Opinion
Bankruptcy No. 02-31334
September 8, 2003
MEMORANDUM AND ORDER
This matter is before the Court on the objection filed by Debtors David L. Groth and Linda F. Groth on June 30, 2003 to the proofs of claim of the Internal Revenue Service (IRS). In particular, the most recent proof of claim of the FRS, filed January 7, 2003, amends its previous claims to a total claim of $130,934 63 Of the total amount, $117,523.31 is classified as an unsecured priority claim and $13,411.37 is classified as an unsecured general claim. The unsecured priority claim includes two assessments of $35,000.00, representing trust fund recovery penalties assessed against each of the Debtors under 26 U.S.C. § 6672. The United States of America filed an opposition to the Debtors' objection to the claim of the JRS on July 22, 2003.
The matter was heard on August 13, 2003.
I. BACKGROUND
In April 2001, the Debtors formed Advanced Training Solutions, Inc. (ATS), a technology training business. Initially, the Debtors were the only shareholders, directors and officers of ATS. Debtor David Groth was the president, and Debtor Linda Groth was the vice president, secretary and treasurer. ATS loaned money from the United States Small Business Association through Ramsey National Bank, and the Debtors signed a note as officers of ATS as well as a personal guaranty on the loan. The Debtors developed the business concept, and Debtor David Groth designed the training ATS would provide.
Soon after the incorporation of ATS, Michael Volk also became a shareholder and an officer. Debtor David Groth testified that the Debtors became involved with Michael Volk because he had considerable business experience and the Debtors did not. Michael Volk was the registered agent of ATS from its inception, and he became the secretary and treasurer. Debtor Linda Groth remained the vice president.
The Debtors chose the office building, equipment and furnishings and hired employees Debtor David Groth signed the building lease and both of the Debtors personally guaranteed the lease. The Debtors occupied two of the three private offices at ATS,
ATS started doing business in June 2001 with four employees in addition to the Debtors. At first, Debtor David Groth performed the management of all the daily operations of ATS. He was the public face of the business, and he handled the technology training and vendor relationships. Debtor David Groth testified that he soon realized he was not up to the task of managing vendor relationships, and Michael Volk assumed both that responsibility and the handling of other financial matters of ATS. Generally, depositing money was a task of Robert Melander, but Debtor David Groth made deposits and wrote checks on the account occasionally Debtor David Groth testified that theoretically he and Debtor Linda Groth could have written a check from the ATS account at any time, but that they usually checked with Michael Volk before writing any checks Debtor Linda Groth was essentially the office manager. She was involved with the basic functions of the employees, bought supplies, and ensured that the classrooms were ready She signed payroll checks in June and July 2001 and occasionally prepared other ATS checks for small amounts Debtor Linda Groth testified that she made suggestions to Robert Melander about whether a particular bill or creditor should be paid
An ATS checking account was opened at Ramsey National Bank, and initially, only the Debtors had check-writing authority; later, both Michael Volk and Robert Melander were also given check-writing authority on this account. Robert Melander was not an ATS employee and did not bill ATS for his services. Rather, he was employed by Biz Services — another business in which Michael Volk was involved — which had an office in the same building as ATS. He testified that he prepared payroll checks, general ledgers, balance sheets and tax returns for ATS. He also spoke to creditors and wrote checks to them on behalf of ATS.
The Debtors both testified that they put $300,000.00 of their own money into ATS through the life of the business. Some of the money was contributed initially and some of it subsequently when informed by Robert Melander that the business needed more money On at least three occasions, the Debtors contributed money so that ATS could meet its payroll obligations.
ATS had cash flow problems practically from the start Debtor David Groth first became aware of these problems when he received the first call from a vendor/creditor in September. The financial condition of ATS steadily worsened, and Debtor David Groth testified that by December 2001, ten creditors were calling per day. He would notify Michael Volk of the calls, and Michael Volk conveyed to him that he would handle them. Robert Melander testified that ATS almost never had enough money to pay all the creditors, and that he would decide whom to pay based on "whoever screamed the loudest." He stated that he talked to Debtor Linda Groth about the various payments to creditors at her request, He also stated that he talked to Michael Volk about payments to creditors if a situation was urgent or if either of the Debtors told him to talk to Michael Volk about a matter. Robert Melander testified that he primarily talked to Debtor Linda Groth about when to pay certain creditors.
In January 2002, the Debtors had a discussion with Michael Volk about the condition of ATS. Michael Volk said he would fund ATS for 90 days, cutting all non-essential services, and that they would again assess the condition of ATS after that time period. Debtor David Groth testified that from then on, he was involved in very few of the decisions regarding purchasing and payment to vendors. The cash injected into the business after January 2002 came primarily from Michael Volk, although Debtor David Groth testified that he may have contributed a minority amount of cash Michael Volk informed him that a new account would be opened at First International Bank. Although Debtor David Groth testified that to his knowledge he did not have check-writing authority on the new account, Robert Melander testified that Debtor David Groth indeed did have signature authority on the account. Robert Melander testified that the First International Bank account was opened because Ramsey National Bank had "bounced" a payroll check. He also testified that the business was not run any differently after January 2002 than it previously had been, except that Debtor Linda Groth no longer had an office at ATS and gave him permission to call her at home,
Also in January 2002, the Debtors and the other shareholders of ATS executed a stock exchange agreement with Global Franchise Concepts, Inc. (GFC), transferring all of their shares in ATS to Practical Training Solutions, Inc. (PTS), and issuing the sole share certificate of PTS to GFC By the same agreement, GFC issued shares in its class A common stock to the Debtors and the other shareholders. Although the Debtors thus became shareholders in GFC, neither of them were officers or directors of GFC, nor did they relinquish their status as officers and directors of ATS. After the stock exchange, ATS began doing business as PTS of Fargo.
The other shareholders at this time were Michael Volk and ATS employees Jodee Bock and Tammy Page.
Debtor David Groth testified that sometime after the discussion with Michael Volk about the condition of ATS and after the stock exchange, he became aware of the need to make deposits for payroll taxes because his attorney sent him copies of quarterly tax returns for which the payroll taxes had not been paid Although these quarterly tax returns were not prepared by Debtor David Groth, he signed them in his capacity as the president of ATS. The returns for the quarters ending September 30, 2001 and December 3 1, 2001 were both signed on January 3 1, 2002. The return for the quarter ending March 3 1, 2002 was signed on December 6, 2002, and the return for the quarter ending June 21, 2002 was signed on July 3 1, 2002. The payroll tax liabilities were as follows: $13,807.87 for the quarter ending September 30, 2001; $12,167,52 for the quarter ending December 31, 2001; $12,657.46 for the quarter ending March 31, 2002; and $10,252.02 for the quarter ending June 21, 2002. Debtor David Groth testified that he assumed the balances owing were not paid because ATS did not have the funds to pay them. He brought the issue to Michael Yolk's attention, but was not ever presented any checks to sign to pay the tax obligations. Although Robert Melander prepared balance sheets that included the federal payroll tax obligations for ATS, Debtor David Groth testified that he did not receive the balance sheets on a. regular basis. He also testified that he realized the unpaid payroll taxes were a problem when he received a letter from the North Dakota State Tax Commissioner in March 2003 stating that a lien would attach if the overdue payroll taxes were not paid immediately.
The Debtors received a letter dated March 6, 2002, from Ramsey National Bank indicating that ATS d/b/a/ PTS was required to repurchase its accounts receivable and that the Debtors and Michael Volk were required to attend a meeting with the bank and to bring various documents. On March 8, 2002, Debtor David Groth sent an e-mail to Michael Volk discussing the letter from Ramsey National Bank. The Debtors and Michael Volk attended the meeting on March 14, 2002.
On May 13, 2002, ATS received certified Setters from the IRS stating that the outstanding payroll tax obligations had to be paid to prevent collection action. Robert Melander signed for the letters and took them to Debtor David Groth because, Robert Melander testified, he was the president of ATS. Robert Melander also went to the local IRS office to discuss the matter but was unable to resolve anything because he did not have any authority under ATS. Debtor David Groth told Robert Melander that he would take care of the matter the following week.
After operating for approximately one year, ATS closed in June 2002. The Debtors filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code on August 28, 2002.
II. DISCUSSION
Sections 3102 and 3402 of the Internal Revenue Code [ 26 U.S.C. § 3102, 3402] require employers to withhold federal social security and income taxes from the wages of their employees. Olsen v. United States, 952 F.2d 236, 238 (8th Cir. 1991). After the taxes are collected, they become a trust fund in the hands of the employer, and the employee is credited with payment regardless whether the employer pays the taxes to the government. See I.R.C. § 7501; Olsen, 952 F.2d at 238. Thus, the government must seek recourse against the person or persons responsible for nonpayment or the taxes will be lost. Id To protect against such losses, I.R.C. § 6672 provides in pertinent 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.
I.R.C. § 6672 (emphasis added). Section 6672 has been broadly and liberally construed to prevent the unnecessary loss of tax funds by permitting the IRS to reach those individuals responsible for a corporation's failure to pay the owed taxes. See Olsen, 952 F.2d at 238.
To incur liability under section 6672 for unpaid employment taxes, an individual must 1) be a responsible person who 2) willfully fails to pay withholding taxes to the United States. Keller v. United States, 46 F.3d 851, 854 (8th Cir. 1995). Under this section, a tax assessment is presumed correct, and the burden is on the taxpayer to disprove the claim of the IRS by showing by a preponderance of the evidence that he or she was not a responsible person or did not willfully fail to pay over a corporation's trust fund taxes. See Riley v. United States, 118 F.3d 1220, (8th Cir. 1997); In re Mosbrucker, 220 B.R. 656, 657-58 n. 2 (Bankr. D.N.D. 1998).
The Debtors contest any claim of the IRS to a trust fund recovery penalty because the Debtors assert they were not responsible officers of ATS at the time the tax was incurred.
An individual is a responsible person within the meaning of section 6672 if he or she has the status, duty and authority to avoid a default in the collection or payment of the taxes, Keller, 46 F.3d at 854 (citing Kenagy v. United States, 942 F.2d 459, 464 (8th Cir 1991)) In determining whether a person being assessed is a responsible person, a court should consider the following factors:
1. Whether the person was an officer or director;
2. Whether he or she had authority to sign company checks;
3. Whether he or she signed the company tax returns;
4. Whether he or she had the power to hire and fire employees;
5. Whether he or she had, either alone or with others, control over the company's financial affairs;
6. Whether he or she had an entrepreneurial stake in the company, either by virtue of stock ownership or other financial interest.
In re Turner, 35 B.R. 811, 813-14 (Bankr D.N.D. 1983).
At trial, the Debtors conceded their status as responsible persons during the first two quarters of the operation of ATS, through December 3 1, 2001, but argued they were no longer responsible persons after January 2002 The Court disagrees. The evidence is clear that the Debtors were both responsible persons under section 6672 throughout the life of ATS. Debtor David Groth was the president and Debtor Linda Groth was the vice president at all times. Both Debtors were directors at all times. Although Debtor David Groth testified that he was unaware of his check-writing authority on the account at First International Bank opened in January 2002, Robert. Melander testified that he did indeed have such authority. Debtor David Groth signed all of the ATS tax returns. Both Debtors were involved in the hiring process, and neither testified that they relinquished the power to hire or fire employees after January 2002. Despite the Debtors' assertion to the contrary, they did have significant control over the financial affairs of ATS after January 2002. Robert Melander testified that the business was not run any differently after January 2002 except that Debtor Linda Groth worked from home and gave him permission to call her there. Although Michael Volk and Robert Melander handled much of the business after January 2002, more than one person may be considered responsible under section 6672. A person is responsible if be or she "has significant, though not exclusive, authority in the area of corporate decision-making and matters related to federal tax payments." Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991), Moreover, an otherwise responsible person does not avoid liability under section 6672 by delegating his or her authority to another. Keller, 46 F.3d at 854 The Debtors also conceptualized and founded ATS As such, they had an entrepreneurial stake in the business and had invested approximately $300,000.00 of their own money into it. They owned stock in the parent company, GFC, to which they had transferred their stock in ATS. The Debtors both had the status, duty and authority to avoid a default in the payment of the withholding taxes. Thus, there can be no doubt that the Debtors are both responsible persons within the meaning of section 6672.
A responsible person acts willfully if he or she consciously and voluntarily acts or fails to act with the knowledge or intent that as a result of his or her action or inaction trust funds belonging to the government will not be paid and instead 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. Keller, 46 F.3d at 854. Reckless conduct includes a failure to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the government. Id. Once a responsible person has had clear notice that the person to whom he or she delegated responsibility for paying the taxes has wrongfully failed to pay them in the past, he or she continues to delegate that responsibility only at his or her peril. Id. at 855, If the responsible person continues to delegate without taking appropriate measures to ensure that future taxes are paid, his or her failure to take such measures will be considered willful conduct. Id.
The Debtors have not challenged the willfulness requirement of section 6672, and the Court finds that in any event, the evidence supports a finding that this element has been met by the conduct of the Debtors. The evidence is undisputed that the Debtors at the very least acquiesced in the payment of other ATS creditors with knowledge that the withholding taxes were going unpaid.
Lastly, the Debtors assert the IRS can collect only one trust fund recovery penalty, not the two it has assessed and claimed against the Debtors.
Section 6672 imposes joint and several liability on each responsible person, and each responsible person can be held for the total amount of withholding not paid. McCray v. United States, 910 F.2d 1289, 1290 (5th Cir. 1990): Quattrone Accountants, Inc. v. I.R.S., 89.S F.2d 921 (3rd Cir. 1989); Sinder v. United States, 655 F.2d 729, 732 (6th Cir. 1981);Hartman v. United States, 538 F.2d 1336, 1340 (8th Cir. 1976). Although each responsible person is liable for the entire amount of the unpaid withholding tax, the IRS apparently has a policy of using section 6672 as a collection device only, and abating the penalty against a responsible person to the extent it obtains a final recovery of either the unpaid taxes from the employer or the penalty from other responsible persons See USLIFE Title Ins. Co. of Dallas v. Harbison, 784 F.2d 1238, 1243 (5th Cir. 1986); McCray, 910 F.2d at 1290; Quattrone, 895 F.2d at 926; Newsome v. United States, 43 1 F.2d 742, 745 (5th Cir. 1970). "Double recovery by the government is not necessary to fulfill § 6672's primary purpose — protection of government revenues." Brown v. United States, 591 F.2d 1 136, 1 143 (5th Cir. 1979).
However, the fact that more than one person is responsible for a particular delinquency does not relieve another responsible person of his or her personal liability, nor can a responsible person avoid collection against himself or herself on the ground that the government should first collect the tax from someone else. USLIFE Title Ins. Co. of Dallas, 784 F.2d at 1243, Moreover, the Fifth Circuit Court of Appeals, in USLIFE Title Ins. Co. of Dallas, held that the government was substantially justified in attempting to collect a section 6672 assessment against one responsible person even though collections from that person and one other responsible person already totaled the amount of the underlying delinquent taxes. 784 F.2d at 1240. Finally, the court stated:
[P]rohibiting the Government from pursuing each person against whom an assessment has been made subjects it to the risk that the first person to pay the amount of the underlying delinquency might obtain a refund after the limitations period has expired for collecting taxes from the other persons who are responsible for seeing that the withholding taxes were paid.
Id. at 1245.
Thus, under section 6672, Debtor David Groth's liability to the TRS is entirely separate and distinct from Debtor Linda Groth's liability to the IRS even though such liability stems from the same withholding taxes. Arguably, because the IRS does not collect more than what it is owed, if one of the Debtors made payments toward the liability, such payments would decrease the amount the other Debtor would owe the IRS However, the fact remains that both Debtors are jointly and severally liable for the penalty — "The statute is harsh, but the danger against which it is directed — that, of tailing to pay over money withheld from employees until it is too late, because the company has gone broke — is an acute one, against which, perhaps, only harsh measures are availing." Wright v. United States, 809 F.2d 425, 428 (7th Cir. 1987).
III CONCLUSION
Based on the foregoing, the objection of Debtors David L. Groth and Linda K Groth to the proofs of claim filed by the Internal Revenue Service is overruled. The claim of the Internal Revenue Service in the total amount of $130,934,63 is allowed consistent with its proof of claim filed on January 7, 2003.
SO ORDERED.