KOCZYLAS v. U.S., Cite as 110 AFTR 2d 2012-XXXX, 12/03/2012
SKOCZYLAS, Plaintiff, v. UNITED STATES OF AMERICA, Defendant
and Counter-Claimant, v. BREEN, et al. Counter-Defendants.
Case Information:
Code Sec(s):
Court Name: UNITED
STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK,
Docket No.: 09
Civ. 2035 (ILG) (RML),
Date Decided:
12/03/2012.
Disposition:
HEADNOTE
.
II. Legal Standards
A. Section 6672
Section 6672(a) provides, in relevant part, that:
Any person required to collect, truthfully account for, and
pay over any tax imposed by this title who willfully fails to collect such tax,
or truthfully account for and pay over such tax, or willfully attempts in any
manner to evade or defeat any such tax or the payment thereof, shall ... be
liable to a penalty equal to the total amount of the tax evaded, or not
collected, or not accounted for and paid over.
“[U]nder section 6672(a), an individual may be held liable
for unpaid withholding taxes if: (1) he or she was a “responsible person” for
collection and payment of the employer's taxes; and (2) he or she “willfully”
failed to comply” with statutory withholding tax requirements. Winter v. United
States, 196 F.3d 339, 344 [84 AFTR 2d 99-6892] (2d Cir. 1999). “The assessment
of the tax creates a prima facie case of liability, and the person against whom
the penalty is levied bears the burden of establishing by a preponderance of
the evidence that at least one of the two elements of section 6672 liability
does not exist.” Schwinger v. United States, 652 F. Supp. 464, 466 [59 AFTR 2d
87-546] (E.D.N.Y. 1987).
Although “[n]o single factor is dispositive in evaluating
whether an individual” is a “responsible person” within the meaning of §
6672(a), “the determinative question is whether the individual has significant
control over the enterprise's finances.” Winter, 196 F.3d at 345 (internal
quotation omitted). To answer this question, the Second Circuit has developed a
seven-factor test that directs courts to look at whether the individual:
(1) is an officer or member of the board of directors, (2)
owns shares or possesses an entrepreneurial stake in the company, (3) is active
in the management of day-to-day affairs of the company, (4) has the ability to
hire and fire employees, (5) makes decisions regarding which, when and in what
order outstanding debts or taxes will be paid, (6) exercises control over daily
bank accounts and disbursement records, and (7) has check-signing authority.
Id. (internal quotation omitted).
“Even a responsible person may not be held personally liable
under section 6672(a) unless his or her failure to collect, account for, or
remit withholding taxes was willful.” Id. “The principal component of
willfulness is knowledge: a responsible person acted willfully within the meaning
of § 6672(a) if he [or she] (a) knew of
the company's obligation to pay withholding taxes, and (b) knew that company
funds were being used for other purposes instead.” United States v. Rem, 38
F.3d 634, 643 [74 AFTR 2d 94-6649] (2d Cir. 1994). “Willful conduct may also
include a reckless disregard for obvious and known risks as well as a failure
to investigate after having notice that withholding taxes have not been
remitted to the Government.” Winter, 196 F.3d at 345 (quotations omitted).
However, a responsible person will not be held personally liable under §
6672(a) if he or she reasonably believed that taxes were being paid. Id. at
345–36 (discussing a limited ““reasonable cause” exception to section 6672(a)
liability”).
B. Summary Judgment
Summary judgment is appropriate “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “An issue of fact is
genuine if the evidence is such that a reasonable jury could return a verdict
for the nonmoving party. A fact is material if it might affect the outcome of
the suit under the governing law.” Fincher v. Depository Trust & Clearing
Corp., 604 F.3d 712, 720 (2d Cir. 2010) (internal quotation omitted).
The moving party bears the burden of establishing the
absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986). When the burden of proof at trial would fall on the
non-moving party, it ordinarily is sufficient for the movant to point to a lack
of evidence to go to the trier of fact on an essential element of the
non-movant's claim. Id. at 322–23. To defeat a motion for summary judgment, the
non-moving party “must do more than simply show that there is some metaphysical
doubt as to the material facts,” Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586–87 (1986)), and cannot “rely on conclusory allegations
or unsubstantiated speculation.” Brown v. Eli Lilly & Co., 654 F.3d 347,
358 (2d Cir. 2011) (internal quotation omitted). However, under § 6672(a),
“[t]he person against whom the IRS assesses a
§ 6672 tax penalty has the burden of disproving [the tax liability], by
a preponderance of the evidence.” Fiataruolo v. United States, 8 F.3d 930, 938
[72 AFTR 2d 93-6550] (2d Cir. 1993).
A court deciding a motion for summary judgment must
“construe the facts in the light most favorable to the non-moving party and
must resolve all ambiguities and draw all reasonable inferences against the
movant.” Brod v. Omya, Inc., 653 F.3d 156, 164 (2d Cir. 2011) (internal
quotation omitted). “Credibility determinations, the weighing of the evidence,
and the drawing of legitimate inferences from the facts are jury functions, not
those of a judge.” Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150
(2000).
“In the context of a section 6672(a) dispute, ... summary
judgment is appropriate where there are no genuine questions as to the assessed
individual's control of company funds and decision making authority, his or her
knowledge of the deflection of company funds to payees other than the IRS, or
the existence or reasonableness of his or her belief that the taxes were, in
fact, being paid.” Winter, 196 F.3d at 346. “A court may grant summary judgment
as to willfulness “only when the facts are undisputed and application of the
law to those facts will reasonably support only one ultimate conclusion.””
Reiff v. United States, 461 F. Supp. 2d 142, 154 [98 AFTR 2d 2006-7566]
(S.D.N.Y. 2006) (quoting Winter, 196 F.3d at 347). While the individual has the
burden of proof, if “the individual's position makes his [or her] claim of
ignorance of nonpayment plausible and there are no other indicia of knowledge,”
Rem, 38 F.3d at 644, then “a question of fact exists as to willfulness.” Reiff,
461 F. Supp. 2d at 154.
III. Discussion
A. Dvora Skoczylas
Skoczylas argues that she is not a “responsible person”
under § 6672 and that even if the Court finds otherwise, it should still grant
summary judgment in her favor “because she did not willfully fail to pay over
LIHAC's trust fund taxes.” Pl.'s Mem. at 1. The government contends that
Skoczylas is a “responsible person” who willfully failed to pay LIHAC's taxes,
so the Court should deny Skoczylas' motion and grant summary judgment in the
government's favor. Gov't's Opp'n at 1; Gov't's Mem. at 18–19, 23–24. The Court
finds the existence of genuine disputes as to material facts and denies both
parties' motions.
1. “Responsible Person”
Under the Second Circuit's seven-factor test, two factors
weigh in favor of the government, two factors weigh in favor of Skoczylas, and
three factors turn on disputed issues of material fact. Therefore, summary
judgment for either party under § 6672
is not appropriate.
i. Officer or Member of the Board of Directors
The parties agree that Skoczylas was a member of the Board
of Directors and President of LIHAC. Gov't's 56.1 Opp'n ¶¶ 15, 17. Although
they dispute the reach of the title “President” and the importance of how
frequently the Board met or that Skoczylas' position was unpaid, Pl.'s Mem. at
6–9; Gov't's Opp'n at 5–6; Pl.'s Reply at 4, the dispute is irrelevant because
the issue is whether Skoczylas “is an officer or member of the board of
directors.” Winter, 196 F.3d at 345 (emphasis added). Because it is undisputed
that Skoczylas was a director of LIHAC, this factor weighs in favor of finding
that Skoczylas is a “responsible person” under § 6672(a).
ii. Owns Shares or Possesses an Entrepreneurial Stake in the
Company
The parties agree that Skoczylas was the 100% controlling
shareholder at all times relevant to this case. Pl.'s 56.1 Opp'n ¶¶ 9–10.
Although Skoczylas argues that she “was never a bona fide owner” and merely
held the “ceremonial title[] of shareholder,” Pl.'s Mem. at 14, she “concede[s]
that she held legal title to the shares of LIHAC during the periods at issue.”
Pl.'s Reply at 4. Because it is undisputed that Skoczylas was the sole
shareholder of LIHAC, this factor weighs in favor of finding that Skoczylas is
a “responsible person” under § 6672(a).
iii. Actively Manages Day-to-Day Operations
The parties agree that “Skoczylas does not appear to have
been active in the management of the day-to-day affairs of LIHAC.” Gov't's
Opp'n at 6. Although the government notes that Skoczylas was “kept apprised of
[the] financial health of the hospital,” this is a far cry from active
day-to-day management. Therefore, this factor weighs against finding that
Skoczylas is a “responsible person” under § 6672(a).
iv. Has the Ability to Hire and Fire Employees
The parties dispute whether Skoczylas, as a director, had
the ability to hire and fire employees. The government argues that Skoczylas
had this power because she participated in Board meetings that granted
physicians hospital privileges and approved the hiring and firing of various
executives. Gov't's Opp'n at 7–8. Skoczylas responds that the Board did not
have real power to hire and fire because LIHAC was actually run by the Parties
in Interest during the bankruptcy, not the Board. Pl.'s Reply at 5–6. Skoczylas
also asserts that “granting privileges to physicians at a hospital is not
hiring or firing employees.” Id. at 5. Skoczylas is correct that granting a
physician hospital privileges does not constitute an employment contract. Lobel
v. Maimonides Med. Ctr., 835 N.Y.S.2d 28, 29 (1st Dep't 2007) (citing Engelstad
v. Virginia Mun. Hosp., 718 F.2d 262 (8th Cir. 1983)). 6 The parties also
dispute whether the Board or the Parties in Interest ran LIHAC during the
bankruptcy, so there are genuine disputes as to material facts regarding this
factor.
v. Decides Which, When, and in What Order Debts and Taxes
Will Be Paid
The parties agree that Skoczylas lacked the power to decide
which, when, and in what order debts and taxes will be paid. However, the
government contends that because Skoczylas maintained signature power over
LIHAC's corporate checking accounts, she “possessed final veto power” over
paying payroll, debts, and taxes. Gov't's Opp'n at 8. That contention is
unpersuasive given the Second Circuit's cautionary language that “section
6672(a) is not meant to ensnare those who have mere “technical authority.””
Winter, 196 F.3d at 345. Therefore, this factor weighs against finding that
Skoczylas is a “responsible person” under § 6672(a).
vi. Exercises Control over Daily Bank Accounts and
Disbursement Records
The parties dispute whether Skoczylas exercised control over
daily bank accounts. The government contends, and Skoczylas does not appear to
dispute, that “Skoczylas maintained check-signing authority on all of LIHAC's
corporate checking accounts,” “her signature was printed on all issued payroll
checks,” and she “exercised her signatory authority from time-to-time on
LIHAC's operating account.” Gov't's Opp'n at 8. However, Skoczylas argues that
she “did not have possession or control of LIHAC's checkbook”; she “simply
performed the ministerial act of signing the checks in an emergency.” Pl.'s
Reply at 9. The Second Circuit has held that “section 6672(a) was not intended
to apply to an individual who lacks actual control over an employer's finances,
even though he or she has technical authority by virtue of title or ownership
interest.” Winter, 196 F.3d at 346 (citation omitted). Therefore, this factor
depends on whether Skoczylas possessed actual control over LIHAC's checkbook
and bank accounts, which is a disputed material fact.
vii. Has Check-Signing Authority
This factor turns on the same disputed material facts
discussed above.
Skoczylas relies heavily on Simpson v. United States, 664 F.
Supp. 43 [62 AFTR 2d 88-5008] (E.D.N.Y. 1987) (Glasser, J.), to argue that she
should be granted summary judgment because the seven factors weigh against
finding that she is a “responsible person.” In Simpson, this court held that
the members of the Board of Trustees of a hospital were not “responsible
persons” under § 6672(a), denied the government's motion for summary judgment,
and granted the Trustees' motion. Id. at 48–50. Skoczylas analogizes her case
to Simpson and emphasizes that, like here, the Trustees in Simpson were unpaid
and did not take the leading role in running the hospital. Pl.'s Mem. at 6.
While the Court recognizes the “social value in having individuals agree to
serve on the boards of hospitals,” it also cautions that “unpaid service on the
board of a not-for-profit institution should not confer automatic immunity from
the strictures of section 6672.” Simpson, 664 F. Supp. at 49. In Simpson, the
Court found that the Trustees “did not sign checks” and “did not hire and fire
employees,” whereas here the Court finds genuine disputes as to material facts for
both factors. Id. Therefore, Simpson, is distinguishable.
A more apt analogue is Winter v. United States. In Winter,
the government introduced evidence that Rita Romer was an officer, director,
and shareholder who possessed check-signing authority and was involved in
important operations decisions. 196 F.3d at 346. In response, Romer introduced
evidence that “she held her ownership interest and her titles merely as a
convenience to her husband, who exercised effective control over her interest
in the company,” while “she had no decision-making authority.” Id. Faced with
this conflicting evidence, the court concluded that “there exists a genuine
issue of fact as to whether she exercised “significant control” over [the
company's] finances or merely enjoyed a “titular designation” at the company,”
so summary judgment was not appropriate. Id. Here, the government has
introduced evidence that Skoczylas was a director and sole shareholder of LIHAC
who may have possessed hiring, firing, and check-signing authority. Conversely,
Skoczylas has introduced evidence that she possessed little, if any, control
over management, operations, or finances. As in Winter, this raises genuine
issues of material fact that cannot be resolved at the summary judgment stage
in favor of either party.
Under the totality of the circumstances, the seven-factor
test does not warrant granting summary judgment to either Skoczylas or the
government. Accordingly, on the issue of whether Skoczylas is a “responsible
person” under § 6672(a), both Skoczylas' and the government's motions are
DENIED.
2. Willfulness
“The principal component of willfulness is knowledge,”
United States v. Rem, 38 F.3d 634, 643 [74 AFTR 2d 94-6649] (2d Cir. 1994),
and, as discussed supra, the parties dispute Skoczylas' knowledge and
involvement throughout the relevant period. Although Skoczylas bears the burden
of proof, she presents sufficient evidence of being unaware of LIHAC's failure
to pay withholding taxes. For example, Hung testified:
Q: So as far as you know, Ms. Skoczylas had no idea of the
delinquency?
A: Correct. I didn't say anything to her.
Reiser Decl., Ex. 7 (Hung Dep.), at 197. Conversely, the
government presents evidence that Skoczylas had access to, and at times even
signed, documents that showed LIHAC's tax delinquencies. Gov't's Mem. at 23–24.
In light of these genuine disputes as to material facts, the issue of
Skoczylas' willfulness cannot be resolved at the summary judgment stage.
Accordingly, both Skoczylas' and the government's motions are DENIED. 7
B. John Breen
Breen concedes that he is a “responsible person” under §
6672(a) for most of the relevant time period, but argues that he is entitled to
summary judgment because “there is no evidence that he acted willfully in
causing any LIHAC payroll tax deficiency.” Breen's Opp'n at 77. The government
contends that it is entitled to summary judgment because “Breen willfully
failed to collect, truthfully account for or pay over LIHAC's withheld
employment taxes to the IRS.” Gov't's Mem. at 24–26. The Court finds that Breen
is a “responsible person” under § 6672(a) for most, but not all, of the
relevant time period, but finds that there are genuine disputes as to material
facts regarding Breen's willfulness. Accordingly, it grants Breen's motion in
part and denies Breen's motion in part, and grant's the government's motion in
part and denies the government's motion in part.
1. “Responsible Person”
Breen's status as a “responsible person” turns on the
precise timeline of events. As discussed supra, it is undisputed that LIHAC did
not fully pay federal payroll taxes for the first three quarters of 2002 and
the first two quarters of 2003. It is also undisputed that Breen was COO during
the first quarter of 2002, was promoted to CEO during the second quarter of
2002, and was CEO for all subsequent quarters in 2002 and 2003.
The parties appear to agree that Breen was not a
“responsible person” in the first quarter of 2002 when he was COO, and was a
“responsible person” in the third quarter of 2002 and first two quarters of
2003 when he was CEO. Breen's Opp'n at 34–36; Gov't's Reply to Breen at 2, 5–6.
But, they dispute whether Breen was a “responsible person” in the second
quarter of 2002. Breen argues that he was not a “responsible person” in the
second quarter of 2002 because he was still COO for most of the quarter.
Breen's Opp'n at 34–36. The government responds that Breen became CEO with 30
days left in the second quarter of 2002, so “there was sufficient time
remaining ... for Breen to determine the status of LIHAC's unpaid federal
employment tax liability accruing during the second quarter”; therefore, Breen
was a “responsible person” in the second quarter of 2002. Gov't's Reply to
Breen at 2, 5–6. Since Breen was promoted to CEO partway through the second
quarter of 2002, the Court finds that the extent of Breen's responsibility in
the second quarter of 2002 raises genuine disputes as to material facts.
Accordingly, on the issue of whether Breen is a “responsible person,” Breen's
motion is GRANTED for the first quarter of 2002, and DENIED for all subsequent
quarters, and the government's motion is GRANTED for the third quarter of 2002
and all subsequent quarters, and DENIED for all previous quarters.
2. Willfulness
Summary judgment is not appropriate on the issue of
willfulness because the issue is a matter of credibility, which is a determination
made at trial. As discussed supra, Breen testified that he was unaware of the
tax liabilities until September 2003, while Hung testified that he informed
Breen in 2002. Similarly, the government argues that Breen was aware of the tax
liabilities in September 2002 based on the minutes of a meeting of the Parties
in Interest, while Breen contends that he was discussing state employment
taxes. Gov't's Reply to Breen at 10–11. Finally, Breen contends that he did not
read the tax information appended to the MORs he signed and, even if he had
read it, he would not have understood it. The government responds that even if
Breen could not understand the tax information appended to the MORs, he showed
a reckless disregard for the “known risk that LIHAC's employment tax
liabilities would not be paid over to the United States” because “he utterly
failed to conduct any investigation to assure himself that employment taxes
were being paid over to the IRS.” Id. Such factual disputes cannot be
adjudicated at the summary judgment stage, so both Breen's and the government's
motions are DENIED. 8
IV. CONCLUSION
For the foregoing reasons, Skoczylas' motion is DENIED, the
government's motion against Skoczylas is DENIED, Breen's motion is GRANTED in
part and DENIED in part, and the government's motion against Breen is GRANTED
in part and DENIED in part.
SO ORDERED.
Dated: Brooklyn, New York
December 3, 2012
I. Leo Glasser
Senior United States District Judge
1
After LIHAC declared
bankruptcy, it experienced management changes in 2000 and 2001 and attempted to
attain not-for-profit status, which has no relevance to this action. Gov't's
56.1 Opp'n ¶¶ 87, 89, 92–94, 100, 122–23.
2
IRS Form 941 is an
employer's quarterly federal tax return. Employers are required to withhold
payroll taxes from employees and report them quarterly on Form 941. See 26
U.S.C. §§ 3102(a), 7501(a); 26 C.F.R. § 31.6011(a)-4.
3
Although Local Civil
Rule 56.1 does not require a reply statement of facts by the movant, it also
does not forbid it. Therefore, the Court will consider reply statements of
facts.
4
The Complaint refers
to “Trust Fund
Recovery Penalties”
because payroll taxes that employers deduct from employees' wages are held by
the employer in a special trust fund for the government's benefit. See 26
U.S.C. § 7501.
5
Breen's motion for
summary judgment, despite spanning 79 pages, does not contain a statement of
material facts in numbered paragraphs as required by Local Civil Rule 56.1(a).
“Failure to submit such a statement may constitute grounds for denial of the
motion.” Local Civ. R. 56.1(a). Nonetheless, for the sake of efficiency and in
light of the voluminous record, the Court will decide Breen's motion in
conjunction with the other parties' motions.
6
Although Skoczylas
does not cite to any authority, LIHAC is governed by New York contract and
employment law because it is a New York hospital.
7
The government also
contends that, in the alternative, Skoczylas should be held strictly liable.
Gov't's Mem. at 26–27. The government appears to base its argument on the
allegation that LIHAC possessed unencumbered funds and chose not to use them to
pay taxes, Gov't's 56.1 ¶ 45, but offers no evidence to support the fact that
the funds were unencumbered. Breen's 56.1 Opp'n ¶ 45. The government's theory
of strict liability is contradicted by the text of the statute, which only
applies to an individual who “willfully fails to collect such tax ... or
willfully attempts in any manner to evade or defeat such tax.” 26 U.S.C. §
6672(a) (emphasis added). Moreover, the Supreme Court has explicitly held that
“the statute cannot be construed to impose liability without fault” because it
“does not impose an absolute duty.” Slodov v. United States, 436 U.S. 238, 254
[42 AFTR 2d 78-5011] (1978). The government's attempts to distinguish Slodov
are unavailing, Gov't's Reply to Pl. at 10–12, because the weight of authority
holds that “[a]ttaining the status of a “responsible person” does not ...
encompass strict liability for a company's tax delinquency.” Michaud v. United
States, 40 Fed. Cl. 1, 23 [80 AFTR 2d 97-8007] (Fed. Cl. 1997).
8
As with Skoczylas,
the government also contends that, in the alternative, Breen should be held
strictly liable. Gov't's Mem. at 26–27. The Court rejects the government's
argument for the same reasons.
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