Greenberg v. United States ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
1-20-1995
Greenberg v USA
Precedential or Non-Precedential:
Docket 94-7075
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 94-7075
___________
MARK Z. GREENBERG,
Appellant
v.
UNITED STATES OF AMERICA;
DEPARTMENT OF THE TREASURY;
INTERNAL REVENUE SERVICE,
Appellees
___________
Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 92-cv-00642)
District Judge: Honorable Sylvia H. Rambo
___________
Argued: August 9, 1994
PRESENT: HUTCHINSON and NYGAARD, Circuit Judges,
and LUDWIG, District Judge*
(Filed December 15, 1994)
____________
Robert E. Chernicoff, Esquire (Argued)
Paige F. Macdonald, Esquire
Farr & Cunningham
2320 North Second Street
P.O. Box 1855
Harrisburg, PA 17105
Attorneys for Appellant
_______________
* Hon. Edmund V. Ludwig, United States District Judge for the
Eastern District of Pennsylvania, sitting by designation.
Loretta C. Argrett, Esquire
Assistant Attorney General
David Barasch, Esquire
United States Attorney
Gary R. Allen, Esquire
Jonathan S. Cohen, Esquire (Argued)
Billie L. Crowe, Esquire
Tax Division
United States Department of Justice
P.O. Box 502
Washington, DC 20044
Attorneys for Appellees
____________
OPINION OF THE COURT
____________
HUTCHINSON, Circuit Judge.
Appellant, Mark Z. Greenberg ("Greenberg"), appeals an
order of the United States District Court for the Middle District
of Pennsylvania granting summary judgment in favor of appellee,
United States of America ("United States"), on Greenberg's claim
for a partial refund of an amount Greenberg paid on an Internal
Revenue Service ("IRS") penalty assessment, and on the United
States' counterclaim to reduce the balance of the assessment to
judgment. In doing so, the district court upheld IRS's
assessment of a 100% "penalty" against Greenberg under section
6672 of the Internal Revenue Code of 1954 (the "Code"), 26
U.S.C.A. § 6672 (West Supp. 1994), after finding that Greenberg
was a "responsible person" who had "willfully" failed to pay over
to IRS federal employment taxes owed by his employer, Turning
Basin, Inc. ("Turning Basin" or the "Company"). We will affirm.
I. Factual & Procedural History
Turning Basin was a holding company which acquired
other companies through leveraged buyouts. Greenberg, a
certified public accountant since 1973, served initially as an
outside accountant for Turning Basin while employed by Alan
Moskowitz & Company. In late 1979, Greenberg accepted the
position of in-house controller at Turning Basin. Soon after
joining Turning Basin, Greenberg became its treasurer and
assistant secretary and signed at least one corporate document, a
loan guarantee, in this capacity. Greenberg also served as a
member of Turning Basin's Board of Directors and in 1981 he
received 40,000 shares of Turning Basin stock. Throughout
Greenberg's tenure with Turning Basin, Arthur Tuchinsky
("Tuchinsky") was Chairman of its Board of Directors, as well as
its Chief Executive Officer and controlling shareholder.
As controller of Turning Basin, Greenberg supervised a
staff of one accountant and two bookkeepers and was responsible
for the hiring and firing of employees within his department.
Although Greenberg acknowledged he exercised this authority, he
contended that decisions on hiring and firing were ultimately
determined by Tuchinsky. Greenberg also testified that Tuchinsky
set the salaries of all of Turning Basin's employees and
officers.
As controller, Greenberg was also responsible for
preparing financial statements and reports on the Company's
subsidiaries. These statements and reports were included in
quarterly or semi-annual reports to Turning Basin's stockholders.
Greenberg coordinated Turning Basin's annual audits with its
outside accounting firm and his department was responsible for
overseeing payment of Turning Basin's creditors and reconciling
the Company's checking account. He was an authorized signatory
on all of Turning Basin's bank accounts and signed checks on all
of them. Turning Basin's corporate checkbooks were first kept in
Greenberg's office and later in the bookkeepers' office.
Greenberg had access to these checkbooks at all times. At his
deposition, Greenberg stated that although he had constant access
to the Company's checkbooks and was an authorized signatory, he
only wrote checks when directed to do so by Tuchinsky. Greenberg
also testified that he was not authorized to raise cash on behalf
of the Company or make wire transfers for Turning Basin without
specific permission from Tuchinsky.
Sometime in 1981, Turning Basin began having cash-flow
problems. Greenberg then became responsible for reviewing the
accounts payable with Tuchinsky and assisting Tuchinsky in
determining which creditors should be paid first. Once Greenberg
and Tuchinsky decided who would be paid, Greenberg would sign
checks to pay them. Whenever a check was returned for
insufficient funds, the bank or creditor would contact either
Greenberg or Tuchinsky in order to resolve the matter. According
to Greenberg's deposition testimony, he and Tuchinsky would again
discuss which current bills were most urgent and Tuchinsky would
decide who to pay and where to find the money to pay them.
Greenberg testified that he never refused to pay anyone that
Tuchinsky told him to pay, nor did he ever pay any creditor
Tuchinsky told him not to pay.
Greenberg was also responsible for preparing and filing
Turning Basin's federal tax returns, including its federal
employment tax returns on Forms 940 and 941. By 1981, Turning
Basin was delinquent in remitting the withholding taxes to IRS.
Greenberg was aware of the tax delinquency from the time it
began. He testified that he discussed the tax delinquencies with
Tuchinsky and repeatedly recommended that the taxes be paid.
Greenberg testified that Tuchinsky assured him the taxes would
get paid, and that Greenberg had believed these assurances. He
admitted, however, that on at least one occasion Tuchinsky
informed him that they must pay more urgent bills right away in
order to keep the business going and would pay the taxes later.
Greenberg therefore continued to write checks to
Turning Basin's employees and other creditors despite the
existing withholding tax delinquencies. Because Tuchinsky was
responsible for placing money in Turning Basin's checking
accounts, Greenberg did not write a check to IRS for the
withholding tax delinquencies because he knew there would be no
funds in the account to cover the check. Greenberg also believed
that if he did issue a check to IRS without Tuchinsky's approval,
he would have been fired immediately. He acknowledged that he
could have authorized wire transfers of cash from the subsidiary
corporations' accounts to Turning Basin's accounts without
Tuchinsky's instructions but did not do so because he felt it was
beyond his authority.
Eventually, Tuchinsky told Greenberg to write checks to
cover the withholding tax delinquencies. Greenberg did so, and
when the checks were returned for insufficient funds, Greenberg
confronted Tuchinsky. When he realized the tax liability would
not be paid, Greenberg resigned as an officer and director of
Turning Basin.
On February 9, 1987, the IRS entered an assessment
under 26 U.S.C.A. § 6672(a) against Greenberg for Turning Basin's
delinquent withholding taxes. Greenberg paid $4,024.26 toward
the assessment and on May 13, 1992 filed a complaint in the
United States District Court for the Middle District of
Pennsylvania seeking a refund. The United States filed an answer
on October 6, 1992 along with a counterclaim seeking $14,456.52
plus interest which it claimed Greenberg still owed under the
penalty provision.
On June 1, 1993, the United States filed a motion for
summary judgment, which the district court granted on December 3,
1993. On February 4, 1994, the court entered an order amending
the judgment to reflect Greenberg's additional payment of
$2,335.13, making the balance due $23,881.68. The balance
included $11,760.29 in interest which had accrued up to
December 3, 1993.
II. Jurisdiction & Standard of Review
The district court had subject matter jurisdiction over
this action pursuant to 28 U.S.C.A. §§ 1340, 1346(a)(1) (West
1993) and 26 U.S.C.A. §§ 7401, 7402 (West 1989). The district
court had jurisdiction over the United States' counterclaim
pursuant to 28 U.S.C.A. § 1346(c) (West 1993). We have
jurisdiction over the final order of the district court pursuant
to 28 U.S.C.A. § 1291 (West 1993).
We review the district court's grant of summary
judgment de novo. United States v. Carrigan, 31 F.3d 130, 133
(3d Cir. 1994). We consider all of the facts and inferences in
the light most favorable to Greenberg, the nonmoving party, in
order to determine whether there is a genuine issue of material
fact. If no genuine issue of material fact remains, the moving
part is entitled to judgment as a matter of law.1 Id.III. Analysis
Sections 3102 and 3401 of the Code require employers to
withhold federal social security and income taxes from the wages
1
. Greenberg filed his notice of appeal on January 31, 1994 but
the district court did not enter its order amending the judgment
to add interest until February 7, 1994. Once the district court
acts on a motion to amend the judgment we have jurisdiction over
the initial judgment or order identified in the notice of appeal,
but a party seeking review of a motion that was outstanding at
the time the initial notice of appeal was filed must file an
amended notice of appeal. See Fed. R. App. P. 4(a)(4). No
amended notice was filed. We note, however, that the parties to
this appeal do not contest the amount of the judgment or the
imposition of interest. Thus, the sole issue before us is
Greenberg's liability for withholding tax. This was definitively
decided by the district court's initial order.
of their employees. 26 U.S.C.A. §§ 3102, 3401 (West Supp. 1994).
The taxes withheld constitute a special fund held "in trust" for
the benefit of the United States. 26 U.S.C.A. § 7501(a) (West
1989). Section 6672 of the Code imposes a penalty on certain
persons for failure to turn over withholding taxes to the IRS.
26 U.S.C.A. § 6672(a) (West Supp. 1994). Specifically, it
provides:
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. . . .
Id.There are two conditions before liability can be
imposed under section 6672: first, the individual must be a
"responsible person," and second, his or her failure to pay the
tax must be "willful." See Carrigan, 31 F.3d at 133; Brounstein
v. United States, 979 F.2d 952, 954 (3d Cir. 1992). If an
individual's conduct fails to meet either condition, the IRS may
not assess a section 6672 penalty against him. With this in
mind, we consider whether the district court correctly concluded
that Greenberg was a responsible person who acted willfully when
he failed to pay over Turning Basin's withholding taxes.
A. Responsible Person Under Section 6672
For purposes of section 6672, a "person" is defined as
"an officer or employee of a corporation . . . under a duty to
perform the act in respect of which the violation occurs." 26
U.S.C.A. § 6671(b) (West 1989). Anyone falling within this
definition is generally referred to as a "responsible person."
Stated another way, a responsible person, for purposes of section
6672(a), is one who is "required to collect, truthfully account
for or pay over any tax due to the United States." Carrigan, 31
F.3d at 133 (citing Brounstein, 979 F.2d at 954).
"'Responsibility is a matter of status, duty, or
authority, not knowledge.' While a responsible person must have
significant control over the corporation's finances, exclusive
control is not necessary." Brounstein, 979 F.2d at 954 (citation
omitted) (quoting Quattrone Accountants, Inc. v. IRS, 895 F.2d
921, 927 (3d Cir. 1990)). In determining whether an individual
is a person responsible for paying over withholding taxes, courts
consider the following factors:
(1) contents of the corporate bylaws, (2)
ability to sign checks on the company's bank
account, (3) signature on the employer's
federal quarterly and other tax returns, (4)
payment of other creditors in lieu of the
United States, (5) identity of officers,
directors, and principal stockholders in the
firm, (6) identity of individuals in charge
of hiring and discharging employees, and (7)
identity of individuals in charge of the
firm's financial affairs.
Id. at 954-55. It is not necessary that an individual have the
final word on which creditors should be paid in order to be
subject to liability under section 6672; a person may be treated
as "responsible" for purposes of the statute if he has
significant control over the disbursement of corporate funds.
United States v. Vespe, 868 F.2d 1328, 1332 (3d Cir. 1989).
The case before us is clearly distinguishable from the
facts involved in Carrigan. There, we held the United States was
not entitled to summary judgment on its claim of section 6672
liability because there was evidence that the taxpayer was not a
"responsible person." In Carrigan, the taxpayer was not
responsible for handling the financial affairs of the company,
nor did he prepare, maintain or have access to any of the
corporate books, records or checkbooks. Furthermore, the
taxpayer in Carrigan did not handle any creditors' bills nor
negotiate with any creditor on behalf of the company. See
Carrigan, 31 F.3d at 133-34.
In contrast, Greenberg was an authorized signatory on
all of Turning Basin's corporate checking accounts and had
unrestricted access to them at all times. This record clearly
shows that Greenberg used this power and signed most of the
payroll checks issued during his tenure at Turning Basin, as well
as checks written to a variety of other creditors, including the
United States. Greenberg was also an officer of the Company, a
member of its Board of Directors and a minority shareholder.
Greenberg was aware of the employment tax delinquency
as soon as it arose. He wrote checks to pay other creditors
while knowing that withholding tax liabilities to the United
States remained unpaid.2 As controller of Turning Basin,
Greenberg was in charge of the accounting department and
supervised the reconciliation of checking account statements. He
also completed various tax forms. Furthermore, Greenberg
reviewed Turning Point's accounts payable with Tuchinsky,
assisted Tuchinsky in determining which creditors should be paid
and signed checks to pay creditors and meet payroll. According
to Greenberg's own testimony, he and Tuchinsky discussed which
creditors needed to be paid most urgently, i.e., which creditors
were threatening to cut off crucial services or supplies, and
then decided who to pay. Finally, Greenberg played a role in the
hiring and firing of employees.
Our conclusion that Greenberg is a responsible person
for purposes of section 6672 is supported by all of the evidence.
The fact that Greenberg was instructed by Tuchinsky to pay
creditors other than the United States despite the existence of
withholding tax delinquencies and the fact Greenberg feared for
his job were he to independently issue a check for the
delinquency do not negate his status as a responsible person.
2
. The dissent argues that Greenberg's check-writing function
was merely ministerial, and that any checks Greenberg wrote were
"worthless unless and until Tuchinsky deposited money into the
checking account to cover them." See infra, typescript at 3,
lines 12-16. The record shows that Greenberg wrote checks to
other creditors and they were successfully negotiated. Instead
of issuing these checks, Greenberg could have chosen to write
checks to the United States. We recognize that the record also
contains evidence tending to show that Greenberg would have lost
his job when Tuchinsky discovered he had paid IRS but, as the
dissent acknowledges, the threat that a person will be fired if
he pays withholding taxes does not excuse a responsible person
from the obligation to pay IRS.
"Instructions from a superior not to pay taxes do not . . . take
a person otherwise responsible under section 6672(a) out of that
category." Brounstein, 979 F.2d at 955 (citing Gephart v. United
States, 818 F.2d 469, 474-75 (6th Cir. 1987); Roth v. United
States, 779 F.2d 1567, 1571-72 (11th Cir. 1986); Howard v. United
States, 711 F.2d 729, 734 (5th Cir. 1983)). We agree with the
district court that this record does not leave any material
questions of fact on Greenberg's responsibility for paying
Turning Point's withholding taxes under section 6672.
B. Willfulness Under Section 6672
The fact that Greenberg is a responsible person does
not end our inquiry because IRS may impose section 6672 liability
only if a responsible person "willfully" fails to collect,
account for or pay over the withheld taxes. 26 U.S.C.A.
§ 6672(a). We have stated, "[u]nder section 6672(a), willfulness
is 'a voluntary, conscious and intentional decision to prefer
other creditors over the Government.' A responsible person acts
willfully when he pays other creditors in preference to the IRS
knowing that taxes are due, or with reckless disregard for
whether taxes have been paid." Brounstein, 979 F.2d at 955-56(citations omitted) (quoting Quattrone, 895 F.2d at 928). In
order for the failure to turn over withholding taxes to be
willful, a responsible person need only know that the taxes are
due or act in reckless disregard of this fact when he fails to
remit to IRS. "Reckless disregard includes failure to
investigate or correct mismanagement after being notified that
withholding taxes have not been paid." Morgan v. United States,
937 F.2d 281, 286 (5th Cir. 1991) (per curiam); see also Vespe,
868 F.2d at 1335. The taxpayer need not act with an evil motive
or bad purpose for his action or inaction to be willful.
Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990).
Any payment to other creditors, including the payment of net
wages to the corporation's employees, with knowledge that the
employment taxes are due and owing to the Government, constitutes
a willful failure to pay taxes. See Datlof v. United States, 252
F. Supp. 11, 32-33 (E.D. Pa.), aff'd, 370 F.2d 655 (3d Cir.
1966), cert. denied, 387 U.S. 906 (1967).
Thus, Greenberg's failure to pay the withholding taxes
Turning Basin owed IRS is willful if he paid other creditors,
including employees, knowing that the withholding taxes were due.
It is no defense that the corporation was in financial distress
and that funds were spent to keep the corporation in business
with an expectation that sufficient revenue would later become
available to pay the United States. See Emshwiller v. United
States, 565 F.2d 1042, 1045-46 (8th Cir. 1977); Hochstein, 900
F.2d at 548-49. It is also not a defense that a taxpayer would
lose his job if he signed a check to the IRS without the express
authority of a superior. Brounstein, 979 F.2d at 956; accord
Howard v. United States, 711 F.2d 729, 733-34 (5th Cir. 1983)
(responsible persons' failure to ensure payment of withholding
taxes where chief executive officer ordered him not to pay taxes
still willful for purposes of section 6672). Finally, the
assurance by another that the taxes will be taken care of is not
a defense to liability under section 6672. See Denbo v. United
States, 988 F.2d 1029, 1033-34 (10th Cir. 1993).
Like the taxpayers in Brounstein and Vespe, this record
clearly demonstrates Greenberg's knowledge that Turning Basin had
not paid withholding taxes due IRS when he was signing checks to
Turning Basin's employees and other creditors. See Brounstein,
979 F.2d at 956; Vespe, 868 F.2d at 1335. Greenberg does not
contend that he was unaware of the outstanding tax liability, nor
does he dispute that he wrote checks to other creditors despite
his knowledge of the outstanding tax liability. The record
clearly demonstrates that Greenberg acted willfully in failing to
ensure payment of the withholding taxes to the IRS. As a
responsible person, he therefore exposed himself to liability
under section 6672. Thus, the district court did not err when it
granted summary judgment in favor of the United States and
against Greenberg on both Greenberg's complaint and the United
States' counterclaim.
IV. Conclusion
For these reasons, we will affirm the order of the
district court.
Greenberg v. U.S., et al, No. 94-7075
NYGAARD, Circuit Judge, dissenting.
26 U.S.C. § 6672 provides that a person responsible for
withholding and paying over taxes who willfully fails to do so is
liable for a penalty equal to the total amount of the unpaid
taxes. Because I think the facts of this case do not establish
Greenberg's responsibility as a matter of law, I would reverse
the summary judgment of the district court. Hence, I dissent.
Responsibility under section 6672 "is a matter of
status, duty or authority, not knowledge." Quattrone
Accountants, Inc. v. IRS, 895 F.2d 921, 927 (3d Cir. 1990). A
person is responsible within the meaning of section 6672 "if the
person has significant, though not necessarily exclusive, control
over the employer's finances." Quattrone Accountants, 895 F.2d
at 927. "Significant control" means "the final or significant
word over which bills or creditors get paid." Id.; see Gephart
v. United States, 818 F.2d 469, 473 (6th Cir. 1987) (stating that
the test for responsibility focuses on "the degree of influence
and control which the person exercised over the financial affairs
of the corporation and, specifically, disbursements of funds and
the priority of payments to creditors."); Godfrey v. United
States, 748 F.2d 1568, 1576 (Fed. Cir. 1984) (defining
responsibility in terms of a person's "power to compel or
prohibit the allocation of corporate funds."). Thus, in
Quattrone Accountants, we found an accounting firm to be a
responsible person because it
paid UDF's [the employer's] monthly bills
without prior approval. Consistent with this
authority, [it] had possession of signature
stamps of the treasurer and president of UDF.
The only limitation on this authority was
that each month [it] had to present to the
Board of UDF the bills it had paid for the
previous month. . . .
Quattrone Accountants, 895 F.2d at 927. Factors we have looked
to in determining whether a person has significant control over
an employer's finances include:
(1) that person's duties under the employer's
corporate bylaws; (2) his or her ability to
sign checks on the employer's bank account;
(3) the signature on the employer's federal
quarterly and other tax returns; (4) the
payment of other creditors in lieu of the
United States; (5) the identity of the
officers, directors and principal
stockholders of the employer; (6) the
identity of the individuals in charge of
hiring and firing employees; and (7) the
identity of the individuals in charge of the
employer's financial affairs.
Brounstein, 979 F.2d at 955.
The district court held that Greenberg was a
responsible person as a matter of law. It correctly noted that
the definition of "responsible person" is not limited to the
person with the final say on which bills get paid, but includes
others as well. See Quattrone, 895 F.2d at 927; see also Vespe,
868 F.2d at 1332 ("More than one individual may be a responsible
[pe]rson for a given employer."). The district court concluded,
primarily from Greenberg's authority to sign checks, that he had
such "significant say." Dist. Ct. Op. at 10.
I disagree that Greenberg's responsibility was
established here as a matter of law. I think that the district
court placed too much reliance on Greenberg's check-writing role.
That is one factor, relevant to the question of responsibility,
but not the only one. See Godfrey, 748 F.2d at 1575 ("The
mechanical duties of signing checks and preparing tax returns are
. . . not determinative of liability under § 6672."). The reason
that check-writing ability is often significant is "because it
generally comes with the ability to choose which creditors will
be paid." Burack v. United States, 461 F.2d 1282, (Ct. Cl.
1972). Here, however, it may not have. Greenberg has offered
evidence that his check-writing functions were merely
ministerial, done at Tuchinsky's behest and requiring his prior
approval, and that, although Greenberg could write the checks,
they were worthless unless and until Tuchinsky deposited money
into the checking account to cover them.
The government does not dispute this evidence; it
simply points to the other indicia of Greenberg's status. I
think that this makes Greenberg's responsibility a question for
the jury. The issue is "for the trier of fact to determine, upon
all the evidence, taking into account questions of credibility
and those reasonable inferences flowing from the evidence which
may establish, or fail to establish, that [Greenberg] possessed a
sufficient degree of authority over corporate decisionmaking so
as to make him a responsible person within section 6672. . . ."
Jay v. United States, 865 F.2d 1175, 1179 (10th Cir. 1989).
The district court reasoned that a finding of
responsibility was dictated by Brounstein. I disagree.
Brounstein was not only the treasurer of the company (like
Greenberg), but also was president and under the corporate bylaws
had the authority to exercise managerial control. Brounstein,
979 F.2d at 955. Additionally, although most of the checks
Brounstein wrote for the company were at the direction of its
principal, he also (unlike Greenberg) issued checks without the
principal's approval. Id.We did say in Brounstein that "[i]instructions from a
superior not to pay taxes do not, however, take a person
otherwise responsible under section 6672(a) out of that
category[]," id. at 955 (emphasis added). That, however, does
not foreclose the possibility that Greenberg might not be
responsible in the first place. The government's reliance on
Howard v. United States, 711 F.2d 729 (5th Cir. 1983) and other
courts of appeals cases following Howard3 is, for the same
reason, misplaced. In Howard, the Fifth Circuit stated:
The fact that Jennings [Howard's superior]
might well have fired Howard had he disobeyed
Jennings' instructions and paid the taxes
does not make Howard any less responsible for
their payment. Howard had the status, duty
and authority to pay the taxes owed, and
would only have lost that authority after he
had paid them. Authority to pay in this
context means effective power to pay. That
Howard had that authority is demonstrated by
the fact that he did issue small checks
3
. Gephart v. United States, 818 F.2d 469 (6th Cir. 1987); Roth
v. United States, 779 F.2d 1567 (11th Cir. 1986).
without Jennings' approval on a number of
occasions. . . .
Id. at 734 (citations omitted). These cases simply say that, if
a person is responsible, a superior's instructions not to pay the