Tuesday, November 30, 2010

Notice 2010-84, 2010-51, 11/29/2010, IRC Sec(s). ________________________________________ Headnote: Reference(s): Full Text: I. Purpose This notice provides guidance under § 402A(c)(4) of the Internal Revenue Code, relating to rollovers from § 401(k) plans to designated Roth accounts in the same plan (“ in-plan Roth rollovers” ), as added by § 2112 of the Small Business Jobs Act of 2010 (“ SBJA” ), P.L. 111-240. The guidance in this notice also generally applies to rollovers from § 403(b) plans to designated Roth accounts in the same plan. II. BACKGROUND Section 402A of the Code sets forth the rules for designated Roth contributions. A designated Roth contribution is an elective deferral that would otherwise be excludable from gross income but that has been designated by the plan participant who elects the deferral as not being so excludable. An employee's designated Roth contributions and attributable earnings must be maintained by the plan in a separate account (a designated Roth account). A qualified distribution, as defined in § 402A(d)(2), from an employee's designated Roth account is excludable from gross income. A distribution from an employee's designated Roth account that is not a qualified distribution is includible in gross income pursuant to § 72 in proportion to the employee's investment in the contract (basis) and earnings on the contract. Section 408A of the Code sets forth the rules for Roth IRAs. A Roth IRA is a type of IRA under which contributions are not deductible from the owner's gross income and qualified distributions, as defined in § 408A(d)(2), are excludable from gross income. Section 408A(d)(4) prescribes a special ordering rule for distributions from a Roth IRA. Section 408A(d)(3)(A) of the Code provides that, generally, the taxable amount of a rollover or conversion to a Roth IRA is includible in gross income as if it were not rolled over or converted. For taxable years beginning in 2010 only, however, the taxable amount of a rollover or a conversion to a Roth IRA that would otherwise be includible in gross income for the taxable year beginning in 2010 is includible half in the taxable year beginning in 2011 and half in the taxable year beginning in 2012, unless the taxpayer elects to include the entire taxable amount in the taxable year beginning in 2010. Section 408A(d)(3)(D) of the Code provides for such additional reporting “ as the Secretary may require to ensure that amounts required to be included in gross income under [ § 408A(d)(3)(A)] are so included.” Under section 408A(d)(3)(E) of the Code, in the case of a taxpayer who is deferring income inclusion of the taxable amount of a rollover to a Roth IRA made in the taxpayer's taxable year beginning in 2010, the taxpayer's gross income for the taxable year beginning in 2010 or 2011 is increased by the amount of any distribution in such year from the Roth IRA that is allocable to the taxable amount of the rollover. Section 408A(d)(3)(F) of the Code provides that any distribution from a Roth IRA that is allocable to the taxable amount of a rollover to the Roth IRA (other than from another Roth IRA or a designated Roth account) made within the preceding 5 taxable years is treated as includible in gross income for purposes of applying the 10% additional tax under § 72(t). The 5-year recapture rule also applies if the rollover to the Roth IRA is from a designated Roth account and the distribution is allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years. (See Q&A-12 of this notice.) Section 2112 of SBJA adds § 402A(c)(4) to the Code, effective for distributions made after September 27, 2010, to permit plans that include a qualified Roth contribution program to allow individuals to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan. Currently, only § 401(k) plans and § 403(b) plans are permitted to include qualified Roth contribution programs. For taxable years beginning after 2010, § 2111 of SBJA permits governmental § 457(b) plans to include designated Roth accounts. Section 402A(c)(4)(A) of the Code provides that any distribution described in § 402A(c)(4) is included in gross income as if it were not rolled over to a designated Roth account. However, for such distributions made in taxable years beginning in 2010, unless the individual elects to include the taxable amount of the distribution in gross income for the taxable year beginning in 2010, the taxable amount of the distribution is includible half in the taxable year beginning in 2011 and half in the taxable year beginning in 2012. Section 402A(c)(4)(B) of the Code provides that in-plan Roth rollovers of eligible rollover distributions may only be made within a plan containing a qualified Roth contribution program from accounts other than designated Roth accounts and only if the otherwise applicable rollover requirements of § § 402(c), 403(b)(8) and 457(e)(16) are satisfied. Section 402A(c)(4)(D) of the Code provides that the rules of § 408A(d)(3)(D), (E), and (F) apply for purposes of § 402A(c)(4). The Joint Committee on Taxation's Technical Explanation of H.R. 5297, which became SBJA, states that an employer may add new, permissible distribution options to a plan that are conditioned on the employee directly rolling over the distribution to his or her designated Roth account under the plan. (JCX-47-10, September 16, 2010, at page 42.) III. Guidance Q-1. What is an “ in-plan Roth rollover” ? A-1. An “ in-plan Roth rollover” is a distribution from an individual's plan account, other than a designated Roth account, that is rolled over to the individual's designated Roth account in the same plan, pursuant to new § 402A(c)(4) of the Code. The rollover may be accomplished by a direct rollover (an “ in-plan Roth direct rollover” ) or by a distribution of funds to the individual who then rolls over the funds into his or her designated Roth account in the plan within 60 days (an “ in-plan Roth 60-day rollover” ). Section 402A(c)(4) applies to distributions made after September 27, 2010. Q-2. What amounts are eligible for in-plan Roth rollovers? A-2. Any vested amount held in a plan account for a plan participant (other than an amount held in a designated Roth account) is eligible for an in-plan Roth rollover to a designated Roth account in the same plan. However, an amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the Code and is an eligible rollover distribution as defined in § 402(c)(4). Thus, in the case of a § 401(k) plan participant who has not had a severance from employment, an in-plan Roth rollover from the participant's pre-tax elective deferral account is permitted to be made only if the participant has reached age 591/2 , has died or become disabled, or receives a qualified reservist distribution as defined in § 72(t)(2)(G)(iii). See Rev. Rul. 2004-12, 2004-1 C.B. 478, for a discussion of the various distribution timing restrictions applicable to amounts held in a plan. An amount is eligible for an in-plan Roth rollover only if the plan provides for such rollovers. But see Q&As-15 through -20 of this notice, permitting retroactive amendments for this purpose. Q-3. Is an in-plan Roth direct rollover treated as a distribution for all purposes? A-3. No. Because an in-plan Roth direct rollover merely changes the account in a plan under which an amount is held and the tax character of the amount, a distribution that is rolled over in an in-plan Roth direct rollover is not treated as a distribution for the following purposes: (a) Section 72(p) (relating to plan loans). A plan loan transferred in an in-plan Roth direct rollover without changing the repayment schedule is not treated as a new loan (so the rule in § 1.72(p)-1, Q&A-20, of the Income Tax Regulations does not apply). (b) Section 401(a)(11) (relating to spousal annuities). A married plan participant is not required to obtain spousal consent in connection with an election to make an in-plan Roth direct rollover. (c) Section 411(a)(11) (relating to participant consent before an immediate distribution of an accrued benefit in excess of $5,000). The amount rolled over continues to be taken into account in determining whether the participant's accrued benefit exceeds $5,000, and a notice of the participant's right to defer receipt of the distribution is not triggered by the in-plan Roth direct rollover. (d) Section 411(d)(6)(B)(ii) (relating to elimination of optional forms of benefit). A participant who had a distribution right (such as a right to an immediate distribution of the amount rolled over) prior to the rollover cannot have this right eliminated through an in-plan Roth direct rollover. Q-4. Can a plan add an in-plan Roth direct rollover option for amounts that are not otherwise distributable under the terms of the plan but that would be permitted to be distributed under the Code if the plan so provided? A-4. Yes. A plan may be amended to add an in-plan Roth direct rollover option for amounts that are permitted to be distributed under the Code but that have not been distributable under more restrictive terms contained in the plan. Moreover, such an amendment is not required to permit any other rollover or distribution option for these amounts. For example, a plan that does not currently allow for in-service distributions from a participant's pre-tax elective deferral account may be amended to permit in-plan Roth direct rollovers from this account by participants who have attained age 591/2 , while not otherwise permitting distribution of these amounts. (However, a plan amendment imposing such a restriction on a pre-existing distribution option would violate § 411(d)(6).) Q-5. Must a plan that offers in-plan Roth rollovers include a description of this feature in the written explanation the plan provides pursuant to § 402(f) to an individual receiving an eligible rollover distribution? A-5. Yes. For example, if the plan administrator generally bases its explanation under § 402(f) on the safe harbor explanation published in Notice 2009-68, 2009-39 I.R.B. 423, the safe harbor explanation for payments not from a designated Roth account could be revised by adding a new section in the “ SPECIAL RULES AND OPTIONS” portion of the explanation that describes the consequences if the distributee were to roll over a payment to a designated Roth account in the same plan, including the following information: • If the distributee rolls over the payment to a designated Roth account in the plan, the amount of the payment rolled over (reduced by any after-tax amounts directly rolled over) will be taxed. However, the 10% additional tax on early distributions will not apply (unless the distributee takes the amount rolled over out of the designated Roth account within the 5-year period that begins on January 1 of the year of the rollover). For payments from the plan in 2010 that are rolled over to a designated Roth account in the plan (and that are not distributed from that account until after 2011), the taxable amount of the rollover will be taxed half in 2011 and half in 2012, unless the distributee elects to be taxed in 2010. • If the distributee rolls over the payment to a designated Roth account in the plan, later payments from the designated Roth account that are qualified distributions will not be taxed (including earnings after the rollover). A qualified distribution from a designated Roth account is a payment made both after the distributee attains age 591/2 (or after the distributee's death or disability) and after the distributee has had a designated Roth account in the plan for a period of at least 5 years. The 5-year period described in the preceding sentence begins on January 1 of the year the distributee's first contribution was made to the designated Roth account. However, if the distributee made a direct rollover to a designated Roth account in the plan from a designated Roth account in a plan of another employer, the 5-year period begins on January 1 of the year the distributee's first contribution was made to the designated Roth account in the plan or, if earlier, to the designated Roth account in the plan of the other employer. Payments from the designated Roth account that are not qualified distributions will be taxed to the extent allocable to earnings after the rollover, including the 10% additional tax on early distributions (unless an exception applies). The section in the safe harbor explanation on payments to a Roth IRA would also need to be revised to reflect that rollovers to the plan's designated Roth account are permitted. Further, for an in-plan Roth direct rollover for in which other distribution alternatives are not available, the safe harbor explanation would need to be revised to reflect the inapplicability of information in the explanation about other distribution alternatives. Q-6. If a participant elects an in-plan Roth rollover, can he or she later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs? A-6. No. The recharacterization rule in § 408A(d)(6) applies only to contributions to IRAs. Q-7. What are the tax consequences of an in-plan Roth rollover? A-7. The taxable amount of the in-plan Roth rollover must be included in the participant's gross income. The taxable amount of an in-plan Roth rollover is the amount that would be includible in a participant's gross income if the rollover were made to a Roth IRA. This amount is equal to the fair market value of the distribution reduced by any basis the participant has in the distribution. (See Notice 2009-75, 2009-35 I.R.B. 436.) Thus, if the distribution includes employer securities attributable to employee contributions, the fair market value includes any net unrealized appreciation within the meaning of § 402(e)(4). If an outstanding loan is rolled over in an in-plan Roth rollover, the amount includible in gross income is the balance of the loan. Q-8. Are in-plan Roth direct rollovers subject to 20% mandatory withholding? A-8. No, 20% mandatory withholding under § 3405(c) does not apply to an in-plan Roth direct rollover. However, a participant electing an in-plan Roth rollover may have to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty. See Publication 505, Tax Withholding and Estimated Tax. Q-9. When is the taxable amount of an in-plan Roth rollover includible in gross income? A-9. Generally, the taxable amount of a distribution that an individual rolls over in an in-plan Roth rollover is includible in gross income in the taxable year in which the distribution occurs. Q-10. Is there an exception to the general rule regarding the year of income inclusion for in-plan Roth rollovers made in 2010? A-10. Yes. For distributions made in 2010 that are rolled over in an in-plan Roth rollover, the taxable amount is includible in gross income half in 2011 and half in 2012 unless the individual elects to include the taxable amount in gross income in 2010 (or unless the special rules described in Q&A-11 of this notice apply). An individual's election of 2010 income inclusion may not be changed after the due date (including extensions) for filing the individual's 2010 income tax return. The election applies to all of an individual's 2010 distributions that are rolled over in an in-plan Roth rollover. The election is independent of any election made with respect to qualified rollover contributions (as defined in § 408A(e)) to a Roth IRA from either a non-Roth IRA or a plan account other than a designated Roth account. The rules in this Q&A-10 and in Q&A-11 relating to the years 2010, 2011 and 2012 apply to calendar-year taxpayers; parallel rules apply to taxable years beginning in 2010, 2011 and 2012 for individuals who are not calendar-year taxpayers. Q-11. If a plan participant is deferring, to 2011 and 2012, inclusion in income of the taxable amount from a 2010 in-plan Roth rollover, are there any special income acceleration rules for distributions allocable to the 2010 in-plan Roth rollover? A-11. Yes, pursuant to § § 402A(c)(4)(D) and 408A(d)(3)(E), if the participant receives a distribution of an amount in 2010 or 2011 allocable to the taxable amount of a 2010 in-plan Roth rollover that would otherwise not be includible in gross income until 2011 and 2012, then the participant's gross income for the year of the distribution is increased by the amount of the distribution that would otherwise not be includible in gross income until a later year. In such a case, the amount that would otherwise be includible in the participant's gross income in 2012 is reduced by the income accelerated. Also, if the distribution is made in 2010, the amount that would otherwise be includible in the participant's gross income in 2011 is reduced by the amount the income accelerated to 2010 exceeds the amount that would otherwise be includible in income in 2012. For example, if a participant makes an in-plan Roth rollover in 2010 with the taxable amount of the rollover, $8,000, being deferred to 2011 and 2012 and then takes a distribution in 2010 or 2011 from the designated Roth account that consists of $5,000 allocable to the taxable amount of the 2010 in-plan Roth rollover, then the participant's gross income for the year of the distribution must be increased by the taxable amount of the rollover that would otherwise be deferred to a later year. If this distribution occurred in 2010, the $5,000 is included in the participant's 2010 gross income and the remaining taxable amount of the 2010 in-plan Roth rollover, $3,000, is included in the participant's 2011 gross income. The income acceleration rule in this Q&A-11 does not apply to a distribution that is rolled over to another designated Roth account of the participant or to a Roth IRA owned by the participant; however, the rule does apply to subsequent distributions made from such other designated Roth account or Roth IRA in 2010 or 2011. For purposes of this Q&A-11, the rules in § § 1.408A-4, Q&A-11, and 1.408A-6, Q&A-6, on income acceleration (as modified by substituting the 2-year spread under § 2112 of SBJA for the 4-year spread in the regulations under § 408A of the Code) also apply. See Q&A-13 of this notice for rules on allocating distributions to in-plan Roth rollovers. Q-12. Are there any special rules relating to the application of the 10% additional tax under § 72(t) for distributions allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years? A-12. Yes, pursuant to § § 402A(c)(4)(D) and 408A(d)(3)(F), if an amount allocable to the taxable amount of an in-plan Roth rollover is distributed within the 5-taxable-year period beginning with the first day of the participant's taxable year in which the rollover was made, the amount distributed is treated as includible in gross income for the purpose of applying § 72(t) to the distribution. The 5-taxable-year period ends on the last day of the participant's fifth taxable year in the period. Thus, if a participant withdraws an amount that includes $6,000 allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years, the $6,000 is treated as includible in the participant's gross income for purposes of applying § 72(t) to the distribution. In such a case, the participant would owe an additional tax of $600 unless an exception under § 72(t)(2) applies. The 5-year recapture rule in this Q&A-12 does not apply to a distribution that is rolled over to another designated Roth account of the participant or to a Roth IRA owned by the participant; however, the rule does apply to subsequent distributions made from such other designated Roth account or Roth IRA within the 5-taxable-year period. For purposes of this Q&A-12, the rules in § 1.408A-6, Q&A-5, on the application of § 72(t) also apply. See Q&A-13 of this notice for rules on allocating distributions to the taxable amount of in-plan Roth rollovers. Q-13. How is an amount distributed from a plan allocated to the taxable amount of an in-plan Roth rollover for purposes of Q&As-11 and -12 of this notice? A-13. Solely for purposes of the income acceleration rule in Q&A-11 and the 5-year recapture rule in Q&A-12, an amount distributed that, under the terms of the plan, is paid from a separate account maintained solely for in-plan Roth rollovers (an in-plan Roth rollover account) is treated as attributable to an in-plan Roth rollover to the extent the amount distributed constitutes recovery of basis determined under the rules of § 72 and § 1.402A-1, Q&A-9. Any amount distributed from a designated Roth account that, under the terms of the plan is not paid from an in-plan Roth rollover account, is treated as attributable to an in-plan Roth rollover to the extent the portion of the distribution that represents a recovery of basis under the rules of § 72 and § 1.402A-1, Q&A-9, exceeds the basis in the designated Roth account other than the basis resulting from in-plan Roth rollovers. If an amount distributed is treated as attributable to an in-plan Roth rollover, then the rules of § 408A(d)(4)(B)(ii)(II) and the last sentence of § 408A(d)(4) apply. Thus, a distribution is attributed to an in-plan Roth rollover on a first-in-first-out basis and any amount attributed to such a rollover is allocated first to the taxable amount of the rollover. Example. In 2010, Participant P, age 45, makes a $100,000 in-plan Roth direct rollover from his profit-sharing account and defers the inclusion of the $90,000 taxable amount of the rollover to 2011 and 2012 ($45,000 in 2011 and $45,000 in 2012). At the time of the in-plan Roth direct rollover, P's designated Roth account contains $78,000 of regular Roth contributions and $25,000 of earnings. Since this is an in-plan Roth direct rollover, the rollover amount is separately accounted for within the designated Roth account. Later in 2010, P takes a $106,000 in-service withdrawal from his designated Roth account. The source can only be the in-plan Roth rollover account, since P is under age 591/2 , which is the earliest the plan allows in-service distributions of elective deferrals from a designated Roth account. At the time of the distribution, P's designated Roth account consists of: In-Plan Roth Rollover Account: In-plan Roth rollover contributions ($10,000 basis).... ... ... ... $100,000 Earnings.... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ....$6,000 Total... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .$106,000 Regular Roth Account: Regular Roth contributions... ... ... ... ... ... ... ... ... ... ... ... ... ... ..$80,000 Earnings... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..$24,000 Total... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... $104,000 Total in designated Roth account... ... ... ... ... ... ... ... ... ... ... ... ... ... ..$210,000 Under the pro-rata rules of § 72, of the $106,000 distribution, $106,000 x 30,000/210,000, or $15,143, is includible in P's gross income. All of the $90,857 of the distribution that is a return of basis is allocated to the in-plan Roth rollover account. P is subject to the additional 10% tax under § 72(t) on $105,143 (the $90,000 taxable amount of the in-plan Roth rollover under the 5-year recapture rule plus $15,143 that is includible in P's gross income under the pro-rata rules of § 72). Also, the entire $90,000 taxable amount of the in-plan Roth rollover is includible in P's gross income for 2010 (rather than being includible in gross income half in 2011 and half in 2012). Since the amount of the in-plan Roth rollover was $100,000, there is $9,143 that may still be allocated to the rollover. This will be reported on a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., by the trustee if another distribution within 5 years is allocable to this rollover, but none of it will be subject to § 72(t) under the 5-year recapture rule because all the taxable amount of the in-plan Roth rollover has been used up. If P were eligible for a distribution from his regular Roth account within his designated Roth account, he could have withdrawn $93,333 and none of it would be allocable to the in-plan Roth rollover (because, of the $93,333 distribution, $80,000 is a return of basis and that would be absorbed by the $80,000 basis in P's regular Roth account). If P withdrew more than $93,333, some would be allocated to the taxable amount of the in-plan Roth rollover even if P asked that the distribution be made from his regular Roth account. Q-14. Is a beneficiary or alternate payee eligible to elect an in-plan Roth rollover? A-14. An in-plan Roth rollover can be elected by a beneficiary only if he or she is a surviving spouse and by an alternate payee only if he or she is a spouse or former spouse. This is because in-plan Roth rollovers can only be elected with respect to distributions that are eligible rollover distributions as defined in § 402(c)(4) that can be rolled over to § 401(k) plans. Section 402(c)(4) defines an eligible rollover distribution as any of certain distributions “ to an employee.” Section 402(c)(9) and § 402(e)(1)(B) provide that a spousal beneficiary, and an alternate payee who is a spouse or former spouse, is treated as the employee for purposes of § 402(c)(4). (While § 402(c)(11) permits a non-spouse beneficiary to elect rollover treatment of certain amounts, that provision does not apply to rollovers to qualified plans.) Q-15. Is a plan amendment providing for in-plan Roth rollovers in a § 401(k) plan required to be adopted by the end of the 2010 plan year? A-15. No. Under section 5.02 of Rev. Proc. 2007-44, 2007-2 C.B. 54, which sets forth certain deadlines for adopting amendments to qualified plans, a plan amendment that provides for in-plan Roth rollovers is a discretionary amendment and ordinarily the amendment would have to be adopted by the last day of the plan year in which the amendment is effective. However, to give plan sponsors sufficient time to adopt plan amendments and thereby enable plan participants to make in-plan Roth rollovers before the end of the 2010 plan year, the Service is extending the deadline for adopting a plan amendment described in Q&A-17 (including amendments to provide for in-plan Roth rollovers in a § 401(k) plan) to the later of the last day of the plan year in which the amendment is effective or December 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment. Q-16. What is the deadline for adopting a plan amendment providing for in-plan Roth rollovers in a § 403(b) plan? A-16. Announcement 2009-89, 2009-52 I.R.B. 1009, provides that if an employer adopts, on or before December 31, 2009 (or, if later, the date the plan is established) a written § 403(b) plan intended to satisfy the requirements of § 403(b) and the regulations, the employer will have a remedial amendment period in which to amend the plan to correct any form defects retroactive to January 1, 2010 (or the date the plan is established), provided that the employer subsequently adopts a pre-approved plan that has received a favorable opinion letter from the Service or applies for an individual determination letter, under forthcoming procedures. In this case, the employer will have reliance that the form of its written plan satisfies the requirements of § 403(b) and the regulations, provided that, during the remedial amendment period, the plan is amended to correct any defects retroactive to January 1, 2010 (or the date the plan is established). In the case of a § 403(b) plan that has a remedial amendment period pursuant to Announcement 2009-89, a plan amendment described in Q&A-17 (including a plan amendment providing for in-plan Roth rollovers) is not required to be adopted before the later of the end of that remedial amendment period or the last day of the first plan year in which the amendment is effective, provided the amendment is effective as of the date the plan first operates in accordance with the amendment. Q-17. What plan amendments does the extension of time under Q&A-15 or Q&A-16 apply to? A-17. The extension of time to adopt a plan amendment under Q&A-15 or Q&A-16 applies to any plan amendment that is adopted pursuant to § 2112 of SBJA. Thus, for example, if a § 401(k) plan or a § 403(b) plan is amended to permit in-plan Roth rollovers, the applicable extension of time under Q&A-15 or Q&A-16 applies to a plan amendment that permits elective deferrals under the plan to be designated as Roth contributions, a plan amendment that provides for the acceptance of rollover contributions by the designated Roth account, and the plan amendment that permits in-plan Roth rollovers, including a plan amendment described in Q&A-4. However, the extension of time to adopt a plan amendment does not apply to a plan amendment that adds a § 401(k) cash or deferred arrangement to the plan. See § 1.401(k)-1(a)(3)(iii)(A). Q-18. Does the extension of time described in Q&As-15 through -17 of this notice apply to § 401(k) safe harbor plans described in § 401(k)(12) or (13)? A-18. Yes, however, instead of the extension being to the later of the last day of the plan year in which the amendment is effective or December 31, 2011, the extension for a § 401(k) safe harbor plan described in § 401(k)(12) or (13) is to the later of December 31, 2011, or the time specified in § 1.401(k)-3(e)(1) (requiring, generally, that safe harbor plan provisions be adopted before the first day of the plan year in which they are effective). Thus, for example, a § 401(k) safe harbor plan with a plan year beginning July 1 may operationally comply with § 2112 of SBJA during the plan year beginning July 1, 2010 (for distributions made after September 27, 2010) and the plan year beginning July 1, 2011, without having to be amended for such change in operation until December 31, 2011. Q-19. Must a plan have a qualified Roth contribution program in place at the time a rollover contribution to a designated Roth account is made in an in-plan Roth rollover? A-19. Yes. Thus, for participants to be eligible for the 2-year income deferral described in Q&A-10 of this notice, the distribution must be made no later than December 31, 2010, and, at the time of the rollover contribution to the designated Roth account, the plan must have a qualified Roth contribution program in place. Q-20. For purposes of Q&A-19 of this notice, when is a qualified Roth contribution program in place? A-20. Although, pursuant to Q&As-15 through -18 of this notice, a plan may be amended retroactively to add a qualified Roth contribution program, such a program is in place on a given date only if, with respect to compensation that could be deferred beginning with that date, eligible employees are given an opportunity to elect on that date to have designated Roth contributions made to the plan (or would have such an opportunity but for a statutory or plan limitation on the amount of an employee's elective deferrals). Drafting Information The principal author of this notice is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this notice may be sent via e-mail to RetirementPlanQuestions@irs.gov.
New case on the trust fund recovery penaltyu U.S. v. BIBIN, Jr., Cite as 106 AFTR 2d 2010-XXXX, 11/17/2010 Code Sec(s): Court Name: UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION, Docket No.: Case No. 09-13388, Date Decided: 11/17/2010. Disposition: Sections 3102(a) and 3402(a) of the Internal Revenue Code require an employer to deduct and withhold income and social security taxes from the wages paid to its employees. Slodov v. United States, 436 U.S. 238, 242–43 [42 AFTR 2d 78-5011] (1978). Employers are also required to pay over their own contributions to the social security system. See 26 U.S.C. § 3111. “Because federal law requires employers to hold these funds in “trust for the United States,” 26 U.S.C. § 7501(a), these taxes are commonly referred to as “trust fund” taxes.” United States v. Energy Resources Co., Inc., 495 U.S. 545, 546–47 [65 AFTR 2d 90-1078] (1990). These “trust fund taxes” are for the exclusive use of the government and are not to be used as working capital for the business or to pay the employer's business expenses, including payroll. 26 U.S.C. §§ 3102(b), 3403, 7501(a); Begier v. Internal Revenue Service, 496 U.S. 53, 60–61 [65 AFTR 2d 90-1095] (1990) (the act giving rise to tax liability, e.g., payment of wages, gives rise to a statutory trust in favor of the United States). The employer is required to report the amount of withheld taxes on its “Employer's Quarterly Federal Tax Return” (Form 941). See 26 C.F.R. § 31.6011(a)-4(a)(1). A Form 941 tax return must be filed every calendar quarter and is generally due on the last day of the first month following the quarter. See 26 C.F.R. § 31.6071(a)-1(a). Once the trust fund taxes are withheld from the employees' wages, the government is required to credit the amount withheld against the employees' individual income tax liabilities, and to record their earnings for Social Security and Medicare eligibility, regardless of whether such taxes are actually paid to the United States and even though the credits may result in refunds to the employees based upon taxes which it has never actually received. See 26 U.S.C. § 31(a); 26 C.F.R. § 1.31-1(a). Thus, the government suffers a loss of revenue, and incurs an unfunded Social Security and Medicare liability, when the “trust fund taxes” are not remitted by the employer. Here, the government suffered such a loss and assessed it against Bibin. Tax assessments by the IRS are entitled to a presumption of correctness. Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933); Sherwin-Williams Co. v. United States, 403 F.3d 793, 796 [95 AFTR 2d 2005-1864] (6th Cir. 2005). In a suit by the government to reduce liabilities to judgment, the introduction into evidence of Forms 4340, Certificates of Assessment and Payment, establishes a prima facie case. United States v. Noble, 3 Fed. Appx. 331, 334 [87 AFTR 2d 2001-719] (6th Cir. 2001); United States v. Walton, 909 F.2d 915, 919 [66 AFTR 2d 90-5379] (6th Cir. 1990). “[T]he taxpayer will bear not only the burden of production, but also the burden of proving by a preponderance of the evidence that the Commissioner's assessment is “arbitrary and excessive.”” Id. at 918–919 (quoting Helvering v. Taylor, 293 U.S. 507, 515 [14 AFTR 1194] (1935)). The taxpayer must demonstrate either that the assessment is erroneous or that the assessment lacked a minimal evidentiary foundation. Id. “If the taxpayer fails to meet his burden of presenting sufficient evidence showing the assessments to be incorrect, summary judgment in favor of the Government is appropriate upon submission of the Certificates of Assessments and Payments.” Fisher v. United States, 61 F.Supp.2d 621, 630 [83 AFTR 2d 99-2065] (E.D. Mich. 1999). The taxpayer bears the burden of proving by a preponderance of the evidence, that, in fact, the assessment is incorrect.” Fisher, supra, 61 F.Supp. at 630; see also United States v. Kraljevich, 364 F. Supp. 2d 655, 657 [95 AFTR 2d 2005-1881] (E.D. Mich. 2005) (citing Kinnie v. United States, 994 F.2d 279, 283 [71 AFTR 2d 93-1979] (6th Cir. 1993) (the person against whom trust fund assessments are made “bears the burden of proving that he is not a responsible person under section 6672 and that he did not act willfully in failing to pay over the taxes.”); Ameriquest Mortgage Co. v. Savalle, 2009 WL 2033236 [104 AFTR 2d 2009-5337], 3 (E.D. Mich., Jul. 9, 2009) (“An IRS assessment under 26 U.S.C. § 6672 is presumptively correct and the person against whom an assessment is made has the burden of showing that he was not a responsible person or that his failure to pay the withholding taxes was not willful.”). Bibin has not offered any evidence contesting the assessments. Thus, the question is whether Bibin is a responsible person or acted willfully in failing to pay over the taxes. As to whether Bibin is a responsible person, section 6672 of the Internal Revenue Code provides that [a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. 26 U.S.C. § 6672. “Person” as used in § 6672 includes, but in no way is limited to, an officer or employee of a company who is under a duty to collect and remit the taxes to the United States. 26 U.S.C. §6671(b). Thus, § 6672 authorizes the collection of the taxes from those persons who were responsible for the company's failure to pay them. “A person is responsible under section 6672 if he retains sufficient control of corporate finances that he can allocate corporate funds to pay the corporation's other debts in preference to the corporation's withholding tax obligations.” Id. at 728. Here, the evidence supports a finding that throughout the default periods when the taxes were not paid, Bibin was a responsible person at Tannery. He had a duty to collect and remit the trust fund taxes at issue to the government. Bibin was the sole shareholder and officer of Tannery, signed tax filings, had check-signing authority, supervised the business operations of the company, hired and fired employees, managed employees, directed or authorized payment of bills, opened and closed corporate bank accounts, signed and countersigned corporate checks, made or authorized bank deposits, authorized payroll checks, authorized payment of federal tax deposits, reviewed federal income tax returns, reviewed payroll tax returns or tax payments, and determined company financial policy. Bibin was also responsible for communicating with the IRS, had discussions with the company's accountants regarding the liabilities, and even admitted that he was responsible in a signed statement. Moreover, by his own admissions, Bibin had nearly total control of the financial affairs of Tannery, uniquely possessed the ability to avoid the default on the company's trust fund tax obligations. Thus, there is no dispute that Bibin is a responsible person under § 6672.4. As to whether Bibin acted willfully in that he knew, or recklessly disregarded the known risk, that trust fund taxes were not being paid to the government. ““Willfully” means merely that the responsible person “had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the Government.”” Cooper v. United States, 827 F.Supp. 1309, 1313 [72 AFTR 2d 93-5865] (E.D. Mich. 1993) (citing cases). Willfulness may also be established if the responsible person “recklessly disregarded facts and known risks that the taxes were not being paid,” such as “when a responsible officer attempts to “immunize himself from the consequences of his actions by wearing blinders which will shut out all knowledge of the liability for and the nonpayment of [the] withholding taxes.”” Harold, 195 Fed.Appx. at 364 and 366 (citing Calderone v. United States, 799 F.2d 254, 264 [58 AFTR 2d 86-5703] and 260 (6th Cir. 1986)). “The responsible party need not exhibit an intent to defraud the IRS or some other evil motive; all that is necessary to demonstrate willfulness is the existence of an intentional act to pay other creditors before the federal government.” Bell v. United States, 355 F.3d 387, 393 [93 AFTR 2d 2004-369] (6th Cir. 2004). Furthermore, “[i]t is no excuse that, as a matter of sound business judgment, the money was paid to suppliers and for wages in order to keep the corporation operating as a going concern—the government cannot be made an unwilling partner in a floundering business.” Collins v. United States, 848 F.2d 740, 741–42 [62 AFTR 2d 88-5038] (6th Cir. 1988). Rather, “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.” Cooper v. United States, supra, 827 F.Supp. at 1313 (citing cases)

Monday, November 29, 2010

www.irstaxattorney.com 888-712-7690 Innocent spouse relief Spouse gets relief from joint tax liability despite knowledge of possible nonpayment Gail Prescott Drayer, TC Memo 2010-257 The Tax Court has granted an individual's request for equitable innocent spouse relief under Code Sec. 6015(f) even though she knew that taxes might not be paid. While she failed to qualify for safe harbor relief, the Court applied a balancing test to determine that relief was appropriate. Background. Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return. However, Code Sec. 6015(f) allows relief to a requesting spouse if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable. Under Rev Proc 2003-61, Sec. 4.01 , a taxpayer must meet seven threshold conditions before IRS will consider a request for equitable innocent spouse relief. Equitable relief will ordinarily be granted if the requesting spouse fulfills three safe harbor conditions in Rev Proc 2003-61, Sec. 4.02 . When a requesting spouse fails to satisfy the safe harbor conditions, IRS may determine through a balancing test whether equitable relief is appropriate. This test involves weighing various factors that are set forth in Rev Proc 2003-61, Sec. 4.03 . Facts. Gail Prescott Drayer and Charles Dryer divorced in 2004 after 21 years of marriage. Gail asked the Tax Court for equitable innocent spouse relief for tax liabilities arising from David's sole proprietorship during tax years '95 through 2003. David began the sole proprietorship, a sign-making business, before meeting Gail. After they married, she left her job as a newspaper typesetter and became a homemaker. Her primary focus was to raise the couple's children and to care for their household. She did, however, assist David with his business in a limited capacity. David testified that Gale made no business decisions and probably did not know how much his business made. The business was the couple's sole source of income from '87 through 2002. The income was modest, and they struggled to pay expenses beyond family necessities. In 2003, Gail got a position as a caregiver. The Drayers filed joint Federal income tax returns for the years at issue. Gail thought she was legally required to sign their tax returns because they were married. Both spouses knew when signing their returns that might not be able to pay their tax liabilities. The Drayers' marriage became increasingly rocky. Gale worried about unpaid tax liabilities, but David would furiously insist that he would handle the problem and would submit another offer-in-compromise to IRS. The Drayers eventually divorced. Gail's financial situation has been tight since her divorce. From 2003 through 2009, she worked part time as an in-home care giver. She earned an annual average of $5,840 from 2004 through 2008. Gail retained the services of AARP Tax-Aide to prepare her timely filed income tax returns for 2004 through 2009 and timely filed and paid the tax bills for those years. She later discovered that $4,880 and $10,357.20 of alimony had been omitted from her 2004 and 2005 tax returns, respectively. She also later learned that $366 of unemployment compensation had been omitted from her 2006 return. Gail requested innocent spouse relief in 2007 for the Drayers' unpaid tax liability of over $230,000 for multiple years. As part of IRS's review, David completed a Form 12508, Questionnaire for Non-Requesting Spouse, where he stated that Gail was not a help with the business. IRS made a preliminary determination to deny Gail's request for innocent spouse relief, determining that she failed to prove she had reason to believe the taxes would be paid when she signed the returns. She appealed the determination and IRS's Appeals Office agreed that Gail met all seven threshold requirements for relief and would suffer economic hardship if obligated to pay the tax liabilities. Appeals also determined that Gail was compliant with tax laws as of the time of determination and that the income tax liabilities in question were attributable to David. Nevertheless, Appeals disallowed the claim for relief in 2008, on the ground that Gail knew or had reason to know that the taxes reported on each return would not be paid. Threshold conditions met. Despite its Appeals Office determination, before the Tax Court, IRS argued that Gail did not meet the seven threshold conditions in Rev Proc 2003-61, Sec. 4.01 for IRS to consider a request for equitable innocent spouse relief. IRS said that she did not meet these conditions because she had not shown that the underpayments were attributable to her husband. The Tax Court disagreed, finding that Gail met her burden of proving that the income for the years at issue was attributable to David and his sole proprietorship. No safe harbor relief. The parties agreed that Gail did not qualify for safe harbor relief under Rev Proc 2003-61, Sec. 4.02(1)(b) , because she knew when she signed the returns that David would not pay the liabilities. Balancing test. The Tax Court applied the balancing test and reached these conclusions with respect to the factors in Rev Proc 2003-61, Sec. 4.03 : ... Marital status. This factor relates to the marital status at the time of the request for innocent spouse relief. The Drayers divorced in 2004, so this factor weighed in favor of relief. ... Economic hardship. This factor focuses on whether the requesting spouse would suffer economic hardship if relief were denied. Given Gail's age, education, low earnings, and other factors, the Court found that payment of such significant outstanding tax liabilities would cause her to suffer economic hardship if her request for relief were denied. This factor weighed in favor of relief. ... Knowledge about nonpayment. This factor is whether the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax liability. The parties agreed that Gail knew at the time she signed the returns that Charles was unlikely to pay the joint tax liabilities. This factor weighed against relief. ... Subsequent compliance with income tax laws. This factor considers whether the requesting spouse made a good faith effort to comply with income tax laws in subsequent years. The Court noted that Gail timely filed returns from 2004 to 2009 but there were some income omissions. When asked about the omissions at trial, Gail credibly indicated surprise and embarrassment. Under these circumstances, the Court found this factor to be neutral. ... Significant economic benefit. This factor is whether the requesting party received a significant economic benefit from the items giving rise to the liability. The Drayers did not receive a significant benefit from the failure to pay their tax liabilities, so this factor weighed in favor of relief. ... Abuse of requesting spouse. The Court found that the abuse factor weighed in favor of relief. ... Poor health. This factor considers whether the requesting spouse was in poor health when signing the return or requesting relief. Gail endured increasing amounts of abuse over the course of a 21-year marriage. She testified at trial that she was depressed after her divorce in 2004, when she was caring for the Drayers' two children and on her own for the first time. Her depression was subsequently diagnosed, and she received disability insurance benefits for depression from August 2009 through 2010. This factor weighed in favor of relief. ... Nonrequesting spouse's legal obligation to pay the outstanding liability This factor is whether the nonrequesting spouse had a legal obligation to pay the outstanding liability. The Drayers' divorce judgment did not assign responsibility for outstanding tax liabilities so this factor was neutral. Bottom line. Five factors weighed in favor of relief, one factor weighed against relief and two factors were neutral. After weighing the testimony and evidence in this fact-intensive and nuanced case, the Court concluded that it would be inequitable to hold Gail liable for the tax liabilities attributable to her ex-husband and his sole proprietorship. Accordingly, it relieved her from joint tax liability for the years in question. References: For equitable innocent spouse relief, see FTC 2d/FIN ¶ V-8553 ; United States Tax Reporter ¶ 60,154.04 ; TaxDesk ¶ 570,928 ; TG ¶ 1929 . Gail P. Drayer v. Commissioner, TC Memo 2010-257 , Code Sec(s) 6015. ________________________________________ GAIL PRESCOTT DRAYER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . Case Information: Code Sec(s): 6015 Docket: Docket No. 17915-08. Date Issued: 11/23/2010 Judge: Opinion by KROUPA HEADNOTE XX. Reference(s): Code Sec. 6015 Syllabus Official Tax Court Syllabus Counsel Barbara N. Doherty and Eric L. Lunsford, 1 for petitioner. John M. Wall, for respondent. Opinion by KROUPA MEMORANDUM FINDINGS OF FACT AND OPINION This case arises from a request for relief from joint and several liability under section 6015(f) 2 for the years 1995 through 2003 (the years at issue). Respondent denied petitioner's request for relief, and petitioner timely filed a stand-alone petition. 3 The issue for decision is whether petitioner is entitled to relief from joint and several liability under section 6015(f). We hold that she is entitled to relief. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of fact and the accompanying exhibits are incorporated by this reference. Petitioner resided in Santa Rosa, California at the time she filed the petition. Petitioner was in her mid-30s when she married Charles Drayer (Mr. Drayer) in 1983. The Drayers divorced in 2004 after 21 years of marriage. Petitioner seeks innocent spouse relief from tax liabilities arising from Mr. Drayer's sole proprietorship during the years at issue. Mr. Drayer began operating a sign-making business called Signs of All Kinds before meeting petitioner. He still owned and operated the business as a sole proprietorship at the time of trial. When petitioner met Mr. Drayer, she worked as a newspaper typesetter and layout artist. After the Drayers married, petitioner left her job and became a homemaker. Petitioner's primary focus was to raise the couple's children, a son born in 1987 and a daughter born in 1988, and to care for their household. During available time, however, petitioner assisted Mr. Drayer with his business. Her role was limited, and she performed relatively minor or administrative tasks such as assembling signs, doing secretarial work, obtaining permits, depositing checks into the business checking account, checking account balances from time to time at Mr. Drayer's direction and gathering financial information to give to the accountant. Petitioner did not design signs, secure business contracts, make business decisions, make sales or receive any compensation for her work. Indeed, Mr. Drayer testified that petitioner made no business decisions and probably did not know how much his business made. Signs of All Kinds was the couple's sole source of income The income from Signs of All Kinds was from 1987 through 2002. modest, and they struggled to pay expenses beyond family necessities. Mr. Drayer asked petitioner to get a job or seek training beyond her high school education when their children became older and were better able to care for themselves. Petitioner did not, however, have another paying job until she got a position as a care giver in 2003. The Drayers filed joint Federal income tax returns for the years at issue. Petitioner thought she was legally required to sign their tax returns because they were married. Petitioner and Mr. Drayer both knew when signing their tax returns for the years at issue that their financial situation was tight and that they might not be able to pay their tax liabilities. Times were tough for the Drayers, and their marriage became increasingly rocky. Mr. Drayer would often get very angry and had frequent outbursts, particularly in the context of discussions about finances and taxes. Petitioner worried about unpaid tax liabilities, but Mr. Drayer would furiously insist that he would handle the problem and would submit another offer- in-compromise to the Internal Revenue Service. Petitioner provided specific examples of angry outbursts, including a time when Mr. Drayer threatened to hit her and broke specific items. He also, after one such incident, told petitioner that he had intended to commit suicide. Mr. Drayer called petitioner derogatory names and publicly humiliated her. He also regularly drank a lot of alcohol and often smoked marijuana. After yet another fight, Mr. Drayer left petitioner and the couple eventually divorced. Petitioner was diagnosed with depression after their divorce. Petitioner retained custody of their two children in the divorce. Mr. Drayer was required to pay child support and spousal support, although spousal support payments were sometimes not made as directed. The judgment for dissolution of marriage did not, however, determine who would pay the couple's outstanding tax liabilities. Petitioner's financial situation has been tight since her divorce. From 2003 through 2009 petitioner worked part time as an in-home care giver. She earned an annual average of $5,840.20 from 2004 through 2008. 4 She was diagnosed with depression and was eligible to receive disability insurance benefits for a year beginning in August 2009. The disability assistance was due to expire in August 2010, at which time petitioner was expected to be able to perform her customary work. Petitioner's monthly income for 2007 was $1,366, which she spent on basic living expenses. 5 Petitioner's monthly income in 2009 totaled $1,793. 6 Petitioner was unemployed at the time of trial. Petitioner retained the services of AARP Tax-Aide to prepare her income tax returns, which were timely filed for 2004 through 2009. Despite her very modest income, petitioner timely filed and paid all liabilities shown on her returns for those years. Petitioner later discovered that $4,880 and $10,357.20 of alimony had been omitted from her 2004 and 2005 tax returns, respectively. She also later learned that $366 of unemployment compensation had been omitted from her 2006 return. Petitioner indicated surprise and embarrassment about the omissions at trial, and was not aware of any other omissions. Respondent asserts that petitioner failed to include $1,800 of alimony in income for 2007 as well. Petitioner requested innocent spouse relief in 2007 for the Drayers' unpaid tax liability of over $230,000 for multiple years. Petitioner checked a box on her initial request for innocent spouse relief, claiming that she was a victim of domestic abuse and feared that filing a claim for innocent spouse relief would result in retaliation. She neglected, however, to complete the question regarding abuse on her related questionnaire because she did not see the question when she and her friend from church completed the questionnaire. As part of respondent's review, Mr. Drayer completed a Form 12508, Questionnaire for Non-Requesting Spouse, where he stated under penalties of perjury that petitioner was not a help with the business. In fact, he stated that she was a simpleton. He confirmed there were no major assets transferred in the divorce except that petitioner received a car. Respondent made a preliminary determination to deny petitioner's request for innocent spouse relief, determining that she failed to prove she had reason to believe the taxes would be paid when she signed the returns. Petitioner appealed the determination. Respondent's Appeals Office agreed that petitioner had met all seven threshold requirements for relief and would suffer economic hardship if obligated to pay the tax liabilities. Respondent's Appeals Office also determined that petitioner was compliant with tax laws as of the time of determination and that the income tax liabilities in question are attributable to Mr. Drayer. Nevertheless, respondent's Appeals Office disallowed the claim for relief in 2008. Respondent denied her relief on the grounds that petitioner knew or had reason to know that the taxes reported on each return would not be paid. OPINION We must decide whether petitioner is entitled to relief from tax liabilities related to her ex-husband's sole proprietorship during the second half of their 21-year marriage. The liabilities consist of amounts shown as due on their returns and left unpaid. Petitioner argues that she qualifies for relief and it is inequitable to hold her liable for underpayments attributable to income from Mr. Drayer's business. Respondent's Appeals Office denied petitioner's claim because she had knowledge that the tax liability might not be paid. Respondent denied her relief even though respondent's Appeals Office determined petitioner had met all seven threshold requirements for relief and that other factors, including economic hardship, subsequent compliance with tax laws and attribution of the liability to Mr. Drayer, all weighed in petitioner's favor. Respondent now seeks to broaden the scope of issues to include those beyond petitioner's knowledge, and to refute determinations made by his Appeals Office. Only section 6015(f) applies as this case involves underpayment of taxes shown on joint returns for the relevant years. 7 The Commissioner has the discretion to relieve a spouse or former spouse of joint liability if, taking into account all the facts and circumstances, it is inequitable to hold that spouse liable for any deficiency or unpaid tax. Sec. 6015(f); sec. 1.6015-4(a), Income Tax Regs. We begin with the standard of review and the burden of proof. Respondent urges us to review the case for abuse of discretion. To do so, however, would be to reject our previous holding that the standard of review is de novo. Porter v. Commissioner, 132 T.C. 203 (2009). A trial de novo requires independent judicial determination of the issues in the case. See, e.g., Morris v. Rumsfeld, 420 F.3d 287, 292, 294 (3d Cir. 2005); Timmons v. White, 314 F.3d 1229, 1233-1234 (10th Cir. 2003). The spouse requesting relief generally bears the burden of proof. See Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 [93 AFTR 2d 2004-2561] (6th Cir. 2004). The Commissioner has outlined procedures for determining whether a requesting spouse qualifies for equitable relief under section 6015(f). See Rev. Proc. 2003-61, 2003-2 C.B. 296. We now analyze the facts under these procedures to determine whether petitioner qualifies for equitable relief. I. Threshold Conditions for Section 6015(f) Relief A requesting spouse must satisfy seven threshold conditions before the Commissioner will consider a request for relief. Id. sec. 4.01, 2003-2 C.B. at 297. Respondent's Appeals Office concluded that petitioner had satisfied all seven. In brief, however, respondent argued that petitioner has not shown that the Drayers' underpayments are attributable to her ex-husband. 8 We disagree. Mr. Drayer started his business, Signs of All Kinds, as a sole proprietorship before he met petitioner. He still owned and operated this business as a sole proprietorship long after their divorce. These facts, although not dispositive, are important. See Franc v. Commissioner, T.C. Memo. 2010-79 [TC Memo 2010-79]. Petitioner credibly testified that her primary focus was to raise her children and care for the Drayers' household. She may have left her job in part to help Mr. Drayer with his business. Her involvement in the business was minimal, however, and she did not play an active role. She did not design signs, make business decisions, make sales or secure contracts. She helped with the business only during available time outside of caring for the Drayers' two children and their home. During this limited time, petitioner assisted Mr. Drayer with his business by assembling signs, performing secretarial work, obtaining permits, depositing checks into the business checking account, checking account balances from time to time at Mr. Drayer's direction and gathering financial information to give to the accountant. Mr. Drayer asked petitioner to get a job or seek job training when their children became older and were better able to care for themselves. As such, petitioner did not actively and substantially participate in Mr. Drayer's work at Signs of All Cf. Ishizaki v. Commissioner, T.C. Memo. 2001-318 [TC Memo 2001-318]. Kinds. The Drayers' work was not collaborative and mutual, and petitioner was never identified as having an ownership interest in Signs of All Kinds. Cf. Olson v. Commissioner, T.C. Memo. 2009-294 [TC Memo 2009-294]. Instead, Mr. Drayer declared on his questionnaire for non-requesting spouse, under penalties of perjury, that petitioner was a simpleton and was not a help with the business. 9 Mr. Drayer also confirmed at trial that petitioner made no business decisions and probably did not know how much the business made. We find that petitioner met her burden of proving that the income for all the years at issue is attributable to Mr. Drayer and his sole proprietorship. Petitioner has satisfied the seven threshold conditions. We now consider whether relief will be granted. II. Safe Harbor for Section 6015(f) Relief Equitable relief will ordinarily be granted if the requesting spouse fulfills three safe harbor conditions. See Gonce v. Commissioner, T.C. Memo. 2007-328 [TC Memo 2007-328]; Billings v. Commissioner, T.C. Memo. 2007-234 [TC Memo 2007-234]; Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298. The parties agree that petitioner does not qualify for relief under the safe harbor because she knew when she signed the relevant returns that Mr. Drayer would not pay the liabilities. See Rev. Proc. 2003-61, sec. 4.02(1)(b), 2003-2 C.B. at 298. III. Balancing Test When a requesting spouse fails to satisfy the safe harbor conditions, the Commissioner may determine through a balancing test whether equitable relief is appropriate. The Commissioner has listed factors to be weighed by the Commissioner in See id. sec. 4.03, 2003-2 C.B. at 298-299. determining relief. The factors include (a) whether the requesting spouse (1) is separated or divorced from the nonrequesting spouse, (2) would suffer economic hardship if relief were denied, (3) had knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability, (4) made a good faith effort to comply with income tax laws in years after the years at issue, (5) received significant economic benefit from the items giving rise to the liability, (6) was abused by the nonrequesting spouse and (7) was in poor health when signing the return or requesting relief and (b) whether the nonrequesting spouse had a legal obligation to pay the outstanding liability. Id. sec. 4.03(2), 2003-2 C.B. at 298-299. The list is nonexhaustive and no single factor is determinative. Id. sec. 4.03(2), 2003-2 C.B. at 298. We address each of the factors in turn. A. Marital Status The first factor relates to the marital status at the time of the request for innocent spouse relief. Petitioner and Mr. Drayer divorced in 2004. This factor weighs in favor of relief. B. Economic Hardship If Relief Were Denied A second factor focuses on whether the requesting spouse would suffer economic hardship if relief were denied. Respondent's Appeals Office found that petitioner most likely would suffer economic hardship if relief were denied. Respondent now argues, however, that petitioner has failed to establish economic hardship because she failed to provide documentation of her current expenses. A requesting spouse suffers economic hardship if paying tax liabilities would prevent the taxpayer from paying reasonable basic living expenses. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; Rev. Proc. 2003-61, sec. 4.02(1)(c), 4.03(2)(a)(ii), 2003-2 C.B. at 298. The Court considers, among other things, in determining economic hardship (1) the taxpayer's age and earning potential, (2) an amount reasonably necessary for food, clothing, housing, medical expenses and transportation, (3) the amount of assets available to pay the taxpayer's expenses, (4) the cost of living in the geographical area in which the taxpayer lives and (5) any other factor bearing on economic hardship. See sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs. We may accept petitioner's testimony if we find it credible. See, e.g., Washington v. Commissioner, 120 T.C. 137, 150 (2003). Petitioner testified that she was on disability for depression at the time of trial, and that her financial situation since her divorce has been precarious. Indeed, petitioner's monthly income at the time of trial totaled $1,793. The disability insurance, which paid $588 per month, was due to expire in August 2010. At that time, petitioner was expected to be able to perform her customary work. Petitioner's customary work, however, has paid less than disability insurance benefits. Petitioner earned an average of $5,840.20 annually from 2004 through 2008, averaging $100 per month less than the amount she received under disability insurance. Petitioner also testified that she was 62 years old at the time of trial and that she has only a high school education. Petitioner worked as a newspaper typesetter and layout artist but has not done this work for more than 20 years. Petitioner appears to have little or no savings or other assets from which to pay extraordinary expenses. Mr. Drayer confirmed that she received only a car from the divorce. Petitioner listed $1,366 as income and the same amount as expenses on the questionnaire for requesting spouse, which she completed in 2007. Her monthly expense list identified very small amounts for rent, food, utilities, telephone and auto payments, insurance and repairs. 10 She listed no medical or insurance expenses and no amount for clothing. Respondent correctly notes that petitioner has not provided more current information regarding her expenses. Nevertheless, given petitioner's age, education, low earnings, expired disability benefits, history of depression and very modest list of 2007 expenses, we find that payment of such significant outstanding tax liabilities would cause petitioner to suffer economic hardship if her request for relief were denied. This factor weighs in favor of relief. C. Knowledge or Reason To Know That the Nonrequesting Spouse Would Not Pay the Income Tax Liability A third factor is whether the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax liability. The parties agree that petitioner knew at the time she signed the relevant returns that Mr. Drayer was unlikely to pay the joint tax liabilities. This factor weighs against relief. D. Subsequent Compliance With Income Tax Laws A fourth consideration is whether the requesting spouse made a good faith effort to comply with income tax laws in subsequent years. Respondent's Appeals Office had determined that petitioner was compliant with tax laws as of 2008 and that this factor weighed in favor of relief. Respondent now disputes this determination. Petitioner sought help from AARP Tax-Aide for income tax returns from 2004 to 2009. She timely filed returns for those years and timely paid the tax liabilities shown. She subsequently learned that there were omissions of alimony from her 2004 and 2005 returns and an omission of unemployment compensation from her 2006 return. 11 When asked about the omissions, petitioner's response at trial credibly indicated surprise and embarrassment about the omissions. Petitioner did not make excuses for her failure and credibly stated that she was not aware of any other omissions. This factor is neutral. E. Significant Economic Benefit A fifth factor is whether the requesting party received a significant economic benefit from the items giving rise to the liability. The parties stipulated that the Drayers did not receive a significant benefit from their failure to pay their tax liabilities. Respondent makes the outlandish assertion in his posttrial brief that petitioner's failure to secure adequate additional income for the family indicates that she received a significant benefit. We will not allow this posttrial contradiction of a conclusive admission. See Rule 91(e). This factor weighs in favor of relief. F. Abuse A sixth factor is abuse of the requesting spouse. Abuse by the nonrequesting spouse favors relief, and a history of such abuse may mitigate a requesting spouse's knowledge that a tax liability would not be paid. Rev. Proc. 2003-61, sec. 4.03(2)(b)(i), 2003-2 C.B. at 299. Abuse need not be physical. The Court has found that mental, emotional and verbal abuse may incapacitate a requesting spouse in the same way as physical abuse. Nihiser v. Commissioner, T.C. Memo. 2008-135 [TC Memo 2008-135]. Claims of abuse require substantiation or specificity in allegations. See id.; Knorr v. Commissioner, T.C. Memo. 2004-212 [TC Memo 2004-212]; Collier v. Commissioner, T.C. Memo. 2002-144 [TC Memo 2002-144]. The Court has noted that this area of tax law is not well developed and requires a careful case-by-case analysis. Nihiser v. Commissioner, supra. Some objective indications of abuse that the Court has considered include (1) isolating the victim, (2) encouraging exhaustion of the victim, (3) obsessive or possessive behavior, (4) threats to commit suicide, to murder the requesting spouse or to kill family or friends, (5) using degrading language including humiliation, denial of victim's talents and abilities and name-calling, (6) abusing drugs or alcohol, or administering such substances to the victim, (7) undermining the victim's ability to reason independently or (8) occasional positive behavior, suggesting that the abuse might end. Id. With this background, we begin with a review of the administrative record and then turn to the testimony presented at trial. Petitioner claimed on her initial request for innocent spouse relief (Form 8857) that she was a victim of domestic abuse and feared requesting innocent spouse relief would result in retaliation. Petitioner credibly testified that she did not describe the abuse on her questionnaire (Form 12510) because she did not see the question, which was at the bottom of the form, when she and her friend from church completed the questionnaire. We now turn to the conflicting trial testimony regarding abuse. It is our duty as the Court to listen to testimony, observe witnesses, weigh the evidence and distill the truth. Diaz v. Commissioner, 58 T.C. 560, 564 (1972); Kropp v. Commissioner, T.C. Memo. 2000-148 [TC Memo 2000-148]. We are not required to accept testimony if it is improbable, unreasonable, or questionable. MacGuire v. Commissioner, 450 F.2d 1239, 1244-1245 [28 AFTR 2d 71-5911] (5th Cir. 1971), affg. T.C. Memo. 1970-89 [¶70,089 PH Memo TC]. We find that petitioner's testimony was credible in material respects. By contrast, we find that Mr. Drayer's and his supporting witness' testimony was not credible in certain aspects, including with respect to abuse. Petitioner credibly testified that Mr. Drayer would often get very angry, particularly in the context of discussions about finances and taxes. Petitioner provided specific examples of angry outbursts, including a time when Mr. Drayer physically threatened to hit her and specific instances of broken items. Mr. Drayer told petitioner that he had intended to commit suicide after one particularly terrible fight. Petitioner testified that Mr. Drayer regularly called her specified derogatory names and publicly humiliated her. She also testified that he regularly drank to excess and smoked marijuana. Significant aspects of her testimony were confirmed by Mr. Drayer and his sister. We find that petitioner has shown that the abuse factor weighs in favor of relief. G. Poor Health When Signing the Return or Requesting Relief A seventh consideration is whether the requesting spouse was in poor health when signing the return or requesting relief. Petitioner endured increasing amounts of abuse over the course of a 21-year marriage. She testified at trial that she was depressed after her divorce in 2004, when she was caring for the Drayers' two children and on her own for the first time. Petitioner's depression was subsequently diagnosed, and she received disability insurance benefits for depression from August 2009 through 2010. This factor weighs in favor of relief. H. Nonrequesting Spouse's Legal Obligation To Pay the Outstanding Liability An eighth factor is whether the nonrequesting spouse had a legal obligation to pay the outstanding liability. The Drayers' divorce judgment did not assign responsibility for outstanding tax liabilities. This factor is neutral. IV. Conclusion In summary, five factors weigh in favor of relief, one factor weighs against relief and two factors are neutral. After weighing the testimony and evidence in this fact-intensive and nuanced case, we conclude that it is inequitable to hold petitioner liable for the tax liabilities attributable to her ex- husband and his sole proprietorship. Accordingly, we relieve petitioner from joint tax liability for the years in question. We have considered all arguments made in reaching our decision and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered for petitioner. ________________________________________ 2 All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. ________________________________________ 3 This Court has jurisdiction to determine whether sec. 6015(f) relief is warranted after a request for relief has been denied by the Commissioner. See sec. 6015(e)(1). ________________________________________ 4 Petitioner earned $7,581 in 2004, $5,016 in 2005, $7,101 in 2005, $4,415 in 2007 and $5,088 in 2008. ________________________________________ 5 Her expenses for 2007 were $1,366 per month, consisting of $800 for rent or mortgage, $100 for food, $70 for utilities, $50 for telephone, $180 for auto payments, $116 for auto insurance and $50 for auto repairs. ________________________________________ 6 Petitioner's monthly income in 2009 consisted of $705 from Social Security, $500 in spousal support and $588 from disability insurance. ________________________________________ 7 Married taxpayers who elect to file a joint return are jointly and severally liable for the entire tax due. See sec. 6013(d)(3). A spouse or former spouse may petition the Commissioner for relief from joint and several liability in certain circumstances. See sec. 6015(a). Sec. 6015(b) and (c) does not apply in cases involving underpayment of tax, as here. Equitable relief may, however, be available under sec. 6015(f). Sec. 1.6015-4, Income Tax Regs.; Rev. Proc. 2003-61, sec. 2.04, 2003-2 C.B. 296, 297. ________________________________________ 8 Respondent had also asserted that petitioner failed to apply for relief within two years after the date of respondent's first collection activity. See Rev. Proc. 2003-61, sec. 4.01(3), 2003-2 C.B. at 297. Respondent has conceded this point. ________________________________________ 9 Mr. Drayer testified at trial that the answers on his questionnaire were intended to keep peace in the family and allow petitioner to start fresh without the burden of prior tax liabilities. He had, however, changed his mind by the time of trial. ________________________________________ 10 Petitioner's income is well below the amount treated as appropriate to cover her allowable expenses in her county of residence under respondent's Collection Financial Standards. See Collection Financial Standards, http://www.irs.gov/individuals/ article/0,,id=96543,00.html (last visited Sept. 21, 2010). Respondent uses the Collection Financial Standards to help determine a taxpayer's ability to pay a delinquent tax liability. For example, $526 per month would be a maximum appropriate allocation for food, clothing and other related items. See National Standards: Food, Clothing and Other Items, http://www. irs.gov/businesses/small/article/0,,id=104627,00.html (last visited Sept. 21, 2010). This amount is $426 more than the $100 that petitioner allocated for this purpose in 2007. The Collection Financial Standards also list $1,772 as an appropriate maximum monthly allowance for rent and utilities in Sonoma County. See California - Local Standards: Housing and Utilities, http://www.irs.gov/businesses/small/article/0,,id=1047 01,00.html (last visited Sept. 21, 2010). This amount is $902 more than the $800 petitioner allocated for this purpose in 2007. These standards are merely guidelines for an appropriate maximum amount, but they provide some objective guidance on a reasonable standard of living in petitioner's region. ________________________________________ 11 Respondent asserts in his posttrial brief that petitioner failed to include $1,800 of alimony from income in 2007 as well. We do not consider amounts raised for the first time in briefs. Petitioner did not have the opportunity to dispute this factual allegation at trial. See Ferrarese v. Commissioner, T.C. Memo. 2002-249 [TC Memo 2002-249]. COLOSIMO, SR. v. U.S., Cite as 106 AFTR 2d 2010-XXXX, 02/16/2010 ________________________________________ CHARLES A. COLOSIMO, SR., Plaintiff, v. UNITED STATES OF AMERICA, Defendant. Case Information: Code Sec(s): Court Name: IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF IOWA CENTRAL DIVISION, Docket No.: No. 4:08-CV-00397, Date Decided: 02/16/2010. Disposition: HEADNOTE . Reference(s): OPINION IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF IOWA CENTRAL DIVISION, ORDER Judge: JOHN A. JARVEY UNITED STATES DISTRICT JUDGE SOUTHERN DISTRICT OF IOWA I. PROCEDURAL BACKGROUND A. Pleadings On January 1, 2007, the IRS assessed trust fund recovery penalties of $711,234.82 against Charles Colosimo (“Colosimo”), Carolyn Colosimo (“Carolyn”), and Andrew Gillaspey (“Gillaspey”) pursuant to 26 U.S.C. §§ 6671 and 6672. On September 19, 2008, Colosimo filed a Claim for Refund and Abatement with the IRS in Minneapolis, requesting a refund of the trust fund recovery penalty of $100 for the 12/31/01 quarter. The United States denied this claim for refund and abatement [See Dkt. 1, Form 843]. On September 26, 2008, Colosimo brought an action against the United States to abate the trust fund recovery penalty and refund all amounts withheld by the United States from him, alleging that the IRS improperly assessed the penalty against him [Dkt. 1]. On November 26, 2008, the government filed an answer to Colosimo's complaint [Dkt. 2]. The government further brought a counterclaim against Colosimo, joining Carolyn and Gillaspey as defendants on the counterclaim. The government brought the counterclaim pursuant to 26 U.S.C. § 7401 to reduce to judgment separate federal tax assessments made against the three, alleging that each counterclaim defendant, as a responsible person within C&C Distribution Services, Inc. (“C&C Distribution”), willfully failed to pay over withheld income and FICA taxes to the United States. On December 9, 2008, the government dismissed the counterclaim against Gillaspey, leaving only Colosimo and Carolyn as counterclaim defendants [Dkt. 5]. On December 15, 2008, Colosimo and Carolyn filed a joint answer to the counterclaim, denying most of the allegations and asserting affirmative defenses [Dkt. 6]. In particular, they asserted that neither of them were “responsible parties” within C&C Distribution, and neither willfully failed to pay, collect, or truthfully account for the withheld taxes. B. Motions before the court 1. Carolyn's motion for summary judgment and Colosimo's motion to strike On October 28, 2009, Carolyn filed a motion for summary judgment [Dkt. 12], arguing that she was not a “responsible person” under 26 U.S.C. § 6672. On November 23, 2009, the government filed a response to Carolyn's motion, arguing that whether Carolyn was a “responsible person”, and whether she willfully failed to pay over withheld taxes, presented genuine issues of material fact [Dkt. 15]. In support of the argument that Carolyn was a “responsible person”, the government cited a declaration by IRS representative Rebecca Denning (“Denning”) that Carolyn had told Denning that Carolyn had the authority at C&C Distribution to prepare, review, sign, and transmit payroll tax returns [Dkt. 15, Appendix, at 260–61]. On December 4, 2009, Carolyn filed a reply to the government's response, conceding that a genuine issue of fact would exist on the willfulness issue, but contesting the government's argument that there are genuine issues of material fact on the threshold issue of whether Carolyn is a “responsible person” [Dkt. 21]. In addition, Carolyn argued that statements in Denning's declaration should be stricken under the “sham affidavit” doctrine, and asked for an award of attorneys' fees for filing the brief under the same doctrine. On December 11, 2009, the government filed a surreply to Carolyn's reply, requesting that the court find that it did not submit a “sham affidavit” and that Carolyn must bear her own attorneys' fees for her reply brief [Dkt. 25]. On December 28, 2009, Carolyn filed a reply to the government's surreply [Dkt. 30]. Meanwhile, on December 10, 2009, Colosimo filed a related motion to strike Rebecca Denning's Declaration – and the government's Statement of Additional Material Facts that relied on it – based on the “sham affidavit” doctrine [Dkt. 24]. The government filed a reply to Colosimo's motion to strike on December 23, 2009, arguing that the portion of Denning's declaration objected to does not affect Colosimo's position in this litigation, as it only relates to Carolyn [Dkt. 29]. 2. Colosimo's and the government's cross-motions for summary judgment On December 1, 2009, Colosimo and the government each filed motions for summary judgment against one another [Dkts. 18 and 19, respectively]. Charles argues that he is not a responsible party for C&C Distribution and did not willfully fail to pay over withholding taxes to the United States. On December 23, 2009, the government filed a response to Colosimo's motion for summary judgment [Dkt. 27], and on January 4, 2010, Colosimo filed a reply [Dkt. 32]. On December 28, 2009, Colosimo filed a response to the government's motion for summary judgment [Dkt. 31], and on January 7, 2010, the government filed a reply [Dkt. 33]. In accordance with the reasoning below, the court rules as follows: ((i)) Carolyn's motion for summary judgment is granted; ((ii)) Carolyn's request for attorneys' fees is denied; ((iii)) Colosimo's motion to strike is denied; ((iv)) Colosimo's motion for summary judgment is denied; and ((v)) the government's motion for summary judgment against Colosimo is granted. II. MOTION FOR SUMMARY JUDGMENT – THE LEGAL STANDARD A motion for summary judgment may be granted only if, after examining all of the evidence in the light most favorable to the nonmoving party, the court finds that no genuine issues of material fact exist and that the moving party is entitled to judgment as a matter of law. HDC Med., Inc., v. Minntech Corp., 474 F.3d 543, 546 (8th Cir. 2007) (citation omitted); see also Kountze ex rel. Hitchcock Found. v. Gaines, 536 F.3d 813, 817 (8th Cir. 2008) (“[S]ummary judgment is appropriate where the pleadings, discovery materials, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to summary judgment as a matter of law.”). Once the movant has properly supported its motion, the nonmovant “may not rest upon the mere allegations or denials of [its] pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e). “[A]n issue of material fact is genuine if the evidence is sufficient to allow a reasonable jury verdict for the nonmoving party.” Great Plains Real Estate Dev., L.L.C. v. Union Cent. Life Ins. et al., 536 F.3d 939, 944 (8th Cir. 2008) (citation omitted). “A genuine issue of fact is material if it “might affect the outcome of the suit under the governing law.”” Saffels v. Rice, 40 F.3d 1546, 1550 (8th Cir. 1994) (citation omitted). The nonmoving party is entitled to all reasonable inferences that can be drawn from the evidence without resort to speculation. Sprenger v. Fed. Home Loan Bank of Des Moines, 253 F.3d 1106, 1110 (8th Cir. 2001). “[A]lthough [the non-moving party] does not have to provide direct proof that genuine issues of fact exist for trial, the facts and circumstances that she [or he] relies “upon must attain the dignity of substantial evidence and not be such as merely to create a suspicion.”” Taylor v. White, 321 F.3d 710, 715 (8th Cir. 2003) (citation omitted). The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff. Sprenger, 253 F.3d at 1110. III. UNDISPUTED FACTS A. C&C Distribution in general C&C Distribution leased storage space and operated truck delivery services. It had over thirty employees. Colosimo, Carolyn, and Gillaspey were officers and/or employees of C&C Distribution from 2001 to 2004. Colosimo and Carolyn's son, Charles Colosimo, Jr. (“Charles, Jr.”) was also involved with the company. Between 2000 and 2004, C&C Distribution failed to pay over to the United States the income and employment taxes withheld from the wages of its employees. The IRS determined that Colosimo, Carolyn, and Gillaspey were responsible for collecting, truthfully accounting for, and paying over those withheld income and employment taxes but willfully failed to do so. Between 2001 and 2004, Colosimo and Carolyn collectively owned 100 percent of the stock in C&C Distribution; each owned 50 percent. The Colosimos also co-owned an entity named C&C Realty. Between 2001 and 2004, C&C Distribution rented space in two warehouses owned by C&C Realty, and Colosimo signed the lease agreements between C&C Distribution and C&C Realty. Taken together, these leases obligated C&C Distribution to pay over $56,000 per month to C&C Realty. Between 2001 and 2004, C&C Distribution accrued a debt of over $500,000 to C&C Realty for unpaid rent. Forms 941 are federal withholding tax returns. C&C Distribution did not file Forms 941 for any quarter of 2001, 2002, 2003, or 2004 prior to June 1, 2004. Colosimo signed C&C Distribution's Forms 941 for the quarters ending September 30, 2004 and December 31, 2004, and Gillaspey signed C&C Distribution's federal income tax returns for the years 2001 through 2004. Between 2001 and 2004, Wendy Wiedner (“Wiedner”) was C&C Distribution's outside accountant. When Wiedner learned of C&C Distribution's large unpaid tax liability in June 2004, she met with Colosimo and Gillaspey. After June 4, 2004, Colosimo and Carolyn were undisputedly aware of C&C Distribution's unpaid federal tax liability. C&C Distribution disbursed funds at least through December 30, 2005 from a Meta Bank/Iowa Savings Bank account held in its name, though C&C Distribution ceased operating its delivery and storage services in early September 2004. Between June 4, 2004 and Labor Day 2004, C&C Distribution disbursed funds totaling $902,084.99 to creditors other than the United States. Between June 4, 2004 and December 31, 2005, C&C Distribution disbursed funds totaling $1,645,512.81 to creditors other than the United States. Between June 4, 2004 and December 31, 2004, C&C Distribution paid $317,272 to C&C Realty. Colosimo stated in his deposition that although he does not recall approving the transfer of assets from C&C Distribution to C&C Realty, he is sure that he would have approved the transfer. In April or June 2006, Colosimo and Carolyn met with IRS Representative Rebecca Denning regarding the unpaid tax liabilities of C&C Distribution. B. Gillaspey's role in C&C Distribution Gillaspey was the bookkeeper of C&C Distribution. He was responsible for preparing the company's financial statements. He also managed dispatchers and truck drivers. Gillaspey had the password to the Electronic Funds Transfer System (“EFTS”) that C&C Distribution would have used to pay payroll taxes, had it paid them. During the period 2001 through 2004, Gillaspey prepared reports of creditors to pay, and omitted from these reports the payroll taxes that C&C Distribution owed to the United States. Gillaspey was never instructed by Colosimo or anyone at C&C Distribution to hide the unpaid payroll tax liability, to hide the payroll liability from C&C Distribution's CPA, or not make the payments of trust fund taxes. Gillaspey prepared all the checks that Colosimo would sign on behalf of C&C Distribution. Gillaspey also prepared and signed C&C Distribution's Forms 941 for various quarters from 2001 to 2004. For other quarters during that time period, Gillaspey prepared them with CPA Pamela Schneider in August of 2005 and signed them then. Gillaspey had informed the outside accountants to C&C Distribution – primarily Wendy Wiedner – that he had filed all Forms 941 for C&C Distribution prior to June 1, 2004, but this was false. Gillaspey was responsible for paying over C&C Distribution's withheld taxes. C. Colosimo's role in C&C Distribution Colosimo was president and treasurer of C&C Distribution between 2001 and 2004. He was also a member of C&C Distribution's board of directors, and was a 50 percent shareholder. Colosimo had the authority to hire and fire employees. He had check-signing authority on all of C&C Distribution's accounts, and exercised that authority by signing checks on behalf of C&C Distribution. He claims he was the only person at C&C Distribution who had the authority to borrow money on the company's behalf between 2001 and 2004. Colosimo authorized C&C Distribution to borrow money from State Savings Bank on at least four occasions during 2003 and once during 2004. During 2003 and 2004, Colosimo pledged his own personal assets to guarantee four loans from State Savings Bank. He signed C&C Distribution's federal income tax returns for the years 2001, 2002, 2003, and 2004; these returns provide specific information on the amount of unpaid payroll taxes that C&C Distribution owed the United States. He signed some of C&C Distribution's Form 941 tax returns for 2004. He often reviewed a report listing creditors prepared by Gillaspey, and from that list determined which creditors to pay. The liability for accrued payroll taxes was not listed on that report due to manipulation by Gillaspey. Colosimo's role as president and treasurer was that of an overseer of the different components of C&C Distribution. Colosimo did not know the password to the EFTS system. Colosimo did not have the technical knowledge to pay the payroll taxes through the EFTS. In November 2003, Colosimo received IRS notices informing him that C&C Distribution had not filed a federal unemployment tax return (Form 940) for 2001 and had not filed federal employment tax returns (Forms 941) for various quarters in 2000, 2001, and 2002. Colosimo faxed these notices to C&C Distribution's accountant Wendy Wiedner soon thereafter. After reviewing these notices, Wiedner called Colosimo to discuss them; Wiedner thought there was a bureaucratic mix-up with an ID number. Colosimo claims that he first learned of C&C Distribution's unpaid federal tax liabilities on June 4, 2004. Colosimo spoke by phone and met with Wiedner about C&C Distribution's unpaid federal tax liabilities during June 2004 and after. D. Carolyn's role in C&C Distribution Carolyn was a director, Vice President, Secretary, and 50 percent shareholder in C&C Distribution during 2001 to 2004. Carolyn spent less than ten hours per week at C&C's offices, where she answered telephone calls, signed checks when directed by Colosimo, and filled in for secretaries as needed. The by-laws of C&C state the duties of the Vice President and Secretary as follows: Powers and Duties of the Vice-Presidents. In the absence of the President or in the event of the President's death, inability or refusal to act, the Vice-President (or if more than one), the senior Vice-President in length of service shall perform the duties of the President, and when so acting, shall have all powers of and be subject to all restrictions upon the President. Each Vice-President shall perform such duties and have such authority as may be assigned to such Vice-President by the President or by the Board. Power and Duties Of the Secretary. The Secretary shall (a) keep minutes of all meetings; (b) attend to serving all notices of the Corporation; (c) be custodian of the corporate seal, if any, the stock certificate books and such other books, records and papers as the Board directs; (d) keep a stock record showing the names of all shareholders, their post office addresses as furnished by them, and the shares of stock held by them, and at least ten days before each shareholders' meeting, prepare a list of shareholders entitled to vote thereat arranged in alphabetical order; (e) sign in the name of the Corporation all contracts authorized by the Board or the President; and (f) in general all duties incident to the office and such other duties as may be assigned by the President or the Board. Carolyn did not have the power at C&C Distribution to hire or fire employees. Carolyn was authorized to sign checks on behalf of C&C between 2001 and 2004, and she in fact signed C&C Distribution checks, including payroll checks, during that time period. Carolyn wrote out by hand numerous checks to C&C Distribution Services creditors and employees, during a two or three week period in September 2004. On March 5, 2003, Carolyn guaranteed a loan from State Savings Bank to C&C Distribution. On June 30, 2003, she personally guaranteed a promissory note that C&C Distribution executed in the event State Savings Bank had to make payments on a letter of credit extended on C&C Distribution's behalf to an insurance company. On December 29, 2004, Carolyn signed a debt settlement agreement between State Savings Bank, herself, Colosimo, C&C Distribution, C&C Transportation Co., Inc., and C&C Realty, in which she warranted and agreed that she gave the personal guarantees mentioned above. As part of the debt settlement agreement, Carolyn agreed to pay C&C Distribution's debts to State Savings Bank out of her personal assets and the assets of C&C Realty. Carolyn learned of C&C Distribution's unpaid federal tax liability on June 4, 2004. After that time, she attended meetings with C&C Distribution's accountant Wendy Wiedner. Between June 4, 2004 and December 31, 2004, Carolyn signed eight checks from C&C Distribution to C&C Realty totaling $120,372. Between December 31, 2004 and December 31, 2005, Carolyn signed two similar checks totaling $35,023.09. IV. CONCLUSIONS OF LAW Federal law requires employers to withhold income, Social Security and Medicare tax from their employee's wages at the time that the wages are paid to the employees. 26 U.S.C. §§ 3101; 3102(a), (b); 3402; 3403; Honey v. United States, 963 F.2d 1083, 1087 [69 AFTR 2d 92-1333] (8th Cir. 1992). The withheld taxes are held in trust by the employer, to be remitted to the IRS at the appropriate intervals. 26 U.S.C. § 7501. Because the withheld taxes are held in trust by the employer, the funds may not be used for any other purpose. Slodov v. United States, 436 U.S. 238, 243 [42 AFTR 2d 78-5011] (1978). If the employer misuses the funds and is unable to pay the money to the government, the individual employee is given credit for paying the taxes. Id. at 943. Under 26 U.S.C. § 6672, however, the government can pursue the company or its officers individually for the unpaid taxes, penalties and interest. Title 26 U.S.C. § 6672 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 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 (2006). Under 26 U.S.C. § 6671(b), “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.” 26 U.S.C. § 6671(b)(2006). To incur liability under § 6672, “an individual must be a responsible person and must willfully fail to pay over the taxes in question.” Ferguson v. United States, 484 F.3d 1068, 1072 [99 AFTR 2d 2007-2486] (8th Cir. 2007) (citation omitted). “A responsible person is someone who has the status, duty and authority to avoid the corporation's default in collection or payment of the taxes.” Id. (citations and quotation marks omitted). In determining if someone is a “responsible person” within a company, courts consider, with no one factor determinative, whether: (1) she is an officer or member of the board of directors; (2) she owns a substantial amount of stock in the company; (3) she manages the day-to-day operations of the business; (4) she has the authority to hire and fire employees; (5) she makes decisions as to the disbursement of funds and payment of creditors; and (6) she possesses the authority to sign company checks. Ferguson v. United States, 343 F.Supp.2d 787, 798 [94 AFTR 2d 2004-6322] (S.D. Iowa 2004) (quoting Barnett v. IRS, 988 F.2d 1449, 1455 [71 AFTR 2d 93-1614] (5th Cir. 1993)), aff'd, 484 F.3d 1068 [99 AFTR 2d 2007-2486] (8th Cir. 2007); see also Moulton v. United States, 429 F.3d 352, 356 [96 AFTR 2d 2005-7193] (1st Cir. 2005) (recognizing as indicia of responsibility “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); Thosteson v. United States, 331 F.3d 1294, 1299 [91 AFTR 2d 2003-2468] (11th Cir. 2003) (same); Smith v. United States, 555 F.3d 1158, 1163 [103 AFTR 2d 2009-880] (10th Cir. 2009) (same). Ultimately, tracking the requirements of § 6672, “[t]he test is whether the person had control of the disbursements of the taxpayer, that is, whether he had the final word as to what bills should or should not be paid, and when.” Anderson v. United States, 561 F.2d 162, 165 [40 AFTR 2d 77-5642] (8th Cir. 1977) (citations and quotation marks omitted). However, this control can be exercised jointly with others. Id. (citations omitted). “It suffices that the person have significant control (not necessarily sole or final authority) over disbursement of the trustee's funds.” Donelan Phelps & Co., Inc. v. United States, 876 F.2d 1373, 1376 [64 AFTR 2d 89-5049] (8th Cir. 1989). A. Carolyn's motion for summary judgment and Colosimo's motion to strike 1. The parties' arguments Carolyn argues that she was not a “responsible person” under 26 U.S.C. § 6672 or indeed even a “person” under 26 U.S.C. § 6671(b). These amount to the same inquiry – namely, whether she was under a duty to collect, account for, and pay over to the United States the withholding taxes of C&C Distribution. She argues that she did not have such a duty, as she did not have significant control over the disbursement of C&C Distribution's funds. She asserts that she had no responsibility for C&C Distribution's payroll taxes. Her main argument is that, though she did all the things recounted above – including signing checks and guaranteeing a loan for C&C Distribution – she did them only at the direction of Colosimo. She asserts that the operation of C&C Distribution was in the hands of Colosimo and Gillaspey, who performed – without her – the following functions: - hiring/firing employees - managing employees - directing or authorizing payment of bills - dealing with major suppliers and customers - negotiating large corporate purchases, contracts, and loans - opening/closing corporate bank accounts - making/authorizing bank deposits - authorizing payroll checks - preparing federal payroll tax returns - authorizing payment of federal tax deposits - reviewing federal income tax returns She asserts that Colosimo, Charles, Jr., and Gillaspey determined which creditors should be paid, based on a list prepared by Gillaspey, and that Gillaspey prepared all payroll checks. She says that she only signed C&C Distribution checks, including payroll checks, when directed to do so by Colosimo. She cites the depositions of Gillaspey, Colosimo, and Wiedner – C&C Distribution's outside accountant – who all specifically testified that she had no responsibility for C&C Distribution's federal withholding taxes. Carolyn argues that she clearly did not have “significant control” over C&C Distribution's payment of withholding taxes, based on the affidavits of Gillaspey, herself, Colosimo, and Charles, Jr., and, in addition, Wiedner's deposition testimony that Carolyn had nothing to do with C&C Distribution's payroll taxes. The government argues that whether Carolyn was a responsible person presents a genuine issue of material fact. 1 The government asserts that Carolyn had “significant control” over C&C Distribution's financial affairs. The government points to Carolyn's corporate positions, fifty percent ownership interest, check-writing, check-signing, and use of personal funds to obtain and repay loans for C&C Distribution. The government points in particular to the fact that Carolyn signed checks, and that she wrote out numerous checks by hand to C&C Distribution's creditors and employees. The government asserts that this casts doubt on Carolyn's claim to have only signed checks that Colosimo instructed her to sign. Carolyn responds that this was an exceptional circumstance in which Gillaspey directed her to prepare checks from a list Gillaspey provided during a two-week period in September 2004, citing affidavits by Gillaspey, Colosimo, and herself. Carolyn says her ability to write checks was limited to this two week period due to a change in bank accounts. The government also points to Carolyn's role in C&C Distribution's acquisition of funds – pledging her personal property to secure loans used to run C&C Distribution, guaranteeing a loan from State Savings Bank to C&C Distribution, and personally guaranteeing a promissory note that C&C Distribution executed. The government also argues that Carolyn was involved in addressing C&C Distribution's unpaid tax liabilities. The government asserts that Carolyn was one of three C&C Distribution employees who met with the company's outside accountant, Wendy Wiedner, to discuss the unpaid tax liabilities after June 4, 2004. Most controversially – and most significantly if true – the government asserts that Carolyn told IRS representative Denning that Carolyn had the authority at C&C Distribution to prepare, review, sign, and transmit payroll tax returns, relying on Denning's declaration. Carolyn disputes this, citing an affidavit of C&C Distribution's corporate counsel, Thomas Flynn, stating that Carolyn told Denning only that Carolyn signed checks at the direction of Colosimo, and that no one told Denning that Carolyn prepared, signed, or transmitted payroll tax returns. 2. The sham affidavit doctrine Indeed, Carolyn argues that Denning's declaration is contrary to her prior sworn testimony and should be stricken under the “sham affidavit” doctrine. “Parties to a motion for summary judgment cannot create sham issues of fact in an effort to defeat summary judgment.” American Airlines, Inc. v. KLM Royal Dutch Airlines, Inc., 114 F.3d 108, 111 (8th Cir. 1997). “Ambiguities and even conflicts in a deponent's testimony are generally matters for the jury to sort out, but a district court may grant summary judgment where a party's sudden and unexplained revision of testimony creates an issue of fact where none existed before.” Id. (quoting Wilson v. Westinghouse Elec. Corp., 838 F.2d 286, 289 (8th Cir. 1988)). “Otherwise, any party could head off a summary judgment motion by supplanting previous depositions ad hoc with a new affidavit, and no case would ever be appropriate for summary judgment.” Id. To the extent that the affiant's affidavit conflicts with his earlier deposition testimony, his affidavit testimony should be disregarded. Plymouth Foam Prods., Inc. v. City of Becker, 120 F.3d 153, 155 n.3 (8th Cir. 1997). However, where the affidavit testimony seems consistent with the affiant's prior deposition testimony, or simply adds more detailed information, the court may properly consider the affidavit on summary judgment. Bass v. City of Sioux Falls, 232 F.3d 615, 618 (8th Cir. 1999). Here, Denning testified about an interview she conducted on April 20, 2006 of Colosimo and Carolyn, with their attorney Thomas Flynn. She said she completed a Form 4180 during the interview, entitled “Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax.” That form reflects that Denning listed both Colosimo and Carolyn in the category of who prepared, reviewed, signed, and transmitted payroll tax returns, though Denning did not mention this as a reason to believe Carolyn was responsible for payroll taxes in her deposition. At her deposition on October 29, 2009, Denning testified as follows: Q: So what evidence do you have that Carolyn Colosimo was a responsible person, other than that she was a 50 percent stockholder, she was a director, she was the vice president and secretary, she could sign checks of C&C Distribution Services, she could guarantee a loan? What other information do you have that determine – to make your determination that she was a responsible person? Mr. Fay: Jim, are you asking at the time she made the assessment or sitting in this deposition? Mr. Monroe: At the time she made the determination. A: Besides what you've just mentioned? Q: Besides what I've just mentioned. A: She signed a debt forgiveness agreement. Did you say that? Maybe you said that. Q: Was she personally liable on the debt? A: I believe they personally guaranteed – Q: So she would've had to sign it anyway? A: Right. Q: Personally? A: Right. I think that's about it. Q: That was as of the date you made your determination? A: Uh-huh. Q: What information do you have, as you sit here today, that she's a responsible person in addition to what you've already testified to? Mr. Fay: And, again, same objection as to what's beyond the scope– A: I don't gather information after I close my case. Q: So you have no additional information? A: No. In her subsequent declaration dated November 19, 2009, Denning stated: During the April 20, 2006 interview, Charles and Carolyn Colosimo told me that Carolyn Colosimo could guarantee or co-sign loans for C&C Distribution, that she could sign or counter-sign checks, that she could authorize or sign payroll checks, and that she could prepare, review, sign and transmit payroll tax returns. Carolyn argues that the last phrase here – that Carolyn told Denning that Carolyn could prepare, review, sign, and transmit payroll tax returns – conflicts with Denning's prior sworn deposition testimony that, in addition to what she had said previously, Denning had no further information that Carolyn was a responsible person. The government counters that there is no conflict, as Denning's prior testimony included this information suggesting Carolyn's responsibility insofar as her prior testimony alluded to the Form 4180 which included this information. At any rate, says the government, it had disclosed this information to Carolyn in interrogatories before Denning's testimony. Denning's affidavit is not a sham affidavit, created merely to head off summary judgment. Indeed, the document on which it is based – the Form 4180 – predates the motion for summary judgment. Moreover, this is far from the “sudden and unexplained revision of testimony” required for a sham affidavit. Instead, the affidavit clarifies Denning's earlier testimony, adding more detailed information to it. Denning appears to have forgotten this specific piece of information during her testimony, and her assertion that she lacked further information does not render any subsequent disclosure of information – especially one already known to the opposing party through interrogatories – inconsistent with her testimony. The court will not strike Denning's declaration, and Carolyn is not entitled to attorneys' fees for her reply brief under the sham affidavit doctrine. For the same reasons, the court also denies Colosimo's motion to strike Denning's declaration and the government's Statement of Additional Material Facts which relies on it. Moreover, the court notes that the paragraph of Denning's declaration which Colosimo presumably objects to as a sham does not relate to his position in this litigation. 3. Whether Carolyn was a responsible person Applying the relevant factors in a light most favorable to the government, there is no genuine issue of material fact as to whether Carolyn was a “responsible person” under 26 U.S.C. § 6672. She was not. Carolyn was a 50 percent stockholder, director, vice president and secretary of C&C Distribution. But corporate titles alone do not make the officer a responsible person. See United States v. Bisbee, 245 F.3d 1001, 1007–08 [87 AFTR 2d 2001-1611] (8th Cir. 2001) (citing Barton v. United States, 988 F.2d 58, 60 [71 AFTR 2d 93-1123] (8th Cir. 1993) (“Government placed unwarranted reliance on Barton's corporate titles, limited management and supervisory powers, and restricted signature authority”)). Moreover, nothing in the corporate bylaws would have given Carolyn the power to decide how to disburse company funds. Carolyn could also sign, and occasionally wrote, checks. However, all the evidence in the record suggests she did this at the direction of Colosimo and Gillaspey. Both Gillaspey and Carolyn testified that this was the case. The government provided no evidence to the contrary. Instead, the government points to the fact that Carolyn wrote out some of the checks by hand, asking the court to speculate that this meant Carolyn decided who to pay. In light of all the evidence to the contrary and Carolyn and Gillaspey's consistent explanations that she wrote checks out by hand only during a limited time period under limited circumstances, this is not an inference the court can make without resort to speculation. Technical signature authority is not the same as having the effective power to pay. See Kenagy v. United States, 942 F.2d 459, 464–66 [68 AFTR 2d 91-5342] (8th Cir. 1991); Barton, 988 F.2d at 59 (counseling against reliance on officer's corporate status and “mechanical functions” if it is beyond dispute that the officer lacks tax-paying authority). Carolyn also guaranteed a loan and a promissory note, and signed a debt reduction agreement. But again, all the evidence in the record suggests she did this at the direction of Colosimo, and the government set forth no specific facts suggesting otherwise. The government cites cases for the proposition that even if Colosimo directed her to perform these actions, that would not absolve her of liability. However, the cases the government cites stand more precisely for the proposition that, where a person is otherwise responsible, the fact that she acted pursuant to direction from superiors does not absolve the person of liability. Here, Carolyn is not otherwise responsible, and thus these cases do not vitiate the importance of Colosimo's close direction of Carolyn's activities. See Smith, 555 F.3d at 1164 (holding only that one corporate officer's greater control over payments to creditors does not free from responsibility another corporate officer with significant control); Roth v. United States, 779 F.2d 1567, 1572 [57 AFTR 2d 86-603] (11th Cir. 1986) (finding that “no instruction by the president or the majority owner of [the employer] could effectively bar an otherwise responsible officer from paying these funds in accordance with the law”); Jay v. United States, 865 F.2d 1175 [63 AFTR 2d 89-822] (10th Cir. 1989) (reversing the district court's finding that company manager was responsible person as a matter of law where his only defense was superior orders). All the other factors point against Carolyn's qualification as a responsible person. It is undisputed that she did not have the authority to hire and fire. It is undisputed that she spent less than ten hours a week at C&C Distribution. In light of these undisputed facts, she could not have managed the day-to-day operations of C&C Distribution. The factor that the Eighth Circuit has emphasized and that most closely tracks the language of § 6672 – whether she had control over which creditors the company paid – emphatically shows that Carolyn was not a responsible person. Four people familiar with C&C Distribution – Gillaspey, Colosimo, Charles, Jr., and C&C Distribution's outside accountant Wendy Wiedner – corroborated Carolyn's testimony that she had no responsibility for C&C Distribution's payroll taxes. Gillaspey, Colosimo, Charles, Jr., and Carolyn all said that she did not make any decisions regarding which creditors would be paid and which ones would not be paid, and Gillaspey said she was not involved in the financial decisions of the company. The government presented no evidence that Carolyn made decisions regarding the disbursement of C&C Distribution's funds. With regard to payroll taxes specifically, Carolyn testified that she did not know what a Form 941 was, and she, Colosimo, and Gillaspey said she does not know how to use a computer. Gillaspey prepared Forms 941, and signed Forms 941 during 2001 to June 2004, and Colosimo signed Forms 941 for the quarters ending September 30, 2004 and December 31, 2004. The government provided no evidence that Carolyn had anything to do with Forms 941. Denning's declaration – based on what she wrote down, which in turn was based on what she heard – made up the only evidence the government provided against the masses of evidence that Carolyn had no responsibility for payroll taxes. The information in Denning's declaration, which she omitted from her own testimony, and which starkly contrasted the testimony of multiple other witnesses, is a mere “scintilla of evidence” which does not preclude summary judgment here. Sprenger, 253 F.3d at 1110. Cases that the government cites where the officer was held to be a “responsible person” involve officers with clearly more responsibility and tax sophistication than Carolyn. See, e.g., Howard v. United States, 711 F.2d 729 [52 AFTR 2d 83-5777] (5th Cir. 1983) (officer and director who ran day-to-day operations, hired and fired, sometimes determined which bills to pay, and was sole signer on company's main account, was responsible person); Hartman v. United States, 538 F.2d 1336, 1344–45 [38 AFTR 2d 76-5510] (8th Cir. 1976) (jury was free to find officer was responsible person where officer was a former accountant familiar with withholding tax laws and signed Forms 941 and income tax returns). Where, as here, the government has provided no evidence that a company officer decided which creditors to pay, and virtually no evidence that she had any responsibility for payroll taxes, the evidence is not sufficient to permit a reasonable jury verdict that she had “significant control” over disbursement of C&C Distribution's funds. The court finds that Carolyn was not a responsible person as a matter of law. Carolyn's motion for summary judgment is granted. B. Colosimo's and the government's cross-motions for summary judgment 1. Charles in Charge: whether Colosimo was a responsible person Colosimo argues that he was not under a duty to collect and pay over taxes because “he was divested of that duty through the financial manipulation of Gillaspey.” Indeed, the undisputed facts reflect that Colosimo determined which creditors to pay from reports prepared by Gillaspey, who omitted from those reports payroll taxes owed to the United States. Colosimo argues that he was therefore relieved of any duty to collect and pay over those taxes. In response, the government argues that the issue of knowledge of the unpaid tax liabilities is wholly irrelevant to the responsibility inquiry. The government argues additionally that Colosimo was under a duty to pay over the taxes withheld from C&C Distribution employees' wages because he was actively and intimately involved with C&C Distribution's finances. The government points out that Colosimo was president and treasurer, a member of the Board of Directors, and a 50% shareholder. The government notes that Colosimo had check-signing authority and exercised that authority. Moreover, Colosimo also decided which creditors the company would pay, and had the authority to hire and fire. The government also points to Colosimo's signature on C&C Distribution's federal income tax returns, his interactions with C&C Distribution's accountant Wendy Wiedner regarding unpaid tax liabilities, and his authority to borrow money and make large expenditures on the company's behalf. The court notes at the outset that Colosimo's argument only applies to the time period preceding June 4, 2004, when Colosimo admits he learned of the unpaid tax liabilities. Colosimo cannot dispute that he was a responsible person after that time. But even before June 4, 2004, applying the relevant factors in a light most favorable to Colosimo, there still is no genuine issue of material fact as to whether he was a responsible person. He was. Every factor supports this conclusion. President, treasurer, director, and 50 percent shareholder, Colosimo also had check-signing authority and the power to hire and fire. An overseer of C&C Distribution's operations, Colosimo clearly managed the day-to-day operations of the business. Moreover, it is undisputed that Colosimo made decisions as to the disbursement of funds and payment of creditors. In these circumstances, it is clear that Colosimo was a responsible person as a matter of law. See Ferguson, 484 F.3d at 1073 (upholding summary judgment for government on issue of responsibility where company officer was CFO and COO, signed checks, disbursed funds, and admitted he had the authority to pay the taxes without board approval); Jenson v. United States, 23 F.3d 1393, 1395 [73 AFTR 2d 94-1976] (8th Cir. 1994) (founder, president, director, with authority to hire and fire and sign checks, who regularly dealt with all major financial issues, is responsible person as a matter of law); Kizzier v. United States, 598 F.2d 1128, 1132 [44 AFTR 2d 79-5001] (8th Cir. 1979) (upholding district court finding that corporate officer who possessed significant authority in the general management and fiscal decisionmaking of the corporation was a responsible person). Against this, Colosimo argues only that Gillaspey's admitted malfeasance with C&C Distribution's books rendered him ignorant of any unpaid tax liability, and thus he could not be responsible for it. 2 But “[k]nowledge that taxes are unpaid is only relevant to the issue of willfulness once a person is found responsible.” Barton, 988 F.2d at 60 (citing Godfrey v. United States, 748 F.2d 1568, 1576 [55 AFTR 2d 85-409] (Fed. Cir. 1984)). Indeed, while “knowledge of nonpayment may be relevant to the issue of willfulness ... it is irrelevant in considering the question of whether he was a “responsible person” under 26 U.S.C. § 6671(b).” Godfrey, 748 F.2d at 1576 (citation omitted). Therefore, Colosimo's argument that he did not know of the unpaid taxes is irrelevant to whether he was a responsible person. Moreover, Colosimo's argument appears to be simply incorrect on its face. Colosimo says he “did not have the effective power to pay the trust fund taxes, as he was divested of that power by Andrew Gillaspey.” But all the evidence indicates that Colosimo did have the effective power to pay the trust fund taxes. Armed with the power to fire employees, Colosimo had access to the books, knew of the payroll tax withholding and remitting requirements and, at best, turned a blind eye to what should have been an obvious problem. Colosimo's complaint that “nothing he could have done could change what occurred” is simply incorrect according to the evidence before the court. “Although he may have delegated to [his subordinate] certain responsibilities relating to the operation of the [company], that delegation did not divest [the superior] of the ultimate authority to prevent the [company's] default in payment of the taxes. The fact that [the superior] chose not to fully exercise that authority is not determinative.” Keller v. United States, 46 F.3d 851, 854 [75 AFTR 2d 95-721] (8th Cir. 1995). Colosimo, who had “the power to control the decision-making process by which the employer corporation allocates funds to other creditors in preference to its withholding tax obligations”, Jefferson v. United States, 546 F.3d 477, 481 [102 AFTR 2d 2008-6572] (7th Cir. 2008), cannot assert he is not responsible simply because he did not exercise this power with enough attention and supervision to prevent employee misconduct and his resulting ignorance of unpaid tax liability. Colosimo was not deprived of his power and authority to collect and pay over federal withholding taxes by the misconduct of his subordinate. See also Purcell v. United States, 1 F.3d 932, 937 [72 AFTR 2d 93-5821] (9th Cir. 1993) (upholding grant of directed verdict for government on issue of responsibility against officer's argument that delegation of financial matters to embezzling subordinate relieved him of responsibility). The court finds that Colosimo was a responsible person as a matter of law. 2. Whether Colosimo willfully failed to pay over the taxes A person willfully fails to pay over taxes if he “acts or fails to act consciously and voluntarily and with knowledge or intent that as a result of his action or inaction trust funds belonging to the government will not be paid over but will be used for other purposes, or by proceeding with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.” Ferguson, 484 F.3d at 1072–73 (quotation marks and citations omitted). “The term willfully does not connote a bad or evil motive, but rather means a voluntary, conscious, and intentional act, such as the payment of other creditors in preference to the United States.” Honey, 963 F.2d at 1087 (citation omitted). “Although willfulness is usually a question of fact, evidence that the responsible person had knowledge of payments to other creditors, including employees, after he was aware of the failure to pay over withholding taxes is proof of willfulness as a matter of law.” Honey, 963 F.2d at 1087 (citation omitted). Viewing the facts in the light most favorable to Colosimo, he did not know of any unpaid tax liability prior to June 2004. Therefore, during that time period he could not have willfully failed to pay the taxes. 3 However, the undisputed facts show that Colosimo had knowledge of payments to other creditors after he was aware of the failure to pay over withholding taxes. It is undisputed that Colosimo knew of the unpaid taxes by June 4, 2004. It is also undisputed that between June 4, 2004 and Labor Day 2004, C&C Distribution disbursed funds totaling $902,084.99 to creditors other than the United States. C&C Distribution made further large payments to creditors other than the United States after that time. Under any view of the facts, Colosimo knew about these payments. This evidence is proof of willfulness as a matter of law. Honey, 963 F.2d at 1087; see also Ferguson, 484 F.3d at 1073 (evidence of knowing payments to other creditors with knowledge of unpaid taxes supports finding of willfulness); Jenson, 23 F.3d at 1395 (evidence that after learning of tax liability officer voluntarily and consciously chose to pay certain creditors before the IRS is sufficient to establish willfulness as a matter of law). Against this, Colosimo argues that after June 2004 he was still not willful in failing to pay over the taxes to the government “due to the substantial and significant encumbrances imposed upon receivable funds by creditors of C&C Distribution.” If C&C Distribution's funds were encumbered, then Colosimo could not have willfully failed to pay the taxes. See generally Honey, 963 F.2d at 1088-90. The government argues that none of C&C Distribution's funds were encumbered. “Where the taxpayer's discretion in the use of funds is subject to restrictions imposed by a creditor holding a security interest in the funds which is superior to any interest claimed by the IRS, the funds are regarded as encumbered if those restrictions preclude the taxpayer from using the funds to pay the trust fund taxes.” Honey, 963 F.2d at 1090 (quoting In re Premo, 116 B.R. 515 [71A AFTR 2d 93-4677] (Bankr. E.D. Mich. 1990)). “The essential point of this definition is that funds are encumbered only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds.” Id. The “taxpayer has the burden to prove that all potentially available funds were encumbered.” Id. at 1087 (citation omitted). Colosimo argues that C&C Distribution funds were encumbered by State Savings Bank, C&C Realty, and West Bank, a lender of C&C Realty. Colosimo points to C&C Distribution's debt of over $460,000 to State Savings Bank, secured by a Security Agreement. But nothing in the Security Agreement prevented C&C Distribution from using funds in its accounts to pay debts to creditors, and this is exactly what C&C Distribution did in disbursing funds throughout 2004 and 2005. 4 Nothing in the Agreement imposed restrictions on C&C Distribution's ability to use its funds to pay taxes. Moreover, a State Savings Bank employee stated that he oversaw C&C Distribution's loans from the bank and that the bank never restricted C&C Distribution's payment of taxes. Colosimo also points to C&C Distribution's debt to C&C Realty of over $600,000 for back rent. But Colosimo co-owns C&C Realty with Carolyn; Colosimo is essentially asking the court to find that Colosimo's other company properly restricted his first company from paying its taxes. Moreover, Colosimo provides virtually no evidence that C&C Realty restricted C&C Distribution from using funds to pay trust fund taxes. Colosimo similarly provides no evidence that any lender of C&C Realty restricted C&C Distribution from using funds to pay trust fund taxes. In addition, at their depositions, neither Colosimo nor Gillaspey could recall State Savings Bank imposing any limitation on C&C Distribution's ability to pay its federal taxes. Colosimo additionally testified that he did not recall any other bank imposing such a limitation. Colosimo and Gillaspey later submitted affidavits contradicting this testimony. This post hoc attempt to rationalize Colosimo's failure to pay over the taxes will not save Colosimo from summary judgment here. The court finds that Colosimo willfully failed to pay over the trust fund taxes as a matter of law. Colosimo's motion for summary judgment is denied. The government's motion for summary judgment against Charles Colosimo is granted. V. CONCLUSION Carolyn's motion for summary judgment [Dkt. 12] is granted; Carolyn's request for attorney's fees is denied. The counterclaim against Carolyn shall be dismissed. Colosimo's motion to strike [Dkt. 24] and motion for summary judgment [Dkt. 18] are denied. The government's motion for summary judgment against Colosimo [Dkt. 19] is granted. Colosimo's claim against the government is dismissed. The clerk shall enter judgment for the government on its counterclaim against Colosimo in the amount of $696,936.66 with statutory interest from December 1, 2009. IT IS SO ORDERED. DATED this 16th day of February, 2010. JOHN A. JARVEY UNITED STATES DISTRICT JUDGE SOUTHERN DISTRICT OF IOWA ________________________________________ 1 Carolyn concedes that there would be a genuine issue of material fact on the willfulness issue if she is a responsible person. ________________________________________ 2 Colosimo adds an argument that he could not be responsible because he did not have the technical ability to pay over the taxes, as he lacked the capacity to use the software to do it and did not know the password. But the technical capacity to pay over the taxes using a particular method is not the same as the effective authority to decide to pay the taxes. See Barton, 988 F.2d at 59 (counseling against reliance on “mechanical functions”). ________________________________________ 3 This is true only under the facts viewed in the light most favorable to Colosimo. For purposes of Colosimo's cross-motion for summary judgment, the court, taking the facts in the light most favorable to the government, would be unable to find Colosimo not responsible as a matter of law even for the time period preceding June 2004, given the government's proffer of evidence that Colosimo had received notices from the IRS in 2003 concerning unpaid taxes. Indeed, given all the other evidence of Colosimo's active involvement in C&C Distribution, there is certainly, at the very least, a genuine issue of material fact as to whether Colosimo knew of the unpaid taxes before June 2004. ________________________________________ 4 Indeed, it also appears from the evidence before the court that the majority of these funds went to creditors other than those that Colosimo claims limited C&C Distribution's ability to pay its trust fund taxes.