Willfulness - knowledge of non-payment

In re Charles R. Howard, Penny S. Howard, Debtors. Charles R. Howard, Plaintiff v. United States of America, Department of Treasury and Gerald A. Jeutter, Jr., Trustee, Defendants.

U.S. Bankruptcy Court, East. Dist. N.C. , Raleigh Div.; 99-01215-5- ATS , September 17, 2003 .

[ Code Sec. 6672]

Penalties, civil: Failure to collect: Knowledge of nonpayment. --

The president and sole owner of a roofing construction company was the responsible officer liable for the corporation's unpaid payroll taxes. The taxpayer contended that he lacked knowledge of the corporation's failure to pay taxes until after they were due. Moreover, his subsequent use of corporate revenues to compensate creditors rather than to pay the delinquent taxes was done in an attempt to increase the ultimate payout to the IRS . Basing its decision on the credibility of presented testimony, the Bankruptcy Court concluded it was not plausible that the individual did not know that the payroll taxes were not being paid. At the very least, the court concluded that he recklessly disregarded whether the taxes were being paid..

MEMORANDUM OPINION

SMALL, Bankruptcy Judge: The trial of this adversary proceeding to determine whether the debtor, Charles R. Howard, owes a debt to the Internal Revenue Service (" IRS ") under 26 U.S.C. §6672 was held in Raleigh, North Carolina on September 4, 2003.

Charles R. Howard and Penny S. Howard filed a petition for relief under chapter 7 of the Bankruptcy Code on June 3, 1999. On April 18, 2002, the IRS assessed Mr. Howard with a tax liability in the amount of $355,008.23 for unpaid payroll taxes of Howard Roofing Systems, Inc. (" HRS "), pursuant to 26 U.S.C. §6672. Mr. Howard brought this adversary proceeding to challenge his liability for those taxes.

This bankruptcy court has jurisdiction over the parties and the subject matter of this proceeding pursuant to 28 U.S.C. §§151, 157, and 1334, and the General Order of Reference entered by the United States District Court for the Eastern District of North Carolina on August 3, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. §157(b)(2)(B), which this court may hear and determine.

Mr. Howard was the president and sole owner of HRS , a roofing construction company created in 1991. The IRS has assessed Mr. Howard for payroll taxes that were not paid by HRS for the quarters ending June 30, 1998, through June 30, 1999, contending that he is a "responsible party" who willfully failed to collect or pay over the tax or otherwise attempted to evade or defeat the payment of the tax as defined in 26 U.S.C. §6672. Mr. Howard admits that he is a responsible party, but denies that he willfully failed to pay the trust fund taxes to the IRS . First, he contends that he did not know that the taxes were not being paid until April 6, 1999. Thereafter, while some company funds were paid to other creditors, Mr. Howard contends that these payments were made to increase the ultimate payout to the IRS .

Mr. Howard is a civil engineer licensed in five states, and has been an owner or officer of a construction and/or roofing business since 1977. The financial aspects of HRS were initially handled by Mr. Howard's wife, and as the company grew, others were hired to assist with payroll and related costs. Mr. Howard hired Karl Beyer as chief financial officer of HRS in April 1997 to handle, among other things, payroll, taxes, and preparation of financial and income statements.

In late 1997 and early 1998, HRS had several jobs that produced less revenue than expected. As a result, fiscal year 1998 showed a loss. Mr. Howard knew the company faced some financial difficulties, and began to look for outside funding. By April 1999, HRS had a letter of intent from an investor and was on the verge of closing on substantial funding. On the eve of closing, the investor backed out due to concerns with the financial situation, and Mr. Howard contacted another potential investor. That investor informed Mr. Howard that it had become aware of a tax lien filed against HRS for unpaid payroll taxes. Mr. Howard contends that this was the first time he had any information that the payroll taxes had not been paid, and that he realized immediately that HRS would have to close its doors. Mr. Howard then confronted Mr. Beyer, accusing him of failing to pay the payroll taxes without Mr. Howard's knowledge or consent.

Thereafter, Mr. Howard engaged in a scheme to maintain the appearance of normalcy at HRS so he could collect outstanding accounts receivable and pay as much money to the IRS as possible. Mr. Howard was advised by his attorneys and accountants that his bank, Centura, held a first lien on HRS 's accounts receivable. In addition, most of HRS 's jobs were bonded, and the bonding company would have the right to collect the receivables for any job it was required to pay for or perform. Acting on this information, as well as the knowledge that he would be personally responsible to pay the trust fund taxes while his personal obligations to the bank and the bonding company would be discharged in bankruptcy, Mr. Howard tried to hide from Centura and the contractors or project owners the financial condition of the company so HRS could collect its receivables and turn them over to the IRS before Centura or the bonding company could seize them.

On April 7, 1999, HRS 's Centura account had a balance of $28,008. ¹ All of the payroll from the following week had not yet cleared, and the checks for the April 9 payroll had already been cut, but not delivered. Mr. Howard decided to honor the payroll checks, both because the employees had already performed the work for which they were being paid and to keep up the appearance that the company was continuing to operate. The April 9 payroll was made through the Centura account, and on April 15, Mr. Howard opened a new account at Triangle Bank to handle all transactions going forward.

After the April 9 payroll was made, no funds remained in the Centura account. HRS had some other loans with Centura for which payments were automatically drafted from this account, and Mr. Howard deposited $4,000 in the account to cover those drafts. It was his intent to have Centura believe that HRS was continuing to operate so it would not seize the accounts receivable. On April 7, 1999, Mr. Howard sent a check to the Colonial Days Inn, a hotel that was housing some HRS employees on an out-of-state job. According to Mr. Howard, Mr. Beyer told Mr. Howard that the account balance was sufficient to cover this check. ² In fact, the check was dishonored.

To open the Triangle Bank account, Mr. Howard deposited a check for $22,000 received in final payment for a job completed in Virginia . He paid the April 16 payroll of approximately $18,000, having laid off approximately one third of the workforce over the course of the prior week. On April 20, HRS collected a large receivable of $91,000 from Penn-Co. HRS maintained its employees on the Penn-Co job until April 23, hoping to keep the appearance of normal operations until the $91,000 check cleared. On April 19, Mr. Howard paid the company's portion of the health insurance payments for its employees. He testified that he understood that employees' claims may not have been paid if the insurance was not brought current, so he chose to make this payment of $18,410.49. On April 21, HRS received $61,010.90 for payment on the Henrico County job, but when the HRS employees were pulled from the job on April 23, Henrico County stopped payment on its check.

From April 23 through June 1, HRS continued to collect some accounts receivable and made payments such as payroll, telephone bills, utilities, and office expenses. Mr. Howard received his regular salary through May 28. He made payments on some vehicles in order to later sell them at a profit. He also paid $12,000 toward a settlement with American Buildings, avoiding execution on a confession of judgment with both personal and corporate pledges. On June 2, 1999, HRS made a payment to the IRS in the amount of $74,000. Mr. Howard contends that this payment could not have been made absent his efforts to keep the appearance of an operating company to collect the accounts receivable. He points to the Henrico County stopped check to support his contention, noting that as soon as the owner learned that the job may not be finished, payments to HRS ceased. Mr. Howard contends that the IRS received substantially more money than it would have, had HRS closed its doors and filed chapter 7 on April 7, 1999.

Mr. Howard further testified that, after learning of the unpaid payroll taxes, he gained control of documents that had been in Mr. Beyer's files, including correspondence between the IRS and HRS . On April 8, he received a printout from Mr. Beyer showing lump sum checks made from Mr. Beyer to the IRS on behalf of the IRS . These checks were handwritten, as opposed to computer generated, and were signed with Mr. Howard's signature stamp. Mr. Howard testified that he did not authorize these checks, and that in the operations of HRS only the vice president had access to his signature stamp. The stamp was only to be used when Mr. Howard was away, and he was to approve all checks either in advance or after the fact. Mr. Howard testified that he did not authorize these checks. He contends that Mr. Beyer made these lump sum payments off the books and without his knowledge so that Mr. Howard would not learn that Mr. Beyer had not been paying the payroll taxes. There were eight of these checks, totaling approximately $600,000.

When asked how he could have operated the business without knowing that the payroll taxes were not paid, Mr. Howard testified that Mr. Beyer handled all of the financial transactions. Mr. Howard was shown financial statements or balance sheets, but he was never shown any document that showed the payroll taxes were owed. He assumed that the financial statements were accurate, but now he knows that from 1997 forward, they were doctored on a monthly basis. He contends that Mr. Beyer credited one account and showed the unpaid taxes as an adjustment to payables. Mr. Howard said he managed the business by reviewing income statements, which showed the money coming in and line item expenses, and he assumed the numbers on the statements were accurate. According to Mr. Howard, there was nothing on any of the statements that would make him suspicious that the payroll taxes were not being paid.

In stark contrast to Mr. Howard's testimony, Mr. Beyer testified that not only did Mr. Howard know that the payroll taxes were not being paid, but he directed Mr. Beyer not to pay them and he directed how to adjust the income statements and financial statements to disguise the payroll tax deficiency. When HRS began having cash flow problems in late 1997, Mr. Howard decided which checks to issue and which bills could wait. Mr. Howard selected the vendors with priority, and he intended to use the expected investment funds to pay the deferred taxes. To maintain the appearance of current taxes for the potential investors, Mr. Howard instructed Mr. Beyer to move the payroll taxes from the tax liability account to accounts payable. Mr. Beyer testified that it was readily apparent that the accounts payable amount was larger than it should have been, given the number of active jobs.

Mr. Beyer also testified that it was common for checks to be handwritten, and that he used the signature stamp at the direction of Mr. Howard. He had Mr. Howard's authorization to issue the lump sum checks to the IRS , and they were handwritten for simplicity. Mr. Beyer further testified that Mr. Howard reviewed the notices from the IRS regarding the delinquent taxes, and that Mr. Howard saw the computer printouts of the correct liabilities. In addition, the Form 941 tax returns showed the unpaid taxes, but Mr. Beyer did not recall showing those returns to Mr. Howard.

Gina Byrd, who was employed at HRS part-time in the accounts payable department, testified that both Mr. Beyer and the vice president had access to the signature stamp. She said that it was not unheard of for Mr. Beyer to issue handwritten checks where time was a problem. Ms. Byrd also testified that she witnessed the beginning of a confrontation between Mr. Howard and Mr. Beyer in April 1999 in which Mr. Howard said to Mr. Beyer, "You caused me to lose my company by not paying taxes." Ms. Byrd said it appeared to her that Mr. Howard was in disbelief that the taxes had not been paid.

Section 6672(a) of the Internal Revenue Code provides, in relevant part, that

[a]ny 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.

26 U.S.C. §6672(a).

The key question for the court to determine is whether Mr. Howard knew before April 1999 that the payroll taxes had not been paid. The testimony is diametrically opposed, and the court's decision ultimately is a credibility determination. The court observes that Mr. Howard is an astute businessman. While he had never failed to pay payroll taxes in the past, perhaps he never faced the severe financial problems that he faced in 1998. Construction companies are acutely aware of the sources of funds, the need for funds and which creditors' payments can be delayed. It is simply not credible that Mr. Howard did not know that the payroll taxes were not being paid. At the very least, he recklessly disregarded whether the taxes were being paid.

Significantly, Mr. Beyer had no incentive to make the decision not to pay the taxes and to keep Mr. Howard uninformed about it. Had Mr. Beyer been embezzling funds or gaining personally from the failure to pay, this might be a different case. Mr. Howard had everything to lose, and gambled that he would be able to pay the taxes once the investment was achieved and his business turned around. Mr. Howard either directed that the taxes not be paid or knowingly let the taxes not be paid while the books were manipulated, and the court finds that this was a willful failure to pay taxes under 26 U.S.C. §6672.

Once HRS was rejected by potential investors and the tax lien appeared on the public record, Mr. Howard knew his time was up, and he decided to pay as much as possible to the IRS . While that may be commendable, under the law his decision to pay other creditors before paying the IRS constitutes a willful failure to pay. Turpin v. United States [ 92-2 USTC ¶50,383], 970 F.2d 1344, 1347 (4th Cir. 1992) (intentional preference of others over the United States is sufficient to establish willfulness under §6672). Because the IRS has already assessed these taxes, Mr. Howard has the burden of proof to show that he did not willfully fail to pay. Mr. Howard has failed to meet his burden of proof, and the court concludes that he is liable for the trust fund taxes under 26 U.S.C. §6672.

Judgment will be entered accordingly.

¹ Mr. Howard transferred $33,000 from his personal account to the HRS account on April 2, 1999, after Mr. Beyer told him HRS would be short for the payroll checks. Mr. Howard testified that it was his understanding that this amount would cover the "total burden" of payroll, including the taxes. This deposit also predates his admitted knowledge of the fact that the payroll taxes had not been made.

² Mr. Howard testified that he did not have the password for the financial program on the computer, and he relied on Mr. Beyer to keep him informed as to the status of the accounts.

In re Ronald D. Nutt, Debtor. United States of America , Appellant v. Ronald D. Nutt, Appellee.

U.S. District Court, Mid. Dist. Fla.; 6:01-Cv-1223-Orl-06JGG, 6:02-Cv-1346-Orl-06 DAB , March 5, 2003 .

Affirming a BC-DC Fla. decision, 2002-2 USTC ¶50,753.

[ Code Sec. 6672]

Penalties, civil: Failure to collect and pay over tax: Knowledge of nonpayment: Recklessness. --

The bankruptcy court did not clearly err in finding that the failure of a debtor owner and officer of a construction company to know that the company did not pay over employment taxes to the government was not reckless. On remand, the bankruptcy court reviewed a witness deposition in which certain documentary evidence was discussed. However, neither the factual underpinnings of the deposition nor the documentary evidence were offered or introduced into evidence during the trial; thus, the factual basis could not be reached. The government's decision not to introduce such evidence was a tactical choice; the district court could not consider matters that were not part of the underlying trial record..

ORDER

YOUNG, Senior District Judge: This case came before the Court on February 26, 2003 for hearing on appeal of the September 23, 2002 Order of the Bankruptcy Court reaffirming on remand its earlier Order dated August 2, 2001 sustaining debtor Ronald D. Nutt's objection to Claim No. 3 of the Internal Revenue Service.

Background:

An earlier appeal of the same issues involved in this case was previously considered in full by the undersigned in Case No. 6:01-Cv-1223-06-JGG. That case was fully briefed and argued by counsel and a decision made by this Court on June 5, 2002 which remanded the case to the Bankruptcy Court by Order. ( See attached Order, Doc. #19 filed in Case No. 6:01-cv-1223-06-JGG).

Thereafter on September 23, 2002, the Bankruptcy Court, again after further briefing by counsel and a hearing thereon, entered its Order reaffirming its August 2, 2001 Findings of Fact and Conclusions of Law sustaining Ronald Nutt's objection to Claim 3 of the Internal Revenue Service. ( See attached copy of Bankruptcy Court Order dated September 23, 2002).

The Bankruptcy Court September 23, 2002 Order was transmitted to the District Court and filed in the original appeal file, Case No. 6:01-cv-1223. Immediately thereafter, Appellant , United States of America , timely filed an appeal from the September 23, 2002 Order which was given Case No. 6:02-cv-1346, and assigned to a different judge in this Court.

On December 3, 2002, the undersigned, unaware that the second appeal had been filed, given a different case number and assigned to another judge, entered an order affirming the bankruptcy court Order of September 23, 2002, on the ground that this Court was unable to find that the factual findings of the Bankruptcy Judge were clearly erroneous.

Appellant thereafter filed in Case No. 6:01-cv-1223-Orl-06-JGG its Motion to Alter or Amend Order (Doc. #23, filed December 17, 2002). A hearing will held on that motion on January 22, 2003, during which hearing the motion was granted by the undersigned and this Court's December 3, 2002 Order was vacated on the grounds that it was premature and improper in light of the new appeal. A written order reaffirming the Court's oral ruling was entered on January 8, 2003.

Appellee, Ronald Nutt then filed in this case (6:02-Civ-1346), his Motion Requesting Reassignment, or Alternatively, Motion to Dismiss Pending Appeal (Doc. #9, filed December 20, 2002). On January 22, 2003 Judge Anne Conway granted the motion in part as to reassignment and the case was reassigned to the undersigned.

With that background, this court heard oral argument of counsel in these effectively consolidated cases on February 26, 2003.

Standard of Review:

This court is required to review the facts in this case under the clearly erroneous standard, and to review the conclusions of law under the de novo standard.

Government counsel argued that the bankruptcy court had erred in failing to make specific findings that the Debtor willfully failed to pay over trust funds based on the totality of the evidence in the case showing that Debtor's business was in serious financial condition and that it was unable to pay creditors. The Government alleges that such inability to be able to stay current with its creditors, which is not in dispute, should have been notice to Debtor that the payroll trust fund taxes were not being paid as well.

However, the Bankruptcy Judge in his Findings of Fact and Conclusions of Law dated August 2, 2001 , at page 13 held:

"The totality of the circumstances indicate that Nutt acted in good faith in regard to the trust fund taxes. Nutt immediately paid the first quarter payroll taxes with his personal funds, contacted the IRS regarding a repayment schedule for the second, third and fourth quarters, remained current on the accruing payroll taxes after October 31, 1995 , and made no payments to other creditors from unencumbered funds upon learning of the unpaid payroll taxes."

It appears to this Court that there has been no substantive change in the issues and/or parties in this case and that the facts remain as they were during consideration of the first appeal. When this Court entered its remand order, the sole issue for reconsideration by the Bankruptcy Court was whether Debtor's failure to know taxes were not being paid was due to a reckless disregard of a known or obvious risk of non-payment in light of the Eleventh Circuit's decision in Malloy v. United States [ 94-1 USTC ¶50,145], 17 F.3d 329 (11th Cir. 1994) specifically as it related to one portion of John Conner's March 21, 2000 deposition regarding a letter of a former Hallmark employee, Michael Storey.

On remand the Bankruptcy Court again reviewed the deposition testimony of John Conner. The Bankruptcy Court found that while Conner testified in his deposition about the letter from Michael Story, neither the factual underpinnings of Conner's deposition, nor Michael Storey's letter were offered or introduced into evidence during the trial of this matter and that therefore the factual basis could not be reached. The Bankruptcy Court further found that even if they had been, that testimony would have been subject to a hearsay objection. The decision to not introduce such evidence was a tactical choice made by the United States and it is improper for this Court to consider any matters which were not a part of the underlying trial record.

As there is no new information for consideration, it is the opinion of this Court that the facts have been fully considered on appeal and again on remand to the Bankruptcy Court. This Court is unable to find that the factual findings of the Bankruptcy Judge as set forth in the August 2, 2001 Findings of Fact, as further reaffirmed by the September 23, 2002 Order, are clearly erroneous. Accordingly, it is

ORDERED that the August 2, 2001 Findings of Fact and Conclusions of Law of the Bankruptcy Court, as reaffirmed following remand by bankruptcy Court Order dated September 23, 2002, are AFFIRMED. The Clerk of Court is directed to close this case by entering an appropriate judgment.

SO ORDERED.

ORDER

This case came before the Court on April 9, 2002 and May 28, 2002 for oral argument on appeal from the August 2, 2001 Findings of Fact, Conclusions of Law and Order of the Bankruptcy Court sustaining Debtor's Objection to Claim No. 3 of the Internal Revenue Service. This Court has jurisdiction pursuant to 28 U.S.C. §158(a).

After reviewing the record on appeal and following argument of counsel, it is the opinion of this Court that the case should be remanded for further findings.

Background:

On August 24, 2000, Debtor, Ronald D. Nutt, filed a voluntary personal bankruptcy petition pursuant to Chapter 11 of the Bankruptcy Code (11 U.S.C.) ¹ . On November 15, 2000 the Internal Revenue Service ( IRS ) filed a proof of claim for Debtor's unpaid trust fund recovery penalty liabilities assessed pursuant to §6672 of the Internal Revenue Code (26 U.S.C.) for unpaid employment taxes for Hallmark Builders, Inc., for the second, third and fourth quarters of 1995 in the amount of $248,862.03. ² The IRS contends that the Debtor was liable for payment of the trust fund taxes for all three quarters in issue because he was both responsible for ensuring that trust fund taxes were withheld from the wages of his former employees at Hallmark Builders and then timely paid over to the United States but that Ronald Nutt had willfully failed to do so.

On January 24, 2001 Debtor filed an objection to the IRS claim alleging (1) that the IRS breached a 1996 settlement agreement and as a result Debtor has suffered damages in excess of the amount of the IRS claim; and (2) that Debtor is not "responsible party" as defined under 26 USC §6672, and has no liability to IRS for the claim. ³

The bankruptcy court in sustaining the Debtor's objection and disallowing the IRS claim, found that Debtor did not willfully fail to pay over funds. The IRS appeals that decision.

Hallmark Builders, Inc. (Hallmark) was formed as a Florida corporation in 1975, for the purpose of building and selling homes in Central Florida . Ronald Nutt (Debtor) was the sole shareholder of Hallmark and had exclusive and direct management of Hallmark until he retired from day-to-day management in December 1993 at which time he appointed John Conner President. Thereafter John Conner served as President until May 1995. Conner replaced Hallmark's controller with an accountant, a Mr. Leyco, who handled all financial matters for Hallmark, including payroll. Although Ronald Nutt gave up the position of President, he nevertheless obviously continued to have final authority over the corporation. It was he who fired John Conner in May 1995. Apparently he continued as the sole stockholder without any board of directors disclosed by the record.

Hallmark failed to pay employment taxes for the second, third and fourth quarters of 1995. Debtor alleges he did not have knowledge that the taxes were not paid until October 1995. The bankruptcy judge in his Findings of Fact and Conclusions of Law, at pg. 3, #12, found that "Nutt did not have actual knowledge of any payroll tax delinquency until October 31, 1995."

After Hallmark Builders filed for Chapter 11 bankruptcy in February, 1996 Hallmark Builders, Ronald Nutt and the IRS entered into a written settlement agreement dated July 18, 1996 which agreement provided for the payment of $270,000 to the United States in full satisfaction of Hallmark's employment tax liability. The Settlement agreement contemplated repayment would be from sales of lots owned by Hallmark and Ronald Nutt. Thereafter, the IRS was paid some money from the sale of lots but there was an alleged breach of the agreement, which is the subject of the pending lawsuit assigned to another judge of this Court.

As previously stated, the Bankruptcy court found that Debtor had not willfully failed to turn over the funds and that a totality of the circumstances indicated that Debtor acted in good faith.

Discussion:

Internal Revenue Code §26 U.S.C. 6672(a) provides that when a person required to collect and pay over withheld taxes willfully fails to do so, he is liable for a penalty equal to the amount of the unpaid taxes. §6672 further provides that personal liability under §6672 is properly imposed upon the person or persons who: (1) were responsible for ensuring that the trust fund taxes were collected and accounted for or paid over to the United States; and (2) willfully failed to discharge that duty.

Although Debtor admits that for the second, third and fourth quarters of 1995 he qualifies as a "responsible person" under §6672 of the Internal Revenue Code, he states that he did not willfully fail to carry out his responsibilities for paying over the taxes. §6672 does not impose upon the responsible person an absolute duty to pay over amounts that should have been collected and withheld. The failure to collect and remit trust fund taxes must be willful. Liability is not imposed without personal fault See Slodov v. United States [ 78-1 USTC ¶9447], 436 U.S. 238 (1978).

The term "willfully" is defined as meaning, in general, a voluntary, conscious, and intentional act. See Mazo v. United States [ 79-1 USTC ¶9284], 591 F.2d 1151 (5th Cir. 1979).

Absence of willfulness can be proved by an affirmative showing that the responsible person did not disregard his duties, and that he undertook all reasonable efforts to see that such taxes would be paid in circumstances where the employer had the means of payment and could reasonably be expected to make the payment. See Feist v. United States [ 79-2 USTC ¶9635], 607 F.2d 954 (Ct. Cl. 1979).

The IRS contends that the Debtor acted willfully and with reckless disregard for a known or obvious risk by failing to determine whether withholding taxes were remitted to the IRS after learning that the company was experiencing cash flow difficulties.

While there is evidence in the record that Debtor had knowledge that Hallmark was experiencing cash flow problems, and had infused over $650,000 of his personal funds to help cure that problem, that evidence relates to a time period prior to Debtor's alleged knowledge of the IRS deficiency.

Decision:

The Eleventh Circuit Court of Appeals held in Malloy v. United States [ 94-1 USTC ¶50,145], 17 F.3d 329, 332 (11th Cir. 1994) "... we hold that a responsible person is liable under §6672 if he or she either had actual knowledge that the taxes were not being paid or acted with a reckless disregard of a known or obvious risk of nonpayment." (emphasis added).

The Bankruptcy Judge found as a matter of fact that the Debtor did not have actual knowledge that the taxes were not being paid until October 1995. That finding is binding on this Court in the absence of a finding that it was erroneous. Although a different finding might have been made from the same facts, this Court is unable to say that the Bankruptcy Judge erred in this respect.

The Bankruptcy Judge also found that the Debtor's failure to know that the taxes were not being paid was not because of acting with reckless disregard of a known or obvious risk of non-payment. While the Bankruptcy Judge stated facts from the record that support that finding, there was no reference to that portion of John Conner's March 21, 2000 deposition (at page 98) referring to a communication from another former Hallmark employee, Michael A. Storey (which is attached as Exhibit #5 to the Conner deposition). In that letter, Michael Storey states:

"It seems the acid test is to view the situation historically as we now understand. Hallmark, previous to your tenure as President, filed bankruptcy, was delinquent in paying employment taxes on at least one occasion in 1988 or 1989, and had misappropriated funds. Roger concealed the tax delinquency and stole money from the company leading to his dismissal by Ron Nutt...."

If there is a factual basis for the contents of Michael Story's letter, there could conceivably be a different view as to whether the Debtor acted with reckless disregard of a known or obvious risk of non-payment.

In Malloy, supra, the Eleventh Circuit also held:

"At the time Malloy invested in the condominium management business, he was aware that the predecessor corporation, SPMC, had financial difficulties, and he saw that the business was restructured so he would not be responsible for SPMC's unknown liabilities. At least by February 1983, Malloy knew that SPMC had failed to pay withholding taxes and that SPMII (Malloy's current corporation), like SPMC before it, was having financial difficulties. Malloy also knew that the same employees who had been responsible for paying SPMC's bills were responsible for paying SPMII's bills. Malloy never made any inquiries to determine whether SPMII was paying the withholding taxes;...."

If Michael Storey's assertions contained in his letter have any basis in fact, it could be found that the Debtor was in much the same position as Malloy and that he therefore would be responsible for the unpaid taxes because of acting with a reckless disregard for a known or obvious risk of non-payment. Based on the record as it now stands, this Court cannot make such a finding but will remand this case to the Bankruptcy Judge to make such further determination as he finds appropriate in light of the holding herein.

In accordance with the foregoing, it is

ORDERED that this case is REMANDED to the Bankruptcy Court for further proceedings consistent with this decision.

SO ORDERED.

¹ Ronald D. Nutt was President of Hallmark Builders, Inc. Hallmark Builders had previously filed a Chapter 11 bankruptcy on February 13, 1996. Hallmark Builders' Chapter 11 was converted to a Chapter 7 on January 21, 1997.

² $75,591.00 was a secured claim, $173,259.03 was an unsecured priority claim, and $12.00 was an unsecured general claim.

³ The record reflects Debtor stipulated during the Mary 2, 2001 Final Evidentiary hearing that during the second, third and fourth quarters of 1995, the period in issue, he qualified as a "responsible person" as defined by statute.

[2001-1 USTC ¶50,417] Beverly Frey, Plaintiff-Counterdefendant v. United States of America , Defendant-Counterplaintiff

U.S. District Court, No. Dist. Tex. , Dallas Div., Civ. 3:99-CV-0831-D, 5/4/2001

[Code Sec. 6672 ]

Employment taxes: Trust fund recovery penalty: Responsible person: Secretary, treasurer, controller: Check-writing authority.--The head of a corporation's accounting department was a responsible person who willfully failed to pay over delinquent employment taxes. Factors supporting this conclusion were that she was the secretary, treasurer, and controller; she had check-writing and signing authority; and she had the status, duty, and authority that gave her effective power to pay the taxes. She provided no evidence that she attempted to use her check-writing authority to pay the taxes and she could not escape responsible person status by claiming that she was directed to pay other creditors before the taxes.

[Code Sec. 6672 ]

Employment taxes: Trust fund recovery penalty: Responsible person: Willfulness: Knowledge: Payment of creditors.--Because the responsible person of a corporation had knowledge of the tax liability, yet paid off debts to other creditors before the government, she was found to have acted willfully. Neither the degree of control of the CEO and chairman of the board nor his directions not to pay taxes had any bearing on the core issue of the taxpayer's knowledge of the delinquent taxes.

[Code Sec. 6203 ]

Assessment: Identification: Social security number.--An erroneous social security number on a tax assessment was insufficient to render the assessment invalid. The taxpayer offered no support for her contention that it did. She was identified by name and did not contend that she failed to understand the nature of the penalty. Moreover, she failed to show that she was misled by this misinformation.

MEMORANDUM OPINION AND ORDER

FITZWATER, District Judge:

The court must decide in this case whether the plaintiff-counterdefendant is a "responsible person" who willfully failed to pay to the Internal Revenue Service (" IRS ") employment taxes withheld by her corporate employer. The court must also resolve whether the IRS assessment is invalid because it lists an incorrect social security number for the plaintiff-counterdefendant.

This case arises from the failure of Pinpoint Communications, Inc. ("Pinpoint") to pay employment taxes to the IRS for the third and fourth quarters of 1995. Pinpoint sought to develop and market a fleet management system that would allow fleet operators, such as cab company dispatchers, to locate and communicate with individual members of the fleet. Patrick G. Bromley ("Bromley") ran Pinpoint as its Chief Executive Officer and Chairman of the Board. He was also Pinpoint's largest stockholder. Bromley exercised final decisionmaking authority over the business, including the approval of certain expenditures and the power to hire and fire employees.

Pinpoint struggled to achieve its goal of profitability. In the second half of 1995, it failed to pay its federal payroll taxes in full. Eventually, it was no longer able to cover operating expenses, and filed for chapter 11 bankruptcy protection on February 1, 1996. It reserved the last of its funds to pay a bankruptcy attorney, relying on a personal check from a board member to satisfy the full fee. In August 1996 Pinpoint's chapter 11 reorganization was converted to a chapter 7 liquidation and the United States Trustee auctioned off all of Pinpoint's assets. At no point did Pinpoint pay the overdue payroll taxes for the third and fourth quarters of 1995.

The IRS , acting pursuant to 26 U.S.C. §6672, assessed plaintiff-counterdefendant Beverly Frey ("Frey") the sum of $284,870.31 on February 18, 1999 , seeking to hold her liable by statute as a "responsible person" who had willfully failed to pay over the withheld employment taxes to the IRS . Frey was Pinpoint's Secretary, Treasurer, and Controller, and the head of its Accounting Department. She was also a minor Pinpoint shareholder. Frey paid $100 of the assessment and then sued defendant-counterplaintiff United States of America ("the government") to recover that sum plus statutory interest. The government counterclaimed to recover $284,770.31--the unpaid part of the assessment--plus interest and all statutory additions provided by law. The government also filed a third-party complaint against Bromley, but later reached a settlement with him and dismissed the third-party action. Only the claims between the government and Frey remain to be litigated. The government now moves for summary judgment, arguing that Frey is a "responsible person" under §6672 who acted willfully in failing to pay the payroll taxes. ¹ It seeks dismissal of her claim and recovery on its counterclaim.

II.

The relevant law regarding liability under §6672 for unpaid employment taxes is familiar and need not be recounted at length. Federal law requires that employers withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See Barnett v. IRS [93-1 USTC ¶50,269], 988 F.2d 1449, 1453 (5th Cir. 1993) (citing 26 U.S.C. §§3102 and 3402). The employer holds the withheld taxes "in trust" for the United States and must pay them over to the government, Id. ; Wood v. United States [87-1 USTC ¶9165], 808 F.2d 411, 414 (5th Cir. 1987). If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes and seek the unpaid funds from the employer. Section 6672(a) imposes liability for these delinquent taxes not only on the corporate employer but on any person, including a corporate officer or employee, who is required to collect, truthfully account for, or pay over any tax--commonly referred to as "responsible persons" ²--who willfully fails to do so. See Barnett [93-1 USTC ¶50,269], 988 F.2d at 1453. This penalty is "separate and distinct from the liability imposed on the employer to remit the trust fund taxes." Stallard v. United States [94-1 USTC ¶50,056], 12 F.3d 489, 493 (5th Cir. 1994) (per curiam ) (footnote omitted). Section 6672 provides the government recourse for collection of the taxes by allowing it to reach the persons responsible for causing the company's failure to pay the taxes. See Newsome v. United States [70-2 USTC ¶9597], 431 F.2d 742, 745 (5th Cir. 1970) (citations omitted).

To establish liability against Frey, the government must demonstrate that (1) she is a responsible person (2) who willfully failed to pay over the taxes. Barnett [93-1 USTC ¶50,269], 988 F.2d at 1453. Once the government offers a §6672 assessment into evidence, the taxpayer bears the burden of disproving her responsible person status or willfulness. Id. Frey, as the plaintiff who seeks a refund of a partial payment of a §6672 penalty, has the burden of proving that she is not a responsible person, even where, as here, the government has counterclaimed for the remainder of the tax. Morgan v. United States [91-2 USTC ¶50,387], 937 F.2d 281, 285 (5th Cir. 1991) (per curiam ) (adopting opinion of Fitzwater, J.) (citing Liddon v. United States [71-2 USTC ¶9591], 448 F.2d 509, 513-14 (5th Cir. 1971)).

III .

Frey first contends the original assessment against her is invalid because it lists an incorrect social security number and that the IRS failed to make a correct assessment via Form 4340 before the statute of limitations expired. She maintains that the assessment against her is invalid and that the court does not have jurisdiction over this case. ³

Before the penalty may be imposed, the government must properly notify the responsible party about the assessment. Stallard [94-1 USTC ¶50,056], 12 F.3d at 493. Pursuant to Treasury Regulation §301.6203-1--the regulation governing assessments--the summary record of the assessment must include the identity of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. "If the summary record is properly supported through a Form 4340, the assessment contained in that summary record is considered presumptively valid[.]" Id. Although the social security number listed on the original assessment actually belongs to a "Beverly Frey" from Houston , Texas , it is not the correct number for the Frey who is the plaintiff-counterdefendant in the present case.

Frey argues that by the time the IRS corrected this error and submitted a Form 4340 with the proper social security number, the statute of limitations had expired, thereby rendering the assessment invalid. In support of her argument, Frey cites Stallard, in particular the Fifth Circuit's characterization of the district court's holding in that case. Stallard does not support her position. In Stallard the Fifth Circuit held that the district court had incorrectly interpreted Brafman v. United States [67-2 USTC ¶12,494], 384 F.2d 863, 865 (5th Cir. 1967), to require that all provisions of Treasury Regulation §301.6203-1 must be met within the limitations period. Stallard [94-1 USTC ¶50,056], 12 F.3d at 493. Correcting this misinterpretation, the Fifth Circuit emphasized that it is the date of the assessment itself, not of the supporting record, that is relevant for resolving statute of limitations issues. Id.

Because the date of the Form 4340 does not render the original assessment untimely in the instant case, the court must now decide whether the erroneous social security number invalidates the assessment. Frey cites no authority to support her contention that it does. In fact, Treasury Regulations require only that "[t]he summary record, through supporting records, shall provide identification of the taxpayer[.]" Treas. Reg. §301.6203-1. Frey was identified by name and does not contend that she failed to understand the nature of the penalty. The Fifth Circuit has held that "a notice of assessment and demand for payment that contains a technical error will be held valid where the taxpayer has not been misled by the error." Sage v. United States [90-2 USTC ¶50,453], 908 F.2d 18, 22 (5th Cir. 1990) (citing Allan v. United States [75-1 USTC ¶9204], 386 F.Supp. 499 (N.D. Tex. 1975) (Porter, J.) (holding that wrong name of company did not invalidate assessment)). Absent proof that would permit a reasonable trier of fact to find that Frey was misled by the misinformation contained in the original assessment, the court declines to hold that it is invalid on this basis.

IV.

Because the government has introduced the assessment in evidence, the burden has shifted to Frey to prove either that she is not a "responsible person" or that she did not act willfully. At the summary judgment stage, she need only adduce evidence that creates a genuine issue of material fact.

The Fifth Circuit "takes a broad view of who is a responsible person under §6672." Logal v. United States [99-2 USTC ¶50,988], 195 F.3d 229, 232 (5th Cir. 1999) (citing Barnett [93-1 USTC ¶50,269], 988 F.2d at 1454). "In a great number of cases, [the Fifth Circuit] has held that a party was a 'responsible person.' " Barnett [93-1 USTC ¶50,269], 988 F.2d at 1454 n.10 (collecting cases). Whether Frey is a responsible person "turns on [her] status, duty, and authority." Turnbull v. United States [91-1 USTC ¶50,196], 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 [83-2 USTC ¶9528], 711 F.2d 729, 734 (5th Cir. 1983)). This inquiry asks whether she "had the actual authority or ability, in view of [her] status within the corporation, to pay the taxes owed." Barnett [93-1 USTC ¶50,269], 988 F.2d 1454. The court looks to six nonexclusive factors to determine responsibility pursuant to §6672, considering whether the person (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-to-day 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 [99-2 USTC ¶50,988], 195 F.3d at 232 (quoting Barnett [93-1 USTC ¶50,269], 988 F.2d at 1455). "No single factor is dispositive." Barnett [93-1 USTC ¶50,269], 988 F.2d at 1455.

The government contends that it has introduced in support of its motion evidence that precludes Frey from creating a genuine fact issue concerning whether she is a "responsible person." The court agrees.

Frey testified that she was the head of Pinpoint's Accounting Department, became the company Controller in 1993, and held the offices of Secretary and Treasurer by mid-1994. As a result of her responsibilities, Frey had an intimate knowledge of Pinpoint's financial situation. She admitted that she handled Pinpoint's day-to-day accounting functions. Frey also acknowledged that she dealt with the company's outside independent auditors and was a member of the Pinpoint management team. She was authorized to provide the sole signature on checks for up to $10,000 and was the person who usually signed employee payroll checks. Frey was a Pinpoint stockholder and prepared financial statements and made financial reports to the Board of Directors at least quarterly. Before Pinpoint's affiliation with Price Waterhouse, Frey was responsible for generating the internal financial reports. She was but one of a handful of employees who had access to computerized company records, including the general ledger and the accounts payable. Frey was familiar with Pinpoint's bank accounts and, as one of two trustees of Pinpoint's 401(k) plan, was a defendant in a Department of Labor action for Pinpoint's failure to pay over 401(k) contributions. She also participated heavily in generating financial projections regarding when Pinpoint would become profitable.

Frey attempts in her summary judgment response to avoid "responsible person" liability by characterizing Bromley--the Pinpoint CEO and Board Chairman--as the person who had authority to pay the taxes, and by minimizing her own power. She contends that despite her titles and formal authority, Bromley's overwhelming control of the daily operations at Pinpoint prevented her from exercising the necessary practical authority to be considered a responsible person under §6672. Her arguments are unavailing, however, and her evidence fails to raise a genuine issue of material fact that requires a trial.

Frey argues that her status as the company's Secretary, Treasurer, and Controller was merely titular and that Bromley made all significant decisions regarding finances. She asserts that she constantly acted only under Bromley's direction and had no