Plett v. United States ( 1999 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
DONALD PLETT,
Plaintiff-Appellant,
v. No. 98-1752
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Claude M. Hilton, Chief District Judge;
Leonie M. Brinkema, District Judge.
(CA-97-800-A)
Argued: April 6, 1999
Decided: July 23, 1999
Before NIEMEYER, WILLIAMS, and TRAXLER,
Circuit Judges.
_________________________________________________________________
Affirmed in part, vacated in part, and remanded for further proceed-
ings by published opinion. Judge Niemeyer wrote the opinion, in
which Judge Williams and Judge Traxler joined.
_________________________________________________________________
COUNSEL
ARGUED: Walter J. Rockler, ARNOLD & PORTER, Washington,
D.C., for Appellant. Charles Foster Marshall, III, Tax Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellee. ON BRIEF: Julius M. Greisman, Katherine M.
Breaks, ARNOLD & PORTER, Washington, D.C., for Appellant.
Loretta C. Argrett, Assistant Attorney General, Ann B. Durney, Helen
F. Fahey, United States Attorney, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
_________________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
The district court entered a $50,000 judgment in favor of the
United States (Internal Revenue Service) against Donald Plett repre-
senting the 100% penalty imposed by 26 U.S.C. § 6672, plus interest,
for Plett's failure to remit payroll taxes of Wilder & Wilder, Inc. to
the United States. The court found that Plett was a person at Wilder
& Wilder responsible for collecting, accounting for, and remitting the
taxes and that he willfully failed to pay them. Based on the undis-
puted facts in the record, we affirm the district court's conclusion that
Plett was liable under § 6672, but we vacate the judgment and remand
for further proceedings to determine the correct amount of liability.
I
The Internal Revenue Code requires that employers withhold fed-
eral income taxes and social security taxes from their employees'
wages. See 26 U.S.C. §§ 3402(a), 3102(a). Because the employer
holds these taxes as "special fund[s] in trust for the United States,"
26 U.S.C. § 7501(a) (emphasis added), the withheld amounts are
commonly referred to as "trust fund taxes," Slodov v. United States,
436 U.S. 238, 243 (1978) (internal quotation marks omitted). While
an employer remains liable for its failure to remit trust fund taxes, the
Internal Revenue Code also imposes personal liability, in an amount
equal to an employer's deficient taxes, upon those officers or employ-
ees (1) responsible for collecting, accounting for, and remitting pay-
roll taxes, and (2) who willfully fail to do so. See 26 U.S.C.
§ 6672(a); 26 U.S.C. § 6671(b); see also O'Connor v. United States,
956 F.2d 48, 50 (4th Cir. 1992) (outlining elements of § 6672 liabil-
ity). Section 6672 provides in pertinent part:
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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.
26 U.S.C. § 6672(a).
The case law interpreting § 6672 generally refers to the person
required to collect, account for, and remit payroll taxes to the United
States as the "responsible person." See Slodov, 436 U.S. at 246 n.7.
But the "responsible person" is not limited to one person in a com-
pany but rather may include many persons connected with the same
employer. See O'Connor, 956 F.2d at 50; accord Barnett v. Internal
Revenue Service, 988 F.2d 1449, 1455 (5th Cir.) ("There may be --
indeed, there usually are -- multiple responsible persons in any com-
pany"), cert. denied, 510 U.S. 990 (1993); Bowlen v. United States,
956 F.2d 723, 728 (7th Cir. 1992) (stating that§ 6672 casts a "broad
net" over many persons in imposing liability for delinquent payroll
taxes).
To determine who within a company is a "responsible person"
under § 6672, we undertake a pragmatic, substance-over-form inquiry
into whether an officer or employee so "participate[d] in decisions
concerning payment of creditors and disbursement of funds" that he
effectively had the authority -- and hence a duty-- to ensure pay-
ment of the corporation's payroll taxes. O'Connor, 956 F.2d at 51.
Stated differently, the "crucial inquiry is whether the person had the
`effective power' to pay the taxes -- that is, whether he had the actual
authority or ability, in view of his status within the corporation, to pay
the taxes owed." Barnett, 988 F.2d at 1454 (citations omitted). Sev-
eral factors serve as indicia of the requisite authority, including
whether the employee (1) served as an officer of the company or as
a member of its board of directors; (2) controlled the company's pay-
roll; (3) determined which creditors to pay and when to pay them; (4)
participated in the day-to-day management of the corporation; (5)
possessed the power to write checks; and (6) had the ability to hire
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and fire employees. See O'Connor, 956 F.2d at 51; United States v.
Landau, 155 F.3d 93, 100-01 (2d Cir. 1998); Barnett, 988 F.2d at
1455.
And to determine whether the "responsible person" "willfully"
failed to collect, account for, or remit payroll taxes to the United
States, we inquire whether the "responsible person" had "knowledge
of nonpayment or reckless disregard of whether the payments were
being made." Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir.
1992) (internal quotation marks and citations omitted). A responsible
person's intentional preference of other creditors over the United
States establishes the element of willfulness under§ 6672(a). See
United States v. Pomponio, 635 F.2d 293, 298 n.5 (4th Cir. 1980).
And an intentional preference, in turn, is established by showing that
the responsible person "[knew] of or recklessly disregard[ed] the exis-
tence of an unpaid deficiency." Turpin, 970 F.2d at 1347.
II
The undisputed facts in the record of this case reveal that Wilder
& Wilder, Inc., a hairstyling salon in the Georgetown area of Wash-
ington, D.C., failed to remit to the United States payroll taxes for the
second, third, and fourth quarters of 1989 and the second quarter of
1990. When Donald Plett filed this refund action to recover from the
IRS $1,940 that he had personally paid in partial satisfaction of the
IRS' assessment but for which he alleged he was not responsible, the
IRS filed a counterclaim to recover from Plett, as a responsible per-
son, the balance of its assessment that it made against Wilder & Wil-
der.
Wilder & Wilder, named for its two principal hairstylists -- Don-
ald Plett, whose nickname was "Wilder," and Alan Crutcher, who
adopted the name "Wilder" because of his relationship with Plett --
was formed in 1986 after Donald Santarelli, a Washington attorney
who was a customer of Crutcher, had agreed to help Crutcher open
a salon. In February 1986, Santarelli and his investment advisor, Peter
Clarke, purchased the assets of an existing beauty salon and trans-
ferred them to Wilder & Wilder. Clarke was then designated presi-
dent/treasurer; Santarelli, vice president; and Plett, secretary. As the
key employee, Plett was also given a written employment agreement.
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Wilder & Wilder opened for business in March 1986. While Santa-
relli paid the initial bills, hired an outside accountant to maintain the
general ledger and other books of the corporation, and worked with
Plett to obtain a $15,000 bank loan for operating capital, his responsi-
bilities as a practicing attorney prevented him from assuming an
active role in Wilder & Wilder's daily operations. Within the first
year, he delegated all decisions as to "what made sense [as] to how
to run the shop" to Plett and Crutcher, making clear that his only con-
cern was that the business not get into "trouble with either the bank
or the government."
Following Santarelli's initial involvement, Plett and Crutcher oper-
ated the business, paying the salon's creditors and employees in the
ordinary course of business. In addition to these responsibilities, Plett
and Crutcher supervised other hairstylists, purchased supplies, hired
and fired employees, scheduled appointments, maintained the cash
register, and otherwise operated the salon's business on a daily basis.
Further, when the corporation needed capital in 1988, Plett himself
signed for a $10,000 bank loan. The salon's outside accountant
explained the relative roles of Santarelli on the one hand and Plett and
Crutcher on the other:
[Santarelli] had never run the business. . . . I think he met
with [Plett and Crutcher] once a year and maybe gave gen-
eral business advice. . . . I don't think that they needed Mr.
Santarelli's approval for anything, but they were always
tight on money.
To assist them in carrying out their financial responsibilities, Plett
and Crutcher hired Susan Zuber as a part time bookkeeper. Zuber pre-
pared the salon's accounts payable and payroll records and wrote out
the checks which she then presented to Plett or Crutcher for signing
and mailing to the salon's creditors. Among the checks that Zuber
prepared for signature were those for the salon's federal payroll and
income taxes. Zuber acknowledged that she never prioritized the
checks with the result that when insufficient funds were available,
Wilder & Wilder's employees often received checks while the salon's
employment taxes went unpaid.
Even though Zuber believed that Santarelli maintained ultimate
responsibility for Wilder & Wilder's financial condition, she inter-
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acted with Plett and Crutcher on most of the salon's routine financial
affairs. She made sure, for instance, to notify Plett and Crutcher of
impending or overdue debts, often urging them to pay those debts as
soon as possible. On occasion, she pressed Plett and Crutcher to pay
the salon's federal payroll taxes "as soon as $ is adequate." Zuber also
compiled the payroll and sales tax returns, presenting them to Plett
and Crutcher for review and execution. In connection with tax returns,
she stated in one memorandum, "When I come in Tuesday, I'll write
the checks, You can sign, I'll copy and mail."
In August 1989, with Santarelli's approval, Plett and Crutcher
hired a new outside accountant, Lawrence Giles, after the salon's
original accountant had ended the relationship when Wilder & Wilder
failed to pay his fees. Giles immediately discovered that the salon's
financial records were "a mess." In particular, he reported to Plett that
the salon was delinquent in failing to pay several months' payroll
taxes. Despite this knowledge, Plett permitted the overdue taxes to go
unpaid, although he continued to sign checks to pay the salon's other
creditors and employees.
In April 1990, Plett signed Wilder & Wilder's federal payroll tax
returns for the second, third, and fourth quarters of 1989, but the cor-
poration did not then have the money to pay the taxes due. When Plett
notified Santarelli of the overdue taxes, Santarelli expressed "out-
rage." He stated that the news confirmed his long-held suspicion that
Plett and Crutcher were misappropriating the salon's funds. He said,
"I became disillusioned with their honesty in running the business. . . .
They had a good clientele, and they were not making any money.
Something was wrong."
In November 1990, Plett, along with Wilder & Wilder's outside
accountants, met with an agent of the IRS to discuss the unpaid pay-
roll taxes. Shortly thereafter, Santarelli terminated Plett's employ-
ment, stating in a letter to him, "It has come to[my] attention . . . that
you have and are continuing to engage in behavior that is not in the
best interest of [Wilder & Wilder] and which may, in fact, constitute
criminal behavior." On December 18, 1990, the IRS seized the Wilder
& Wilder premises and property.
Almost three years after Wilder & Wilder ceased its operations, the
IRS assessed a personal penalty against Plett in the amount of
6
$50,995 for Wilder & Wilder's unpaid employment taxes covering
the last three quarters of both 1989 and 1990. When Plett commenced
this action against the United States in 1997 to recover a portion of
the assessment previously paid by him, the United States filed a coun-
terclaim for the entire amount of the assessment. The assessment was
subsequently reduced to $38,582 because the IRS discovered that
Wilder & Wilder had satisfied liabilities for the last two quarters of
1990.
On cross-motions for summary judgment, the district court held
that Plett was a responsible person who willfully failed to remit Wil-
der & Wilder's payroll taxes and therefore was personally liable for
a penalty in the amount of the unpaid taxes. The court emphasized
that Plett, "who is sufficiently educated," signed "essentially all of the
checks" and the payroll tax returns, and paid other creditors after
learning in August 1989 that Wilder & Wilder was delinquent in pay-
ing its payroll taxes. Following a bench trial to determine the amount
of Plett's liability, the court entered a judgment against Plett for
$50,000, representing a $38,008 trust fund penalty plus interest. This
appeal followed.
III
Although Plett acknowledges that he signed checks, loan docu-
ments, and tax returns for Wilder & Wilder, he contends that he
should not be liable for Wilder & Wilder's unpaid payroll taxes
because he possessed no independent control over the salon's finan-
cial activities. Plett argues that he was hired"strictly as a hairdresser"
who was a "non-owner and subordinate employee of Wilder & Wil-
der." He claims that he could exercise no independent judgment to
make decisions on financial or tax matters. In signing checks, for
instance, he claims that he was only doing "as he was told." In conclu-
sion, he asserts that he "had virtually nothing to do with, and no
power over, financial affairs."
Plett's contentions that he was "strictly a hairdresser" and had vir-
tually no power to make decisions about financial matters are simply
not supported by the undisputed facts in the record. To make such
contentions in his brief on appeal, Plett's counsel obviously had to
overlook these undisputed facts.
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The record shows that shortly after Santarelli formed the business
and hired its first outside accountant, he turned the daily operations
of the business over to Plett and Crutcher. Plett was the corporate sec-
retary, and, as an officer of the corporation, he signed corporate docu-
ments, including the corporation's tax returns and a corporate
resolution authorizing extraordinary borrowing. More importantly, he
supervised the work of Zuber, the bookkeeper, who prepared virtually
all of the corporation's financial paperwork for Plett's signature. Plett
signed most of the corporation's checks and other day-to-day paper-
work. Santarelli's interest was limited to that of an organizer, officer,
and investor, whose "only concern was that we didn't get into . . .
trouble with either the bank or the government."
Also consistent with this arrangement, Plett hired and supervised
other hairstylists, scheduled appointments, collected money from
patrons, paid cash-on-delivery vendors, and paid the salon's other
creditors and employees. Nothing in the record suggests that Plett
lacked authority to write these checks and to satisfy Wilder & Wil-
der's ongoing obligations, including its tax obligations. Indeed, just
the opposite is true. The record reflects that when cash was short, the
bookkeeper made that fact known to Plett, and not to Santarelli.
While Plett did not have exclusive financial authority, it is undisputed
that his authority was sufficient to determine which bills would be
paid and which would not. And while vendors and employees were
paid, the IRS was not, even though the need to pay the IRS had been
brought to Plett's attention.
That Plett was given this level of financial control was manifested
by Santarelli's reaction when he learned in April 1990 that the corpo-
ration lacked sufficient cash to remit its payroll taxes to the IRS. In
addition to expressing outrage, Santarelli testified that he did not
understand why "they [Plett and Crutcher] were not making money"
because they had good clientele. He stated that"[s]omething was
wrong," but he did not know what. He testified that he told Plett and
Crutcher, "How can you guys do this? This is real trouble. It's better
you don't pay the rent . . . [than] you don't pay that which gives you
criminal liability." He also told them, "the salon should be making
this money. Where is it going? What's going on?" These are not the
expressions of an officer who had day-to-day financial control or was
familiar with the salon's cash flow. Such financial control was indis-
8
putably in the hands of Plett, Crutcher, and the bookkeeper they
supervised, Zuber.
To determine whether Plett has liability under 26 U.S.C. § 6672(a),
we must consider whether he was responsible for collecting, account-
ing for, and remitting Wilder & Wilder's payroll taxes, and if so,
whether he "willfully" failed to fulfill those obligations. Applying the
factors described in O'Connor and Landau , it is apparent that Plett
was a "responsible person" for purposes of creating § 6672 liability:
(1) Plett was an officer of Wilder & Wilder; (2) he controlled its pay-
roll; (3) by paying non-governmental creditors and not paying the
United States, he determined which creditors to pay; (4) he was
responsible for the day-to-day operations of Wilder & Wilder, includ-
ing its routine financial affairs; (5) he had the power to sign checks
and in fact signed most of them; and (6) he had the power, and exer-
cised it, to hire and fire employees. See O'Connor, 956 F.2d at 51;
Landau, 155 F.3d at 101.
To have § 6672 liability, Plett must also have willfully failed to pay
the employee withholding taxes. The facts that establish that Plett was
financially responsible also establish this "willfulness" requirement.
Zuber, the salon's bookkeeper whom Plett supervised, notified Plett
as early as 1987 of unpaid federal payroll tax obligations that needed
to be satisfied "as soon as $ is adequate." In addition, in August 1989,
Wilder & Wilder's outside accountant informed Plett that the salon's
books were "a mess" and, in particular, that several months' federal
payroll taxes had not been paid. Plett failed to take any action in
response to this information. Despite his responsibility to pay ongoing
bills, Plett did nothing to pay, or to insure payment of, these taxes.
Instead, he permitted the taxes to go unpaid while he continued to
write checks to himself and the salon's employees and creditors. Over
$200,000 worth of checks, the majority of which Plett signed, cleared
Wilder & Wilder's corporate accounts from April to December 1990.
These facts readily establish that Plett, if he did not knowingly fail to
pay the IRS, certainly recklessly disregarded these tax obligations.
See Turpin, 970 F.2d at 1347.
Plett suggests that the summary judgment mechanism was an
improper means to resolve the complex issue of his liability under
§ 6672 because it was "unduly abbreviated." But in the absence of
9
disputed material facts, summary judgment represents a favored
mechanism to secure the "just, speedy, and inexpensive determina-
tion" of such issues. Fed. R. Civ. P. 1. Summary judgment "does not
become disfavored simply because a case is complex" or even if there
are some disputed facts. Thompson Everett, Inc. v. National Cable
Adver., L.P., 57 F.3d 1317, 1322-23 (4th Cir. 1995). The essential
question presented on a motion for summary judgment remains
whether, in the absence of a genuine dispute over material facts, the
moving party is entitled to judgment as a matter of law. See Fed. R.
Civ. P. 56(c). And the question of whether a given set of facts entitles
a party to judgment is a question of law.
In this case, the facts material to whether Plett was a responsible
person who willfully failed to remit payroll taxes are undisputed.
They show that Plett managed essentially all aspects of Wilder &
Wilder's operation; he served as the salon's corporate secretary and
signed loan documents and tax returns on behalf of the corporation in
that capacity; he signed and issued a majority of the checks to Wilder
& Wilder's vendors, creditors, and employees; and he oversaw the
work of the salon's bookkeeper. In addition, Plett continued to issue
checks to the salon's employees and nongovernmental creditors after
receiving notice that the salon was deficient in paying its federal
unemployment taxes. These undisputed facts are sufficient to con-
clude as a matter of law that Plett is liable under§ 6672 as a "respon-
sible person."
IV
Plett also contends that the district court clearly erred in finding the
amount of his liability because it failed to give him certain offsetting
credits.
Following a bench trial, the district court found as fact that Wilder
& Wilder's employment tax liability as of 1990 was $52,000, of
which $38,008 represented unpaid trust fund taxes. Since Plett's lia-
bility under § 6672 applies only to the trust fund liability, which the
court computed to be $38,008, the court entered judgment against
Plett for $38,008 plus interest, for a total of $50,000.
Plett contends that the district court erroneously failed to credit him
with (1) the value of assets seized by the IRS in December 1990; (2)
10
a $4,717 payment that Wilder & Wilder allegedly made with respect
to the second quarter of 1989; and (3) a credit for the proceeds of
Crutcher's bank account previously seized by the IRS. In addition,
Plett contends that the district court erred in failing to apply payments
made with respect to unemployment taxes and other miscellaneous
payments and refunds.
With respect to the value of assets seized by the IRS in December
1990, the district court found the value of Wilder & Wilder's assets
to be $13,500 based on a personal property tax return that it filed with
the District of Columbia. Because the IRS permissibly applied this
credit first to the non-trust fund liability of Wilder & Wilder, see
Buffalow v. United States, 109 F.3d 570, 574-75 (9th Cir. 1997), no
amount remained to reduce the trust fund liability in the amount of
$38,008 for which Plett was responsible.
With respect to the other credits, the district court simply found
that Plett failed in his burden of proof. For instance, with respect to
the $4,717, Plett acknowledged that he had no recollection of actually
having made that payment, and in the absence of proof that the pay-
ment was made, the district court rejected the credit. The district
court's factual findings were supported by evidence, or the lack of
evidence, and we find no error in the manner that the court applied
the law to them, with but one exception.
Shortly before trial, the IRS agreed to dismiss its§ 6672 liability
claim against Crutcher with the stipulation that"all payments made
by Alan Crutcher toward his 100% penalty liability will be applied to
Donald Plett's 100% liability." While the parties believe that that
amount could exceed $5,000 and they agree that Plett is entitled to a
credit for the amount, they do not know what the exact amount is.
Because Plett should receive a credit for the Crutcher credits once
they have been computed, we vacate the judgment and remand to per-
mit the district court to determine the amounts of these credits and to
reduce the judgment accordingly. The district court's rulings in all
other respects are affirmed.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED FOR FURTHER PROCEEDINGS
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