Opinion
BANKRUPTCY NO. 98-71176-CMS-11, ADVERSARY PROCEEDING NO. 98-70277
May 30, 2000
MEMORANDUM OPINION AND ORDER
This case came before this Court on Cross Motions for Summary Judgment on Debtor's Objection to Claim of the Internal Revenue Service (hereinafter, "IRS"). A hearing was held on April 12, 2000. Debtor's objection and the cross-motions relate to Claim No. 18 filed by the IRS in the total amount of $840,270.42. The parties have resolved some of the issues in Debtor's objection and the IRS filed an amended claim on April 12, 2000, in the total amount of $782,123.15. The issues remaining for summary judgment are: (1) whether the Debtor, Eddie Battles, is liable for the trust fund recovery penalty (hereinafter, "TFRP") assessments for unpaid federal withholding taxes of Battles Steel, Inc. (hereinafter, "BSI"), EBS Construction, Inc., and Battles Steel Fabrication and Supply, Inc: (2) whether the statute of limitations found at Section 6501(a) of the Internal Revenue Code (26 U.S.C.) bars assessment of the TFRP with respect to the withholding taxes of BSI for the first, second and third quarters of 1994; and (3) whether the amount of the amended claim of the IRS is accurate.
The Court has ordered the parties to provide additional briefing on issues No. 2 and 3 as they are not ripe for summary judgment. The sole issue to which this summary judgment is directed is issue No. 1, whether Eddie Battles is liable for the TFRP assessments at issue.
UNDISPUTED FACTS
In 1986, the Debtor (hereinafter; "Battles") began his construction business as a sole proprietorship. Battles performed all administrative tasks, including payment of federal withholding taxes. During this period, the business grew and annual revenues rose from $50,000 to $1,000,000. Battles hired additional employees during this period of growth.
On December 20, 1991, Battles incorporated the sole proprietorship as BSI, becoming the President and sole shareholder. In 1992, Doug Thompson (hereinafter, "Thompson") incorporated Steel Construction Supply, Inc. (hereinafter, "SCS"). In 1993, Thompson hired Terri Mims (hereinafter, "Mims") as bookkeeper for SCS. Mims was also the bookkeeper for BSI.
In early 1993, SCS and BSI entered a business arrangement whereby Battles guaranteed a joint line of credit for the two corporations at First Alabama Bank (now known as Regions Bank). The joint line of credit required both corporations to route all monies collected as accounts receivable to the Regions line of credit.
In December 1993, Battles experienced marital problems culminating in a divorce in August, 1994. During that period, Battles transferred BSI's employees to SCS's payroll so that he would be free to address personal issues.
In 1994, Thompson and Mims opened a bank account at Compass Bank. Battles was a signatory on that account. In violation of the agreement with Regions Bank, Thompson and Mims did not route the accounts receivable funds to Regions Bank but diverted those funds to the Compass Bank account.
In the summer of 1994, Battles became aware that the accounts receivable fund had not been applied to the Regions Bank line of credit. In August 1994, Battles severed his relations with SCS and moved BSI's business operations to an office adjacent to a football stadium. SCS agreed to repay the line of credit. In the fall of 1994, BSI stopped using the joint credit line.
In October, 1995, the IRS informed Battles that BSI had not met its federal withholding tax obligations. In turn, Battles confronted Mims who assured him that all withholding tax obligations had been met. Battles accused Mims of embezzling the withheld tax moines.
In 1997, BSI through Battles, applied to Regions Bank for financing. He anticipated the loan would provide funds from which to pay the delinquent tax liability. In anticipation of obtaining financing, BSI contracted for new construction projects during the summer of 1997.
In January 1998, Regions Bank denied BSI's request for financing, and reduced the existing line of credit from $600,000 to $300,000. Regions Bank demanded that BSI repay $200,000 on the line of credit. In response to this demand and an accompanying threat to foreclose on the liability, Battles paid and/or surrendered $100,000 to Regions Bank from funds earmarked to pay federal withholding taxes.
The IRS assessed a TFRP against Battles for the unpaid federal withholding taxes of BSI for the first, second, third and fourth quarters of 1994. Those assessments are contained in the amended claim of the IRS. Also included in the amended claim are TFRP assessments against Battles for the unpaid federal withholding tax liability of BSI for the third and fourth quarters of 1995, and the second, third and fourth quarters of 1996, and the second and third quarters of 1997; TFRP assessments with respect to EBS Construction, Inc. for the fourth quarter of 1995, and all four quarters in 1996; and Battles Steel Fab Supply, Inc. for the third and fourth quarters of 1996, and the first and second quarters of 1997. Battles concedes, and this Court agrees that the undisputed evidence establishes as a matter of law, that he is liable for the TFRP assessments with respect to the withholding taxes of BBS Construction, Inc.; Battles Steel Fab and Supply, Inc.; and BSI for the third and fourth quarters of 1995; and the second, third and fourth quarters of 1996.
The TFRP assessment for the second quarter of 1996 has been fully satisfied.
Although Battles admits liability for the TFRP, he disputes the amount of the assessment claiming it is based on a fraudulent duplicate Form 941 filed for the fourth quarter of 1995. Battles presented evidence to establish that the Form 941 reporting a tax liability of $243,746.01 was fraudulent and the correct withholding tax liability is $9,420.93. The IRS agreed and abated the $243,746.01 assessment, and made another TFRP assessment against Battles based on the correct tax liability of $9,420, and amended its claim. This Court reserves ruling on whether the amended claim contains the correct assessment.
Battles disputes his liability for the TFRP with respect to the withholding tax liability of BSI for all four quarters of 1994. He contends that personal problems severely limited his business contact with BSI and that SCS, through Thompson and Mims, ran BSI during 1994. Battles also contends that he was unable to use funds earmarked to pay withholding taxes because Regions Bank demanded that BSI repay a portion of its obligation under the line of credit. The United States responds that Battles was not relieved of personal liability by delegating his responsibility to pay the withholding taxes to others. The United States further contends that Battles' acquiescence in BSI's continued business operations and payment to other creditors, after Battles became aware of the unpaid withholding tax liability, establishes his liability as a matter of law.
STANDARD FOR SUMMARY JUDGMENT
"Summary judgment is properly regarded not as a disfavored procedural shortcut but, rather, as an integral part of the federal rules as a whole, which are designed to secure a just, speedy, and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Pursuant to Fed.R.Civ.P. 56(c), summary judgment is proper —
if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).
In considering a motion for summary judgment, the Court must view the underlying facts, and all reasonable inferences drawn therefrom, in the light most favorable to the other party. Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
DISCUSSION
Generally, under the Internal Revenue Code, employers are required to withhold federal income and social security taxes from the wages of their employees and to pay the withheld taxes to the government. If such taxes are not withheld and paid, Section 6672 imposes a "penalty" equal to the unpaid taxes on any person who was required to collect and pay over the withheld taxes and willfully failed to do so.
The liability imposed by Section 6672 is not penal in nature, even though it is denominated a penalty, since it provides the government with only the amount to which it was entitled to collect as the tax. The primary purpose of Section 6672 is to furnish a means of ensuring that the tax is paid. United States v. Huckabee Auto Co., 783 F.2d 1546, 1548 (11th Cir. 1986).
Generally, the courts have broadly interpreted who will constitute a responsible person within the meaning of Section 6672. Williams v. United States, 931 F.2d 805, 810, reh'g granted and opinion supplemented, 939 F.2d 915 (11th Cir. 1991). "Responsibility is a `matter of status, duty and authority.'" George v. United States, 819 F.2d 1008, 1011 (11th Cir. 1987) (citing Mazo v. United States, 591 F.2d 1151, 1153 (5th Cir.), cert. denied sub nom. Lattimore v. United States, 444 U.S. 842 (1979)); see also Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir. 1987). Indicia of responsibility include holding of corporate office, control over financial affairs, stock ownership, authority to disburse corporate funds, day-to-day managerial responsibility, and the ability to hire and fire employees. Williams, 931 F.2d at 810 (citing George, 819 F.2d at 1011).
Battles possessed many of the characteristics of responsibility. Battles does not dispute these facts but argues that he delegated full authority to pay the withholding taxes to SCS, Thompson and Mims, and that he did not actively participate or have knowledge of BSI's business operations during this period of time.
Courts have uniformly and repeatedly rejected the delegation of authority theory argued by Battles. Responsibility is a matter of status, duty and authority. "Authority turns on the nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld taxes are paid over flows from the authority that enables one to do so." Purcell v. United States, 1 F.3d 932 936 (9th Cir. 1993); see also, Hornsby v. Internal Revenue Service, 588 F.2d 952, 953 (5th Cir. 1979); George v. United States, 819 F.2d at 1012; Mazo v. United States, 591 F.2d at 1154; McDonald v. United States, 939 F.2d 916, 919 fn. 6 (11th Cir. 1991).
The facts show that in 1993 and throughout 1994, Battles had complete authority to hire, to fire, was President, sole shareholder, and a signatory on all BSI's bank accounts, including its payroll account. Battles was BSI and was responsible for the corporation. The fact that he delegated his responsibility to SCS, Thompson and/or Mims does not change Battles' status, duty and authority under the law. Although he delegated responsibility to others, Battles retained the authority to hire and to fire anytime he chose to exercise that authority. He remained signatory on all bank accounts and retained such authority over those accounts. He remained President and sole shareholder. He had the authority to do anything he chose as far as BSI was concerned. Battles evidenced that authority in the summer of 1994 when he participated in opening another bank account at Compass Bank. He again evidenced his authority in August, 1994, when he severed the relationship between BSI, SCS, Thompson and Mims, by relocating BSI's office to the football stadium and/or his home. There is no evidence that his duties, as far as his legal duties, changed. That he chose to delegate his legal duty doesn't relieve him of responsibility for that legal duty. Because Battles retained his status, duty and authority, regardless of whether he exercised it or not, he remained responsible under the law.
The next issue is whether Battles' failure to remit the withholding taxes was "willful" under Section 6672. Battles contends that his failure to pay the withholding taxes was not willful because Regions Bank held control over BSI's money.
In October 1995, Battles was advised by an IRS employee that BSI had an unpaid withholding tax liability. Battles was informed by Mims that the withholding tax obligations had been met and Mims produced checks allegedly evidencing payment of the taxes when, in fact, payment had not been made. Although the IRS had alerted Battles to the tax liability, BSI continued to do business, executing new construction contracts and continuing to pay wages and vendors. From October 1995 forward, BSI incurred additional federal withholding tax liabilities evidencing their continued payment of net wages.
The "willfulness" element of Section 6672 is satisfied if the responsible person has knowledge of payments to other creditors after he becomes aware of the failure to remit the withheld taxes. Smith v. United States, 894 F.2d 1549, 1553; Thibodeau, 828 F.2d at 1505; Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir.) cert. denied sub nom. Lattimore v. United States, 444 U.S. 842 (1979). Battles was made aware of BSI's delinquent tax obligations in October 1995. With that knowledge BSI, through Battles, continued to operate and incurred additional withholding tax liabilities while failing to address the delinquent taxes.
[i]f a corporation has only sufficient cash to pay net wages, and does so, there may be literally no funds to constitute the corpus of the trust, but the responsible persons are nevertheless liable for failure to collect withholding taxes; the United States may not be made an unwilling joint venturer in the corporate enterprise.
Mazo, 591 F.2d at 1154 (citing Brown v. United States, 591 F.2d 1136 (5th Cir. 1979); Sorenson v. United States, 521 F.2d 325 (9th Cir. 1975)
Battles' argues that his failure to pay the withholding taxes was not willful because Regions Bank held control over BSI's money. The Eleventh Circuit has ruled, and this Court agrees, that a bank's lien on a corporation's accounts receivable does not relieve a party of "willfulness" when the corporation continues doing business and paying other creditors. McDonald v. United States, 939 F.2d 916, 918 (11th Cir. 1991); Williams v. United States, 931 F.2d 805, 810 (11th Cir. 1991).
This Court grants the Motion for Summary Judgment filed by the United States on the issue of Battles' liability for the TFRP assessments for the unpaid federal withholding taxes of BSI for the first, second, third and fourth quarters of 1994, the third and fourth quarters of 1995, the second, third and fourth quarters of 1996, and the second and third quarters of 1997; the TFRP assessments with respect to EBS Construction, Inc. for the fourth quarter of 1995, and all four quarters in 1996; and Battles Steel Fab Supply, Inc. for the third and fourth quarters of 1996, and the first and second quarters of 1997. This Court denies the Motion for Summary Judgment filed by the Debtor, Eddie Battles, with respect to his liability for the corporations and periods identified above. This Court reserves ruling on the remaining issues presented by summary judgment.