Wednesday, October 10, 2007

Back Taxes IRC 6672 – Summary Judgment denied where taxpayer could prove a material issue of fact

United States of America, Plaintiff, v. William Kyriakakis, Defendant, U.S. District Court, Mid. Dist. Fla., Orlando Div.; 6:06-cv-1624-Orl-19JGG, September 20, 2007.

[ Code Sec. 6672]

Trust fund recovery penalty: Unpaid payroll taxes: Responsible person: Willfulness: Genuine issue of material fact: Summary judgment. --


II. Federal Trust Fund Recovery Penalty Liabilities

As Plaintiff correctly points out, Title 26, Sections 3102(a) and 3402(a) of the United States Code require an employer to deduct and withhold income taxes from the wages paid to its employees. 26 U.S.C. §§3102(a), 3402(a) (2006). These withheld taxes are to be held in a "special fund in trust for the United States." Id. §7501(a). The Code further 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.

Id. §6672(a). A "person" is defined 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." Id. §6671(b).

The Eleventh Circuit Court of Appeals has held that the test for liability under Section 6672(a) can be reduced to two elements: "(1) a reasonable person (2) who has willfully failed to perform a duty to collect, account for, or pay over federal employment taxes." Thosteson v. United States, 331 F.3d 1294, 1298 (11th Cir. 2003). According to the Eleventh Circuit, "[o]nce an individual is established as a `responsible person,' the burden shifts to the individual to disprove willfulness." Malloy v. United States, 17 F.3d 329, 331 (11th Cir. 1994).

A. Responsible Person

Courts have generally taken a broad view of who constitutes a responsible person. Smith v. United States, 894 F.2d 1549, 1553 (11th Cir. 1990). Responsibility under Section 6672 is a matter of "status, duty, and authority." Williams v. United States, 931 F.2d 805, 810 (11th Cir. 1991) (quoting Mazo v. United States, 591 F.2d 1151, 1156 (5th Cir. 1979), cert. denied, 444 U.S. 842 (1979)). Indicia of responsibility include "the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees." Id. (quoting George v. United States, 819 F.2d 1008, 1011 (11th Cir. 1987)). More than one person in a corporation may be a responsible person. Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir. 1987).

Defendant admits that he is a "responsible person" for KYPA, Inc. and Bell Corporation. (Doc. No. 32 at p. 8.) However, Defendant denies that he is a "responsible person" for KYPA of Clearwater, Inc. ( Id. at pp. 8-9.) Plaintiff asserts that the September 9, 1993 letter from Defendant establishes that he was a responsible person not only for KYPA, Inc. and Bell Corporation but also for KYPA of Clearwater, Inc. (Doc. No. 30 at pp. 11-12; Doc. No. 30-4 at p. 18.) Defendant argues that this letter instead shows that Defendant was not responsible for KYPA of Clearwater, Inc. (Doc. No. 32 at pp. 8-9.)

The September 9 letter states in its subject line that it refers to "Kypa Incorporated/Bell Corporation." (Doc. No. 30-4 at p. 18.) Plaintiff asks the Court to infer from this letter that Defendant has responsibility over KYPA of Clearwater, Inc., but such an inference is impermissible at the summary judgment stage. See Anderson, 477 U.S. at 255. All inferences are to be drawn in favor of the non-moving party. Id. Where more than one inference may be drawn from the facts and that inference creates an issue of material fact, summary judgment must be denied. Id.

Plaintiff has offered evidence that Defendant was a fifty-percent owner of KYPA of Clearwater, Inc. and that he had check-writing authority for that company. (Doc. No. 30-2 at pp. 6-7, 10, 14.) 1 In response, Defendant has offered evidence that he had almost no involvement with the stores owned by KYPA of Clearwater, Inc. which were located in Florida. (Doc. No. 32-2 at pp. 4-5; Doc. No. 32-5 at p. 23; see also Doc. No. 32-3 at p. 9.) This creates a genuine issue of material fact as to whether Defendant is a responsible person for KYPA of Clearwater, Inc. which this Court may not resolve on summary judgment.

B. Willfulness

Under Section 6672, a person acts "willfully" when he or she commits a "voluntary, conscious, and intentional act." Paris v. United States, 355 B.R. 867, 872 (M.D. Fla. 2006) (quoting Mazo, 491 F.2d at 1155). It does not require a fraudulent or improper motive on the part of the responsible person. Id. The willfulness requirement is satisfied if "there is evidence that the responsible officer had knowledge of payments to other creditors after he was aware of the failure to remit withholding taxes." Smith, 894 F.2d at 1553. Where a responsible party continues paying other creditors in order to keep the company going and preserve its ability to repay tax debt, that party still may be liable under Section 6672. Thosteson, 331 F.3d at 1301. Generally, the question of willfulness is a subjective one that should be reserved for the jury. Thibodeau, 828 F.2d at 1505.

Since Defendant has admitted that he is a responsible party for KYPA, Inc. and Bell Corporation, the Court will consider whether Defendant willfully failed to pay taxes for those two companies. Plaintiff seeks to impose liability on Defendant for taxes assessed as early as April 1, 1992. (Doc. No. 30 at p. 6, ¶31.) Defendant, however, contends that he was not even aware of the failure to pay taxes until sometime in September of 1993. (Doc. No. 32-5 at pp. 16, 44; see also Doc. No. 30 at p. 13 ("Defendant had knowledge of the unpaid taxes at least by the time he signed the September 9, 1993 [letter]").) This creates a genuine issue of material fact as to whether Defendant willfully failed to pay over taxes prior to September 1993.

After September 1993, Defendant admits that he was aware of the tax problems of KYPA, Inc. and Bell Corporation. (Doc. No. 32-5 at pp. 16, 44.) After this time, Defendant asserts that he began to keep records of when the income tax checks would come in and the date on which they should be taken to the bank. ( Id. at p. 14.) Defendant alleges he would return the checks to the controller, Mr. Haggis, and Mr. Haggis and Mr. Papageorgiou would be in charge of getting the checks to the bank. ( Id. at pp. 14-15.) Defendant claims that the checks were going to the bank but were not being honored. ( Id. at pp. 15, 21.) In his deposition, Defendant testified: "It was my belief that the payroll [tax] checks were brought to the bank on the days that were indicated [in my records]." ( Id. at p. 15.) Accordingly, Defendant offers evidence that raises a genuine issue of material fact regarding whether he willfully failed to perform his duty to collect, account for, and pay taxes to the government. Therefore, Plaintiff's Motion for Summary Judgment must be denied.


Based on the foregoing, this Court DENIES Plaintiff's Motion for Summary Judgment. (Doc. No. 30.) The Court further directs Defendant to file an Answer to Plaintiff's Amended Complaint (Doc. No. 29) within ten (10) days of the date of this Order or sanctions, including but not limited to a default judgment, may be imposed.

DONE and ORDERED in Chambers in Orlando, Florida on September 19, 2007.

1 Percentage ownership and signatory authority are two of several factors to consider when deciding who is a responsible person under Section 6672. See, e.g., Williams, 931 F.2d at 810; Ferguson v. United States, 317 F. Supp. 2d 945, 954 (S.D. Iowa 2004). No single factor is dispositive. Ferguson, 317 F. Supp. 2d at 954. The fact that Defendant is a fifty percent owner of KYPA of Clearwater, Inc., while relevant to the determination of whether he is a responsible party, is not conclusive. See id.

Alvin Brown, Esq.
Tax Attorney
703 425-1400

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