During the entire quarter, she had the

authority to remit the trust-fund taxes to the federal government, but she failed to do

so. Instead, she wrote checks to other creditors (and supervised the writing of

checks to other creditors).

      Against this admitted failure, Romano-Murphy’s essential point is that she

made various efforts to cause a payment of the trust-fund taxes. As explained

before, a responsible person is absolved of liability for the trust-fund-recovery

penalty if the payments are actually made. But NPRN did not pay the trust-fund

taxes in dispute. Under the reasonable-cause defense, reasonable efforts to pay

trust-fund taxes may absolve the responsible officer of liability. But none of

Romano-Murphy’s alleged efforts to cause a payment on NPRN’s behalf obviate

that she authorized payments to creditors other than the United States and therefore

willfully failed to pay the trust-fund taxes. See Thosteson, 331 F.2d at 1301. We

could end our analysis of willfulness here. However, in the interest of

completeness, we will explain infra part IV.B why none of the actions that Romano-

Murphy says she took to make payment of the trust-fund taxes constituted

reasonable efforts to pay them.
                                         -98-

[*98] B.    Romano-Murphy Did Not Make Reasonable Efforts To Pay NPRN’s
            Unpaid Trust-Fund Taxes

      Romano-Murphy contends that many of her actions constitute reasonable

efforts to pay the trust-fund taxes within the context of the reasonable-cause

defense.

             1.     NPRN’s June 2004 Temporary Merger With Nurses
                    Staffing, LLC, and Its August 2004 Negotiations With
                    PRN Health Services, Inc.

      In June 2004 NPRN temporarily merged its operations with Nurses Staffing,

LLC. In August 2004, after this merger failed, the members of NPRN received an

offer from a different company, PRN Health Services, Inc., to purchase a 60%

interest in NPRN for $850,000. Romano-Murphy contends that she personally

supported both the June 2004 temporary merger of NPRN with Nurses Staffing,

LLC, and the August 2004 negotiations by NPRN’s members with PRN Health

Services, Inc. She argues that the success of either deal would have “eliminated

the tax liability”. In effect, Romano-Murphy is arguing that had NPRN

successfully merged with either PRN Health Services, Inc., or Nurses Staffing,

LLC, in 2004, the merged company would have been financially stable enough

that by the second quarter of 2005 it would have been able to make full deposits of

trust-fund taxes withheld from wages. We disagree. Arranging a merger with
                                          -99-

[*99] another company--in the hopes that the merged company will later make trust-

fund deposits during a future quarter--is not a reasonable effort to pay the trust-fund

taxes for the future quarter.

             2.     The Alleged Assumption by NAC of NPRN’s Second
                    Quarter 2005 Trust-Fund-Tax Liability

      Romano-Murphy claims that NPRN’s trust-fund-tax liability for the second

quarter of 2005 was assumed by NAC in the asset-purchase agreement, and that she

reasonably expected that NAC would pay the liability. We disagree.

      In support of her view that NPRN’s trust-fund-tax liability for the second

quarter of 2005 was assumed by NAC in the asset-purchase agreement, Romano-

Murphy makes the following contentions:

      NOC [i.e., NAC] expressly assumed the outstanding trust fund portion
      of Federal taxes due as of date of closing of $174,300 [citing Schedule
      1.4 of the asset-purchase agreement].

      Schedule 1.4 does not specifically label the assumed taxes as the trust
      fund portion. However, in conjunction with Schedules 3.7 with label
      of “state taxes other than withholding” which includes the Internal
      Revenue Service in the listing * * * and Schedule 3.11 Taxes * * *
      which depicts total taxes owed at time of closing, correctly provides
      implicit assumption the taxes assumed in Schedule 1-4 are trust fund
      liabilities.

The IRS takes the position that “Assumed Liabilities” do not include the trust-fund-

tax liabilities for the second quarter of 2005. It reasons:
                                         -100-

      [*100] The asset purchase agreement does not assume NPRN’s
      employment tax liabilities for the second quarter 2005. Section 1.4(a)
      of the Asset Purchase Agreement states that MSSI, the parent company
      of NOC, will assume certain liabilities specifically set forth in this
      Section, one of which are the “general payables specifically set forth in
      Schedule 1.4” of the Asset Purchase Agreement. Section 1.4(a) further
      states that all other liabilities, not stated as assumed liabilities in this
      Section, are excluded liabilities and remain the liabilities of NPRN.
      Schedule 1.4 titled “General Payables” sets out two categories,
      “Taxes” and “General Payables.” * * * Dr. Sahay, the CEO of MSSI,
      the purchasing company, testified that MSSI did not assume the 2005
      second quarter employment tax liability of NPRN. * * * It was not the
      intent of the purchaser to assume these liabilities. Only the “General
      Payables” which were specifically set forth on Schedule 1.4, excluding
      the section titled “Taxes” were assumed by MSSI. In addition,
      petitioner admitted that the Asset Purchase Agreement did not
      expressly provide for the purchaser to assume liability for unpaid
      employment taxes.

      It is unnecessary for us to determine whether the asset-purchase agreement

obligated NAC to assume NPRN’s trust-fund-tax liability for the second quarter of

2005. Even if NAC (or MSSI) had assumed NPRN’s trust-fund-tax liability, we

do not believe that there was a reasonable expectation that NAC would pay the

trust-fund taxes. As it turns out, NOC (i.e., NAC after it was renamed) made

$70,000 in payments of NPRN’s employment taxes (or related penalties or

interest), but the payments did not fully satisfy the balances, and none of the

payments were applied to the second quarter of 2005. We find that the failure of
                                          -101-

[*101] NAC (subsequently renamed NOC) to pay NPRN’s trust-fund taxes for the

second quarter of 2005 was foreseeable by Romano-Murphy.

        Romano-Murphy also argues that she personally ensured that the letter of

intent signed by MSSI on December 6, 2004, contained a requirement that MSSI

assume the liability for NPRN’s trust-fund taxes. She implies that the terms of the

letter of intent (a document that is not in the record) were similar to those of the

draft letter of intent (a document that is in the record). Even if this is true, the draft

letter of intent provided only that MSSI would assume “a liability on Nurses PRN

balance sheet of no more than $220,000 related to current operations”. See supra

part 6. Another provision of the letter required NPRN to pay all of its past due tax

liabilities. See supra part 6. That suggests that the $220,000 in assumed liabilities

would not have included any tax liabilities.

        We find that it was unreasonable for Romano-Murphy to think that NAC

(later known as NOC) would pay NPRN’s trust-fund taxes for the second quarter of

2005.

        We have taken Romano-Murphy’s argument about the alleged assumption by

NAC of the second-quarter-2005 trust-fund taxes as an attempt to show that she did

not act willfully. We do not understand her to be arguing that the assumption of

liabilities by NAC actually operated to relieve her of her section-6672 liability.
                                         -102-

[*102] Such an argument would be invalid. Under section 6672 Romano-Murphy is

liable for a penalty, and that section provides no mechanism for her to shift her

responsibility for the penalty to someone else. See Collins v. United States, 92-2

U.S. Tax Cas. (CCH) para. 50,351 (E.D. Mo. 1992); Markel v. United States, 70-2

U.S. Tax Cas. (CCH) para. 9702 (W.D. Tex. 1970).

             3.     Whether Romano-Murphy’s Refusal To Pay the Trust-
                    Fund Taxes Was Justified by the Subsequent Payment of
                    $1.6 Million

      Romano-Murphy next argues:

      Petitioner had reasonable cause to not fully pay the 2005/06 trust fund
      liabilities as they occurred as it would have resulted in a material
      change in the business of Nurses PRN, LLC [NPRN] and jeopardized
      the sale. Had a material change occurred, the Internal Revenue Service
      would not have received $1.6 million in sale proceeds to pay
      outstanding tax liabilities of Nurses PRN, LLC.

Romano-Murphy’s argument presupposes that it is permissible for a responsible

person to refuse to remit trust-fund taxes if it will allow the employer to remit the

taxes later. We do not see a qualitative difference between Romano-Murphy’s

argument and the argument, rejected by the Court of Appeals for the Eleventh

Circuit in Thibodeau, 828 F.2d at 1506, that the responsible officer had to use the

trust-fund money to keep his company in business. The court stated: “The

taxpayer argues that the checks [to creditors] he signed were necessary to keep the
                                         -103-

[*103] corporation operating as a going concern, but the government cannot be

made an unwilling partner in a business experiencing financial difficulties.” Id. In

any event, as discussed before, we do not think it was reasonable for Romano-

Murphy to think that NAC (later known as NOC) would pay all of NPRN’s overdue

trust-fund taxes. Orchestrating the asset sale was not a reasonable effort to pay

federal trust-fund taxes. Although as part of the asset sale $1.6 million was paid

toward NPRN’s employment-tax liabilities and although $73,783.00 of the $1.6

million payment was applied to NPRN’s employment-tax liability for the second

quarter of 2005, the question is whether Romano-Murphy had a reasonable

assurance that the entire trust-fund liability for the second quarter of 2005 would be

paid by NAC. We find she had no reasonable assurance.

             4.     Romano-Murphy’s Efforts To Sell NOC’s Assets in 2006

      Romano-Murphy argues that in 2006 she backed negotiations to sell NOC’s

assets or to merge NOC with another company. She contends that these

transactions would have resulted in the assumption or the payment of the trust-

fund taxes still owing for the second quarter of 2005. These negotiations involved

(1) a potential sale to Resolve Staffing, Inc., in July 2006, (2) a potential merger

with RealTime Services, Inc./Day Holding, LLC, in August 2006, (3) a potential
                                         -104-

[*104] sale to General Healthcare Resources, Inc., in September 2006, and (4) a

potential sale to PRN Health Services, Inc., in November 2006. Romano-Murphy

contends that despite her personal backing for these proposals, they were all vetoed

by others.

        At most, Romano-Murphy was attempting to raise cash, which could be used

to pay the IRS. This is not the same as attempting to pay the IRS. These attempts

were not reasonable efforts to pay the trust-fund taxes for the second quarter of

2005.

              5.    Romano-Murphy’s Filing of a Proof of Claim in the
                    Bankruptcy of MSSI

        Romano-Murphy claims that once MSSI went bankrupt, she acted on behalf

of NPRN in litigating its rights against MSSI as MSSI’s creditor. She characterizes

her activities as follows: “protecting the trust fund via valid Proof of Claim in

Federal Bankruptcy Court and personally defending claim in the State of Virginia.”

At most, Romano-Murphy’s actions in bankruptcy and state court increased the

probability that NPRN would receive a portion of the distribution of MSSI’s assets.

This, too, is not the same as attempting to pay the overdue trust-fund taxes to the

IRS.
                                         -105-

[*105] We find that Romano-Murphy’s participation in bankruptcy and state court

proceedings against MSSI was not a reasonable effort to remit the unpaid trust-fund

taxes to the United States.

             6.     Accurate Reporting and Cooperation With the IRS

      Romano-Murphy argues that she accurately reported NPRN’s tax liabilities

and cooperated fully with the IRS. But Romano-Murphy’s liability under section

6672 stems from her failure to pay NPRN’s trust-fund-tax liability, not her failure to

report it accurately. The accuracy of her reporting and her later cooperation with

the IRS are irrelevant.

      Incidentally, we note that Romano-Murphy has challenged the amount of the

trust-fund-recovery penalty on the ground that NPRN made deposits and payments

of trust-fund taxes that were not correctly applied by the IRS. We have resolved

these challenges. Romano-Murphy does not appear to raise what would be a

separate contention, that these deposits and payments constituted reasonable efforts

to remit the trust-fund taxes for the second quarter of 2005. We find that it was not

reasonable for Romano-Murphy to suppose that the deposits or payments would

reduce the trust-fund-tax liability for the second quarter of 2005.
                                         -106-

[*106] C.     Alleged Errors Made by the Appeals Office Regarding Willfulness

       Romano-Murphy argues that the Appeals Office made two errors of fact in

determining that her actions were willful. She contends that these errors of fact

constitute an abuse of discretion.

       First, Romano-Murphy challenges the following statement by the Appeals

Office:

       You [Romano-Murphy] indicated that the tax should have been
       absorbed through the sale of Nurses PRN LLC [NPRN] to Nurses
       Onsite Corporation [NOC] thru an asset purchase agreement.
       However, the sale did not materialize and the buyer filed bankruptcy.
       ***

Romano-Murphy observes that the sale of NPRN’s assets to NAC did

“materialize”. The asset-purchase agreement was executed on June 16, 2005. The

sale was completed on July 1, 2005. It was not until December 27, 2006, that MSSI

and NAC (by then called NOC) filed for bankruptcy. This was nearly 1-1/2 years

after the sale.

       Second, Romano-Murphy argues that the Appeals Office erred in making the

following statement:

       [R]eview of records showed that the tax period in question was not
       part of the settlement you addressed in your issues of protest but rather
       had accrued subsequent to the settlement issue being raised.
       ***
                                        -107-

[*107] Romano-Murphy contends that this conclusion is wrong. She states:

      Petitioner sent letters and completed several forms to dispute the TFRP
      [trust-fund-recovery penalty] issued [sic] being raised, all of which
      protested the 2005/06 TFRP issue at hand and have no relevance to the
      $1.6 million cash consideration received from MSSI to pay outstanding
      tax liabilities as mistakenly stated in the Notice of Determination.
      [Record citations omitted.]

      Because we accord no deference to the determination of the Appeals Office,

see supra part I.A, it is not necessary to determine whether its reasoning was

defective. We have drawn our own conclusions about whether Romano-Murphy is

liable for a section 6672 penalty of $346,732.38. We determine that she is.

      To reflect the foregoing,


                                                           Decision will be entered

                                                    for respondent.
