Opinion
Civil Action No. 3:98-C V-2027-D.
April 27, 2000
MEMORANDUM OPINION AND ORDER
In this action to recover a $33,207.06 penalty assessed pursuant to 26 U.S.C. § 6672 for failure to pay withheld payroll taxes, plaintiff moves for summary judgment. He contends the government cannot establish that he is a responsible person who acted willfully because he did not have signature authority over corporate bank accounts and thus lacked the power to direct and control payments of corporate funds, and because he accepted employment from the company's investors on the condition that they have ultimate authority over disbursement of funds. The court denies the motion.
I
Health World, Inc. d/b/a World-Wide Health Studios ("World-Wide"), a company that operated a chain of health clubs, experienced financial difficulties and failed to pay to the Internal Revenue Service ("IRS") social security and income taxes withheld from employees during the last quarter of 1986 and first two quarters of 1987. Plaintiff Jackie G. Gross ("Gross") assisted WorldWide in a bankruptcy workout. As part of the workout, four individual investors (medical doctors) each paid $50,000 for 20% stock ownership stakes in World-Wide. Gross received the remaining 20% for his efforts in negotiating the workout. He also assumed the role of Chief Operating Officer ("COO"). As COO, Gross became heavily involved in World-Wide's day-to-day operations. He signed the payroll tax return for the first quarter of 1987, maintained the company's financial records, served as its Vice President, held a seat on its Board of Directors, and worked in its corporate offices on a daily basis. Gross did not have signature authority over World-Wide's corporate bank accounts. Financial decisions were ultimately made at the discretion of the majority shareholders. Responsibility for paying routine bills, such as rent, was delegated to other officers whom World-Wide hired.
Shortly after emerging from bankruptcy, World-Wide began having cash flow problems. On May 21, 1987 Gross signed the necessary petition and schedules to place World-Wide back into bankruptcy. Before placing World-Wide into bankruptcy, Gross withdrew $50,000 in personal compensation from the company. The bankruptcy schedules that Gross signed showed that the company owed the IRS $85,596.00 in withheld payroll taxes.
The IRS assessed a $33,207.06 penalty against Gross under § 6672 for failure to pay the amounts due in employee withholding taxes. Gross paid part of the penalty ($50) and filed a refund claim. After the IRS denied the claim, Gross filed this refund suit against defendant United States of America ("the government"'), seeking reimbursement of the penalty, interest, and abatement of any outstanding tax liability claims against him related to World-Wide's failure to remit payroll taxes.
II A
The Internal Revenue Code requires employers to withhold certain federal social security and income taxes from an employee's wages. 26 U.S.C. § 3102 and 3402. The employer holds the withheld sums in trust and must later pay them to the IRS in quarterly intervals. See § 7501; 26 C.F.R. § 31.6071 (a)-1 (1999). The IRS may impose a penalty equal to the entire amount of the unpaid taxes on
(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[.]26 U.S.C. § 6672 (a); Barnett v. IRS, 988 F.2d 1449, 1453 (5th Cir. 1993). To establish that Gross is liable, the government must demonstrate that (1) he is a responsible person (2) who acted willfully. See Barnett, 988 F.24 at 1453. Once the Government offers a § 6672 assessment into evidence, the taxpayer bears the burden of disproving his responsible person status or willfulness. See id.
The Fifth Circuit "takes a broad view of who is a responsible person under § 6672." Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999) (citing Barnett, 988 F.2d at 1454). Whether Gross is a responsible person "turns on his status, duty, and authority." Turnbull v. United States, 929 F.2d 173, 178 (5th Cir. 1991). "The crucial inquiry is whether the individual had the effective power to pay the taxes." Id. (citing Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983)). "[T]his statute applies to all responsible persons, not just to the most responsible person." Id. As the Barnett panel explained:
The crucial inquiry is whether the person had the "effective power" to pay the taxes — that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed. . . . There may be — indeed, there usually are — multiple responsible persons in any company. That another person in the company has been delegated the jobs of withholding and paying employees' taxes and generally paying creditors is beside [the] point. The crucial inquiry is whether a party such as [plaintiff], by virtue of his position in (or vis-a-vis) the company, could have had "substantial" input into such decisions, had he wished to exert his authority.Barnett, 988 F.2d at 1454-55 (citations and footnote omitted). The court determines whether someone is a responsible person by analyzing six factors: whether he
(i) is an officer or member of the board of directors; (ii) owns a substantial amount of stock in the company; (iii) manages the day-today operations of the business; (iv) has the authority to hire or fire employees; (v) makes decisions as to the disbursement of funds and payment of creditors; and (vi) possesses the authority to sign company checks.Logal, 195 F.3d at 232 (quoting Barnett, 988 F.2d at 1455).
B
Gross appears to focus his summary judgment motion on the fifth and sixth elements. See P. Br. at 7. He asserts that he is not a responsible person because "he did not have signature authority over the corporate bank accounts until after the corporation filed for protection under the Bankruptcy Code on May 22, 1987." Id. He contends "that he specifically declined to be named an authorized signator on [World-Wide's] bank accounts because of a prior experience with the personal liability such authority could engender." Id. Gross maintains that it was a condition of his employment that the majority owners — the four medical doctors who held the other 80% of World-Wide's stock — retained ultimate authority over disbursement of funds. The government responds that a genuine fact issue exists concerning whether Gross is a responsible person because one cannot defeat such status merely by intentionally declining signature authority over corporate bank accounts for the sole purpose of avoiding § 6672 liability.
The court holds that Gross' bases for avoiding responsible person liability are alone insufficient to support entry of summary judgment. The record presents genuine fact issues concerning at least five of the six criteria for assessing responsible person status.
Concerning the first three factors, the evidence shows that Gross was World-Wide's Vice President and COO, he owned 20% of the company stock, and he managed substantial aspects of World-Wide's day-to-day business. Regarding the fourth element, a trier of fact could reasonably conclude that Gross had the power to hire and fire employees. As to the fifth factor, a reasonable jury could find that he had significant, even if not exclusive, control over the disbursement of funds. Concerning the sixth factor, Gross argues that he never possessed authority to sign corporate checks. He does not, however, cite any evidence to support this allegation, other than to state that his "affidavit establishes that he specifically declined to be named an authorized signator on the bank accounts because of a prior experience with the personal liability such authority could engender." P. Br. at 7.
The government has submitted evidence in the form of an unsigned IRS appeal case memorandum that finds that Gross "signed most of the checks." D. App. at 16. Gross objects to this evidence as hearsay. P. Rep. Br. at 1-2. The court need not decide whether the evidence is admissible, however, because check writing power is not a prerequisite to responsible person status. Raba v. United States, 977 F.2d 941, 945 (5th Cir. 1992). "To [hold] differently would open the door to a host of evasive tactics." Id.
Moreover, Gross cannot avoid liability solely because of the absence of evidence to support the fifth or sixth elements (or both factors overall). These factors function as indicia of a person's authority over an enterprise's financial or general decisionmaking, Barnett, 988 F.2d at 1455, but "[n]o single factor is dispositive," id.
Concerning Gross' assertion that "[i]t was a condition of his employment that the group of doctors be, from the outset, the ones ultimate authority over disbursal of funds," P. Br. at 7, the government has submitted evidence that Gross maintained World-Wide's financial records, D. App. at 6, and that on at least one occasion he signed World-Wide's payroll tax form, id. at 1. A trier of fact could reasonably infer from this evidence that Gross had significant control over disbursement of funds and other financial matters.
Gross' reliance in his reply brief on McMillan v. United States, 47 F.3d 1169 (6th Cir. 1995) (per curiam) (unpublished opinion), also lacks merit. McMillan is an unpublished opinion of the Sixth Circuit in which the court affirmed a district court holding that an independent financial consultant to a delinquent company was not liable as a responsible person. See id. at **3-**4. McMullan is like the facts of the present case only in the sense that the assessed party also lacked corporate check writing privileges See Id. at **3. Otherwise, McMillan is readily distinguishable. Unlike Gross, the delinquent company's independent financial consultant did not (1) serve as an officer, employee or director, (2) own stock, (3) have authority to hire or fire people, (4) engage in day-to-day management of business affairs, or (5) have the power to negotiate loans or execute contracts. See id.
Gross is not entitled to summary judgment because he has failed to present any summary judgment evidence, other than his own affidavit, to support his position. See Stull v. United States, 1999 WL 1425000, at *3 (N.D. Tex. Dec. 2, 1999) (Sanders, J.) ("Because they have the burden of disproving the Government's assessment against them, and may not rest on mere conclusory allegations or denials in their pleadings, their failure to present any summary judgment evidence is fatal to their case."). Moreover, Gross' motion fails in light of the government's proffered evidence. Because no single factor is dispositive, the court looks to all the evidence in determining responsible person status. See Hutchinson v. United States, 962 F. Supp. 965, 968 (N.D. Tex. 1997) (Solis. J.) (quoting Barnett, 988 F.2d at 1454). A reasonable fact finder could conclude that Gross fulfills at least five of the six responsible person criteria. The court cannot, therefore, relieve Gross of his responsible person status before trial. See, e.g., Raba v. United States, 977 F.2d 941, 944-45 (5th Cir. 1992) (holding that chief financial officer and member of board of directors of company that failed to pay over trust fund money to IRS was responsible person where he had unhindered role in conducting daily financial affairs of company but lacked actual check writing authority); Holder v. United States, 1999 WL 172271, at *3 (N.D. Tex. Mar. 18, 1999) (Buchmeyer, C.J.) (holding that plaintiff was responsible person as a matter of law where he satisfied all criteria, excluding management of day-to-day business affairs); Hare v. United States, 1997 WL 331788, at *5 (E.D. La. Mar. 3, 1997) (holding that president and board member of company that failed to pay over trust fund money to IRS was responsible person where he satisfied at least five of six indicia of authority). Therefore, the court concludes that genuine fact issues exist about whether Gross is a responsible person under § 6672(a).
C
Gross discusses the willfulness requirement for § 6672 liability, see P. Br. at 5-7, but does not specifically address whether he acted willfully, perhaps because he maintains that he did not act culpably, whether willfully or not. Because Gross has failed to establish, as a matter of law, that he did not act willfully, the court declines to grant summary judgment on this basis.
* * *
Gross' March 3, 2000 motion for summary judgment is denied.
SO ORDERED.