Willfulness - Knowledge of Non-Payment

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Willfulness - knowledge of non-payment

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In re Charles R. Howard, Penny S. Howard, Debtors. Charles R. Howard, Plaintiff v. United States of America, Department of Treasury and Gerald A. Jeutter, Jr., Trustee, Defendants.

U.S. Bankruptcy Court, East. Dist. N.C. , Raleigh Div.; 99-01215-5- ATS , September 17, 2003 .

[ Code Sec. 6672]

Penalties, civil: Failure to collect: Knowledge of nonpayment. --

The president and sole owner of a roofing construction company was the responsible officer liable for the corporation's unpaid payroll taxes. The taxpayer contended that he lacked knowledge of the corporation's failure to pay taxes until after they were due. Moreover, his subsequent use of corporate revenues to compensate creditors rather than to pay the delinquent taxes was done in an attempt to increase the ultimate payout to the IRS . Basing its decision on the credibility of presented testimony, the Bankruptcy Court concluded it was not plausible that the individual did not know that the payroll taxes were not being paid. At the very least, the court concluded that he recklessly disregarded whether the taxes were being paid..





MEMORANDUM OPINION



SMALL, Bankruptcy Judge: The trial of this adversary proceeding to determine whether the debtor, Charles R. Howard, owes a debt to the Internal Revenue Service (" IRS ") under 26 U.S.C. 6672 was held in Raleigh, North Carolina on September 4, 2003.

Charles R. Howard and Penny S. Howard filed a petition for relief under chapter 7 of the Bankruptcy Code on June 3, 1999. On April 18, 2002, the IRS assessed Mr. Howard with a tax liability in the amount of $355,008.23 for unpaid payroll taxes of Howard Roofing Systems, Inc. (" HRS "), pursuant to 26 U.S.C. 6672. Mr. Howard brought this adversary proceeding to challenge his liability for those taxes.

This bankruptcy court has jurisdiction over the parties and the subject matter of this proceeding pursuant to 28 U.S.C. 151, 157, and 1334, and the General Order of Reference entered by the United States District Court for the Eastern District of North Carolina on August 3, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. 157(b)(2)(B), which this court may hear and determine.

Mr. Howard was the president and sole owner of HRS , a roofing construction company created in 1991. The IRS has assessed Mr. Howard for payroll taxes that were not paid by HRS for the quarters ending June 30, 1998, through June 30, 1999, contending that he is a "responsible party" who willfully failed to collect or pay over the tax or otherwise attempted to evade or defeat the payment of the tax as defined in 26 U.S.C. 6672. Mr. Howard admits that he is a responsible party, but denies that he willfully failed to pay the trust fund taxes to the IRS . First, he contends that he did not know that the taxes were not being paid until April 6, 1999. Thereafter, while some company funds were paid to other creditors, Mr. Howard contends that these payments were made to increase the ultimate payout to the IRS .

Mr. Howard is a civil engineer licensed in five states, and has been an owner or officer of a construction and/or roofing business since 1977. The financial aspects of HRS were initially handled by Mr. Howard's wife, and as the company grew, others were hired to assist with payroll and related costs. Mr. Howard hired Karl Beyer as chief financial officer of HRS in April 1997 to handle, among other things, payroll, taxes, and preparation of financial and income statements.

In late 1997 and early 1998, HRS had several jobs that produced less revenue than expected. As a result, fiscal year 1998 showed a loss. Mr. Howard knew the company faced some financial difficulties, and began to look for outside funding. By April 1999, HRS had a letter of intent from an investor and was on the verge of closing on substantial funding. On the eve of closing, the investor backed out due to concerns with the financial situation, and Mr. Howard contacted another potential investor. That investor informed Mr. Howard that it had become aware of a tax lien filed against HRS for unpaid payroll taxes. Mr. Howard contends that this was the first time he had any information that the payroll taxes had not been paid, and that he realized immediately that HRS would have to close its doors. Mr. Howard then confronted Mr. Beyer, accusing him of failing to pay the payroll taxes without Mr. Howard's knowledge or consent.

Thereafter, Mr. Howard engaged in a scheme to maintain the appearance of normalcy at HRS so he could collect outstanding accounts receivable and pay as much money to the IRS as possible. Mr. Howard was advised by his attorneys and accountants that his bank, Centura, held a first lien on HRS 's accounts receivable. In addition, most of HRS 's jobs were bonded, and the bonding company would have the right to collect the receivables for any job it was required to pay for or perform. Acting on this information, as well as the knowledge that he would be personally responsible to pay the trust fund taxes while his personal obligations to the bank and the bonding company would be discharged in bankruptcy, Mr. Howard tried to hide from Centura and the contractors or project owners the financial condition of the company so HRS could collect its receivables and turn them over to the IRS before Centura or the bonding company could seize them.

On April 7, 1999, HRS 's Centura account had a balance of $28,008. 1 All of the payroll from the following week had not yet cleared, and the checks for the April 9 payroll had already been cut, but not delivered. Mr. Howard decided to honor the payroll checks, both because the employees had already performed the work for which they were being paid and to keep up the appearance that the company was continuing to operate. The April 9 payroll was made through the Centura account, and on April 15, Mr. Howard opened a new account at Triangle Bank to handle all transactions going forward.

After the April 9 payroll was made, no funds remained in the Centura account. HRS had some other loans with Centura for which payments were automatically drafted from this account, and Mr. Howard deposited $4,000 in the account to cover those drafts. It was his intent to have Centura believe that HRS was continuing to operate so it would not seize the accounts receivable. On April 7, 1999, Mr. Howard sent a check to the Colonial Days Inn, a hotel that was housing some HRS employees on an out-of-state job. According to Mr. Howard, Mr. Beyer told Mr. Howard that the account balance was sufficient to cover this check. 2 In fact, the check was dishonored.

To open the Triangle Bank account, Mr. Howard deposited a check for $22,000 received in final payment for a job completed in Virginia . He paid the April 16 payroll of approximately $18,000, having laid off approximately one third of the workforce over the course of the prior week. On April 20, HRS collected a large receivable of $91,000 from Penn-Co. HRS maintained its employees on the Penn-Co job until April 23, hoping to keep the appearance of normal operations until the $91,000 check cleared. On April 19, Mr. Howard paid the company's portion of the health insurance payments for its employees. He testified that he understood that employees' claims may not have been paid if the insurance was not brought current, so he chose to make this payment of $18,410.49. On April 21, HRS received $61,010.90 for payment on the Henrico County job, but when the HRS employees were pulled from the job on April 23, Henrico County stopped payment on its check.

From April 23 through June 1, HRS continued to collect some accounts receivable and made payments such as payroll, telephone bills, utilities, and office expenses. Mr. Howard received his regular salary through May 28. He made payments on some vehicles in order to later sell them at a profit. He also paid $12,000 toward a settlement with American Buildings, avoiding execution on a confession of judgment with both personal and corporate pledges. On June 2, 1999, HRS made a payment to the IRS in the amount of $74,000. Mr. Howard contends that this payment could not have been made absent his efforts to keep the appearance of an operating company to collect the accounts receivable. He points to the Henrico County stopped check to support his contention, noting that as soon as the owner learned that the job may not be finished, payments to HRS ceased. Mr. Howard contends that the IRS received substantially more money than it would have, had HRS closed its doors and filed chapter 7 on April 7, 1999.

Mr. Howard further testified that, after learning of the unpaid payroll taxes, he gained control of documents that had been in Mr. Beyer's files, including correspondence between the IRS and HRS . On April 8, he received a printout from Mr. Beyer showing lump sum checks made from Mr. Beyer to the IRS on behalf of the IRS . These checks were handwritten, as opposed to computer generated, and were signed with Mr. Howard's signature stamp. Mr. Howard testified that he did not authorize these checks, and that in the operations of HRS only the vice president had access to his signature stamp. The stamp was only to be used when Mr. Howard was away, and he was to approve all checks either in advance or after the fact. Mr. Howard testified that he did not authorize these checks. He contends that Mr. Beyer made these lump sum payments off the books and without his knowledge so that Mr. Howard would not learn that Mr. Beyer had not been paying the payroll taxes. There were eight of these checks, totaling approximately $600,000.

When asked how he could have operated the business without knowing that the payroll taxes were not paid, Mr. Howard testified that Mr. Beyer handled all of the financial transactions. Mr. Howard was shown financial statements or balance sheets, but he was never shown any document that showed the payroll taxes were owed. He assumed that the financial statements were accurate, but now he knows that from 1997 forward, they were doctored on a monthly basis. He contends that Mr. Beyer credited one account and showed the unpaid taxes as an adjustment to payables. Mr. Howard said he managed the business by reviewing income statements, which showed the money coming in and line item expenses, and he assumed the numbers on the statements were accurate. According to Mr. Howard, there was nothing on any of the statements that would make him suspicious that the payroll taxes were not being paid.

In stark contrast to Mr. Howard's testimony, Mr. Beyer testified that not only did Mr. Howard know that the payroll taxes were not being paid, but he directed Mr. Beyer not to pay them and he directed how to adjust the income statements and financial statements to disguise the payroll tax deficiency. When HRS began having cash flow problems in late 1997, Mr. Howard decided which checks to issue and which bills could wait. Mr. Howard selected the vendors with priority, and he intended to use the expected investment funds to pay the deferred taxes. To maintain the appearance of current taxes for the potential investors, Mr. Howard instructed Mr. Beyer to move the payroll taxes from the tax liability account to accounts payable. Mr. Beyer testified that it was readily apparent that the accounts payable amount was larger than it should have been, given the number of active jobs.

Mr. Beyer also testified that it was common for checks to be handwritten, and that he used the signature stamp at the direction of Mr. Howard. He had Mr. Howard's authorization to issue the lump sum checks to the IRS , and they were handwritten for simplicity. Mr. Beyer further testified that Mr. Howard reviewed the notices from the IRS regarding the delinquent taxes, and that Mr. Howard saw the computer printouts of the correct liabilities. In addition, the Form 941 tax returns showed the unpaid taxes, but Mr. Beyer did not recall showing those returns to Mr. Howard.

Gina Byrd, who was employed at HRS part-time in the accounts payable department, testified that both Mr. Beyer and the vice president had access to the signature stamp. She said that it was not unheard of for Mr. Beyer to issue handwritten checks where time was a problem. Ms. Byrd also testified that she witnessed the beginning of a confrontation between Mr. Howard and Mr. Beyer in April 1999 in which Mr. Howard said to Mr. Beyer, "You caused me to lose my company by not paying taxes." Ms. Byrd said it appeared to her that Mr. Howard was in disbelief that the taxes had not been paid.

Section 6672(a) of the Internal Revenue Code provides, in relevant part, that

[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.


26 U.S.C. 6672(a).

The key question for the court to determine is whether Mr. Howard knew before April 1999 that the payroll taxes had not been paid. The testimony is diametrically opposed, and the court's decision ultimately is a credibility determination. The court observes that Mr. Howard is an astute businessman. While he had never failed to pay payroll taxes in the past, perhaps he never faced the severe financial problems that he faced in 1998. Construction companies are acutely aware of the sources of funds, the need for funds and which creditors' payments can be delayed. It is simply not credible that Mr. Howard did not know that the payroll taxes were not being paid. At the very least, he recklessly disregarded whether the taxes were being paid.

Significantly, Mr. Beyer had no incentive to make the decision not to pay the taxes and to keep Mr. Howard uninformed about it. Had Mr. Beyer been embezzling funds or gaining personally from the failure to pay, this might be a different case. Mr. Howard had everything to lose, and gambled that he would be able to pay the taxes once the investment was achieved and his business turned around. Mr. Howard either directed that the taxes not be paid or knowingly let the taxes not be paid while the books were manipulated, and the court finds that this was a willful failure to pay taxes under 26 U.S.C. 6672.

Once HRS was rejected by potential investors and the tax lien appeared on the public record, Mr. Howard knew his time was up, and he decided to pay as much as possible to the IRS . While that may be commendable, under the law his decision to pay other creditors before paying the IRS constitutes a willful failure to pay. Turpin v. United States [ 92-2 USTC 50,383], 970 F.2d 1344, 1347 (4th Cir. 1992) (intentional preference of others over the United States is sufficient to establish willfulness under 6672). Because the IRS has already assessed these taxes, Mr. Howard has the burden of proof to show that he did not willfully fail to pay. Mr. Howard has failed to meet his burden of proof, and the court concludes that he is liable for the trust fund taxes under 26 U.S.C. 6672.

Judgment will be entered accordingly.

1 Mr. Howard transferred $33,000 from his personal account to the HRS account on April 2, 1999, after Mr. Beyer told him HRS would be short for the payroll checks. Mr. Howard testified that it was his understanding that this amount would cover the "total burden" of payroll, including the taxes. This deposit also predates his admitted knowledge of the fact that the payroll taxes had not been made.

2 Mr. Howard testified that he did not have the password for the financial program on the computer, and he relied on Mr. Beyer to keep him informed as to the status of the accounts.

 

In re Ronald D. Nutt, Debtor. United States of America , Appellant v. Ronald D. Nutt, Appellee.

U.S. District Court, Mid. Dist. Fla.; 6:01-Cv-1223-Orl-06JGG, 6:02-Cv-1346-Orl-06 DAB , March 5, 2003 .

Affirming a BC-DC Fla. decision, 2002-2 USTC 50,753.

[ Code Sec. 6672]

Penalties, civil: Failure to collect and pay over tax: Knowledge of nonpayment: Recklessness. --

The bankruptcy court did not clearly err in finding that the failure of a debtor owner and officer of a construction company to know that the company did not pay over employment taxes to the government was not reckless. On remand, the bankruptcy court reviewed a witness deposition in which certain documentary evidence was discussed. However, neither the factual underpinnings of the deposition nor the documentary evidence were offered or introduced into evidence during the trial; thus, the factual basis could not be reached. The government's decision not to introduce such evidence was a tactical choice; the district court could not consider matters that were not part of the underlying trial record..





ORDER



YOUNG, Senior District Judge: This case came before the Court on February 26, 2003 for hearing on appeal of the September 23, 2002 Order of the Bankruptcy Court reaffirming on remand its earlier Order dated August 2, 2001 sustaining debtor Ronald D. Nutt's objection to Claim No. 3 of the Internal Revenue Service.



Background:

An earlier appeal of the same issues involved in this case was previously considered in full by the undersigned in Case No. 6:01-Cv-1223-06-JGG. That case was fully briefed and argued by counsel and a decision made by this Court on June 5, 2002 which remanded the case to the Bankruptcy Court by Order. ( See attached Order, Doc. #19 filed in Case No. 6:01-cv-1223-06-JGG).

Thereafter on September 23, 2002, the Bankruptcy Court, again after further briefing by counsel and a hearing thereon, entered its Order reaffirming its August 2, 2001 Findings of Fact and Conclusions of Law sustaining Ronald Nutt's objection to Claim 3 of the Internal Revenue Service. ( See attached copy of Bankruptcy Court Order dated September 23, 2002).

The Bankruptcy Court September 23, 2002 Order was transmitted to the District Court and filed in the original appeal file, Case No. 6:01-cv-1223. Immediately thereafter, Appellant , United States of America , timely filed an appeal from the September 23, 2002 Order which was given Case No. 6:02-cv-1346, and assigned to a different judge in this Court.

On December 3, 2002, the undersigned, unaware that the second appeal had been filed, given a different case number and assigned to another judge, entered an order affirming the bankruptcy court Order of September 23, 2002, on the ground that this Court was unable to find that the factual findings of the Bankruptcy Judge were clearly erroneous.

Appellant thereafter filed in Case No. 6:01-cv-1223-Orl-06-JGG its Motion to Alter or Amend Order (Doc. #23, filed December 17, 2002). A hearing will held on that motion on January 22, 2003, during which hearing the motion was granted by the undersigned and this Court's December 3, 2002 Order was vacated on the grounds that it was premature and improper in light of the new appeal. A written order reaffirming the Court's oral ruling was entered on January 8, 2003.

Appellee, Ronald Nutt then filed in this case (6:02-Civ-1346), his Motion Requesting Reassignment, or Alternatively, Motion to Dismiss Pending Appeal (Doc. #9, filed December 20, 2002). On January 22, 2003 Judge Anne Conway granted the motion in part as to reassignment and the case was reassigned to the undersigned.

With that background, this court heard oral argument of counsel in these effectively consolidated cases on February 26, 2003.


Standard of Review:



This court is required to review the facts in this case under the clearly erroneous standard, and to review the conclusions of law under the de novo standard.

Government counsel argued that the bankruptcy court had erred in failing to make specific findings that the Debtor willfully failed to pay over trust funds based on the totality of the evidence in the case showing that Debtor's business was in serious financial condition and that it was unable to pay creditors. The Government alleges that such inability to be able to stay current with its creditors, which is not in dispute, should have been notice to Debtor that the payroll trust fund taxes were not being paid as well.

However, the Bankruptcy Judge in his Findings of Fact and Conclusions of Law dated August 2, 2001 , at page 13 held:

"The totality of the circumstances indicate that Nutt acted in good faith in regard to the trust fund taxes. Nutt immediately paid the first quarter payroll taxes with his personal funds, contacted the IRS regarding a repayment schedule for the second, third and fourth quarters, remained current on the accruing payroll taxes after October 31, 1995 , and made no payments to other creditors from unencumbered funds upon learning of the unpaid payroll taxes."


It appears to this Court that there has been no substantive change in the issues and/or parties in this case and that the facts remain as they were during consideration of the first appeal. When this Court entered its remand order, the sole issue for reconsideration by the Bankruptcy Court was whether Debtor's failure to know taxes were not being paid was due to a reckless disregard of a known or obvious risk of non-payment in light of the Eleventh Circuit's decision in Malloy v. United States [ 94-1 USTC 50,145], 17 F.3d 329 (11th Cir. 1994) specifically as it related to one portion of John Conner's March 21, 2000 deposition regarding a letter of a former Hallmark employee, Michael Storey.

On remand the Bankruptcy Court again reviewed the deposition testimony of John Conner. The Bankruptcy Court found that while Conner testified in his deposition about the letter from Michael Story, neither the factual underpinnings of Conner's deposition, nor Michael Storey's letter were offered or introduced into evidence during the trial of this matter and that therefore the factual basis could not be reached. The Bankruptcy Court further found that even if they had been, that testimony would have been subject to a hearsay objection. The decision to not introduce such evidence was a tactical choice made by the United States and it is improper for this Court to consider any matters which were not a part of the underlying trial record.

As there is no new information for consideration, it is the opinion of this Court that the facts have been fully considered on appeal and again on remand to the Bankruptcy Court. This Court is unable to find that the factual findings of the Bankruptcy Judge as set forth in the August 2, 2001 Findings of Fact, as further reaffirmed by the September 23, 2002 Order, are clearly erroneous. Accordingly, it is

ORDERED that the August 2, 2001 Findings of Fact and Conclusions of Law of the Bankruptcy Court, as reaffirmed following remand by bankruptcy Court Order dated September 23, 2002, are AFFIRMED. The Clerk of Court is directed to close this case by entering an appropriate judgment.

SO ORDERED.


ORDER



This case came before the Court on April 9, 2002 and May 28, 2002 for oral argument on appeal from the August 2, 2001 Findings of Fact, Conclusions of Law and Order of the Bankruptcy Court sustaining Debtor's Objection to Claim No. 3 of the Internal Revenue Service. This Court has jurisdiction pursuant to 28 U.S.C. 158(a).

After reviewing the record on appeal and following argument of counsel, it is the opinion of this Court that the case should be remanded for further findings.


Background:



On August 24, 2000, Debtor, Ronald D. Nutt, filed a voluntary personal bankruptcy petition pursuant to Chapter 11 of the Bankruptcy Code (11 U.S.C.) 1 . On November 15, 2000 the Internal Revenue Service ( IRS ) filed a proof of claim for Debtor's unpaid trust fund recovery penalty liabilities assessed pursuant to 6672 of the Internal Revenue Code (26 U.S.C.) for unpaid employment taxes for Hallmark Builders, Inc., for the second, third and fourth quarters of 1995 in the amount of $248,862.03. 2 The IRS contends that the Debtor was liable for payment of the trust fund taxes for all three quarters in issue because he was both responsible for ensuring that trust fund taxes were withheld from the wages of his former employees at Hallmark Builders and then timely paid over to the United States but that Ronald Nutt had willfully failed to do so.

On January 24, 2001 Debtor filed an objection to the IRS claim alleging (1) that the IRS breached a 1996 settlement agreement and as a result Debtor has suffered damages in excess of the amount of the IRS claim; and (2) that Debtor is not "responsible party" as defined under 26 USC 6672, and has no liability to IRS for the claim. 3

The bankruptcy court in sustaining the Debtor's objection and disallowing the IRS claim, found that Debtor did not willfully fail to pay over funds. The IRS appeals that decision.

Hallmark Builders, Inc. (Hallmark) was formed as a Florida corporation in 1975, for the purpose of building and selling homes in Central Florida . Ronald Nutt (Debtor) was the sole shareholder of Hallmark and had exclusive and direct management of Hallmark until he retired from day-to-day management in December 1993 at which time he appointed John Conner President. Thereafter John Conner served as President until May 1995. Conner replaced Hallmark's controller with an accountant, a Mr. Leyco, who handled all financial matters for Hallmark, including payroll. Although Ronald Nutt gave up the position of President, he nevertheless obviously continued to have final authority over the corporation. It was he who fired John Conner in May 1995. Apparently he continued as the sole stockholder without any board of directors disclosed by the record.

Hallmark failed to pay employment taxes for the second, third and fourth quarters of 1995. Debtor alleges he did not have knowledge that the taxes were not paid until October 1995. The bankruptcy judge in his Findings of Fact and Conclusions of Law, at pg. 3, #12, found that "Nutt did not have actual knowledge of any payroll tax delinquency until October 31, 1995."

After Hallmark Builders filed for Chapter 11 bankruptcy in February, 1996 Hallmark Builders, Ronald Nutt and the IRS entered into a written settlement agreement dated July 18, 1996 which agreement provided for the payment of $270,000 to the United States in full satisfaction of Hallmark's employment tax liability. The Settlement agreement contemplated repayment would be from sales of lots owned by Hallmark and Ronald Nutt. Thereafter, the IRS was paid some money from the sale of lots but there was an alleged breach of the agreement, which is the subject of the pending lawsuit assigned to another judge of this Court.

As previously stated, the Bankruptcy court found that Debtor had not willfully failed to turn over the funds and that a totality of the circumstances indicated that Debtor acted in good faith.


Discussion:



Internal Revenue Code 26 U.S.C. 6672(a) provides that when a person required to collect and pay over withheld taxes willfully fails to do so, he is liable for a penalty equal to the amount of the unpaid taxes. 6672 further provides that personal liability under 6672 is properly imposed upon the person or persons who: (1) were responsible for ensuring that the trust fund taxes were collected and accounted for or paid over to the United States; and (2) willfully failed to discharge that duty.

Although Debtor admits that for the second, third and fourth quarters of 1995 he qualifies as a "responsible person" under 6672 of the Internal Revenue Code, he states that he did not willfully fail to carry out his responsibilities for paying over the taxes. 6672 does not impose upon the responsible person an absolute duty to pay over amounts that should have been collected and withheld. The failure to collect and remit trust fund taxes must be willful. Liability is not imposed without personal fault See Slodov v. United States [ 78-1 USTC 9447], 436 U.S. 238 (1978).

The term "willfully" is defined as meaning, in general, a voluntary, conscious, and intentional act. See Mazo v. United States [ 79-1 USTC 9284], 591 F.2d 1151 (5th Cir. 1979).

Absence of willfulness can be proved by an affirmative showing that the responsible person did not disregard his duties, and that he undertook all reasonable efforts to see that such taxes would be paid in circumstances where the employer had the means of payment and could reasonably be expected to make the payment. See Feist v. United States [ 79-2 USTC 9635], 607 F.2d 954 (Ct. Cl. 1979).

The IRS contends that the Debtor acted willfully and with reckless disregard for a known or obvious risk by failing to determine whether withholding taxes were remitted to the IRS after learning that the company was experiencing cash flow difficulties.

While there is evidence in the record that Debtor had knowledge that Hallmark was experiencing cash flow problems, and had infused over $650,000 of his personal funds to help cure that problem, that evidence relates to a time period prior to Debtor's alleged knowledge of the IRS deficiency.


Decision:



The Eleventh Circuit Court of Appeals held in Malloy v. United States [ 94-1 USTC 50,145], 17 F.3d 329, 332 (11th Cir. 1994) "... we hold that a responsible person is liable under 6672 if he or she either had actual knowledge that the taxes were not being paid or acted with a reckless disregard of a known or obvious risk of nonpayment." (emphasis added).

The Bankruptcy Judge found as a matter of fact that the Debtor did not have actual knowledge that the taxes were not being paid until October 1995. That finding is binding on this Court in the absence of a finding that it was erroneous. Although a different finding might have been made from the same facts, this Court is unable to say that the Bankruptcy Judge erred in this respect.

The Bankruptcy Judge also found that the Debtor's failure to know that the taxes were not being paid was not because of acting with reckless disregard of a known or obvious risk of non-payment. While the Bankruptcy Judge stated facts from the record that support that finding, there was no reference to that portion of John Conner's March 21, 2000 deposition (at page 98) referring to a communication from another former Hallmark employee, Michael A. Storey (which is attached as Exhibit #5 to the Conner deposition). In that letter, Michael Storey states:

"It seems the acid test is to view the situation historically as we now understand. Hallmark, previous to your tenure as President, filed bankruptcy, was delinquent in paying employment taxes on at least one occasion in 1988 or 1989, and had misappropriated funds. Roger concealed the tax delinquency and stole money from the company leading to his dismissal by Ron Nutt...."


If there is a factual basis for the contents of Michael Story's letter, there could conceivably be a different view as to whether the Debtor acted with reckless disregard of a known or obvious risk of non-payment.

In Malloy, supra, the Eleventh Circuit also held:

"At the time Malloy invested in the condominium management business, he was aware that the predecessor corporation, SPMC, had financial difficulties, and he saw that the business was restructured so he would not be responsible for SPMC's unknown liabilities. At least by February 1983, Malloy knew that SPMC had failed to pay withholding taxes and that SPMII (Malloy's current corporation), like SPMC before it, was having financial difficulties. Malloy also knew that the same employees who had been responsible for paying SPMC's bills were responsible for paying SPMII's bills. Malloy never made any inquiries to determine whether SPMII was paying the withholding taxes;...."


If Michael Storey's assertions contained in his letter have any basis in fact, it could be found that the Debtor was in much the same position as Malloy and that he therefore would be responsible for the unpaid taxes because of acting with a reckless disregard for a known or obvious risk of non-payment. Based on the record as it now stands, this Court cannot make such a finding but will remand this case to the Bankruptcy Judge to make such further determination as he finds appropriate in light of the holding herein.

In accordance with the foregoing, it is

ORDERED that this case is REMANDED to the Bankruptcy Court for further proceedings consistent with this decision.

SO ORDERED.

1 Ronald D. Nutt was President of Hallmark Builders, Inc. Hallmark Builders had previously filed a Chapter 11 bankruptcy on February 13, 1996. Hallmark Builders' Chapter 11 was converted to a Chapter 7 on January 21, 1997.

2 $75,591.00 was a secured claim, $173,259.03 was an unsecured priority claim, and $12.00 was an unsecured general claim.

3 The record reflects Debtor stipulated during the Mary 2, 2001 Final Evidentiary hearing that during the second, third and fourth quarters of 1995, the period in issue, he qualified as a "responsible person" as defined by statute.

 

[2001-1 USTC 50,417] Beverly Frey, Plaintiff-Counterdefendant v. United States of America , Defendant-Counterplaintiff

U.S. District Court, No. Dist. Tex. , Dallas Div., Civ. 3:99-CV-0831-D, 5/4/2001

[Code Sec. 6672 ]

Employment taxes: Trust fund recovery penalty: Responsible person: Secretary, treasurer, controller: Check-writing authority.--The head of a corporation's accounting department was a responsible person who willfully failed to pay over delinquent employment taxes. Factors supporting this conclusion were that she was the secretary, treasurer, and controller; she had check-writing and signing authority; and she had the status, duty, and authority that gave her effective power to pay the taxes. She provided no evidence that she attempted to use her check-writing authority to pay the taxes and she could not escape responsible person status by claiming that she was directed to pay other creditors before the taxes.


[Code Sec. 6672 ]

Employment taxes: Trust fund recovery penalty: Responsible person: Willfulness: Knowledge: Payment of creditors.--Because the responsible person of a corporation had knowledge of the tax liability, yet paid off debts to other creditors before the government, she was found to have acted willfully. Neither the degree of control of the CEO and chairman of the board nor his directions not to pay taxes had any bearing on the core issue of the taxpayer's knowledge of the delinquent taxes.

[Code Sec. 6203 ]

Assessment: Identification: Social security number.--An erroneous social security number on a tax assessment was insufficient to render the assessment invalid. The taxpayer offered no support for her contention that it did. She was identified by name and did not contend that she failed to understand the nature of the penalty. Moreover, she failed to show that she was misled by this misinformation.

MEMORANDUM OPINION AND ORDER

FITZWATER, District Judge:

The court must decide in this case whether the plaintiff-counterdefendant is a "responsible person" who willfully failed to pay to the Internal Revenue Service (" IRS ") employment taxes withheld by her corporate employer. The court must also resolve whether the IRS assessment is invalid because it lists an incorrect social security number for the plaintiff-counterdefendant.

I.

This case arises from the failure of Pinpoint Communications, Inc. ("Pinpoint") to pay employment taxes to the IRS for the third and fourth quarters of 1995. Pinpoint sought to develop and market a fleet management system that would allow fleet operators, such as cab company dispatchers, to locate and communicate with individual members of the fleet. Patrick G. Bromley ("Bromley") ran Pinpoint as its Chief Executive Officer and Chairman of the Board. He was also Pinpoint's largest stockholder. Bromley exercised final decisionmaking authority over the business, including the approval of certain expenditures and the power to hire and fire employees.

Pinpoint struggled to achieve its goal of profitability. In the second half of 1995, it failed to pay its federal payroll taxes in full. Eventually, it was no longer able to cover operating expenses, and filed for chapter 11 bankruptcy protection on February 1, 1996. It reserved the last of its funds to pay a bankruptcy attorney, relying on a personal check from a board member to satisfy the full fee. In August 1996 Pinpoint's chapter 11 reorganization was converted to a chapter 7 liquidation and the United States Trustee auctioned off all of Pinpoint's assets. At no point did Pinpoint pay the overdue payroll taxes for the third and fourth quarters of 1995.

The IRS , acting pursuant to 26 U.S.C. 6672, assessed plaintiff-counterdefendant Beverly Frey ("Frey") the sum of $284,870.31 on February 18, 1999 , seeking to hold her liable by statute as a "responsible person" who had willfully failed to pay over the withheld employment taxes to the IRS . Frey was Pinpoint's Secretary, Treasurer, and Controller, and the head of its Accounting Department. She was also a minor Pinpoint shareholder. Frey paid $100 of the assessment and then sued defendant-counterplaintiff United States of America ("the government") to recover that sum plus statutory interest. The government counterclaimed to recover $284,770.31--the unpaid part of the assessment--plus interest and all statutory additions provided by law. The government also filed a third-party complaint against Bromley, but later reached a settlement with him and dismissed the third-party action. Only the claims between the government and Frey remain to be litigated. The government now moves for summary judgment, arguing that Frey is a "responsible person" under 6672 who acted willfully in failing to pay the payroll taxes. 1 It seeks dismissal of her claim and recovery on its counterclaim.

II.

The relevant law regarding liability under 6672 for unpaid employment taxes is familiar and need not be recounted at length. Federal law requires that employers withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See Barnett v. IRS [93-1 USTC 50,269], 988 F.2d 1449, 1453 (5th Cir. 1993) (citing 26 U.S.C. 3102 and 3402). The employer holds the withheld taxes "in trust" for the United States and must pay them over to the government, Id. ; Wood v. United States [87-1 USTC 9165], 808 F.2d 411, 414 (5th Cir. 1987). If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes and seek the unpaid funds from the employer. Section 6672(a) imposes liability for these delinquent taxes not only on the corporate employer but on any person, including a corporate officer or employee, who is required to collect, truthfully account for, or pay over any tax--commonly referred to as "responsible persons" 2--who willfully fails to do so. See Barnett [93-1 USTC 50,269], 988 F.2d at 1453. This penalty is "separate and distinct from the liability imposed on the employer to remit the trust fund taxes." Stallard v. United States [94-1 USTC 50,056], 12 F.3d 489, 493 (5th Cir. 1994) (per curiam ) (footnote omitted). Section 6672 provides the government recourse for collection of the taxes by allowing it to reach the persons responsible for causing the company's failure to pay the taxes. See Newsome v. United States [70-2 USTC 9597], 431 F.2d 742, 745 (5th Cir. 1970) (citations omitted).

To establish liability against Frey, the government must demonstrate that (1) she is a responsible person (2) who willfully failed to pay over the taxes. Barnett [93-1 USTC 50,269], 988 F.2d at 1453. Once the government offers a 6672 assessment into evidence, the taxpayer bears the burden of disproving her responsible person status or willfulness. Id. Frey, as the plaintiff who seeks a refund of a partial payment of a 6672 penalty, has the burden of proving that she is not a responsible person, even where, as here, the government has counterclaimed for the remainder of the tax. Morgan v. United States [91-2 USTC 50,387], 937 F.2d 281, 285 (5th Cir. 1991) (per curiam ) (adopting opinion of Fitzwater, J.) (citing Liddon v. United States [71-2 USTC 9591], 448 F.2d 509, 513-14 (5th Cir. 1971)).

III .

Frey first contends the original assessment against her is invalid because it lists an incorrect social security number and that the IRS failed to make a correct assessment via Form 4340 before the statute of limitations expired. She maintains that the assessment against her is invalid and that the court does not have jurisdiction over this case. 3

Before the penalty may be imposed, the government must properly notify the responsible party about the assessment. Stallard [94-1 USTC 50,056], 12 F.3d at 493. Pursuant to Treasury Regulation 301.6203-1--the regulation governing assessments--the summary record of the assessment must include the identity of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. "If the summary record is properly supported through a Form 4340, the assessment contained in that summary record is considered presumptively valid[.]" Id. Although the social security number listed on the original assessment actually belongs to a "Beverly Frey" from Houston , Texas , it is not the correct number for the Frey who is the plaintiff-counterdefendant in the present case.

Frey argues that by the time the IRS corrected this error and submitted a Form 4340 with the proper social security number, the statute of limitations had expired, thereby rendering the assessment invalid. In support of her argument, Frey cites Stallard, in particular the Fifth Circuit's characterization of the district court's holding in that case. Stallard does not support her position. In Stallard the Fifth Circuit held that the district court had incorrectly interpreted Brafman v. United States [67-2 USTC 12,494], 384 F.2d 863, 865 (5th Cir. 1967), to require that all provisions of Treasury Regulation 301.6203-1 must be met within the limitations period. Stallard [94-1 USTC 50,056], 12 F.3d at 493. Correcting this misinterpretation, the Fifth Circuit emphasized that it is the date of the assessment itself, not of the supporting record, that is relevant for resolving statute of limitations issues. Id.

Because the date of the Form 4340 does not render the original assessment untimely in the instant case, the court must now decide whether the erroneous social security number invalidates the assessment. Frey cites no authority to support her contention that it does. In fact, Treasury Regulations require only that "[t]he summary record, through supporting records, shall provide identification of the taxpayer[.]" Treas. Reg. 301.6203-1. Frey was identified by name and does not contend that she failed to understand the nature of the penalty. The Fifth Circuit has held that "a notice of assessment and demand for payment that contains a technical error will be held valid where the taxpayer has not been misled by the error." Sage v. United States [90-2 USTC 50,453], 908 F.2d 18, 22 (5th Cir. 1990) (citing Allan v. United States [75-1 USTC 9204], 386 F.Supp. 499 (N.D. Tex. 1975) (Porter, J.) (holding that wrong name of company did not invalidate assessment)). Absent proof that would permit a reasonable trier of fact to find that Frey was misled by the misinformation contained in the original assessment, the court declines to hold that it is invalid on this basis.

IV.

Because the government has introduced the assessment in evidence, the burden has shifted to Frey to prove either that she is not a "responsible person" or that she did not act willfully. At the summary judgment stage, she need only adduce evidence that creates a genuine issue of material fact.

A.

The Fifth Circuit "takes a broad view of who is a responsible person under 6672." Logal v. United States [99-2 USTC 50,988], 195 F.3d 229, 232 (5th Cir. 1999) (citing Barnett [93-1 USTC 50,269], 988 F.2d at 1454). "In a great number of cases, [the Fifth Circuit] has held that a party was a 'responsible person.' " Barnett [93-1 USTC 50,269], 988 F.2d at 1454 n.10 (collecting cases). Whether Frey is a responsible person "turns on [her] status, duty, and authority." Turnbull v. United States [91-1 USTC 50,196], 929 F.2d 173, 178 (5th Cir. 1991). "The crucial inquiry is whether the individual had the effective power to pay the taxes." Id. (citing Howard v. United States [83-2 USTC 9528], 711 F.2d 729, 734 (5th Cir. 1983)). This inquiry asks whether she "had the actual authority or ability, in view of [her] status within the corporation, to pay the taxes owed." Barnett [93-1 USTC 50,269], 988 F.2d 1454. The court looks to six nonexclusive factors to determine responsibility pursuant to 6672, considering whether the person (i) is an officer or member of the board of directors; (ii) owns a substantial amount of stock in the company; (iii) manages the day-to-day operations of the business; (iv) has the authority to hire or fire employees; (v) makes decisions as to the disbursement of funds and payment of creditors; and (vi) possesses the authority to sign company checks. Logal [99-2 USTC 50,988], 195 F.3d at 232 (quoting Barnett [93-1 USTC 50,269], 988 F.2d at 1455). "No single factor is dispositive." Barnett [93-1 USTC 50,269], 988 F.2d at 1455.

B.

The government contends that it has introduced in support of its motion evidence that precludes Frey from creating a genuine fact issue concerning whether she is a "responsible person." The court agrees.

1.

Frey testified that she was the head of Pinpoint's Accounting Department, became the company Controller in 1993, and held the offices of Secretary and Treasurer by mid-1994. As a result of her responsibilities, Frey had an intimate knowledge of Pinpoint's financial situation. She admitted that she handled Pinpoint's day-to-day accounting functions. Frey also acknowledged that she dealt with the company's outside independent auditors and was a member of the Pinpoint management team. She was authorized to provide the sole signature on checks for up to $10,000 and was the person who usually signed employee payroll checks. Frey was a Pinpoint stockholder and prepared financial statements and made financial reports to the Board of Directors at least quarterly. Before Pinpoint's affiliation with Price Waterhouse, Frey was responsible for generating the internal financial reports. She was but one of a handful of employees who had access to computerized company records, including the general ledger and the accounts payable. Frey was familiar with Pinpoint's bank accounts and, as one of two trustees of Pinpoint's 401(k) plan, was a defendant in a Department of Labor action for Pinpoint's failure to pay over 401(k) contributions. She also participated heavily in generating financial projections regarding when Pinpoint would become profitable.

2.

Frey attempts in her summary judgment response to avoid "responsible person" liability by characterizing Bromley--the Pinpoint CEO and Board Chairman--as the person who had authority to pay the taxes, and by minimizing her own power. She contends that despite her titles and formal authority, Bromley's overwhelming control of the daily operations at Pinpoint prevented her from exercising the necessary practical authority to be considered a responsible person under 6672. Her arguments are unavailing, however, and her evidence fails to raise a genuine issue of material fact that requires a trial.

Frey argues that her status as the company's Secretary, Treasurer, and Controller was merely titular and that Bromley made all significant decisions regarding finances. She asserts that she constantly acted only under Bromley's direction and had no power to act without his approval. Furthermore, in an attempt to illustrate their relative interest in and control over Pinpoint, she compares her stock ownership--0.13%--to Bromley's outlay of approximately $4.5 million. The fact that Bromley exercised more influence and control over the operations of Pinpoint does not mean that Frey was not also a responsible person. The Fifth Circuit has recognized that "[t]here may be--indeed, there usually are--multiple responsible persons in any company." Barnett [93-1 USTC 50,269], 988 F.2d at 1455. Section 6672 "applies to all responsible persons, not just to the most responsible person." Gustin v. United States [89-2 USTC 9423], 876 F.2d 485, 491 (5th Cir. 1989). A host of persons have been held liable as responsible persons even though they did not exercise final decisionmaking authority over all the operations of the company. See Howard [83-2 USTC 9528], 711 F.2d at 734 (citing cases in which persons have been held to be "responsible," despite existence of another person with more significant control over company decisions). The focus, therefore, is not upon whether Bromley exercised more authority than did Frey, but upon whether Frey had the status, duty, and authority that gave her effective power to pay Pinpoint's delinquent payroll taxes.

Concerning her control over Pinpoint's operations, Frey contends that she had neither effective power to pay taxes nor significant authority in the general management and financial decisionmaking of the corporation. 4 In particular, she focuses on her limited authority to make employment decisions. She asserts that outside the Accounting Department, she lacked the authority to hire and fire employees and to participate in these decisions. She points out that although she had the authority to participate in Accounting Department hiring decisions, the persons hired for these positions had to be approved by others, and that she was involved in the hiring of only two employees. This evidence does not create a genuine issue of material fact on whether she was a responsible person. See Gustin [89-2 USTC 9423], 876 F.2d at 492 (holding that party was responsible person despite limited authority to hire employees). Her inability to make final employment decisions outside the Accounting Department did not prevent her from exercising sufficient power within that department to ensure that Pinpoint paid its taxes. Moreover, authority to make employment decisions within the Accounting Department, even if not unilateral, would only permit a reasonable trier of fact to find that she did exercise significant control over Pinpoint's operations.

Frey contends that even if she did possess some degree of control over the operations of Pinpoint, her authority did not extend to the financial operations of the company. She maintains that she did not have the effective authority to pay the taxes because that power rested exclusively with Bromley. She argues that Bromley, not she, was the person with authority to direct the payment of creditors. The focus under 6672, however, is not on who is the most responsible person, but whether the person in question had the effective power to pay the taxes. Even if she was not the "one with ultimate authority over expenditures of funds," P. Br. 19, a reasonable trier of fact could only find that she was intimately involved in Pinpoint's financial operations. She handled the day-to-day accounting functions, dealt with outside auditors, had access to financial records, and generated financial reports for the Board of Directors. Bromley's relatively greater control does not create a fact issue as to whether Frey had sufficient authority over the financial operations of the company to pay the delinquent taxes.

Moreover, Frey does not dispute that she possessed the power to provide the sole signature on checks under $10,000 and usually signed employees' paychecks. She attempts to draw a distinction, however, between the right to sign a check and the requirement that, before she did so, she obtain someone else's approval. Frey maintains that Bromley's authorization was necessary before she could sign a check. She also relies on the fact that Pinpoint policy prohibited her from engaging in "piecemealing," i.e., dividing what was in fact a single expenditure into two or more disbursements to circumvent limits on expense authority. She reasons that because two signatures were required on a check that exceeded $10,000, and in view of the "piecemealing" policy and Bromley's tight control of Pinpoint's finances, she would have been required to obtain a cosignor's signature to make a tax payment in full to the IRS .

The fact that Frey's check writing authority was circumscribed by company policy and Bromley's extensive powers over Pinpoint operations does not create a material fact issue because persons with even limited check writing authority have been held to be responsible persons. See Gustin [89-2 USTC 9423], 876 F.2d at 492. Frey has submitted no evidence that she attempted to use her check writing authority to pay the taxes. See id. (noting that responsible person who only had authority to provide sole signature on checks under $2,500 never showed that he had requested and was denied authority to pay the tax bill). Finally, she cannot escape responsible person status by claiming that Bromley explicitly directed her not to pay the taxes and to pay other creditors instead. Although the difficulty of her situation is indubitable, the Fifth Circuit has affirmed liability despite the fact that an individual would have been terminated had she paid the payroll taxes. See Howard [83-2 USTC 9528], 711 F.2d at 734-35.

The evidence adduced by the government establishes that Frey's status and duties, and her authority over financial matters and access to company funds, provided her with the effective power to pay Pinpoint's delinquent payroll taxes. In her response, she has failed to introduce evidence that would permit a reasonable trier of fact to find that she was not a responsible person under 6672. The government is therefore entitled to summary judgment on this issue.

V.

If an individual is a "responsible person" under 6672, then to avoid liability she must prove that she did not act willfully. See Morgan [91-2 USTC 50,387], 937 F.2d at 286 ("The responsible person bears the burden of proving h[er] actions were not willful.").

A.

"[T]he willfulness inquiry is the sifter in most 6672 cases." Barnett [93-1 USTC 50,269], 988 F.2d at 1457. "Willfulness under 6672 requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent." Id. ; Morgan [91-2 USTC 50,387], 937 F.2d at 285. "A responsible person acts willfully if [s]he knows the taxes are due but uses corporate funds to pay other creditors, or if [s]he recklessly disregards the risk that the taxes may not be remitted to the government." Logal [99-2 USTC 50,988], 195 F.3d at 232 (citations omitted). Moreover, "[a] responsible person who learns of the underpayment of taxes must use later-acquired unencumbered funds to pay the taxes; failure to do so constitutes willfulness." Id. "Willfulness is normally proved by evidence that the responsible person paid other creditors with knowledge that withholding taxes were due at the time to the United States ." Barnett [93-1 USTC 50,269], 988 F.2d at 1457. "A considered decision not to fulfill one's obligation to pay the taxes owed, evidenced by payments made to other creditors in the knowledge that the taxes are due, is all that is required to establish willfulness." Howard [83-2 USTC 9528], 711 F.2d at 736.

B.

The government has submitted evidence that Frey knew of the unpaid payroll taxes from the time they first went unpaid and knew that Pinpoint never paid them. Frey does not dispute that in 1995 she was intimately aware of Pinpoint's financial difficulties and its failure to pay the taxes. In particular, she does not deny that she knew that Pinpoint had not met the September 30, 1995 payroll, the October 1, 1995 rent, and overdue employment taxes. When Frey informed Bromley in October that funds were insufficient to make these payments, he directed her not to pay the taxes. Pinpoint eventually received more funding later that month. Bromley and Frey then discussed the most urgent debts, including the employment taxes, and the decision was made to pay the October 15 payroll in full, including payroll taxes. On October 31, November 15, and November 30, employees received half pay and the applicable taxes were remitted to the IRS . Pinpoint did not, however, pay the overdue employment taxes. Throughout this period, during which other debts were satisfied and Frey herself even received a paycheck, she remained aware that Pinpoint had not repaid overdue payroll taxes.

Frey argues that she did not act willfully because Bromley exercised overwhelming control over company funds. She suggests that Bromley's direction not to pay the overdue taxes precludes a finding that she acted willfully. These arguments would not permit a reasonable trier of fact to find in Frey's favor. The Fifth Circuit has explicitly held that a responsible person who knows of her employer's delinquent payroll taxes acts willfully regardless of her superior's instruction not to pay the taxes. See Howard [83-2 USTC 9528], 711 F.2d at 735-36. A reasonable trier of fact could only find that Frey knew of the tax deficiencies and Pinpoint's persistence in satisfying other debts before paying the delinquent taxes, and thus find that Frey acted willfully.

Once Frey "became aware of the tax liability, [she] had a duty to ensure that the taxes were paid before any payments were made to other creditors." Barnett [93-1 USTC 50,269], 988 F.2d at 1457 (citing Mazo v. United States [79-1 USTC 9284], 591 F.2d 1151, 1154 (5th Cir. 1979)). The government's undisputed evidence that she failed to do so establishes willfulness as a matter of law. Id. (citing Howard [83-2 USTC 9528], 711 F.2d at 735; Mazo [79-1 USTC 9284], 591 F.2d at 1157). Neither Bromley's relative degree of control over Pinpoint nor his direction not to pay the taxes raises a genuine issue of material fact about Frey's knowledge of the delinquent taxes. Accordingly, the government is entitled to summary judgment.

* * *

The government's motion for summary judgment is granted. It is entitled to dismissal of Frey's action against it and to recover from Frey the sum of $284,770.31, plus interest and all statutory additions provided by law. The government has settled with Bromley and indicates that it will credit Frey for any payments that Bromley has made. Accordingly, the judgment that the court files today is entered with the explicit proviso that Frey is entitled to a credit against the judgment for any payment that Bromley has made to the government.

SO ORDERED.

1 The court has not considered for any purpose the government's reply appendix filed February 8, 2001 because it is impermissible under either the pre-1998 or the present summary judgment rules. See Tovar v. United States , 2000 WL 425170, at *4 n.8 (N.D. Tex. Apr. 18) (Fitzwater, J.), aff'd, 244 F.3d 135 (5th Cir. Dec. 12, 2000) (table) (per curiam ).

2 See Barnett [93-1 USTC 50,269], 988 F.2d at 1453 n.6 (noting that cases decided under 6672 generally refer to such persons as "responsible persons").

3 Frey does not cite any authority for the proposition that the operation of a limitations bar deprives this court of jurisdiction, nor does she elaborate on this assertion elsewhere in her brief or explain how, if the court lacks jurisdiction, it has the power to grant her the relief she seeks in her suit against the government.

4 Frey relies on the Federal Circuit's reasoning in Godfrey v. United States [84-2 USTC 9974], 748 F.2d 1568, 1575 (Fed. Cir. 1984), to argue that she did not participate in day-to-day management of the company. In Godfrey the Federal Circuit compared the limited authority of the petitioner in that case to that of the taxpayer in White v. United States [67-1 USTC 9250], 372 F.2d 513, 514-15 (Ct.Cl. 1967) (per curiam ), in which responsible person status was found. Godfrey's reasoning, therefore, is not, as Frey contends, a definition of day-to-day management. Rather, it is a description of the duties of one particular person who was found to be a responsible person in a case that is not binding authority on this court. The court declines to adopt this description as a definition of day-to-day management when the Fifth Circuit has provided sufficient guidance on this issue.

 

 

[2000-1 USTC 50,536] In the Matter of Eddie Battles, Debtor. Eddie D. Battles, Plaintiff v. United States of America, and State of Alabama Department of Revenue, Defendants

U.S. Bankruptcy Court, No. Dist. Ala. , West. Div., 98-71176- CMS -11, 5/30/2000

[Code Sec. 6672 ]

Penalties, civil: Trust fund recovery penalty: Responsible person: Failure to pay over withholding taxes: Delegation of payment responsibility.--

The president and majority shareholder of a corporation that failed to pay its federal employment tax was a responsible person despite having delegated that duty to a business partner. The taxpayer retained control over the day-to-day operations of the business while being away from work during the tax periods at issue. The evidence showed that he retained authority to hire and fire employees and remained a signatory on the corporation's bank accounts.

[Code Sec. 6672 ]

Penalties, civil: Trust fund recovery penalty: Willfulness: Actual knowledge.--

The president and majority shareholder of a corporation who was found to be a responsible person willfully failed to pay his corporation's employment taxes. The taxpayer paid off a tax lien that his bank had placed on his corporation's line of credit despite having actual knowledge of the tax deficiencies. Although the bank's lien would have prevented his corporation from completing its contractual obligations, the obligations were incurred after the IRS informed him of the tax delinquencies.

MEMORANDUM OPINION AND ORDER

STILSON, Bankruptcy Judge:

This case came before this Court on Cross Motions for Summary Judgment on Debtor's Objection to Claim of the Internal Revenue Service (hereinafter, " IRS "). A hearing was held on April 12, 2000. Debtor's objection and the cross-motions relate to Claim No. 18 filed by the IRS in the total amount of $840,270.42. The parties have resolved some of the issues in Debtor's objection and the IRS filed an amended claim on April 12, 2000, in the total amount of $782,123.15. The issues remaining for summary judgment are: (1) whether the Debtor, Eddie Battles, is liable for the trust fund recovery penalty (hereinafter, "TFRP") assessments for unpaid federal withholding taxes of Battles Steel, Inc. (hereinafter, " BSI "), EBS Construction, Inc., and Battles Steel Fabrication and Supply, Inc.: (2) whether the statute of limitations found at Section 6501(a) of the Internal Revenue Code (26 U.S.C.) bars assessment of the TFRP with respect to the withholding taxes of BSI for the first, second and third quarters of 1994; and (3) whether the amount of the amended claim of the IRS is accurate.

The Court has ordered the parties to provide additional briefing on issues No. 2 and 3 as they are not ripe for summary judgment. The sole issue to which this summary judgment is directed is issue No. 1, whether Eddie Battles is liable for the TFRP assessments at issue.

UNDISPUTED FACTS

In 1986, the Debtor (hereinafter, "Battles") began his construction business as a sole proprietorship. Battles performed all administrative tasks, including payment of federal withholding taxes. During this period, the business grew and annual revenues rose from $50,000 to $1,000,000. Battles hired additional employees during this period of growth.

On December 20, 1991, Battles incorporated the sole proprietorship as BSI , becoming the President and sole shareholder. In 1992, Doug Thompson (hereinafter, "Thompson") incorporated Steel Construction & Supply, Inc. (hereinafter, " SCS "). In 1993, Thompson hired Terri Mims (hereinafter, "Mims") as bookkeeper for SCS . Mims was also the bookkeeper for BSI .

In early 1993, SCS and BSI entered a business arrangement whereby Battles guaranteed a joint line of credit for the two corporations at First Alabama Bank (now known as Regions Bank). The joint line of credit required both corporations to route all monies collected as accounts receivable to the Regions line of credit.

In December 1993, Battles experienced marital problems culminating in a divorce in August, 1994. During that period, Battles transferred BSI 's employees to SCS 's payroll so that he would be free to address personal issues.

In 1994, Thompson and Mims opened a bank account at Compass Bank. Battles was a signatory on that account. In violation of the agreement with Regions Bank, Thompson and Mims did not route the accounts receivable funds to Regions Bank but diverted those funds to the Compass Bank account.

In the summer of 1994, Battles became aware that the accounts receivable fund had not been applied to the Regions Bank line of credit. In August 1994, Battles severed his relations with SCS and moved BSI 's business operations to an office adjacent to a football stadium. SCS agreed to repay the line of credit. In the fall of 1994, BSI stopped using the joint credit line.

In October, 1995, the IRS informed Battles that BSI had not met its federal withholding tax obligations. In turn, Battles confronted Mims who assured him that all withholding tax obligations had been met. Battles accused Mims of embezzling the withheld tax monies.

In 1997, BSI through Battles, applied to Regions Bank for financing. He anticipated the loan would provide funds from which to pay the delinquent tax liability. In anticipation of obtaining financing, BSI contracted for new construction projects during the summer of 1997.

In January 1998, Regions Bank denied BSI 's request for financing, and reduced the existing line of credit from $600,000 to $300,000. Regions Bank demanded that BSI repay $200,000 on the line of credit. In response to this demand and an accompanying threat to foreclose on the liability, Battles paid and/or surrendered $100,000 to Regions Bank from funds earmarked to pay federal withholding taxes.

The IRS assessed a TFRP against Battles for the unpaid federal withholding taxes of BSI for the first, second, third and fourth quarters of 1994. Those assessments are contained in the amended claim of the IRS . Also included in the amended claim are TFRP assessments against Battles for the unpaid federal withholding tax liability of BSI for the third and fourth quarters of 1995, and the second, third and fourth quarters of 1996, 1 and the second and third quarters of 1997; TFRP assessments with respect to EBS Construction, Inc. for the fourth quarter of 1995, and all four quarters in 1996; and Battles Steel Fab. & Supply, Inc. for the third and fourth quarters of 1996, and the first and second quarters of 1997. Battles concedes, and this Court agrees that the undisputed evidence establishes as a matter of law, that he is liable for the TFRP assessments with respect to the withholding taxes of EBS Construction, Inc.; Battles Steel Fab. and Supply, Inc.; and BSI for the third and fourth quarters of 1995; 2 and the second, third and fourth quarters of 1996.

Battles disputes his liability for the TFRP with respect to the withholding tax liability of BSI for all four quarters of 1994. He contends that personal problems severely limited his business contact with BSI and that SCS , through Thompson and Mims, ran BSI during 1994. Battles also contends that he was unable to use funds earmarked to pay withholding taxes because Regions Bank demanded that BSI repay a portion of its obligation under the line of credit. The United States responds that Battles was not relieved of personal liability by delegating his responsibility to pay the withholding taxes to others. The United States further contends that Battles' acquiescence in BSI 's continued business operations and payment to other creditors, after Battles became aware of the unpaid withholding tax liability, establishes his liability as a matter of law.

STANDARD FOR SUMMARY JUDGMENT

"Summary judgment is properly regarded not as a disfavored procedural shortcut but, rather, as an integral part of the federal rules as a whole, which are designed to secure a just, speedy, and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Pursuant to Fed. R.Civ.P. 56(c), summary judgment is proper--

if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).

In considering a motion for summary judgment, the Court must view the underlying facts, and all reasonable inferences drawn therefrom, in the light most favorable to the other party. Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

DISCUSSION

Generally, under the Internal Revenue Code, employers are required to withhold federal income and social security taxes from the wages of their employees and to pay the withheld taxes to the government. If such taxes are not withheld and paid, Section 6672 imposes a "penalty" equal to the unpaid taxes on any person who was required to collect and pay over the withheld taxes and willfully failed to do so.

The liability imposed by Section 6672 is not penal in nature, even though it is denominated a penalty, since it provides the government with only the amount to which it was entitled to collect as the tax. The primary purpose of Section 6672 is to furnish a means of ensuring that the tax is paid. United States v. Huckabee Auto Co. [86-1 USTC 9268], 783 F.2d 1546, 1548 (11th Cir. 1986).

Generally, the courts have broadly interpreted who will constitute a responsible person within the meaning of Section 6672. Williams v. United States [91-1 USTC 50,285], 931 F.2d 805, 810, reh'g granted and opinion supplemented [91-2 USTC 50,418], 939 F.2d 915 (11th Cir. 1991). "Responsibility is a 'matter of status, duty and authority.' " George v. United States [87-2 USTC 9384], 819 F.2d 1008, 1011 (11th Cir. 1987) (citing Mazo v. United States [79-1 USTC 9284], 591 F.2d 1151, 1153 (5th Cir.), cert. denied sub nom. Lattimore v. United States , 444 U.S. 842 (1979)); see also Thibodeau v. United States [87-2 USTC 9620], 828 F.2d 1499, 1503 (11th Cir. 1987). Indicia of responsibility include holding of corporate office, control over financial affairs, stock ownership, authority to disburse corporate funds, day-to-day managerial responsibility, and the ability to hire and fire employees. Williams [91-1 USTC 50,285], 931 F.2d at 810 (citing George [87-2 USTC 9384], 819 F.2d at 1011).

Battles possessed many of the characteristics of responsibility. Battles does not dispute these facts but argues that he delegated full authority to pay the withholding taxes to SCS , Thompson and Mims, and that he did not actively participate or have knowledge of BSI 's business operations during this period of time.

Courts have uniformly and repeatedly rejected the delegation of authority theory argued by Battles. Responsibility is a matter of status, duty and authority. "Authority turns on the nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld taxes are paid over flows from the authority that enables one to do so." Purcell v. United States [93-2 USTC 50,460], 1 F.3d 932, 936 (9th Cir. 1993); see also, Hornsby v. Internal Revenue Service [79-1 USTC 9188], 588 F.2d 952, 953 (5th Cir. 1979); George v. United States [87-2 USTC 9384], 819 F.2d at 1012; Mazo v. United States [79-1 USTC 9284], 591 F.2d at 1154; McDonald v. United States [91-2 USTC 50,472], 939 F.2d 916, 919 fn. 6 (11th Cir. 1991).

The facts show that in 1993 and throughout 1994, Battles had complete authority to hire, to fire, was President, sole shareholder, and a signatory on all BSI 's bank accounts, including its payroll account. Battles was BSI and was responsible for the corporation. The fact that he delegated his responsibility to SCS , Thompson and/or Mims does not change Battles' status, duty and authority under the law. Although he delegated responsibility to others, Battles retained the authority to hire and to fire anytime he chose to exercise that authority. He remained signatory on all bank accounts and retained such authority over those accounts. He remained President and sole shareholder. He had the authority to do anything he chose as far as BSI was concerned. Battles evidenced that authority in the summer of 1994 when he participated in opening another bank account at Compass Bank. He again evidenced his authority in August, 1994, when he severed the relationship between BSI , SCS , Thompson and Mims, by relocating BSI 's office to the football stadium and/or his home. There is no evidence that his duties, as far as his legal duties, changed. That he chose to delegate his legal duty doesn't relieve him of responsibility for that legal duty. Because Battles retained his status, duty and authority, regardless of whether he exercised it or not, he remained responsible under the law.

The next issue is whether Battles' failure to remit the withholding taxes was "willful" under Section 6672. Battles contends that his failure to pay the withholding taxes was not willful because Regions Bank held control over BSI 's money.

In October 1995, Battles was advised by an IRS employee that BSI had an unpaid withholding tax liability. Battles was informed by Mims that the withholding tax obligations had been met and Mims produced checks allegedly evidencing payment of the taxes when, in fact, payment had not been made. Although the IRS had alerted Battles to the tax liability, BSI continued to do business, executing new construction contracts and continuing to pay wages and vendors. From October 1995 forward, BSI incurred additional federal withholding tax liabilities evidencing their continued payment of net wages.

The "willfulness" element of Section 6672 is satisfied if the responsible person has knowledge of payments to other creditors after he becomes aware of the failure to remit the withheld taxes. Smith v. United States [90-1 USTC 50,134], 894 F.2d 1549, 1553; Thibodeau [87-2 USTC 9620], 828 F.2d at 1505; Mazo v. United States [79-1 USTC 9284], 591 F.2d 1151, 1157 (5th Cir.), cert. denied sub nom. Lattimore v. United States , 444 U.S. 842 (1979). Battles was made aware of BSI 's delinquent tax obligations in October 1995. With that knowledge BSI , through Battles, continued to operate and incurred additional withholding tax liabilities while failing to address the delinquent taxes.

[i]f a corporation has only sufficient cash to pay net wages, and does so, there may be literally no funds to constitute the corpus of the trust, but the responsible persons are nevertheless liable for failure to collect withholding taxes; the United States may not be made an unwilling joint venturer in the corporate enterprise.

Mazo [79-1 USTC 9284], 591 F.2d at 1154 (citing Brown v. United States [79-1 USTC 9285], 591 F.2d 1136 (5th Cir. 1979); Sorenson v. United States [75-2 USTC 9694], 521 F.2d 325 (9th Cir. 1975).

Battles' argues that his failure to pay the withholding taxes was not willful because Regions Bank held control over BSI 's money. The Eleventh Circuit has ruled, and this Court agrees, that a bank's lien on a corporation's accounts receivable does not relieve a party of "willfulness" when the corporation continues doing business and paying other creditors. McDonald v. United States [91-2 USTC 50,472], 939 F.2d 916, 918 (11th Cir. 1991); Williams v. United States [91-1 USTC 50,285], 931 F.2d 805, 810 (11th Cir. 1991).

This Court grants the Motion for Summary Judgment filed by the United States on the issue of Battles' liability for the TFRP assessments for the unpaid federal withholding taxes of BSI for the first, second, third and fourth quarters of 1994, the third and fourth quarters of 1995, the second, third and fourth quarters of 1996, and the second and third quarters of 1997; the TFRP assessments with respect to EBS Construction, Inc. for the fourth quarter of 1995, and all four quarters in 1996; and Battles Steel Fab. & Supply, Inc. for the third and fourth quarters of 1996, and the first and second quarters of 1997. This Court denies the Motion for Summary Judgment filed by the Debtor, Eddie Battles, with respect to his liability for the corporations and periods identified above. This Court reserves ruling on the remaining issues presented by summary judgment.

SO ORDERED.

1 The TFRP assessment for the second quarter of 1996 has been fully satisfied.

2 Although Battles admits liability for the TFRP, he disputes the amount of the assessment claiming it is based on a fraudulent duplicate Form 941 filed for the fourth quarter of 1995. Battles presented evidence to establish that the Form 941 reporting a tax liability of $243,746.01 was fraudulent and the correct withholding tax liability is $9,420.93. The IRS agreed and abated the $243,746.01 assessment, and made another TFRP assessment against Battles based on the correct tax liability of $9,420, and amended its claim. This Court reserves ruling on whether the amended claim contains the correct assessment.

 

 

[99-2 USTC 50,787] Paul M. Larson and Kristina Larson, husband and wife, Plaintiffs v. United States of America, Defendant

U.S. District Court, East. Dist. Wash., 98-CY-3064-FVS, 8/3/99 , 76 FSupp 2 d 1092

[Code Sec. 6672 ]

Penalties, civil: Responsible person: Trust fund recovery penalty: Majority shareholder.--A corporation's majority shareholder was found to be a responsible person liable for the trust fund recovery penalty when he acted willfully in failing to pay withheld federal taxes. Although he did not control the day-to-day operations and was neither a corporate officer nor an employee, he personally guaranteed an operating loan, acted as a signatory on all of the corporation's checking accounts and could incur corporate debt. The taxpayer was characterized as a majority shareholder since he could vote shares held as community property, as well as other shares transferred to him in an allegedly deficient transfer.

[Code Sec. 6672 ]

Penalties, civil: Trust fund recovery penalty: Willful failure to remit: Knowledge of nonpayment.--A corporation's majority shareholder was found to have willfully failed to see that the withheld federal taxes were paid when he had notice and acted in reckless disregard of a known risk that the funds may not be remitted to the government. Since the taxpayer had personally borrowed the funds to pay an earlier tax deficiency, he was on notice that the corporation's president had mismanaged the company and could not be trusted to pay the taxes. His failure to take a more active role in securing payment constituted willful failure to pay over withheld taxes.

ORDER GRANTING GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

VAN SICKLE, District Judge:

BEFORE THE COURT are the parties' cross-motions for summary judgment. Oral arguments on the motions were heard telephonically on July 8, 1999. The plaintiffs were represented by James A. Perkins; the government by Thomas A. Dosik. This Order will memorialize the Court's ruling.

Procedural Background

This suit was brought by the plaintiffs, Paul and Kristina Larson, for a refund of $1,337.39 and the abatement of a Trust Fund Recovery Penalty assessed against Paul Larson in the amount of $143,547.47.

The defendant moved for summary judgment on April 13, 1999. The plaintiffs filed a cross-motion for summary judgment on June 10, 1999.

Factual Background

In June 1988, Paul Larson ("Larson"), Gary Johnson ("Johnson"), and William Van Valkenberg ("Van Valkenberg"), formed CEMCO Acquisition Corporation ("CEMCO"). The purpose of CEMCO was to acquire the Central Engine and Machine Company, then owned by Johnson's father. Larson provided most, if not all, of the initial funding for the corporation. Larson, Johnson, and Van Valkenberg each personally guaranteed an operating loan of $400,000 and a revolving credit loan with the Bank of California ("BankCal"). Under the original stock agreement, Johnson owned 48 percent of CEMCO's outstanding shares; Larson and Van Valkenberg each owned 26 percent. Larson primarily viewed himself as an outside investor.

From incorporation until January 1994, Johnson was CEMCO's president and on-site manager. CEMCO's directors were Van Valkenberg, Cuyler Lighthall ("Lighthall"), and Larson's wife, Kristina Larson. Lighthall also served as the corporation's secretary and treasurer.

Paul Larson was never a corporate officer or an employee of CEMCO, nor was he on the Board of Directors. Larson had no involvement in the day-to-day running of the business. Larson was, however, a signatory on all of the corporation's checking accounts and was listed on corporate accounts as a person who could incur corporate debt. Larson claims that though he had authority from BankCal to sign checks and to incur debt on behalf of CEMCO, he was never authorized by the corporation to sign checks or to incur debt. Larson never wrote a corporate check until Johnson's resignation as president in January 1994.

In May 1989, Larson purchased all of Van Valkenberg's CEMCO shares, leaving Larson with a 52 percent ownership interest in the corporation. Larson argues that he was unable to vote these shares because the transfer was not done pursuant to the Stock Subscription Agreement. The government disputes that Larson lacked authority to vote the Van Valkenberg shares. 1

In 1992, under Johnson's management, CEMCO failed to turn over its employee tax withholdings to the government. Upon learning of the tax delinquency from the IRS in November 1992, Larson borrowed money to loan to CEMCO, which in turned paid the owed taxes. Johnson assured Larson that all future taxes would be timely paid.

On January 14, 1993, BankCal sent a letter to Larson and Johnson informing them that it wanted to terminate CEMCO's loan. BankCal was unhappy with the CEMCO account because it was continually overdrawn, financial statements were often submitted late, inventory levels were too high, overdue accounts receivable remained an unacceptable percentage of the total amount owed, the line of credit remained routinely drawn and was not revolving as intended, and the net income of the corporation remained too low.

On March 22, 1993, BankCal sent a letter to Johnson and Larson, complaining that CEMCO's checking account was routinely overdrawn. BankCal sent yet another letter to Johnson and Larson on May 7, 1993, informing them that CEMCO was in violation of the credit agreement.

In August 1993, BankCal sent Larson a letter informing him that CEMCO had an outstanding state tax lien. BankCal asked Larson to discuss the situation with Johnson and institute an "action plan" to prevent future tax liens. In response, Larson wrote a one-sentence letter to Johnson, which read: "Please let me know the status of this matter and how you are handling it." Def.'s Ex. S. Larson claims he followed up by personally discussing the situation with Johnson and that he was led to believe that the state tax lien had been paid, leaving CEMCO clear of any tax obligations.

A second state tax lien was filed against CEMCO in September 1993.

Still, Larson believed that CEMCO had a positive financial outlook. Late in 1993, however, Larson learned that Johnson had falsified corporate records and had failed to file federal employee withholdings returns for three quarters in 1993.

CEMCO filed its employee withholding returns for the second, third, and fourth quarters of 1993 in January 1994. Larson borrowed $40,000 from Lighthall to lend to Johnson, who in turn used the funds to pay a portion of the tax liability. The tax return for the first quarter of 1994 was never filed.

In January 1994, Johnson resigned as president and manager of CEMCO. Kristina Larson was named CEMCO's new president. See Def.'s Ex. X.

Lighthall was hired to assess CEMCO's financial status. After completing an investigation, Lighthall determined that CEMCO was insolvent. CEMCO closed its doors in March 1994.

Larson was assessed with a $143,577.47 Trust Fund Recovery Penalty on September 15, 1997 , as a responsible person who willfully failed to collect, truthfully account for, and pay over CEMCO's employment taxes for the second, third, and fourth quarters of 1993, and the first quarter of 1994. On October 16, 1997 , Larson paid $1,337.39, representing the employment taxes for one employee for one quarter. Larson filed a claim for a refund on October 17, 1997 , which was denied. The plaintiffs filed this action on July 2, 1998 .

The plaintiffs and the government have both moved for summary judgment.

Legal Standard

A moving party is entitled to summary judgment where there are no genuine issues of material fact in dispute and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. To survive summary judgment, a non-moving party with the burden of proof must make a sufficient showing of a material dispute as to an essential element of the case. Celotex Corp. v. Catrett, 477 U.S. 316, 323, 106 S.Ct. 2548, 2552 (1986).

Inferences drawn from facts are to be viewed in the light most favorable to the non-moving party, but the non-moving party must do more than show that there is some "metaphysical doubt" as to the material facts. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 572, 586-87, 106 S.Ct. 1348, 1356 (1986). The non-moving party cannot rely on conclusory allegations alone to create an issue of material fact. Hansen v. United States , 7 F.3d 137, 138 (9th Cir. 1993).

Analysis

In general, employers are required to withhold federal taxes from employee wages. When they do so, they hold the money in trust for the United States and must then pay the money over to the United States on a quarterly basis. These taxes are known as trust fund taxes. Under 26 U.S.C. 6672, the IRS may assess a civil penalty against responsible corporate officials of an employer that fails to pay over collected employee taxes, equal to the amount of the delinquent trust fund taxes. 2 See Davis v. United States [92-1 USTC 50,292], 961 F.2d 867, 869 (9th Cir. 1992). To be liable for a trust fund penalty under section 6672, an individual must (1) have been a "responsible person" and (2) have acted "willfully" in failing to collect or pay over the withheld taxes. See id. at 869-70.

The individual against whom the assessment is made bears the burden of proving by a preponderance of the evidence that he was not a responsible person or that he did not act willfully. See United States v. Jones [94-2 USTC 50,448], 33 F.3d 1137, 1139 (9th Cir. 1994); Hochstein v. United States [90-1 USTC 50,205], 900 F.2d 543, 547 (2nd Cir. 1990).

A. Responsible Person.

1. Legal Definition.

A person is responsible for the payment of trust fund taxes for purposes of the trust fund penalty if he had the "final word on which bill should or should not be paid." Maggy v. United States [77-2 USTC 9686], 560 F.2d 1372, 1374 (9th Cir. 1977). "The final word does not mean 'final' but instead 'the authority required to exercise significant control over the corporation's financial affairs, regardless of whether [the individual] exercised such control in fact.' " Jones [94-2 USTC 50,448], 33 F.3d at 1139 (quoting Purcell v. United States [93-2 USTC 50,460], 1 F.3d 932, 937 (9th Cir. 1993) "[R]esponsibility is a matter of status, duty, and authority, not knowledge." Davis [92-1 USTC 50,292], 961 F.2d at 873.

Authority turns on the scope and nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid over flows from the authority that enables one to do so.

Purcell [93-2 USTC 50,460], 1 F.3d at 937. Courts are instructed to "look beyond official titles to the actual decision-making process." Jones [94-2 USTC 50,448], 33 F.3d at 1139. More than one person can be responsible for the payment of taxes, and liability can be imposed on any responsible person.

Factors to consider when determining whether an individual is a "responsible person" are whether the individual: (1) is an owner, an officer, or a director of the corporation; (2) manages the day-to-day operations of the corporation; (3) makes decisions as to disbursement of funds and payment of creditors; (4) has check-signing authority; (5) has authority to sign corporate tax returns; and (6) can hire and fire employees. See Alsheskie v. United States [94-2 USTC 50,387], 31 F.3d 837, 840 (9th Cir. 1994) (Trott, J., dissenting) (citing Denbo v. United States [93-1 USTC 50,177], 988 F.2d 1029, 1032 (10th Cir. 1993); Brounstein v. United States [93-2 USTC 50,512], 979 F.2d 952, 954-955 (3rd Cir. 1992); Raba v. United States [93-1 USTC 50,039], 977 F.2d 941, 943 (5th cir. 1992)). Courts have generally given broad interpretation to the term "responsible person." See Denbo [93-1 USTC 50,177], 988 F.2d at 1032. In fact, the Ninth Circuit has described the IRS 's enforcement power under section 6672 and applicable case law as "Draconian." Phillips v. IRS [96-1 USTC 50,057], 73 F.3d 939, 943 (9th Cir. 1996).

2. Larson was a Responsible Person.

The government concedes that several of the factors listed above do not apply in this case. Larson was not a director of CEMCO, nor was he a corporate officer. He did not participate in the day-to-day operations of the corporation.

However, other factors favor a finding of responsibility. Larson did have the authority, at least from CEMCO's primary lender, to sign checks and to incur corporate debt. Furthermore, he did have some ability to control the disbursement of funds and the payment of creditors, as he loaned funds to the corporation in late 1993 for the express purpose of paying CEMCO's delinquent taxes.

The primary issue in this case is the characterization of Larson's ownership interest in CEMCO. The government contends that Larson was CEMCO's majority shareholder during the tax periods in question and, as such, had absolute authority over the control of the corporation. The government argues that as majority shareholder, Larson had the authority to change the board of directors, which in turn could have changed the management structure of CEMCO. Along with this corporate control, Larson could then vest himself with authority to hire and fire employees, to write checks, to make decisions as to the disbursement of funds and the payment of creditors, and to sign corporate tax returns.

Larson, on the other hand, disputes that he was CEMCO's majority shareholder. He claims that he was never able to exercise majority shareholder control over CEMCO because: (1) his wife had a community property interest in all of his shares and (2) procedural deficiencies in the transfer of the Johnson and Van Valkenberg shares prevented him from voting those shares.

a. Community Property. Larson claims that because his wife had a community property interest in his CEMCO stock, he was never a majority shareholder. He argues that he would have had to obtain his wife's consent to exercise majority shareholder status.

Larson's argument lacks merit. Even assuming the shares were indeed held as community property, Larson had the authority to exercise sole control over the stock. In Washington , either spouse, acting alone, may manage and control community property unless the it meets one of six criteria not applicable in this case. See WASH . REV . CODE 26.16.030. Thus Larson, acting alone, could have voted the shares of CEMCO stock.

b. Equitable Interest Only. Larson also argues that he did not have majority shareholder status because the Van Valkenberg shares were not transferred in compliance with the Stock Subscription Agreement. See Pls.' Ex. 5. Larson argues that because Johnson never transferred Van Valkenberg's shares into Larson's name in CEMCO's books for voting purposes, Larson never had the authority to exercise majority shareholder control of the corporation.

The Court finds that any procedural deficiency to the transfer of the Van Valkenberg shares was insufficient to divest Larson of the majority shareholder status that those shares conferred. First, Larson openly held himself out to be CEMCO's primary shareholder. In the minutes of a corporate meeting held on January 24, 1994 , Larson is identified as CEMCO's "principal shareholder." Def.'s Ex. X. Furthermore, Larson represented to the IRS in August 1996 that he owned 60% of CEMCO's shares. Def.'s Ex. A.

Second, even if the terms of the transfer violated the Stock Subscription Agreement, Larson had an equitable interest in the Van Valkenberg shares, for which he had paid valid consideration. While Larson admits that legal remedies existed under which he could have tried to exercise his equitable interest in the shares, Larson claims that those remedies would have been too time consuming to have been effective. Yet, had Johnson demanded corporate formality, Larson gives no reason why Van Valkenberg would not have voted the Van Valkenberg shares at Larson's direction.

Finally, the Court finds it noteworthy that Larson is an experienced member of the Washington bar, evidencing a certain level of sophistication and knowledge. The Court finds it difficult to accept that one experienced in corporate matters would pay good money for shares he could not exercise control over. The Court finds it just as difficult to accept that Larson would allow an error in corporate formality to go uncorrected for four years if he truly believed that the error affected his legal interest in the shares. 3

The Court finds, as a matter of law, that Paul Larson was a responsible person during the last three quarters of 1993 and the first quarter of 1994. Larson was the majority shareholder and primary financier of a closely-held corporation. He was listed on CEMCO's BankCal account as one who could incur corporate debt and could issue corporate checks. Though not a director or an officer, he had the absolute power as majority shareholder to control all operations of the corporation. When the corporation ran into financial trouble, both BankCal and the IRS looked to Larson, as well as to Johnson, to remedy the problem. Twice when CEMCO failed to pay its federal taxes, Larson personally borrowed money to infuse into the corporation. Though he chose not to exercise it, Larson had the effective power to ensure that federal taxes were paid. The Court finds this power sufficient to establish that Larson had the duty, authority, and status which render him a responsible person under section 6672.

Supporting this ruling is the Tenth Circuit's decision in Denbo v. United States . See Denbo [93-1 USTC 50,177], 988 F.2d 1029 (10th Cir. 1993). In Denbo, the taxpayer was the 50% shareholder of the corporation. While the taxpayer was the corporation's secretary and treasurer, as well as a director, he had no involvement in the day-to-day operations of the business. He had check-signing authority on the corporate bank accounts, but never used it. The taxpayer arranged corporate financing and personally borrowed money to keep the business operational. Though the taxpayer met regularly with the corporation's other 50% owner, Allred, to discuss the financial solvency of the corporation, Allred wrote all corporate checks, all payroll checks, hired and fired employees, and reviewed and signed the payroll tax returns. See Denbo [93-1 USTC 50,177], 988 F.2d at 1031.

The Tenth Circuit found that the those facts were sufficient to permit the jury to find that the taxpayer was a responsible person.

The record provides evidence of Denbo's status as a responsible person within the meaning of section 6672. He made arrangements for several bank loans and also made personal loans to the corporation "in order to keep things going." [] He held regular meetings with Allred and the accountants. And, while he did not exercise his authority to sign checks, he had such authority from the beginning. These undisputed facts, along with Denbo's 50% stock ownership and status as an officer and director of the corporation, demonstrate that he possessed "significant authority in the . . . fiscal decisionmaking of the corporation." []

Denbo correctly points out that it was Allred, not he, who controlled the day-to-day operations of the corporation and made decisions concerning the payment of creditors and disbursement of funds. However, while it is clear that Allred exercised greater control over the corporation than Denbo, "[s]ection 6672 does not confine liability for the unpaid taxes only to the single officer with the greatest or the closest control or authority over corporate affairs." [] It suffices that Denbo had "significant, as opposed to absolute, control of the corporation's finances." [] He was responsible for infusing capital into the corporation, often pledging his own assets as collateral. His financial involvement in the corporation, along with his check-signing authority, gave him the effective power to see to it that the taxes were paid.

Id. at 1032-33 (internal citations omitted) (emphasis added). 4

Like Denbo, Larson infused money into the corporation. Like Denbo, Larson had the unexercised authority to write corporate checks. Like Denbo, Larson's lack of day-to-day involvement in the corporation cannot shield him from his responsibility to see that CEMCO's taxes were paid. The only meaningful distinction between the facts in Denbo and the case at hand is that Denbo was an officer and director of the corporation, while Larson was not. However, the record presented to the Court shows that, other than Johnson, CEMCO's directors and officers existed for corporate formality only. The Court is therefore unwilling to find that Larson's lack of a corporate title divests him of the responsibility to see that CEMCO's taxes were paid.

The Court is slightly troubled by the possible implication that a majority shareholder will always be a responsible person. However, in this case, Larson's involvement in CEMCO was greater than just that of a majority shareholder. He was the primary source of funding for the continuing operations of the corporation. He had the authority to write corporate checks, and at least once directed the payment of creditors. The Court therefore finds that Paul Larson was a responsible person as a matter of law. 5

B. Willfulness.

Even if an individual is found to be a "responsible person," he is not liable under section 6672 unless he also "willfully failed to collect, truthfully account for, and pay over withheld taxes. . . ." 26 U.S.C. 6672 (emphasis added).

Willfulness, as it is used in section 6672, is the "voluntary, conscious and intentional act to prefer other creditors over the United States ." Davis [92-1 USTC 50,292], 961 F.2d at 871 (citations omitted). An intent to defraud the government or other bad motive need not be proven. See id. " '(R)eckless disregard' of whether the taxes are being paid over, as distinguished from actual knowledge of whether they are being paid over, may suffice to establish willfulness." Phillips [96-1 USTC 50,057], 73 F.3d at 942.

The willfulness requirement is satisfied if the responsible person acts with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government, [], such as by failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted.

Mazo v. United States [79-1 USTC 9284], 591 F.2d 1151, 1154 (5th Cir. 1979) (internal citation omitted).

It is the government's position that Larson acted willfully as a matter of law by failing to ensure that CEMCO's taxes were paid after learning that Johnson had failed to pay them in the past. The plaintiffs argue that whether an individual acted with a "reckless disregard" is a question of fact that must be determined by a fact finder. The plaintiffs' position is not supported by case law.

One court accurately summarized as follows the distinctive fact patterns from which to infer a reckless disregard sufficient to demonstrate willfulness as a matter of law under section 6672:

"First, courts have held that reliance upon the statements of a person in control of the finances of a company may constitute reckless disregard when the circumstances show that the responsible person knew that the person making the statements was unreliable. [citation omitted] This requires a finding that the responsible person had knowledge that the other individual had in the past failed to perform adequately with regard to the financial affairs of the taxpayer entity. . . .

Second, courts have held that '[w]illful conduct also includes failure to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the Government.' [citation omitted] This requires a finding that the responsible person had 'notice' that the taxes had not been remitted in the past."

Thomsen v. United States [89-2 USTC 9575], 887 F.2d 12, 18 (1st Cir. 1998) (quoting I.R.S. v. Blais [85-2 USTC 9684], 612 F.Supp. 700, 710 (D. Mass. 1985)).

The plaintiffs also argue that willfulness based on a reckless disregard of an obvious risk that taxes will not be paid cannot be found as a matter of law when the unpaid taxes which put the responsible person on notice are subsequently paid over prior to incurring a new tax liability. Essentially, the plaintiffs argue that the slate was wiped clean once Larson borrowed the money to pay the delinquent taxes for 1992, or, at the very least, the payment creates a question of fact as to whether Larson was on notice. Neither case law nor logic supports this theory.

The Ninth Circuit rejected a similar argument in Phillips. See Phillips [96-1 USTC 50,057], 73 F.3d at 943. In upholding a jury's verdict of liability under section 6672, the Ninth Circuit noted that "[e]ven if the jury believed [the taxpayer's] account entirely, it could conclude that he should have asked [the delegatee] if she was paying the taxes, in light of her failure to pay them three years earlier." Id. (emphasis added).

The Court does not mean to suggest that, as a matter of law, a delegatee's one-time failure to pay taxes will, in perpetuity, brand that delegatee unreliable; after a period of unmarred years, the delegatee may be able to resurrect his or her former trustworthiness.

This is not such a case. The fact that Larson personally ensured that the delinquent 1992 taxes were paid did not transform Johnson into a reliable and trustworthy on-sight manager four months later. To hold otherwise would allow top corporate officials to engage in a cycle of delegating responsibility to persons known to be unreliable yet escaping liability by remedying the situation once the IRS takes notice of a delinquency.

Larson does not deny that he learned in November 1992 that Johnson had failed to submit tax withholdings; in fact, Larson personally borrowed the funds to pay the owed taxes. At that point, Larson was put on notice that Johnson had mismanaged the corporation and could not be trusted to pay CEMCO's taxes. Larson also admits receiving correspondence from BankCal several times in 1993 concerning the unsatisfactory status of CEMCO's account. In August 1993, Larson learned from BankCal that there was an outstanding state tax lien filed against CEMCO--a tax lien that Johnson had not disclosed.

Despite these warning signs, Larson did not take a more active role in CEMCO's operational affairs. He did not check corporate records. He did nothing to ensure that CEMCO's federal tax withholdings were actually being filed. He did not ask to see the withholdings returns. Instead, Larson relied on the assurances of a person he knew had failed to file federal withholdings in the past.

The facts before the Court are similar to those that were before the Ninth Circuit in United States v. Leuschner, a case in which the court found willfulness as a matter of law. See Leuschner [64-2 USTC 9742], 336 F.2d 246, 248 (9th Cir. 1964). Leuschner was a director and general manager of two corporations, Yosemite Creek Company and Kadota Creek Company. Leuschner hired Anders to keep the books, prepare and file tax returns, and pay the bills for Yosemite . Leuschner later learned that Anders had not been paying over Yosemite 's federal withholdings. After this disclosure, Yosemite was forced to close, but Kadota carried on what was essentially the same business. Leuschner hired Anders to perform for Kadota the same bookkeeping functions that he had performed for Yosemite . Once again, Anders failed to pay over the federal withholdings.

The trial court found that Leuschner was a responsible person but that he did not willfully fail to submit the taxes for Kadota. On appeal, the Ninth Circuit reversed the district court's finding on willfulness.

When Kadota took over the business, Leuschner knew that Anders, on whom he relied, had failed to see that such taxes were paid and had preferred other creditors. Yet he did absolutely nothing to see that this did not happen again. He was Anders' superior in the company. He had a duty to see that the taxes were paid. He knew that the withheld moneys were a trust fund for the United States , and were to be paid to it. He knew that Anders, to whom he looked to carry out that duty, had not done it. He could no longer, in good faith, look to Anders to do his duty for him. His complete failure to do anything to see that Anders, or he himself, performed that duty, is, we think, as a matter of law, a "voluntary, conscious and intentional" failure. The court's contrary finding is clearly erroneous.

Id. at 248 (emphasis added).

A jury question would exit if there was a genuinely disputed issue of fact as to whether Larson was put on notice of Johnson's mismanagement. Here, there is no such issue. The Court believes the undisputed facts in this case could not support the conclusion that Larson did not act willfully when he failed to correct Johnson's mismanagement of CEMCO; the Court thus holds as a matter of law that Larson's failure to see that federal taxes were paid was willful.

IT IS HEREBY ORDERED:

1. The government's motion for summary judgment (Ct. Rec. 13) is GRANTED.

2. The government is awarded a judgment of $142,240.08, plus interest.

3. The plaintiffs' motion to continue summary judgment hearing (Ct. Rec. 27) is GRANTED.

4. The government's motion to strike brief and declaration (Ct. Rec. 32) is DENIED.

5. The plaintiffs' motion for permission to file over length brief (Ct. Rec. 38) is GRANTED.

6. The plaintiffs' motion for summary judgment (Ct. Rec. 41) is DENIED.

IT IS SO ORDERED. The District Court Executive is hereby directed to enter this order, ENTER A JUDGMENT, furnish copies to counsel, and CLOSE THE FILE .

1 Also in 1989, Johnson transferred to Larson eight percent of CEMCO's outstanding shares. Again, Larson denies that he acquired a legal interest in Johnson's stock because the transfer was never officially recorded.

2 26 U.S.C. 6672 provides, in relevant part:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

3 There is no indication from the record presented that Van Valkenberg had any involvement with CEMCO after the transfer of those shares in 1989.

4 The Court's holding is also supported by the Sixth Circuit's decision in Kinnie v. United States . See Kinnie [93-1 USTC 50,311], 994 F.2d 279 (6th Cir. 1993). The taxpayer in Kinnie was the 50% shareholder of a business. Though vice-president, he was not involved in the day-to-day operations of the business and viewed himself as an outside investor. The Sixth Circuit held that he was a responsible person as a matter of law because of his ownership, title, and check-writing authority. See id. at 284.

5 The plaintiffs rely heavily on the more limited definition of "responsible person" found in In re Premo. See In re Premo [90-2 USTC 50,396], 116 BR 515 (Bankr. E.D. Mich. 1990). Whether or not the analysis in Premo is compelling, the Court is not inclined to look at precedent from the Bankruptcy Court of the Eastern District of Michigan for guidance on an issue that the Ninth Circuit has firmly and competently addressed. Furthermore, the Sixth Circuit's decision in Kinnie casts serious doubt on the continuing validity of Premo's definition of a "responsible person." See Kinnie [93-1 USTC 50,311], 994 F.2d at 284.

 

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