Tuesday, April 8, 2008

6672 Trust fund penalty

Among the factors indicative of the requisite authority over the corporate taxpayer's finances or general decision making to qualify an individual as a "responsible person," are:
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 payroll; (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.

Charles B. Erwinv. United States Of America,

U.S. District Court, Mid. Dist. N.C.; 1:06CV59, March 18, 2008.

[ Code Sec. 6672]

Assessment: Employment withholding taxes: Failure to pay taxes: Willfulness: Trust fund recovery penalty: Responsible person. --

The founder, shareholder and officer of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation's unpaid withholding taxes. The individual was a "responsible person" with respect to the corporation because he exercised significant control over the corporation's day-to-day activities, hired or fired management employees and accountants in charge of the corporation's payroll operations, reviewed weekly and monthly financial statements, personally guaranteed payments to vendors and directed checks to be written and expenses to be paid. Further, the individual acted willfully because he had reason to know that the taxes were not being paid, but directed that payments be made to creditors other than the IRS.


BEATY, Chief Judge: This matter is before the Court on the Recommendation from the United States Magistrate Judge [Document #55] granting summary judgment in favor of the United States for unpaid payroll withholding taxes owed by GC Affordable Dining, Inc. ("GCAD"), a corporation in which Plaintiff was a shareholder, pursuant to 26 U.S.C. §6672. Plaintiff brought suit against the United States for the recovery of tax penalties assessed against him. The United States filed a Counterclaim against Plaintiff for a trust fund recovery penalty, plus interest, in the amount of $264,579.00, representing the payroll taxes required to be withheld from GCAD employees' wages during four quarters: the third quarter of 1998 and the first, second, and third quarters of 1999. The United States subsequently filed a Third-Party Complaint against Stephen C. Coggin ("Coggin"), William G. Pintner ("Pintner"), James Barry Light ("B. Light"), and Hartsell B. Light, Jr. ("H. Light") alleging the same claims alleged against Erwin [Document #9]. On September 19, 2007, the United States filed a Motion for Summary Judgment against Erwin on his claims as well as its counterclaims against Erwin [Document #45]. Erwin then filed a cross Motion for Summary Judgment against the United States on its counterclaims against him [Document #46]. On November 27, 2007, Magistrate Judge Dixon recommended that the Court deny Erwin's Motion for Summary Judgment and grant the United States' Motion for Summary Judgment [Document #55].

Within the time provided by 28 U.S.C. §636, Counsel for Plaintiff objected to the Recommendation. This Court reviewed de novo the Objections and the portions of the Magistrate Judge's Recommendation to which objection was made, and has made a determination which is in accord with the Magistrate Judge's decision. The Court will therefore adopt the Magistrate Judge's Recommendation.

Consequently, the Court will order that Plaintiff's Motion for Summary Judgment be denied, and that the United States Motion for Summary Judgment against Plaintiff Charles B. Erwin be granted. As a result of this determination, Plaintiff Erwin's claims against the United States will be dismissed and judgment will be entered in favor of the United States on its counterclaims against Plaintiff Erwin. 1

Because all claims by and against Plaintiff Erwin have now been resolved, the only remaining claims are those claims brought by the United States against the Third Party Defendants, Stephen C. Coggin, William G. Pintner, James Barry Light, and Hartsell B. Light, Jr. However, the United States has filed a Motion pursuant to Federal Rule of Civil Procedure 54(b) for Entry of Final Judgment Against Plaintiff Erwin and a Motion to Stay further proceedings against the Third Party Defendants [Document #67]. Plaintiff Erwin and Defendants Pintner, B. Light and H. Light all consent. 2 Having considered this motion, the Court finds that all of the claims by and against Plaintiff Erwin have been resolved, but that the United States' claims against the Third Party Defendants in this case remain unresolved. The Court further finds that there is no just reason for delay of the entry of final judgment as to the claims by and against Plaintiff Erwin. Therefore, the United States' motion will be granted and final judgment as to Plaintiff Erwin pursuant to Rule 54(b) will be entered contemporaneously herewith. Further, the Court concludes that a Stay as to the United States' claims against the Third Party Defendants in this case is appropriate pending final resolution of any appeal by Plaintiff Erwin.


DIXON, United States Magistrate Judge: This matter is before the court on cross motions for summary judgment filed by Plaintiff Charles B. Erwin (doc. no. 46) and Defendant United States of America (doc. no. 45). Plaintiff filed this action after paying a portion of the amount allegedly due under a trust fund recovery penalty for unpaid payroll withholding taxes for GC Affordable Dining, Inc, ("GCAD"), assessed against him pursuant to 26 U.S.C. §6672. The government counterclaimed for a total of $264,579 in unpaid assessments, penalties and interest for the fourth quarter of 1998 and the first three quarters of 1999. The motions have been fully briefed and the matter is ripe for disposition. Because there has been no consent, I must address the motions by way of a recommendation. For the following reasons, it will be recommended that the court grant Defendant's motion for summary judgment and deny Plaintiff's motion for summary judgment.

II. Discussion

A. Summary Judgment Standard

Summary judgment is appropriate when there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Zahodnick v. International Bus. Machs. Corp., 135 F.3d 911, 913 (4th Cir. 1997). The party seeking summary judgment bears the burden of initially coming forward and demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met its burden, the non-moving party must then affirmatively demonstrate that there is a genuine issue of material fact which requires trial. Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). There is no issue for trial unless there is sufficient evidence favoring the non-moving party for a fact-finder to return a verdict for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Sylvia Dev. Corp. v. Calvert County, Md., 48 F.3d 810, 817 (4th Cir. 1995). Thus, the moving party can bear his burden either by presenting affirmative evidence or by demonstrating that the non-moving party's evidence is insufficient to establish his claim. Celotex Corp., 477 U.S. at 331 (Brennan, J., dissenting). When making the summary judgment determination the court must view the evidence, and all justifiable inferences from the evidence, in the light most favorable to the non-moving party. Zahodnick, 135 F.3d at 913; Halperin v. Abacus Tech. Corp., 128 F.3d 191, 196 (4th Cir. 1997).

B. Liability under 26 U.S.C. §6672

Federal law requires that employers withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See 26 U.S.C. §§3102(a) and 3402(a). The employer holds the withheld taxes `in trust' for the United States and must pay them over to the government on a regular basis. 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. The relevant statute, 26 U.S.C. §6672(a), provides:
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.

Liability under section 6672, thus, requires proof that the actor (1) was a "responsible person" under a duty to collect, account for, and pay over trust fund taxes, and (2) willfully failed to discharge his duty. Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir. 1992). A party is not presumed to be a "responsible person," however, merely on the basis of his title. See O'Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992) (titular authority is not sufficient; substance of circumstances must demonstrate that officer exercises and uses authority over financial affairs or is under a duty to do so.) The Fourth Circuit has stated that, in determining responsibility under section 6672, the "crucial inquiry [is] whether the person had the effective power to pay taxes - that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay taxes owed." Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999) (quoting Barnett v. I.R.S., 988 F.2d 1449, 1455 (5th Cir. 1993)). Among the factors indicative of the requisite authority over the corporate taxpayer's finances or general decision making to qualify an individual as a "responsible person," are:
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 payroll; (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.

Id. These factors are to be evaluated together; no single factor is dispositive or determinative of authority. Barnett, 988 F.2d at 1455. There can be more than one person in a corporation who qualifies as a "responsible person", Plett, 185 F.3d at 219, and section 6672 applies to all responsible persons, not just the most responsible person. Turnbull v. United States, 929 F.2d 173, 178 (5th Cir. 1991).

1. Responsible person

Crediting all factual assertions which favor Plaintiff, the court nonetheless concludes that as to who is the "responsible person" under 26 U.S.C. §6672, no genuine issue of material fact precludes summary judgment for the Government, and summary judgment is therefore appropriate.

Upon review of the substance of Plaintiff's authority within GCAD, and applying the Plett factors, it is clear and beyond genuine issue that Plaintiff had the authority to direct that the tax payments be made. Concrete indications of Plaintiff's authority include the fact that he was involved in most, if not all, of the major decisions regarding GCAD, including lease negotiations, and hiring of the management team and the accountants who performed services for GCAD. In fact, all but one of the Plett factors go in the Government's favor.

a. Board of Directors

While an individual's title is not necessarily determinative, it is a factor to be considered. O'Connor, 956 F.2d at 50. Plaintiff here was a founder, shareholder and officer of GCAD. He started as a one-third shareholder, but by 2000 he owned 100 percent of the GCAD stock. He also served as Secretary and Treasurer during the entire period, and as Vice-President in the late 1990s and President as of February 1, 2000. This factor clearly favors the Government's position that Plaintiff was a "responsible person."

b. Control of company payroll

Plaintiff admits that, on several occasions, he and the other shareholders attempted to infuse capital into the corporation to pay the delinquent payroll taxes. In fact, Plaintiff admits that when he "learned that the Light Brothers had not satisfied [the withholding tax] obligations the shareholders raised capital and remitted $150,000 to the Light Brothers, expressly instructing the Light Brothers to cure the tax deficiency." (Plaintiff's memo in support of s.j. 12). Clearly, then, Plaintiff viewed himself (together with the other shareholders) to be responsible for payment of the payroll taxes and further had the authority to order that the taxes be paid. There is no evidence that Plaintiff himself personally oversaw the payroll, but there is evidence that he participated in the decision to hire the accountants who took care of the day-to-day payroll operations. Moreover, in late 1999, Plaintiff put his own management company, Chelda, in charge of GCAD's accounting functions, including payroll and withholding tax matters. (Pl. dep. 212.)

c. Payment of creditors

The evidence also shows that Plaintiff had decision-making authority over which creditors would be paid. He signed personal guarantees to several food vendors, ensuring that those bills would be paid. In his deposition, Plaintiff admitted that lease payments and food vendors were paid out of gross receipts which were available even in 2000 to pay down the tax delinquency. Barry Light, one of GCAD's accountants, testified that Plaintiff regularly gave instructions as to which creditors should be paid, and at one point at the end of 1998, Plaintiff and Coggin instructed Light to pay rents and expenses "but nothing on the taxes." (Barry Light dep. 78). While Plaintiff may not have exercised his authority on a daily basis, he clearly had the power to direct which payments were made and when they would be made.

d. Participation in day-to-day management

Plaintiff was involved in many facets of the GCAD operations from its startup in 1994 to the close of business in 2001. Plaintiff participated in the hiring and firing of GCAD's managers and accountants. He also participated in decisions regarding restaurant locations, negotiation of leases and other contracts, and personally guaranteed payments to food vendors so that they would extend credit to GCAD. In addition, Plaintiff admits that he reviewed weekly sales figures and monthly financial statements and visited the GCAD restaurants and met with the restaurant managers. According to Barry Light, daily sales figures for each store were faxed to Plaintiff and Coggin every day. (Barry Light dep. 68.) In fact, Barry Light and Pintner regarded Plaintiff's involvement to be on a daily basis. (Pintner dep. 33-34; Barry Light dep. 68.) Pintner testified that he "didn't do anything without [Coggin and Plaintiff's] awareness." (Pintner dep. 33.) Plaintiff testified that he reviewed the federal income tax returns for GCAD. (Pl. dep. 124.) Plaintiff clearly was more than a "passive investor" in GCAD. His participation in the operations of the corporation qualifies him as a responsible person.

e. Check-writing authority

There is no evidence in the record that Plaintiff had authority to write or sign checks on behalf of GCAD. Nevertheless, it is clear that, in light of his many roles in the corporation, he had the authority to direct checks be written and expenses be paid, and that he in fact exercised that authority on many occasions.

f. Hiring/firing authority

The final Plett factor is whether the individual had the authority to hire and fire employees. Plaintiff was actively involved in the hiring and firing of Markley, Pugal, Pintner, and the Light Brothers, all of whom were management employees or, in the case of the Light Brothers, individuals performing professional services to GCAD. There is no evidence that Plaintiff was involved in the hiring and/or firing of the individual restaurant managers or employees, but his participation in the hiring of the corporate managers clearly shows that he had authority over employment decisions.

In analyzing these factors, the court is cognizant that no one factor is controlling, and, indeed, that the salient, deciding point is whether Plaintiff had the effective power to see that the taxes were paid. The evidence clearly shows that Plaintiff had that power, stemming from his actual authority and ability, in view of his status as a founder, director, officer and shareholder and his day-to-day involvement in GCAD. Simply because Plaintiff may not have been present on a daily basis does not change the fact that at any point, by virtue of his authority, Plaintiff could have had substantial input into financial decisions of the corporation, and in fact, on numerous occasions he exercised that authority. Based upon the evidence set forth, supra, Plaintiff clearly falls within the parameters of a "responsible person" under section 6672. 8

2. Willfulness

To determine whether a responsible person "willfully" failed to collect, account for or remit payroll taxes to the United States, the court must "inquire whether the `responsible person' had `knowledge of nonpayment or reckless disregard of whether the payments were being made.' " Plett, 185 F.3d at 219 (citing Turpin, 970 F.2d at 1347). A responsible person's intentional preference of other creditors over the United States with knowledge of the nonpayment of payroll taxes establishes his willfulness as a matter of law. Plett, 185 F.3d at 219; United States v. Pomponio, 635 F.2d 293, 298 (4th Cir. 1980). An intentional preference is shown by establishing that the responsible person knew of or recklessly disregarded the existence of an unpaid payroll tax deficiency. Plett, 185 F.3d at 219; Turpin, 970 F.2d at 1347. One way in which willfulness may be established is to show that the responsible person made a "voluntary, conscious and intentional decision to prefer other creditors over the Government." Greenberg v. United States, 46 F.3d 239, 244 (3rd Cir. 1994).

Plaintiff asserts that because he was relying on "seasoned professional" accountants, he "had no reason to think that GCAD's IRS obligations were not being satisfied." (Pl. memo in support of s.j. 18). By the end of 1998, however, Plaintiff knew or had strong reason to know that GCAD was undergoing a financial crisis. In fact, in December 1998 Plaintiff learned that the Light Brothers had failed to make payroll tax deposits for a prior quarter. Plaintiff then made capital contributions and "strongly admonished" the Light Brothers to make timely tax payments in the future. His failure to monitor the situation after first becoming aware of the Light Brothers' actions is simply indefensible.

Even assuming, as Plaintiff claims, that he was not aware of the tax deficiencies until August 1999, his actions after that period show willfulness. During the third quarter of 1999, GCAD's payroll tax liability increased by $163,000, yet the corporation only made two tax deposits totaling $7,118.24. Thus, the withholding tax deficiency at the end of the third quarter of 1999 was over $150,000. Plaintiff made a capital contribution of $50,000, but GCAD still owed over $100,000 for that quarter. Moreover, prior deficiencies from 1998 and the first two quarters of 1999 were not satisfied. During this entire period, however, other creditors were paid and substantial sales revenues were generated. To be sure, GCAD was struggling financially; Plaintiff asserts that rents and expenses were paid just to keep the doors open. Nevertheless, as the court noted in Greenberg, "[i]t is no defense that the corporation was in financial distress and that funds were spent to keep the corporation in business with the expectation that sufficient revenue would later become available to pay the United States." 46 F.3d at 244. It must also be noted that Plaintiff himself raised funds to pay the first tax deficiencies. At the very least, at that point, and as an officer and shareholder of the company actively involved in many corporate decisions, Plaintiff was on notice that tax liability was an issue which might again be a problem in the future and that it was critical to stay on top of the matter and prevent future tax delinquency. After all, "the government cannot be made an unwilling partner in a business experiencing financial difficulties." Thibodeau v. United States, 828 F.2d 1499, 1506 (11th Cir. 1987).

Although not yet addressed by the Fourth Circuit, courts in other circuits have held that even if a "responsible person" is unaware that withholding taxes have gone unpaid in past quarters, a responsible person who becomes aware that taxes have gone unpaid in past quarters in which he was also a responsible person, is under a duty to use all "unencumbered funds" available to the corporation to pay those back taxes. See Thosteson v. United States, 331 F.3d 1294, 1300-01 (11th Cir. 2003); United States v. Kim, 111 F.3d 1351, 1357 (7th Cir. 1997); Honey v. United States, 963 F.2d 1083, 1089 (8th Cir. 1992); Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir. 1979). This duty extends not only to funds available to the corporation at the time the responsible person becomes aware, but also to any unencumbered funds acquired thereafter. Thosteson, 331 F.3d 1294. As explained by the Eleventh Circuit:
If the responsible person fails to use such unencumbered funds to satisfy the past unpaid liability, he is deemed personally liable for the taxes that went unpaid in the past while he was responsible. The responsible person deemed liable for the unpaid liability of past tax quarters is considered to have "willfully" failed to pay over the taxes for those past quarters, even though he was unaware at that time that the taxes were going unpaid.

Thosteson, 331 F.3d at 1301. Plaintiff was under a duty to reduce GCAD's accrued tax liability with funds acquired after the taxes had been withheld and the funds, presumably, were dissipated. Thus, once Plaintiff was made aware of the unpaid tax liability, payments made to creditors other than the IRS constituted willful violations of section 6672.

Plaintiff, relying on Turpin v. United States, 970 F.2d 1344 (4th Cir. 1992), argues that his knowledge of GCAD's past tax deficiency "does not, as a matter of law, establish that he acted willfully with respect to the next deficiency." (Pl. memo. in resp. to def. m.s.j. 16-17). Plaintiff's reliance on Turpin, however, is misplaced, because the plaintiff in that case was found, by a jury, to have neither known of nor to have recklessly disregarded the corporation's tax deficiency. Plaintiff here clearly knew of the tax deficiency as of August 1999, and there is evidence that GCAD generated over $5 million in gross receipts after that date. These funds were used to pay other creditors, including landlords and food vendors, together with employee wages, while the tax deficiencies remained unpaid. Moreover, even after the initial deficiencies were brought to Plaintiff's attention, he continued to entrust the financial management of the corporation to the Light Brothers, whom he knew to be unreliable. Under these facts, Plaintiff's reckless disregard demonstrates willfulness as a matter of law for the purposes of summary judgment.

III. Conclusion

Because Plaintiff is a responsible person under section 6672 and he willfully failed to pay withheld taxes to the IRS, IT IS RECOMMENDED that the motion of the United States for summary judgment (doc. no. 45) be GRANTED and Plaintiff's motion for summary judgment (doc. no. 46) be DENIED .

1 Plaintiff filed an action seeking a refund of tax penalties and related interest assessed to him under 26 U.S.C. §6672. Because the reasoning of the Magistrate Judge's Recommended decision applies equally to the claims by Plaintiff Erwin against the United States and the counterclaims by the United States against Plaintiff Erwin, and because the Magistrate Judge recommended granting the United States' Motion for Summary Judgment in its entirety, all of Plaintiff Erwin's claims against the United States will be dismissed.

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