Technical Analysis & Citations What It does, Why
it works -
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Commentary
Please keep in mind these taxes are
those that are withheld from the payroll checks of the employees. This
penalty does not apply to the employer's portion of those taxes.
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Analysis
Law
SECTION 6672. FAILURE TO COLLECT AND PAY OVER TAX, OR
ATTEMPT TO EVADE OR DEFEAT TAX
(a) GENERAL RULE
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. No penalty shall be imposed under section 6653 or
part II of subchapter A of chapter 68 for any offense to which this section is
applicable.
SECTION 7501. LIABILITY FOR TAXES WITHHELD OR COLLECTED
(a) GENERAL RULE
Whenever any person is required to collect or withhold
any internal revenue tax from any other person and to pay over such tax to the
United States, the amount of tax so collected or withheld shall be held to be a
special fund in trust for the United States. The amount of such fund shall be
assessed, collected, and paid in the same manner and subject to the same
provisions and limitations (including penalties) as are applicable with respect
to the taxes from which such fund arose.
(b) PENALTIES
FOR PENALTIES APPLICABLE TO VIOLATIONS OF THIS SECTION,
SEE SECTIONS 6672 AND 7202.
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Analysis
Regs
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Start of Technical
Analysis
Cases
I have included 2 cases in this section. One is the 11th
Circuit and one for the 4th Circuit. For my friends in the 5th
Circuit and other Circuits - I have not omitted your areas for any special
reason, so pleased forgive me. The two cases have no special significance
for any person or any Circuit. I have chosen the cases at random to
present the IRS's position on payroll taxes, how dangerous it is to pay other
bills before the payroll taxes, and the risks of any person with authority ( or perceived
authority, although limited by management) or person writing or signing checks
or authorizing "what to pay" lists.
Harris v. United States, KTC 1999-323 (11th Cir. 1999)
UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
JUNE HARRIS, Plaintiff-Counter-Defendant-Appellee
Cross-Appellant, v.
UNITED STATES OF AMERICA, Defendant-Counter-Claimant
Third-Party Plaintiff-Appellant, Cross-Appellee, v.
OSCAR LUSSIER HARRIS, Third-Party Defendant.
Docket: 97-5180 Filed May 21, 1999
Appeals from the United States District Court for the
Southern District of Florida
Docket: 95-CV-6944
Start of Cases Section
PER CURIAM:
Before: TJOFLAT, BARKETT and MARCUS, Circuit Judges.
Under section 6672 of the Internal Revenue Code (26
U.S.C.), any officer or employ of a corporation who is responsible for the
collection or payment of federal employment taxes (a "responsible
person") who willfully fails to pay such taxes is liable for a penalty
equal to the unpaid amount. <<ENDNOTE 1>> Pursuant to this statute,
the Internal Revenue Service made penalty assessments for unpaid taxes in the
amount of $86,421.37 against Oscar Eugene Lussier and June Harris after Savoy
Electronics, Inc. ("Savoy"), failed to pay withholding and social
security taxes for the last three quarters of 1991. Lussier was Savoy's
president, and Harris was vice-president of sales. Harris paid a divisible
portion of the assessment ($450) and then brought this suit under 26 U.S.C.
section 7422(a) (1994) seeking a refund of that payment and cancellation of the
assessment. The Government counterclaimed against Harris for the unpaid portion
of the assessment. The Government also impleaded Lussier as a third-party
defendant and asserted a claim for the unpaid assessment against him.
Harris moved for summary judgment, contending that as a
matter of law she was not a "responsible person" within the meaning of
section 6672.
To support her contention, Harris argued that she lacked the characteristics
of a responsible person, which include the holding of corporate office, control
over financial affairs, the authority to disburse corporate funds, ownership of
stock in the company, and the authority to hire and fire employees. See George
v. United States, 819 F.2d 1008, 1011 (11th Cir. 1987).
First, Harris claimed that her job responsibilities did not include control
over Savoy's financial or tax matters; she stated that she did not even know
that Savoy was delinquent on its tax payments until her employment was
terminated in January 1992. Second, Harris claimed that she only had limited
authority to disburse funds; although she had the authority to sign routine
checks (such as "recurring payroll checks to employees"), she could
not sign other checks without the express approval of Lussier or his wife.
Third, Harris stated that she did not own stock in Savoy. Fourth, Harris
asserted that she had virtually no authority to hire and fire employees;
although she probably had the authority to hire and fire employees in the sales
department, she could only take such action subject to Lussier's approval.
<<ENDNOTE 2>>
In response to Harris' motion, the Government submitted a number of documents
to demonstrate that a genuine issue of material fact existed as to whether
Harris was a responsible person. These documents included the corporate
resolution and bank signature cards that gave Harris the authority (without
limitation) to sign checks on behalf of Savoy, two Savoy checks signed by Harris
in payment of unemployment taxes, a copy of an IRS form in which Harris admitted
that she loaned money to the corporation to pay its payroll, and a signed
declaration from Lussier that stated, inter alia, that Harris was authorized to
sign checks on behalf of Savoy and that she was a shareholder of Savoy's
publicly-owned parent company.
On August 27, 1996, the district court granted Harris' motion for summary
judgment, on the ground that the Government failed to offer any "real
evidence" that Harris was a responsible person. <<ENDNOTE 3>> A
docket entry accompanying the court's order stated that the pending motions
relating to the Government's claim against Lussier were moot, and a second
docket entry stated that the case was closed. The Government then filed a motion
to reopen the case because its claim against Lussier had not been adjudicated;
the district court denied the motion. In response, the Government moved the
court to certify its judgment in favor of Harris under Fed. R. Civ. P. 54(b).
The court granted the motion, but then entered final judgment in favor of Harris
under Fed. R. Civ. P. 58, and ordered the case closed.
The Government now appeals the court's grant of summary
judgment in favor of Harris and its denial of the Government's motion to reopen
its case against Lussier.
I. --- As an initial matter, we must determine whether
we have jurisdiction to entertain this appeal. Absent some exception, we have
jurisdiction over appeals only from final judgments of a district court. See 28
U.S.C. section 1291 (1994). When there are multiple parties in the case, the
court can enter final judgment against fewer than all of the parties only if it
certifies pursuant to Rule 54(b) that "there is no just reason for
delay." Fed. R. Civ. P. 54(b); accord Schoenfeld v. Babbitt, 168 F.3d 1257,
1265 (11th Cir. 1999). In the case before us,
the district court has not entered final judgment regarding the Government's
claim against Lussier; thus, that claim is still pending in the district court,
and we do not have jurisdiction to hear the Government's appeal regarding that
claim. We conclude that we do have
jurisdiction to hear the Government's appeal against Harris. Although the
district court entered final judgment in favor of Harris under Rule 58, we
construe the court's order as constituting a final judgment pursuant to Rule
54(b). We do so for two reasons. First, the Government moved the court to
certify its judgment in favor of Harris under Rule 54(b), and the district court
stated in its order that it was granting that motion. Second, because the court
had not rendered a final decision regarding the claim against Lussier, it could
not have entered final judgment in favor of Harris unless it did so under Rule
54(b); thus, it is logical to assume that the court intended to enter judgment
pursuant to that rule. We therefore proceed to review the merits of the
Government's appeal of the entry of summary judgment for Harris.
II. --- In determining whether an individual qualifies
as a responsible person under section 6672, the court must examine the
individual's status, duty, and authority within the corporation, not her
knowledge of the tax liability. See Mazo v. United States, 591 F.2d 1151, 1156
(5th Cir. 1979). <<ENDNOTE 4>>
Liability attaches to any person who, based on her status in the corporation,
has the "actual authority or ability" to pay the taxes. Barnett
v. I.R.S., 988 F.2d 1449, 1454 (5th Cir. 1993). As we have stated, indicia of a
responsible person include the holding of corporate office, control of financial
matters, the authority to disburse corporate funds, ownership of stock in the
company, and the authority to hire and fire employees. <<ENDNOTE 5>>
See George v. United States, 819 F.2d 1008, 1011 (11th Cir. 1987). We conclude
that there was a genuine issue of material fact as to whether Harris fit this
definition of a responsible person. <<ENDNOTE 6>>
The Government offered substantial evidence that
indicated Harris' responsibility under section 6672.
First, it submitted Lussier's declaration that Harris
had the authority to sign checks on behalf of Savoy, and the corporate
resolution and bank signature cards that granted her such authority. These
documents refuted Harris' contention that her authority to disburse corporate
funds was limited; although Harris claimed that she could sign non-routine
checks only with approval, the Government's evidence indicated that her
check-signing authority was unlimited. <<ENDNOTE 7>>
Second, the Government's evidence indicated that
Harris was a shareholder of Savoy's publicly-owned parent company, and
therefore that she indirectly owned stock in Savoy. A reasonable trier of fact
could conclude that Harris' indirect ownership interest, together with her
status as an officer of the corporation, afforded her sufficient authority to
ensure that the taxes were paid.
Third, the Government offered two Savoy checks signed
by Harris in payment of unemployment taxes. This evidence refutes her
contention that she had no control over Savoy's financial or tax affairs; it
demonstrates that Harris has paid taxes on behalf of Savoy in the past, and
therefore suggests that she had the ability to pay Savoy's delinquent
withholding and social security taxes.
Finally, the Government submitted the IRS form on
which Harris admitted that she loaned Savoy money to pay its payroll. It is
reasonable to infer that a person who helped the corporation meet its payroll
could exert substantial influence over the payment of payroll taxes. Thus, the
Government's evidence suggested that Harris had the ability to pay the
delinquent taxes.
In sum, we conclude that the Government's evidence was
sufficient to raise a genuine issue of material fact as to whether Harris was a
responsible person under section 6672; thus the district court inappropriately
granted summary judgment in favor of Harris.
III. --- For the foregoing reasons, we vacate the
district court's entry of summary judgment in favor of Harris and remand the
case for further proceedings. In addition to conducting further proceedings on
Harris' claim against the Government and the Government's counterclaim, we
assume that the district court will entertain the Government's claim against Lussier.
VACATED and REMANDED.
<<ENDNOTES>>
1/ 26 U.S.C. section 6672(a) (1994) states:
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.
2/ Harris also submitted the affidavits of three Savoy
employees, each of whom stated that Harris neither had the authority to sign
checks without Lussier's approval nor had control over Savoy's financial and tax
affairs.
3/ Because the district court concluded that Harris was
not a responsible person, it did not address the question of whether she
"willfully" failed to pay the delinquent taxes.
4/ In Bonner v. City of Prichard, 661 F.2d 1206, 1209
(11th Cir. 1981) (en banc), this court adopted as binding precedent all
decisions of the former Fifth Circuit handed down prior to October 1, 1981.
5/ Courts have "taken a broad view of who
constitutes a responsible person." Smith v. United States, 894 F.2d 1549,
1553 (11th Cir. 1990).
6/ We review a district court's grant of summary
judgment de novo. See Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1117 (11th
Cir. 1993). We affirm the grant of summary judgment only if "there is no
genuine issue as to any material fact and . . . the moving party is entitled to
judgment as a matter of law." Fed. R. Civ. P. 56(c). The non-moving party
is entitled to all reasonable factual inferences that may be drawn from the
evidence.
See Rayle Tech, Inc. v. DEKALB Swine Breeders, Inc.,
133 F.3d 1405, 1409 (11th Cir. 1998).
7/ Furthermore, even if Harris' check-signing authority
was limited to routine checks, there is an issue of material fact as to whether
Savoy's tax payments were routine. During the relevant time period, employers
whose payroll taxes exceeded $500 per month were required to pay the taxes on a
monthly basis, and employers whose taxes exceeded $3000 after any three to four
day period were required to pay the taxes within three banking days of the end
of that period. See Treas. Reg. section 31.6302(c)-1(a)(1)(i), (ii). In light of
the amount of the assessment ($86,421.37) and the fact that Savoy at times
employed nearly 100 employees, Savoy at least was required to pay its payroll
taxes every month, and potentially was required to pay several times per month.
A reasonable fact finder could conclude that these payments were
"routine," and therefore that Harris had the authority to pay these
taxes without first obtaining the approval of Lussier or his wife.
U.S. 4th Circuit Court of Appeals
PLETT v US
PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH
CIRCUIT
DONALD PLETT, Plaintiff-Appellant,
v. No. 98-1752
UNITED STATES OF AMERICA, Defendant-Appellee.
Appeal from the United States District Court for the Eastern District of
Virginia, at Alexandria. Claude M. Hilton, Chief District Judge; Leonie M.
Brinkema, District Judge. (CA-97-800-A)
Argued: April 6, 1999
Decided: July 23, 1999
Before NIEMEYER, WILLIAMS, and TRAXLER, Circuit Judges.
_________________________________________________________________
Affirmed in part, vacated in part, and remanded for further proceedings by
published opinion. Judge Niemeyer wrote the opinion, in which Judge Williams and
Judge Traxler joined.
_________________________________________________________________
Start of Cases Section
COUNSEL
ARGUED: Walter J. Rockler, ARNOLD & PORTER, Washington, D.C., for
Appellant. Charles Foster Marshall, III, Tax Division, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Julius M. Greisman,
Katherine M. Breaks, ARNOLD & PORTER, Washington, D.C., for Appellant.
Loretta C. Argrett, Assistant Attorney General, Ann B. Durney, Helen F. Fahey,
United States Attorney, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee.
_________________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
The district court entered a $50,000 judgment in favor of the United States
(Internal Revenue Service) against Donald Plett repre- senting the 100% penalty
imposed by 26 U.S.C. § 6672, plus interest, for Plett's failure to remit
payroll taxes of Wilder & Wilder, Inc. to the United States. The court found
that Plett was a person at Wilder & Wilder responsible for collecting,
accounting for, and remitting the taxes and that he willfully failed to pay
them. Based on the undis- puted facts in the record, we affirm the district
court's conclusion that Plett was liable under § 6672, but we vacate the
judgment and remand for further proceedings to determine the correct amount of
liability.
I
The Internal Revenue Code requires that employers withhold fed- eral income
taxes and social security taxes from their employees' wages. See 26 U.S.C.
§§ 3402(a), 3102(a). Because the employer holds these taxes as "special
fund[s] in trust for the United States," 26 U.S.C. § 7501(a)
(emphasis added), the withheld amounts are commonly referred to as "trust
fund taxes," Slodov v. United States , 436
U.S. 238, 243 (1978) (internal quotation marks omitted). While an employer
remains liable for its failure to remit trust fund taxes, the Internal Revenue
Code also imposes personal liability, in an amount equal to an employer's
deficient taxes, upon those officers or employ- ees (1) responsible for
collecting, accounting for, and remitting pay- roll taxes, and (2) who willfully
fail to do so. See 26 U.S.C. § 6672(a); 26 U.S.C. § 6671(b); see
also O'Connor v. United States , 956 F.2d 48, 50 (4th Cir. 1992) (outlining
elements of § 6672 liabil- ity). Section 6672 provides in pertinent 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.
26 U.S.C. § 6672(a).
The case law interpreting § 6672 generally refers to the person required to
collect, account for, and remit payroll taxes to the United States as the
"responsible person." See Slodov , 436
U.S. at 246 n.7. But the "responsible person" is not limited to
one person in a com- pany but rather may include many persons connected with the
same employer. See O'Connor , 956 F.2d at 50; accord Barnett v.
Internal Revenue Service , 988 F.2d 1449, 1455 (5th Cir.) ("There may
be -- indeed, there usually are -- multiple responsible persons in any com- pany"),
cert. denied , 510
U.S. 990 (1993); Bowlen v. United States , 956 F.2d 723, 728 (7th
Cir. 1992) (stating that§ 6672 casts a "broad net" over many persons
in imposing liability for delinquent payroll taxes).
To determine who within a company is a "responsible person" under
§ 6672, we undertake a pragmatic, substance-over-form inquiry into whether an
officer or employee so "participate[d] in decisions concerning payment of
creditors and disbursement of funds" that he effectively had the authority
-- and hence a duty-- to ensure pay- ment of the corporation's payroll taxes. O'Connor
, 956 F.2d at 51. Stated differently, the "crucial inquiry is whether
the person had the `effective power' to pay the taxes -- that is, whether he had
the actual authority or ability, in view of his status within the corporation,
to pay the taxes owed." Barnett , 988 F.2d at 1454 (citations
omitted). Sev- eral factors serve as indicia of the requisite authority,
including whether the employee (1) served as an officer of the company or as a
member of its board of directors; (2) controlled the company's pay- roll; (3)
determined which creditors to pay and when to pay them; (4) participated in the
day-to-day management of the corporation; (5) possessed the power to write
checks; and (6) had the ability to hire and fire employees. See O'Connor ,
956 F.2d at 51; United States v. Landau , 155 F.3d 93, 100-01 (2d Cir.
1998); Barnett , 988 F.2d at 1455.
And to determine whether the "responsible person" " willfully
" failed to collect, account for, or remit payroll taxes to the United
States, we inquire whether the "responsible person" had
"knowledge of nonpayment or reckless disregard of whether the payments were
being made." Turpin v. United States , 970 F.2d 1344, 1347 (4th Cir.
1992) (internal quotation marks and citations omitted). A responsible person's
intentional preference of other creditors over the United States establishes the
element of willfulness under§ 6672(a). See United States v. Pomponio ,
635 F.2d 293, 298 n.5 (4th Cir. 1980). And an intentional preference, in turn,
is established by showing that the responsible person "[knew] of or
recklessly disregard[ed] the exis- tence of an unpaid deficiency." Turpin
, 970 F.2d at 1347.
II
The undisputed facts in the record of this case reveal that Wilder &
Wilder, Inc., a hairstyling salon in the Georgetown area of Wash- ington, D.C.,
failed to remit to the United States payroll taxes for the second, third, and
fourth quarters of 1989 and the second quarter of 1990. When Donald Plett filed
this refund action to recover from the IRS $1,940 that he had personally paid in
partial satisfaction of the IRS' assessment but for which he alleged he was not
responsible, the IRS filed a counterclaim to recover from Plett, as a
responsible per- son, the balance of its assessment that it made against Wilder
& Wil- der.
Wilder & Wilder, named for its two principal hairstylists -- Don- ald
Plett, whose nickname was "Wilder," and Alan Crutcher, who adopted the
name "Wilder" because of his relationship with Plett -- was formed in
1986 after Donald Santarelli, a Washington attorney who was a customer of
Crutcher, had agreed to help Crutcher open a salon. In February 1986, Santarelli
and his investment advisor, Peter Clarke, purchased the assets of an existing
beauty salon and trans- ferred them to Wilder & Wilder. Clarke was then
designated presi- dent/treasurer; Santarelli, vice president; and Plett,
secretary. As the key employee, Plett was also given a written employment
agreement. Wilder & Wilder opened for business in March 1986. While Santa-
relli paid the initial bills, hired an outside accountant to maintain the
general ledger and other books of the corporation, and worked with Plett to
obtain a $15,000 bank loan for operating capital, his responsi- bilities as a
practicing attorney prevented him from assuming an active role in Wilder &
Wilder's daily operations. Within the first year, he delegated all decisions as
to "what made sense [as] to how to run the shop" to Plett and Crutcher,
making clear that his only con- cern was that the business not get into
"trouble with either the bank or the government."
Following Santarelli's initial involvement, Plett and Crutcher oper- ated the
business, paying the salon's creditors and employees in the ordinary course of
business. In addition to these responsibilities, Plett and Crutcher supervised
other hairstylists, purchased supplies, hired and fired employees, scheduled
appointments, maintained the cash register, and otherwise operated the salon's
business on a daily basis. Further, when the corporation needed capital in 1988,
Plett himself signed for a $10,000 bank loan. The salon's outside accountant
explained the relative roles of Santarelli on the one hand and Plett and
Crutcher on the other:
[Santarelli] had never run the business. . . . I think he met with [Plett and
Crutcher] once a year and maybe gave gen- eral business advice. . . . I don't
think that they needed Mr. Santarelli's approval for anything, but they were
always tight on money.
To assist them in carrying out their financial responsibilities, Plett and
Crutcher hired Susan Zuber as a part time bookkeeper. Zuber pre- pared the
salon's accounts payable and payroll records and wrote out the checks which she
then presented to Plett or Crutcher for signing and mailing to the salon's
creditors. Among the checks that Zuber prepared for signature were those for the
salon's federal payroll and income taxes. Zuber acknowledged that she never
prioritized the checks with the result that when insufficient funds were
available, Wilder & Wilder's employees often received checks while the
salon's employment taxes went unpaid.
Even though Zuber believed that Santarelli maintained ultimate responsibility
for Wilder & Wilder's financial condition, she inter- acted with Plett and
Crutcher on most of the salon's routine financial affairs. She made sure, for
instance, to notify Plett and Crutcher of impending or overdue debts, often
urging them to pay those debts as soon as possible. On occasion, she pressed
Plett and Crutcher to pay the salon's federal payroll taxes "as soon as $
is adequate." Zuber also compiled the payroll and sales tax returns,
presenting them to Plett and Crutcher for review and execution. In connection
with tax returns, she stated in one memorandum, "When I come in Tuesday,
I'll write the checks, You can sign, I'll copy and mail."
In August 1989, with Santarelli's approval, Plett and Crutcher hired a new
outside accountant, Lawrence Giles, after the salon's original accountant had
ended the relationship when Wilder & Wilder failed to pay his fees. Giles
immediately discovered that the salon's financial records were "a
mess." In particular, he reported to Plett that the salon was delinquent in
failing to pay several months' payroll taxes. Despite this knowledge, Plett
permitted the overdue taxes to go unpaid, although he continued to sign checks
to pay the salon's other creditors and employees.
In April 1990, Plett signed Wilder & Wilder's federal payroll tax returns
for the second, third, and fourth quarters of 1989, but the cor- poration did
not then have the money to pay the taxes due. When Plett notified Santarelli of
the overdue taxes, Santarelli expressed "out- rage." He stated that
the news confirmed his long-held suspicion that Plett and Crutcher were
misappropriating the salon's funds. He said, "I became disillusioned with
their honesty in running the business. . . . They had a good clientele, and they
were not making any money. Something was wrong."
In November 1990, Plett, along with Wilder & Wilder's outside
accountants, met with an agent of the IRS to discuss the unpaid pay- roll taxes.
Shortly thereafter, Santarelli terminated Plett's employ- ment, stating in a
letter to him, "It has come to[my] attention . . . that you have and are
continuing to engage in behavior that is not in the best interest of [Wilder
& Wilder] and which may, in fact, constitute criminal behavior." On
December 18, 1990, the IRS seized the Wilder & Wilder premises and property.
Almost three years after Wilder & Wilder ceased its operations, the IRS
assessed a personal penalty against Plett in the amount of $50,995 for Wilder
& Wilder's unpaid employment taxes covering the last three quarters of both
1989 and 1990. When Plett commenced this action against the United States in
1997 to recover a portion of the assessment previously paid by him, the United
States filed a coun- terclaim for the entire amount of the assessment. The
assessment was subsequently reduced to $38,582 because the IRS discovered that
Wilder & Wilder had satisfied liabilities for the last two quarters of 1990.
On cross-motions for summary judgment, the district court held that Plett was
a responsible person who willfully failed to remit Wil- der & Wilder's
payroll taxes and therefore was personally liable for a penalty in the amount of
the unpaid taxes. The court emphasized that Plett, "who is sufficiently
educated," signed "essentially all of the checks" and the payroll
tax returns, and paid other creditors after learning in August 1989 that
Wilder & Wilder was delinquent in pay- ing its payroll taxes. Following a
bench trial to determine the amount of Plett's liability, the court entered a
judgment against Plett for $50,000, representing a $38,008 trust fund penalty
plus interest. This appeal followed.
II
Start of Cases Section
Although Plett acknowledges that he signed checks, loan docu- ments, and tax
returns for Wilder & Wilder, he contends that he should not be liable for
Wilder & Wilder's unpaid payroll taxes because he possessed no independent
control over the salon's finan- cial activities. Plett argues that he was
hired"strictly as a hairdresser" who was a "non-owner and
subordinate employee of Wilder & Wil- der." He claims that he could
exercise no independent judgment to make decisions on financial or tax matters.
In signing checks, for instance, he claims that he was only doing "as he
was told." In conclu- sion, he asserts that he "had virtually nothing
to do with, and no power over, financial affairs."
Plett's contentions that he was "strictly a hairdresser" and had
vir- tually no power to make decisions about financial matters are simply not
supported by the undisputed facts in the record. To make such contentions in his
brief on appeal, Plett's counsel obviously had to overlook these undisputed
facts. The record shows that shortly after Santarelli formed the business and
hired its first outside accountant, he turned the daily operations of the
business over to Plett and Crutcher. Plett was the corporate sec- retary, and,
as an officer of the corporation, he signed corporate docu- ments, including the
corporation's tax returns and a corporate resolution authorizing extraordinary
borrowing. More importantly, he supervised the work of Zuber, the bookkeeper,
who prepared virtually all of the corporation's financial paperwork for Plett's
signature. Plett signed most of the corporation's checks and other day-to-day
paper- work. Santarelli's interest was limited to that of an organizer, officer,
and investor, whose "only concern was that we didn't get into . . . trouble
with either the bank or the government."
Also consistent with this arrangement, Plett hired and supervised other
hairstylists, scheduled appointments, collected money from patrons, paid
cash-on-delivery vendors, and paid the salon's other creditors and employees.
Nothing in the record suggests that Plett lacked authority to write these checks
and to satisfy Wilder & Wil- der's ongoing obligations, including its tax
obligations. Indeed, just the opposite is true. The record reflects that when
cash was short, the bookkeeper made that fact known to Plett, and not to
Santarelli. While Plett did not have exclusive financial authority, it is
undisputed that his authority was sufficient to determine which bills would be
paid and which would not. And while vendors and employees were paid, the IRS was
not, even though the need to pay the IRS had been brought to Plett's attention.
That Plett was given this level of financial control was manifested by
Santarelli's reaction when he learned in April 1990 that the corpo- ration
lacked sufficient cash to remit its payroll taxes to the IRS. In addition to
expressing outrage, Santarelli testified that he did not understand why
"they [Plett and Crutcher] were not making money" because they had
good clientele. He stated that"[s]omething was wrong," but he did not
know what. He testified that he told Plett and Crutcher, "How can you guys
do this? This is real trouble. It's better you don't pay the rent . . . [than]
you don't pay that which gives you criminal liability." He also told them,
"the salon should be making this money. Where is it going? What's going
on?" These are not the expressions of an officer who had day-to-day
financial control or was familiar with the salon's cash flow. Such financial
control was indis- putably in the hands of Plett, Crutcher, and the bookkeeper
they supervised, Zuber.
To determine whether Plett has liability under 26 U.S.C. § 6672(a), we must
consider whether he was responsible for collecting, account- ing for, and
remitting Wilder & Wilder's payroll taxes, and if so, whether he
"willfully" failed to fulfill those obligations. Applying the factors
described in O'Connor and Landau , it is apparent that Plett was a
"responsible person" for purposes of creating § 6672 liability: (1)
Plett was an officer of Wilder & Wilder; (2) he controlled its pay- roll;
(3) by paying non-governmental creditors and not paying the United States, he
determined which creditors to pay; (4) he was responsible for the day-to-day
operations of Wilder & Wilder, includ- ing its routine financial affairs;
(5) he had the power to sign checks and in fact signed most of them; and (6) he
had the power, and exer- cised it, to hire and fire employees. See O'Connor ,
956 F.2d at 51; Landau , 155 F.3d at 101.
To have § 6672 liability, Plett must also have willfully failed to pay the
employee withholding taxes. The facts that establish that Plett was financially
responsible also establish this "willfulness" requirement. Zuber, the
salon's bookkeeper whom Plett supervised, notified Plett as early as 1987 of
unpaid federal payroll tax obligations that needed to be satisfied "as soon
as $ is adequate." In addition, in August 1989, Wilder & Wilder's
outside accountant informed Plett that the salon's books were "a mess"
and, in particular, that several months' federal payroll taxes had not been
paid. Plett failed to take any action in response to this information. Despite
his responsibility to pay ongoing bills, Plett did nothing to pay, or to insure
payment of, these taxes. Instead, he permitted the taxes to go unpaid while he
continued to write checks to himself and the salon's employees and creditors.
Over $200,000 worth of checks, the majority of which Plett signed, cleared
Wilder & Wilder's corporate accounts from April to December 1990. These
facts readily establish that Plett, if he did not knowingly fail to pay the IRS,
certainly recklessly disregarded these tax obligations. See Turpin , 970
F.2d at 1347.
Plett suggests that the summary judgment mechanism was an improper means to
resolve the complex issue of his liability under § 6672 because it was
"unduly abbreviated." But in the absence of disputed material facts,
summary judgment represents a favored mechanism to secure the "just,
speedy, and inexpensive determina- tion" of such issues. Fed. R. Civ. P. 1.
Summary judgment "does not become disfavored simply because a case is
complex" or even if there are some disputed facts. Thompson
Everett, Inc. v. National Cable Adver., L.P. , 57 F.3d 1317, 1322-23 (4th
Cir. 1995). The essential question presented on a motion for summary judgment
remains whether, in the absence of a genuine dispute over material facts,
the moving party is entitled to judgment as a matter of law. See Fed. R.
Civ. P. 56(c). And the question of whether a given set of facts entitles a party
to judgment is a question of law.
In this case, the facts material to whether Plett was a responsible person
who willfully failed to remit payroll taxes are undisputed. They show that Plett
managed essentially all aspects of Wilder & Wilder's operation; he served as
the salon's corporate secretary and signed loan documents and tax returns on
behalf of the corporation in that capacity; he signed and issued a majority of
the checks to Wilder & Wilder's vendors, creditors, and employees; and he
oversaw the work of the salon's bookkeeper. In addition, Plett continued to
issue checks to the salon's employees and nongovernmental creditors after
receiving notice that the salon was deficient in paying its federal unemployment
taxes. These undisputed facts are sufficient to con- clude as a matter of law
that Plett is liable under§ 6672 as a "respon- sible person."
IV
Plett also contends that the district court clearly erred in finding the
amount of his liability because it failed to give him certain offsetting
credits.
Following a bench trial, the district court found as fact that Wilder &
Wilder's employment tax liability as of 1990 was $52,000, of which $38,008
represented unpaid trust fund taxes. Since Plett's lia- bility under § 6672
applies only to the trust fund liability, which the court computed to be
$38,008, the court entered judgment against Plett for $38,008 plus interest, for
a total of $50,000.
Plett contends that the district court erroneously failed to credit him with
(1) the value of assets seized by the IRS in December 1990; (2) a $4,717 payment
that Wilder & Wilder allegedly made with respect to the second quarter of
1989; and (3) a credit for the proceeds of Crutcher's bank account previously
seized by the IRS. In addition, Plett contends that the district court erred in
failing to apply payments made with respect to unemployment taxes and
other miscellaneous payments and refunds.
With respect to the value of assets seized by the IRS in December 1990, the
district court found the value of Wilder & Wilder's assets to be $13,500
based on a personal property tax return that it filed with the District of
Columbia. Because the IRS permissibly applied this credit first to the non-trust
fund liability of Wilder & Wilder, see Buffalow v. United States ,
109 F.3d 570, 574-75 (9th Cir. 1997), no amount remained to reduce the trust
fund liability in the amount of $38,008 for which Plett was responsible.
With respect to the other credits, the district court simply found that Plett
failed in his burden of proof. For instance, with respect to the $4,717, Plett
acknowledged that he had no recollection of actually having made that payment,
and in the absence of proof that the pay- ment was made, the district court
rejected the credit. The district court's factual findings were supported by
evidence, or the lack of evidence, and we find no error in the manner that the
court applied the law to them, with but one exception.
Shortly before trial, the IRS agreed to dismiss its§ 6672 liability claim
against Crutcher with the stipulation that"all payments made by Alan
Crutcher toward his 100% penalty liability will be applied to Donald Plett's
100% liability." While the parties believe that that amount could exceed
$5,000 and they agree that Plett is entitled to a credit for the amount, they do
not know what the exact amount is. Because Plett should receive a credit for the
Crutcher credits once they have been computed, we vacate the judgment and remand
to per- mit the district court to determine the amounts of these credits and to
reduce the judgment accordingly. The district court's rulings in all other
respects are affirmed.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED FOR FURTHER PROCEEDINGS
Start of Cases Section
Howard v. United States, KTC
1983-37 (5th Cir. 1983)
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
WAYMON LEON HOWARD, Plaintiff-Appellant v. UNITED
STATES, Defendant-Appellee.
Docket: 82-1461 Filed August 12, 1983
Appeal from the United States District Court for the
Northern District of Texas
OPINION
INTRODUCTION:
Before: CLARK, Chief Judge, THORNBERRY and RANDALL,
Circuit Judges.
THORNBERRY, Circuit Judge:
Appellant Waymon Leon Howard [Howard] appeals the
district court's grant of summary judgment to the United States finding him
personally liable for unpaid federal withholding taxes owed the Internal Revenue
Service by his employer. Concluding that Howard was a "responsible
person" who, without reasonable cause, willfully failed to collect any pay
over these taxes, we affirm.
FACTS:
Eden Marketing Corporation [Eden] was a Texas
corporation engaged in the sale of skin care products to various control centers
throughout the United States. It was incorporated on May 12, 1978, did business
for a short while, and is currently without assets.
Appellant Howard was a director, minority shareholder,
Treasurer, and Executive Vice-President of Eden from April 13, 1978 to September
12, 1978, when he resigned. Howard was responsible for Eden's day-to-day
operations. Although Mr. Paul Jennings, CEO and majority shareholder, had final
responsibility for hiring and firing, Howard hired and fired a number of
employees with Jennings' approval during this period.
At the start of his tenure at Eden, Howard himself
determined on several occasions which of Eden's bills were to be paid. In May of
1978 Howard caused $8,000 in back taxes to be paid the IRS. The IRS credited
this money to the liability of one of Jennings' predecessor partnerships, with
which Howard had no connection. Jennings became extremely upset when he learned
of Howard's action, and ordered Howard not to pay the IRS any more money.
Jennings subsequently relieved Howard of his duties with Eden for several weeks.
Upon being reinstated, Howard was instructed by
Jennings not to pay any
more bills without Jennings' approval. Although
Jennings generally told
Howard which creditors he should pay and when, Howard
did issue small
checks without Jennings' approval on a number of
occasions.
From May 12, 1978 to July 6, 1978, Howard was the only
authorized signatory on Eden's main checking account, and wrote most of the
company's checks. From July 6, 1978 until September 7, 1978, Howard and
Comptroller Richard Jameson, an employee working under Howard's supervision,
were the only authorized signatories on this account. The bank required only one
signature on checks drawn on this account.
Eden incurred employment tax liability for the second,
third and fourth quarters of 1978 in the amount of $30,388.53. These taxes
included federal income taxes withheld from employees, the employee portion of
FICA (Social Security) taxes withheld from Eden's employees, and the employer
portion of FICA taxes. Howard was aware that taxes were due and owing to the
IRS, at least in some amount, as early as June 1978. At some point during the
summer of 1978, Howard contacted a senior IRS official who was also a deacon at
his church and asked what he should do about Eden's unpaid taxes. Howard
testified at his deposition that the official suggested that he write a letter
to the IRS explaining the situation. Howard did not write the letter right away.
He continued fulfilling his duties at Eden throughout the summer, writing at
least 36 checks to creditors other than the IRS during that period. Howard
officially resigned from Eden on September 12, 1978. In his letter of
resignation, Howard advised Jennings of his concern over Eden's unpaid taxes.
<<ENDNOTE 1>> By letter dated September 20, 1978, Howard advised the
local District Director of the IRS that Eden owed somewhat in excess of $30,000
in back taxes. <<ENDNOTE 2>>
Howard did not mention in this letter either his
conversation with the senior IRS official, or Jennings' instructions that he pay
no further taxes to the IRS without Jennings' approval. At the time Howard
wrote this letter, Eden still had a substantial amount of money on deposit at
its bank, as well as substantial assets in the form of inventories and accounts
receivable. The IRS did not move to collect the taxes Eden owed until over two
years later. By that point, Eden was without assets.
The IRS then issued assessments in the amount of the
unpaid taxes under section 6672(a) of the Internal Revenue Code <<ENDNOTE
3>> against both Howard and Jennings. Howard was assessed $22,671.76,
representing all of Eden's unpaid federal and FICA employee's withholding taxes
for the second and third quarters of 1978. Howard paid a small portion of this
assessment and instituted suit for a refund. The IRS counterclaimed for the
unpaid balance of the assessment, and attempted to bring Jennings into the suit
as an additional defendant on the counterclaim. Unfortunately, the IRS was
unable to effect personal service on Jennings. The district court granted the
IRS' motion for summary judgment based on the undisputed facts set forth above.
The court determined that: (1) Howard was a person responsible for the
collection and payment of taxes under sections 6671(b) and 6672(a); (2) Howard
willfully failed to pay over the taxes owed; and (3) Howard lacked a saving
"reasonable cause" for his willful failure to pay these taxes. Howard
appeals that decision to this Court.
ANALYSIS:
Under Rule 56 of the Federal Rules of Civil Procedure,
summary judgment is appropriate where "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 a judgment as a matter of law." Fed. R. Civ.
P. 56(c). In considering whether to grant a motion for summary judgment, the
court must view the evidence in the light most favorable to the party opposing
the motion. Trevino v. Celanese Corp., 701 F.2d 397, 407 (5th Cir. 1983).
Sections 3102 and 3402 of the Internal Revenue Code
require employers to withhold federal income tax and social security taxes from
their employees' wages. The money withheld constitutes a special fund held in
trust for the United States. I.R.C. section 7501 (1977). Each employee is
credited by the Government with the taxes withheld from his wages, even if they
are never remitted to the Government. Mazo v. United States, 591 F.2d 1151, 1153
(5th Cir.), cert. denied, 444 U.S. 842, 100 S. Ct. 82, 62 L. Ed. 2d 54 (1979).
When a corporate employer neglects to pay the required taxes, section 6672(a)
authorizes the Government to assess the full amount of taxes due against the
corporation's responsible officers in the form of a penalty. Slodov v. United
States, 436 U.S. 238, 98 S. Ct. 1778, 1783, 56 L. Ed. 2d (1978); Moore v. United
States, 465 F.2d 514, 517 (5th Cir. 1972), cert. denied, 409 U.S. 1108, 93 S.
Ct. 907, 34 L. Ed. 2d 688 (1973). This penalty is distinct from and in addition
to the employer's liability for these taxes. Newsome v. United States, 431 F.2d
742, 745 (5th Cir. 1970).
Before it may assess the penalty under section 6672(a)
for employees' unpaid federal income and FICA taxes, the IRS must show that the
person assessed was a person responsible for the payment of those taxes who,
without reasonable cause, willfully failed to collect, account for or pay over
the taxes to the IRS. See note 3, supra.
Responsible Person The
district court found that Howard was responsible for the collection and payment
of taxes under I.R.C. sections 6671(b) and 6672(a). Howard argues that he was
not a "responsible person" under these two statutes because: (1) he
was not the majority shareholder in Eden; (2) CEO Paul Jennings, who had
ultimate control over all payments by Eden to private creditors and to the IRS,
ordered him not to pay any taxes; and (3) the IRS did not seek to impose the
section 6672(a) penalty on Rick Jameson, one of Howard's subordinates who, like
Howard, was authorized to write checks on Eden's main checking account.
Howard's arguments are without merit. The fact that he was
a minority shareholder is itself legally insufficient to establish that he was
not a "responsible person," and is relevant only to the extent that it
supports his second argument, that he was merely following Paul Jennings' orders
in refusing to pay the taxes owed.
Responsibility in this context is a matter of status,
duty and authority. Mazo, 591 F.2d at 1156. Howard was a director, minority
shareholder, Treasurer and Executive Vice President of Eden during the second
and third quarters of 1978. He ran Eden's day-to-day operations. He was the sole
signatory on the corporation's main checking account for a substantial portion
of that period, and shared check-signing authority with Rick Jameson for the
remainder of the relevant period. During a prior quarter, it was he who directed
that $8,000 in back taxes be paid the IRS.
See Brown v. United States, 464 F.2d 590, 591 (5th Cir.
1972) ("responsible person" was person successful in securing payment
of withholding taxes during prior quarter), cert. denied, 410 U.S. 908, 93 S.
Ct. 962, 35 L. Ed. 2d 270 (1973). Howard's duties, prerogatives, and prior acts
are more than sufficient to establish that he was a "responsible
person" for the purpose of section 6672(a) liability. Commonwealth National
Bank of Dallas v. United States, 665 F.2d 743, 755 (5th Cir. 1982) (lending bank
officer with power to see that corporate borrower's taxes were paid, and to make
decisions as to disbursement of funds, was a "responsible person");
Mazo, 591 F.2d at 1155-56 (general manager in charge of corporation's day-to-day
operations and possessing check-signing authority was a "responsible
person"); Hornsby v. IRS, 588 F.2d 952, 953 (5th Cir. 1979) (corporate
officer with check-signing authority was a "responsible person");
Neckles v. United States, 579 F.2d 938, 940 (5th Cir. 1978) (de facto corporate
officer regarded by some as a "boss," who signed checks and had
significant control over disbursement of corporate funds, was a
"responsible person"); Adams v. United States, 504 F.2d 73, 75 (7th
Cir. 1974) ("responsible person" need not be a corporate officer, but
only someone with significant control over the disbursement of funds); Liddon
v. United States, 448 F.2d 509, 513 (5th Cir. 1971) (50% shareholder and
corporate agent with authority to sign checks was a "responsible
person"), cert. denied, 406 U.S. 918, 92 S. Ct. 1769, 32 L. Ed. 2d 117
(1972); Monday v. United States, 421 F.2d 1210, 1214-15 (9th Cir. 1970)
("responsible person" status generally attaches to "high
corporate officials charged with general control over corporate business affairs
who participate in decisions concerning payment of creditors and disbursement of
funds.") cert. denied, 400 U.S. 821, 91 S. Ct. 38, 27 L. Ed. 2d 48 (1970).
The fact that Jennings might well have fired Howard had
he disobeyed Jennings' instructions and paid the taxes does not make Howard any
less responsible for their payment. See Brown, 464 F.2d at 591 n. 1 (5th Cir.
1972) ("responsible person" need not have final word on payment of
bills and taxes). Howard had the status, duty and authority to pay the taxes
owed, and would only have lost that authority after he had paid them.
Authority to pay in this context means effective power
to pay. That Howard had this authority is demonstrated by the fact that he did
issue small checks without Jennings' approval on a number of occasions.
Commonwealth National Bank, 665 F.2d at 752. Had Jennings fired Howard for
paying the taxes, Howard would at least have fulfilled his legal obligations.
<<ENDNOTE 4>> Faced with the possibility of leaving the frying pan
with only minor burns, Howard chose instead to stay on in the vain hope of
avoiding the fire. While we appreciate the difficulty of his position, we cannot
condone his abdication of the responsibility imposed upon him by law. See Moore,
465 F.2d at 517 (corporate officers who merely followed their superior's
instructions in issuing checks to creditors were nevertheless "responsible
persons").
Finally, Howard seeks to escape liability by
analogizing his situation to that of Jameson. Jameson shared check-signing
authority with Howard.
The IRS did not assess the 6672(a) penalty against
Jameson. Howard argues that the IRS' failure to pursue Jameson can only be
explained by the proposition that Jameson was not a "responsible
person," because Jennings had the last word in determining which of Eden's
bills and taxes should be paid. Howard infers from this that he is not a
"responsible person" either.
It does not follow from the fact that the IRS failed to
assess the penalty against Jameson that he was not a "responsible
person." The IRS is not obligated to pursue every person with
responsibility for paying taxes of this sort, and did not abuse its discretion
in assessing the penalty against Howard, and not Jameson. Hornsby, 588 F.2d at
954. The fact that there may be other fiscally "responsible persons"
does not relieve Howard of his duty to pay these taxes as a "responsible
person." Id. <<ENDNOTE 5>>
Willful Failure
Howard argues that because he was obeying Jennings'
orders in not paying the taxes, his action cannot be characterized as
"willful." In Mazo
we stated that:
The issue of willfulness is necessarily directed to the
state of the responsible person's mind, a subjective determination. This
determination is usually factual, and "if sufficiently controverted, would
preclude the granting of a summary judgment on penalty liability," Teel v.
United States [529 F.2d 903, 905 (9th Cir. 1976)]. However, as the court held in
Teel, supra, evidence that the responsible person had knowledge of payments to
other creditors after he was aware of the failure to pay withholding tax is
sufficient for summary judgment on the question of willfulness. See also Kalb v.
United States [505 F.2d 506, 511 (2d Cir. 1974)], and our decision in Moore v.
United States [465 F.2d 514, 516 (5th Cir. 1972)], cert. denied [409 U.S. 1108,
93 S. Ct. 907, 34 L. Ed. 2d 688 (1973)], sustaining the correctness of a charge
to the jury that the taxpayer's conduct was willful as a matter of law.
Mazo, 591 F.2d at 1157. It is undisputed that Howard
knew he had failed to pay the taxes in question. In May of 1978 he directed that
$8,000 in taxes be paid. He later contacted a senior IRS official to determine
what should be done about the unpaid taxes, and notified Jennings in his letter
of resignation that these taxes remained unpaid. It is also undisputed that
Howard had knowledge of payments to other creditors after he was aware of the
failure to pay the taxes. Howard himself signed 36 checks made out to other
creditors after he knew that Eden owed taxes to the IRS.
We hold that under the rule set forth in Mazo, Howard's
conduct was willful as a matter of law. Howard nonetheless argues that in
order to be willful, his failure to pay the taxes had to be voluntary. Since he
was only following his superior's orders, he contends that his omission was
involuntary, i.e. that he was not personally at fault for the failure to pay. In
Slodov v. United States, 436 U.S. 238, 98 S. Ct. 1778, 36 L. Ed. 2d 251 (1978),
the Supreme Court stated that "[t]he fact that [section 6672] imposes a
'penalty' and is violated only by a 'willful failure' is itself strong evidence
that it was not intended to impose liability without personal fault." Id.
98 S. Ct. at 1788. However, as we have already noted in our analysis of Howard's
status as a "responsible person," Howard had a choice. He could have
paid the taxes, accepted the consequences and thus avoided the penalty. Neither
his discomfort over not paying the taxes, nor his desire to see them paid, makes
his failure to pay any the less willful. In the context of 6672(a),
"willful" means voluntary, conscious, or intentional, as opposed to
accidental. Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979). An action
or omission need not be motivated by bad intent to be willful. Feist v. United
States, 607 F.2d 954, 961 & n. 8 (Ct. Cl. 1979); Mazo, 591 F.2d at 1154;
Sorensen v. United States, 521 F.2d 325, 328 & n. 3 (9th Cir. 1975). 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. Feist, 607 F.2d at
961; Mazo, 591 F.2d at 1157; Brown v. United States, 591 F.2d 1136, 1140 (5th
Cir. 1979); Sorensen, 521 F.2d at 328; Brown, 464 F.2d at 591; Monday, 421 F.2d
at 1215.
Reasonable Cause
The failure to remit taxes under section 6672(a) is not
willful if the taxpayer can produce a "reasonable cause" for this
failure. Newsome, 431 F.2d at 747. The reasonable cause exception is quite
limited in scope. Id. Howard has cited no cases holding that the existence of an
order from a superior not to pay withholding taxes constitutes reasonable cause
for failure to pay them, and we have found none. <<ENDNOTE 6>>
Howard further argues, however, that because he
contacted a deacon in his church who was a senior official of the IRS, and was
told to "write a letter" to the IRS explaining his problem, he had
reasonable cause not to make the required payments. Howard's conversation with
this official is only briefly adverted to in the record. The record does not
disclose when this conversation took place, the identity of the official, or
what was said except for the official's recommendation that Howard write the IRS
a letter. We do not believe that a recommendation by an IRS official that a
person contact the appropriate IRS office and explain his problem to them
constitutes reasonable cause for not paying taxes. We also note that Howard did
not write the letter in question until after he had resigned from Eden. By that
point, he had voluntarily relinquished his authority to pay the tax out of
corporate funds. His liability was established, and there was little anyone
could have done to help him. The record contains no indication that the IRS
official to whom Howard spoke ever told him that he could escape liability by
writing the IRS, or that he was not under any obligation to pay the taxes owed.
We conclude that, as a matter of law, Howard lacked reasonable cause for his
failure to collect and pay the taxes owed.
Other Considerations
Howard contends that he would not be in the position he
is in today if the IRS had promptly sought to collect the taxes owed once he
notified them that they had not been paid. This is beside the point. A corporate
officer cannot neglect his corporation's fiscal obligations, resign his
position, and then seek to shift those obligations to the IRS. Slodov, 98 S. Ct.
at 1785. Howard's personal liability was independently established long before
he notified the IRS of Eden's tax deficiency. See Hornsby, 588 F.2d at 954
(liability imposed by section 6672(a) is distinct from corporation's duty to pay
withheld taxes); Newsome, 431 F.2d at 745. Their handling of this deficiency is
legally irrelevant to the separate issue of his liability.
Howard also claims that because he resigned his
position with Eden shortly before the end of the third quarter of 1978, he
cannot be held personally liable for Eden's tax deficiency for that
quarter. Section 6672(a) imposes liability on
any person "required to collect, truthfully account for, and pay over any
tax . . .." Since he was no longer employed by Eden on the date that taxes
for the third quarter were due, Howard claims that he was not a person
responsible for their payment.
We rejected this same argument in Brown, 591 F.2d at
1140. Relying on the Supreme Court's decision in Slodov, we said:
In Slodov, the Court specifically stated that an
officer or employee need not be responsible for the payment of withholding
taxes at the end of the quarter in order to be a responsible person for that
quarter; it noted that otherwise "the penalties easily could be evaded by
changes in officials' responsibilities prior to the expiration of any
quarter."
Brown, 591 F.2d at 1140 (citations omitted).
<<ENDNOTE 7>> We see no reason to depart from our holding in Brown.
See also Kalb v. United States, 505 F.2d 506, 509 (2d Cir. 1974)
("responsible person" still liable under section 6672(a) even though
company went bankrupt before the end of the first quarter), cert. denied, 421
U.S. 979, 95 S. Ct. 1981, 44 L. Ed. 2d 471 (1975).
CONCLUSION
Finding no disputed issues of material fact, we hold
that Howard was a person responsible for the collection and payment of taxes
under sections 6672(a) and 6671(b) who, without reasonable cause, willfully
failed to pay these taxes.
We cannot help feeling that it is Jennings who should
pay these taxes. The district court described
Jennings as "an even more responsible person" than Howard. However,
Jennings is apparently no longer within reach of the long arm of the IRS. And
section 6672(a) looks only to "responsible persons," not to "the
most responsible person," for satisfaction. Although we recognize that our
holding today may appear harsh to some, we are bound to follow the law as
interpreted by the Supreme Court and this Circuit.
The judgment of the district court is accordingly
Affirmed.
<<ENDNOTES>>
1/ The relevant portion of that letter is excerpted
below:
Paul, I am very concerned about the Federal payroll tax
and the State
and Federal unemployment tax that has not been paid. It
has been my
practice over the years to pay these taxes promptly as
they are due.
However, due to the financial condition that I found in
Eden I could not
pay these taxes in full. I did pay in $8,000.00 some
time ago to I.R.S.,
in lieu of making a payroll. If no payment has been
made recently, then I
recall these taxes to be in excess of $30,000.00.
2/ A copy of that letter is reproduced below:
20 September 1978
District Director
Internal Revenue Service
1100 Commerce Street
Dallas, Texas 75202
Gentlemen:
I have recently been under the employ of Eden Marketing
Corporation* as
Executive Vice President and General Manager. I entered
into their
employment on April 13, 1978, and officially resigned
on September 12,
1978. During that five month tenure I was requested on
one occasion to
step down as the general manager for a period of
several weeks by Mr. Paul
D. Jennings, the president and major stockholder. I did
step down as
general manager for a period of time and was later
reinstated as general
manager on another date.
When I joined the Eden Marketing Corporation people in
April, 1978,
they were in grave financial condition. They owed heavy
debts to vendors,
were overdrawn at their bank, and were not making their
federal payroll
tax deposits. In May, 1978, I made a deposit of payroll
tax in the amount
of $8,000.00, in lieu of paying a payroll. Due to the
heavy debts that I
was faced with paying, and Eden not having any original
capital, I was
unable to pay any further moneys due to Internal
Revenue Service. I
believe that you will find that the amount still due to
be something in
excess of $30,000.00.
I am enclosing a copy of my formal resignation along
with this letter
and request that this information be kept in the
strictest of confidence.
Sincerely,
/s/ W. Leon Howard *3210 Belt Line Road, #154
3239 Whispering Oak Dallas, Texas 75234
Dallas, Texas 75234 phone: 241-0761
home phone: 243-7636 Paul D. Jennings, President
office phone: 242-2138 home phone: 661-1062
WLH/mih
Enc. (1)
3/ Section 6672(a) provides:
Sec. 6672. Failure To Collect and Pay Over Tax, Or
Attempt To Evade Or
Defeat Tax.
(a) General Rule--
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. No penalty shall be imposed under
section 6653 for any
offense to which this section is applicable.
I.R.C. section 6672(a) (West Supp. 1982). The
"person" referred to in
section 6672(a) is defined as follows:
Sec. 6671. Rules For Application Of Assessable
Penalties.
(b) Person Defined -- The term "person", as
used in this subchapter,
includes an officer or employee of a corporation, or a
member or employee
of a partnership who as such officer, employee, or
member is under a duty
to perform the act in respect of which the violation
occurs.
I.R.C. section 6671(b) (1977).
4/ The fact that Howard was stripped of his duties for
a period of
several weeks does not absolve him of liability under
section 6672(a),
give that he was a "responsible person" for a
substantial portion of the
relevant quarters.
5/ We need not and do not decide whether Jameson was in
fact a
"responsible person" under sections 6672(a)
and 6671(b).
6/ The district court characterized Howard's argument
that Jennings'
control over disbursements constituted reasonable cause
for Howard's
failure to pay as one of "upward delegation,"
and rejected it by
analogizing to the holding in Mazo that "mere
delegation of responsibility
to another does not constitute reasonable cause."
Mazo, 591 F.2d at 1155.
We are somewhat puzzled at this characterization, since
authority is by
definition normally delegated downward to subordinates.
However, this
novel concept was not necessary to the district court's
holding that
Howard lacked reasonable cause, and the court in
rejecting Howard's
argument properly stated the applicable rule, that
"[o]ne who has the
status, duty and authority within a corporate structure
to pay over trust
fund taxes due cannot rely on the instructions of
another to violate his
duty."
7/ In Slodov, the Supreme Court held that the word
"and" in that
portion of section 6672(a) imposing liability on any
person "required to
collect, truthfully account for, and pay over any tax .
. . was
disjunctive. A person responsible for any of these
three activities is a
"responsible person" within the meaning of
the statute. Slodov, 98 S. Ct.
at 1785-87.
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Revenue
Procedures
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Revenue Procedures Section
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Revenue
Rulings
Please keep in mind these taxes are those
that are withheld from the payroll checks of the employees. This
penalty does not apply to the employer's portion of those taxes.
Caution Volunteers!
REV. RUL. 84-83
ISSUE: Can a volunteer member of a board of
trustees of organizations referred to in section 501(a) of the Code can be
considered a responsible person and liable for the penalty under section 6672?
LAW AND ANALYSIS
Under section 6672(a) of the Code any person required
to collect, truthfully account for, and pay over any internal revenue tax 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 such tax or the
payment thereof, shall, in addition to other penalties, be liable to a penalty
equal to the total amount of the tax evaded, or not collected, or not accounted
for and paid over. No penalty will be imposed under section 6653 for any offense
to which this section is applicable.
Section 6671(b) of the Code defines the term person to
include an officer or employee of a corporation, or a member or employee of a
partnership, who as such officer, employee, or member is under a duty to perform
the act in respect of which the violation occurs. The determination of who
is the person under a duty to collect, account for, and pay over the employment
and withholding taxes for wages paid to employees is especially dependent upon
the facts of the case See United States v. Graham, 309 F 2d 210 (9th Cir. 1962);
Bauer v. United States, 543 F. 2d 142 (Ct. Cl 1976); Feist v. United States, 607
F 2d 954 (Ct. Cl. 1979).
The term "person" includes an officer or
employee, but does not exclude others. Its scope is illustrated rather than
limited by the examples in section 6671(b) of the Code. Section 6672(a) is
addressed to those person who have responsibility for payment of the withheld
taxes, who have knowledge of the tax delinquency and who have authority over the
decision to pay or not to pay the taxes, not necessarily persons who have the
duty of filling out the forms. Trustees can have this responsibility, knowledge
and authority.
HOLDING
The trustee can be liable for unpaid employment and
withholding taxes. The fact that a trustee is
a volunteer member of the board of trustees does not in and of itself mean the
trustee will or will not be deemed liable. The trustee's liability depends on
whether he or she is found to meet the tests of responsibility and willfulness
under section 6672 of the Code.
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Revenue Rulings
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Private
Letter Rulings
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Analysis
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Clearly, the prudent course of action is to avoid exposure to the 100 percent
penalty by never failing to collect and remit trust fund taxes.
