Free Order on Motion for Summary Judgment - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 On August 19, 2003, Plaintiff filed a complaint seeking a refund and abatement of penalties assessed and/or collected against him pursuant to 26 U.S.C. § 6672. Compl. (doc. # 1). The United REVEREND ROBERT W. SCHLICHT, Plaintiff, vs. UNITED STATES of AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) No. CIV 03-1606 PHX RCB IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

O R D E R

States filed its answer and a counterclaim against Plaintiff seeking to collect the balance of the assessed penalties. (doc. # 8). judgment. Ans.

The parties have filed cross-motions for summary Both motions are fully briefed. The Court has

Mots. (docs. # 63, 67).

Resps. (docs. # 70, 72); Replies (docs. # 71, 74).

considered the arguments submitted by the parties and is now prepared to rule. . . .

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I.

Background Schlicht Memorial Lutheran Home, Inc. ("the corporation") is a

non-profit entity in Minnesota which operates long-term nursing care facilities. 64) ¶ 3. Defendant's Statement of Facts ("DSOF") (doc. #

The United States asserts that the payroll taxes for this

corporation were not paid for the tax periods ending March 30, 1997; June 30, 1997; and September 30, 1997. Id. ¶ 21. The tax

code permits the assessment of a penalty equal to the amount of any such unpaid taxes against a responsible person which includes "[a]ny person required to collect, truthfully account for, and pay over" such taxes. 26 U.S.C. § 6672(a). The IRS assessed this

penalty against Plaintiff due to his status as the president of the corporation in 1997. Compl. (doc. # 1). The propriety of this

penalty is at issue in this litigation. II. Summary Judgment Standard To grant summary judgment, the Court must determine that the record before it contains "no genuine issue as to any material fact" and, thus, "that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). In determining whether

to grant summary judgment, the Court will view the facts and inferences from these facts in the light most favorable to the nonmoving party. See Matsushita Elec. Co. v. Zenith Radio Corp.,

475 U.S. 574, 587 (1986). The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. 242, 247-48 (1986). See Anderson v. Liberty Lobby, Inc., 477 U.S. A material fact is any factual dispute that -2Document 81-2 Filed 07/06/2005

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might affect the outcome of the case under the governing substantive law. Id. at 248. A factual dispute is genuine if the

evidence is such that a reasonable jury could resolve the dispute in favor of the nonmoving party. Id. A party opposing a motion

for summary judgment cannot rest upon mere allegations or denials in the pleadings or papers, but instead must set forth specific facts demonstrating a genuine issue for trial. See id. at 250.

Finally, if the nonmoving party's evidence is merely colorable or is not significantly probative, a court may grant summary judgment. See, e.g., California Architectural Build. Prods., Inc. v. Franciscan Ceramics, 818 F.2d 1466, 1468 (9th Cir. 1987). III. 26 U.S.C. § 6672 The Internal Revenue Code requires employers to withhold federal social security and individual income taxes from the wages of their employees. See 26 U.S.C. §§ 3102(a), 3402(a). Although

an employee collects this money each salary period, payment to the federal government takes place on a quarterly basis. 7501(a). 26 U.S.C. §

In the interim, the employer holds the collected taxes in Id. These taxes are known as "trust

trust for the government. fund taxes." (1978).

See Slodov v. United States, 436 U.S. 238, 243

Once net wages are paid to an employee, the government

credits that employee with the tax payments, regardless of whether the taxes are ultimately paid over by the employer. See id. In

order to protect against revenue losses, the tax code offers the IRS a variety of means of recovering from employers who fail to pay over collected employee taxes. Specifically, in addition to tax

liens (26 U.S.C. § 6321) and criminal penalties (26 U.S.C. §§ 7202, 7215), the IRS may assess a civil penalty against responsible -3Document 81-2 Filed 07/06/2005

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corporate officials equal to the amount of delinquent trust fund taxes ("trust fund recovery penalty") under 26 U.S.C. § 6672. Section 6672 provides, in relevant part: Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. Plaintiff argues that the § 6672 penalty cannot be assessed against him because he was not a responsible person and because he did not willfully fail to pay the delinquent trust fund taxes. Mot. (doc. # 67); Resp. (doc. # 72). The United States has

submitted Certificates of Assessment and Payment (Forms 4340) for the § 6672 penalty for each quarter. 2, K-3. States. 1994). DSOF (doc. # 64) Exs. K-1, K-

These forms establish a prima facie case for the United United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. Therefore, Plaintiff cannot prevail unless he can

demonstrate by a preponderance of the evidence that either the element of responsibility or the element of willfulness is not met. See id. A. Responsible person

For purposes of assessing a § 6672 penalty, a "responsible party" is one who has the "final word as to what bills should or should not be paid, and when." Alsheskie v. United States, 31 F.3d A person is deemed to

837, 838 (9th Cir. 1994) (citation omitted).

have the final word when he possessed "the authority required to exercise significant control over the corporation's financial affairs, regardless of whether he exercised such control in fact." -4Document 81-2 Filed 07/06/2005

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Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993).

More

than one person can be found responsible with respect to any tax quarter at issue, and liability can be imposed on each. v. United States, 423 F.2d 448, 449 (9th Cir. 1970). Responsibility turns on the "scope and nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid over flows from the authority that enables one to do so." 33 F.3d at 1139 (citation omitted). In the absence of an admission of responsibility, there are various factors which are indicative of significant control. factors include "the individual's duties as outlined in the corporate bylaws, his ability to sign checks, his status as an officer or director, and whether he could hire and fire employees." Hochstein v. United States, 900 F.2d 543, 547 (2nd Cir. 1990); See Jones, 33 F.3d at 1140 (approving use of the Hochstein factors). The United States has submitted evidence that Plaintiff was the president of the corporation, the corporate bylaws charged Plaintiff with "general active management" of the corporation, Plaintiff had check signing authority, and Plaintiff both hired and fired employees. 60, 160. DSOF (doc. # 63) Exs. B, H-1, H-2, I, D at 31, These Jones, See Turner

All of this evidence indicates that Plaintiff had Furthermore,

significant control over the corporation's finances.

there are checks in the record which Plaintiff signed and sent to the IRS for the payment of trust fund taxes. Id. Ex. I. See id.

Plaintiff acknowledges that he was president and the bylaws Resp. (doc. #

27 gave him general active management of the company. 28 72) at 8-9.

While he argues that he did not have sole check-5Document 81-2 Filed 07/06/2005

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1 signing authority or the sole authority to hire and fire, he does 2 not allege that he had no check-signing authority or authority over 3 personnel decisions. Id. at 7-9. The fact that others might have

4 also shared that authority is irrelevant to whether Plaintiff was a 5 responsible person for purposes of § 6672. 6 449. See Turner, 423 F.2d at

There is undisputed evidence that each of the Hochstein

7 factors indicates that Plaintiff had significant control over the 8 corporation's finances. Plaintiff asserts that there are other Mot.

9 circumstances which show that he did not have such control. 10 (doc. # 67) at 7-8.

Plaintiff points to the fact that he did not

11 own any shares in the corporation, but this fact is irrelevant 12 because the corporation did not issue any stock. Id. Plaintiff

13 goes on to claim that he was not active in day-to-day management, 14 he did not decide which bills to pay when, and he did not have 15 control over bank accounts and disbursement records. Id. The

16 Court need not consider whether such circumstances would militate 17 in favor of concluding that Plaintiff was not a responsible person 18 because Plaintiff has submitted no evidence to support these 19 assertions. See id. Mere allegations or denials in the pleadings

20 or papers are not sufficient to create a genuine issue of fact. 21 Anderson, 477 U.S. at 250. 22 The undisputed facts are that Plaintiff was president of the

23 corporation, was charged with "general active management" of the 24 corporation, had check signing authority, hired and fired 25 employees, and on at least one occasion sent corporate checks 26 signed by himself to the IRS for payment of trust fund taxes. 27 These facts indicate that Plaintiff had significant control of the 28 corporation's finances. Even though he may not have exercised his

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1 authority over the finances on a regular basis, he was responsible 2 for ensuring that the corporation paid its trust fund taxes. 3 Purcell, 1 F.3d at 937. 4 5 B. Wilfulness See

Even though Plaintiff was a responsible person, the penalty

6 could still not be assessed against him unless he "willfully" 7 failed to make the corporation pay the delinquent trust fund taxes. 8 26 U.S.C. § 6672. In this context willfulness is "a voluntary,

9 conscious and intentional act to prefer other creditors over the 10 United States." Davis v. United States, 961 F.2d 867, 871 (9th Cir.

11 1992); Klotz v. United States, 602 F.2d 920, 923 (9th Cir. 1979). 12 Willfulness does not require an intent to defraud the government or 13 any other bad motive. 14 923. Davis, 961 F.2d at 871; Klotz, 602 F.2d at

Indeed, conduct motivated by a reasonable cause, such as a See, e.g., The

15 desire to meet payroll, may nonetheless be willful.

16 Phillips v. United States, 73 F.3d 939, 942 (9th Cir. 1996). 17 standard is further explicated as follows: 18 19 20

If a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, even to meet the payroll out of personal funds he lends the corporation, our precedents require that the failure to pay withholding taxes be deemed "willful." Once a responsible person gains knowledge

21 Id. (citations omitted).

22 of a payroll tax deficiency, he is liable for all periods during 23 which he was a responsible party, regardless of whether those 24 periods precede or follow the date he gained that knowledge. 25 Davis, 961, F.2d at 873. 26 The United States presents evidence that even though the See

27 corporation had financial difficulties, it nevertheless had a 28 positive cash flow throughout 1997 and the assets to pay its unpaid -7Document 81-2 Filed 07/06/2005

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1 trust fund taxes.

DSOF (doc. # 64) Exs. T. U-1 through U-6.

2 Plaintiff does not dispute this point, but argues that he was not 3 willful because he was not aware that the corporation's trust fund 4 taxes were delinquent for the first three quarters of 1997. 5 (doc. # 67) at 8-11. Plaintiff asserts in his briefing that Mot.

6 "[w]hen [he] discovered the taxes were not being paid, he 7 immediately confronted all those responsible, and requested that 8 the Board pay the taxes forthwith. 9 resigned." Id. at 9. When they refused, he

If there was any evidence to support this

10 version of events, there would most likely be a genuine issue of 11 fact regarding willfulness. 12 support. However, Plaintiff offers no such

Moreover, the record throws doubt on Plaintiff's version Plaintiff acknowledges that he became aware of the tax

13 of events.

14 deficiency on August 13, 1997 when he met with IRS Revenue Officer 15 Larry Inman to discuss the corporation's tax problems. 16 # 67) at 3. Mot. (doc.

Yet Plaintiff did not resign until November 14, 1997. The corporation paid other creditors in Id. Ex. D at 183-84. Plaintiff did send Id. Ex.

17 DSOF (doc. # 64) Ex. C-3. 18 between these two dates.

19 three checks to the IRS which paid part of the deficiency. 20 I.

Nevertheless, once Plaintiff became aware of the deficiency, he

21 failed to ensure payment in full of that deficiency before any 22 other creditors were paid. See id. Exs. J-1, J-2, J-3. The law is

23 clear that such a failure is willful and subjects the responsible 24 person to § 6672 penalties. 25 26 C. Status of underlying tax liability

In Plaintiff's motion for summary judgment he argues that the

27 penalties assessed against him are inappropriate because the 28 corporation has paid off the underlying trust fund tax liability. -8Document 81-2 Filed 07/06/2005

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1 Mot. (doc. # 67) at 11-12.

First, Plaintiff points to the three Id. at 11, Ex. I.

2 checks he sent to the IRS in October of 1997.

3 Since these checks totaled $15,831.53, Plaintiff argues that they 4 paid off the deficiency for the third quarter of 1997 which was 5 assessed at $15,153.62. Id. However, the assessment took into DSOF (doc. # 64) Ex. J-

6 account the payments from October of 1997. 7 3.

If Plaintiff had not submitted those checks the current

8 assessment for the third quarter of 1997 would be upwards of thirty 9 thousand dollars. Next, Plaintiff states that the corporation

10 submitted a check to the IRS in the amount of $170,366.86 in May of 11 1998 which was to be used to defray the trust fund liability for 12 1996-1998. Mot. (doc. # 67) at 12, Ex. J. The IRS forms which

13 indicate all payments made toward the tax liability for the first 14 three quarters of 1997 do not reflect that any portion of this 15 check was applied to the deficiencies from those quarters. 16 (doc. # 64) Exs. J-1, J-2, J-3. DSOF

Most likely this is because the

17 corporation's tax liability from 1996 exceeded the amount of the 18 1998 check, so no funds remained to be applied to 1997. Tax lien

19 forms indicate that as of January 9, 1998 the corporation's 20 outstanding liability for 1996 was $281,873.99. Id. Ex. Q.

21 Therefore, the copies of checks which Plaintiff provided are not 22 sufficient to support the conclusion that the corporation paid its 23 tax deficiency for the first three quarters of 1997. 24 IV. 25 Conclusion The undisputed evidence indicates both that Plaintiff was a

26 responsible person and that he willfully failed to pay the trust 27 fund taxes owed for the first three quarters of 1997. Therefore,

28 the § 6672 penalties assessed against Plaintiff were appropriate, -9Document 81-2 Filed 07/06/2005

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1 and the United States is entitled to judgment in its favor as a 2 matter of law both on Plaintiff's claim and on it's own 3 counterclaim. Plaintiff must pay the balance of the trust fund

4 penalty assessed against him plus statutory interest and accruals. 5 The United States shall submit a proposed form of judgment setting 6 forth the proper dollar amount within fifteen days of the date this 7 order is entered. 8 IT IS ORDERED that Defendant's Motion for Summary Judgment

9 (doc. # 63) is GRANTED. 10 IT IS FURTHER ORDERED that Plaintiff's Motion for Summary

11 Judgment (doc. # 67) is DENIED. 12 IT IS FINALLY ORDERED directing Defendant to submit a proposed

13 form of judgment within fifteen (15) days. 14 15 16 17 18 19 Copies to counsel of record 20 21 22 23 24 25 26 27 28 - 10 Document 81-2 Filed 07/06/2005 DATED this 25th day of August, 2005.

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