Harold v. United States , 195 F. App'x 358 ( 2006 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 06a0576n.06
Filed: August 11, 2006
No. 05-4217
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
JOHN H. HAROLD,
Plaintiff-Appellant, ON APPEAL FROM THE
UNITED STATES DISTRICT
v. COURT FOR THE
NORTHERN DISTRICT OF
UNITED STATES OF AMERICA, OHIO
Defendant-Appellee.
BEFORE: MARTIN and SUTTON, Circuit Judges; JORDAN, District Judge.*
LEON JORDAN, District Judge. John H. Harold (“Appellant”) appeals the grant
of summary judgment in favor of the United States of America in this action involving
Internal Revenue Service assessments under 26 U.S.C. § 6672(a). Although the district court
in some respects erred in its application of the familiar summary judgment standard, these
errors were harmless and we affirm.
*
The Honorable R. Leon Jordan, United States District Judge for the Eastern District of
Tennessee, sitting by designation.
Harold v. United States, No. 05-4127
I. Facts
Appellant has only a high school education. From 1977 through 1987, he
worked as the store manager of Bob’s Sparkle Market (“Bob’s Market”) in Elyria, Ohio.
Bob’s Market, a local grocery, was owned by Appellant’s father, Robert Harold, Sr.
Appellant was responsible for doing “everything” at Bob’s Market, including paying
vendors, hiring employees, and “ma[king] sure the store ran efficiently.” He testified that
his father, however, was responsible for the submission of Bob’s Market’s payroll taxes.
In 1987, Appellant transferred to his father’s new Amherst, Ohio grocery,
Harold’s Sparkle Market (“Harold’s Market”), to work as the store manager.1 Appellant
testified that his responsibilities at Harold’s Market were the same “basically” as at Bob’s
Market. He hired employees. He fired at least one person, with his father’s approval.
Appellant had check writing authority and signed checks written to suppliers, lenders, the
State of Ohio Department of Taxation, and at least “some” checks to the IRS. He approved
payment of invoices. He was an officer of Harold’s Sparkle Market, Inc., serving as
treasurer.
In the mid-1990's, a “Super K” grocery opened near Harold’s Market, causing
a gradual decline in sales. In 1996, Appellant applied a substantial amount of his own funds
to satisfy IRS and Ohio tax liens on Bob’s (not Harold’s) Market. Also in 1996, Appellant
wrote checks on the Harold’s Market bank account to pay expenses of Bob’s Market.
1
The assessments at issue apply to taxes owed by Harold’s Market only.
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Appellant testified that the bills of Harold’s Market were paid “to my
knowledge,” but he admitted that by 1996 Harold’s was behind in payments to its suppliers.
Appellant testified that he “didn’t know there was a tax issue [at Harold’s Market] other than
maybe a week or two . . . where the [tax] deposit was done a week later.” When either
accountant Sandra West or front office manager Wendy Biltz would inform him that “there
wasn’t enough money at that time to put in the payroll [tax account],” Appellant would tell
them to “Do it tomorrow. That’s what I would respond.” Appellant acknowledged that Ms.
West “emphasized” the importance of paying federal payroll taxes. Based on the tax
problems he discovered in 1996 at Bob’s Market, Appellant subsequently “always thought
that was important[.]”
Appellant responded affirmatively when asked whether he knew “that as a
matter of policy the IRS sends out notices when payroll taxes aren’t being paid?” He
recalled receiving and paying such notices at Harold’s Market in 1996, at least up until
October of that year:
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Q: . . . did you ever receive mail from the IRS with respect to the payroll taxes
of Harold’s Sparkle Market?
A: Yes.
Q: . . . And that was because you were delinquent in paying the Harold’s
Sparkle Market payroll taxes, correct?
A: That’s what the letter would have pertained to.
...
Q: . . . What did you do?
...
A: Paid them.
...
Q: And what did – do you recall now what you did to get them paid?
...
A: Personal accounts, general accounts, anything it took to get them paid I did.
Further, the affidavit of Ms. West confirmed that
In 1995 and 1996, Robert, Sr. and on some occasions, John Harold, would tell
me about the notices they were receiving from the Internal Revenue Service
about unpaid payroll taxes for both Bob’s Market and Harold’s Market. I
informed both Robert, Sr. and John, that it was important to pay the payroll
taxes. From these conversations in 1995 and 1996, it was clear that both John
and Robert, Sr., were aware that their stores were having financial and tax
problems.
At his deposition, Appellant was questioned regarding Ms. West’s affidavit.
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Q: If Sandy West were to state that she in fact had conversations with you
about the delinquent federal payroll taxes at Harold’s Sparkle Market, would
she be incorrect?
A: I don’t know.
Q: You couldn’t say that she was wrong then; is that what you’re saying?
A: Yes.
In 1996, Appellant reduced expenses, including inventory and employee hours,
in response to Harold’s Market’s decreasing sales. He knew in 1996 that checks written on
the store account were being returned for insufficient funds. He testified that he began
monitoring the expenses of Harold’s Market to be sure that they stayed below a certain
percentage of total sales, because “that’s what the manager is, you got to keep these
guidelines.”
Appellant’s father died in January 1997. Appellant continued to manage
Harold’s Market for one or two months until the grocery was closed. At a meeting in
February 1997, Appellant, his stepmother, his brother, and two attorneys made “a joint
decision” to close Harold’s Market. In Appellant’s own words, “I closed the Harold’s
Sparkle Market.” He “sold the inventory down” and transferred between $60,000.00 and
$80,000.00 of merchandise to Bob’s Market. At his deposition, Appellant acknowledged that
after receiving the inventory proceeds he “assumed” that no payroll taxes were owed to the
IRS.
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Q: So you liquidated Harold’s Sparkle Market . . . and you received
approximately 60 to $80,000?
A: Right. And in my mind then when I did that everybody was paid because
we had a good inventory.
...
Q: But at the time you liquidated . . . Harold’s Sparkle Market, what did you
do to make sure that the payroll taxes for Harold’s Sparkle Market were being
paid or had been paid?
A: I assumed they were paid. I did nothing.
Approximately two years later, Appellant received a letter from the IRS indicating that
$17,000.00 in payroll taxes were owed by Harold’s Market. He did not initially respond to
the letter because he assumed that his father’s estate would pay the bill.
II. 26 U.S.C. § 6672(a)
The Internal Revenue Code provides in material part:
Any person required to collect, truthfully account for, and pay over any tax
imposed by this title who willfully fails to collect such tax, or truthfully
account for and pay over such tax, or willfully attempts in any manner to evade
or defeat any such tax or the payment thereof, shall, in addition to other
penalties provided by law, be liable to [sic] 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). An individual subject to personal liability under § 6672(a) is termed
a “responsible person.” See Slodov v. United States, 436 U.S. 238, 246 n.7 (1978).
“Liability attaches if an individual meets two requirements. He must be a ‘responsible
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person’ under the statute, and he must ‘willfully’ fail to pay over to the government the
amount due.” Gephart v. United States, 818 F.2d 469, 473 (6th Cir. 1987).
A corporation can have more than one “responsible person” and, “[g]enerally,
such a person is one with ultimate authority over expenditure of funds since such a person
can fairly be said to be responsible for the corporation’s failure to pay over its taxes, or more
explicitly, one who has authority to direct payment of creditors.” Id. (internal quotations
omitted). As for § 6672(a)’s “willfulness” requirement, “conduct amounting to no more than
negligence is not willful for section 6672 purposes. The responsible person must have at
least deliberately or recklessly disregarded facts and known risks that the taxes were not
being paid.” Calderone v. United States, 799 F.2d 254, 260 (6th Cir. 1986) (emphasis
added).
Taxes withheld from the wages of an employee are held by the employer in
trust for the government. These trust fund taxes are for the exclusive use of
the government and cannot be used to pay business expenses of the employer,
including salaries. It is no excuse that, as a matter of sound business judgment,
the money was paid to suppliers and for wages in order to keep the corporation
operating as a going concern – the government cannot be made an unwilling
partner in a floundering business.
Collins v. United States, 848 F.2d 740, 741-42 (6th Cir. 1988) (citations omitted). Appellant
bears the burden of proving that he was not a responsible person and/or that he did not act
willfully. Kinnie v. United States, 994 F.2d 279, 283 (6th Cir. 1993).
III. Procedure
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On August 3, 1998, the IRS assessed against Appellant personally a $24,
624.97 trust fund recovery penalty pertaining to unpaid payroll taxes of Harold’s Market for
the last two quarters of 1996 and the first quarter of 1997. After the IRS withheld his and his
wife’s year 2000 tax refunds and applied them to the assessed penalty, Appellant filed suit
in the United States District Court for the Northern District of Ohio. He sought judgment in
the amount of the retained refunds along with abatement of the remaining penalty. The
United States counterclaimed for judgment equal to the unsatisfied assessment plus interest.
The parties consented to have all proceedings conducted before a magistrate
judge. On July 21, 2005, the magistrate granted summary judgment in favor of the
government, concluding that there was no genuine issue of material fact either as to: (1)
whether Appellant was a “responsible person”; or (2) whether Appellant “willfully” failed
to submit the payroll taxes. The magistrate then entered judgment in favor of the United
States in the amount of “$36,042.00 plus statutory additions and interest[.]”
IV. Standard of Review
We review a grant of summary judgment de novo. Bell v. United States, 355
F.3d 387, 391 (6th Cir. 2004). Summary judgment is appropriate “if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).
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After the moving party has carried its initial burden of showing that there are
no genuine issues of material fact in dispute, the burden shifts to the non-moving party to
present specific facts demonstrating a genuine issue for trial. Matsushita Elec. Indus. Co.,
Ltd., v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). In order to defeat a motion for
summary judgment, the non-moving party must present significantly probative evidence in
support of his complaint. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). The
non-movant’s evidence is to be believed, and all justifiable inferences are to be drawn in that
party’s favor. Id. at 255. However, “[o]nly disputes over facts that might affect the outcome
of the suit under the governing law will properly preclude the entry of summary judgment.
Factual disputes that are irrelevant or unnecessary will not be counted.” Id. at 248. Further,
a non-movant may not create a genuine issue of material fact merely by contradicting his
own testimony. Reid v. Sears, Roebuck & Co., 790 F.2d 453, 460 (6th Cir. 1986).
V. Analysis
Appellant contends that he “was nothing more than a store manager, for a
business run by his father. . . . [and] simply did not have the requisite authority sufficient to
raise his position to that of a ‘person responsible’ under 26 U.S.C. § 6672(a).” He further
argues that he could not have “willfully” failed to remit withholding taxes because he “had
no authority to . . . pay corporate obligations, and did not even know what the obligations
were.” In support of his position, Appellant cites various factual findings whereby the
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magistrate judge allegedly failed to construe disputed material evidence in the light most
favorable to him.
A. Responsible Person
The test for determining responsibility under § 6672(a) 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.” Gephart v. United States, 818 F.2d 469, 473 (6th Cir. 1987). Relevant facts to
consider include: (1) the person’s corporate duties; (2) his check-signing authority; (3)
whether he was an officer of the corporation; (4) whether he had authority to hire and fire;
and (5) “the identity of the individuals who were in control of the financial affairs of the
corporation.” Id.
As noted, a corporation can have more than one “responsible person” under §
6672(a). Id. Responsibility is a function of significant, rather than absolute, control. Id. at
475. The statute “encompasses all those who are so connected with a corporation as to have
the responsibility and authority to avoid the default[.]” Id. at 476 (citation omitted).
As to the magistrate judge’s opinion, Appellant first attacks the conclusion that
he had the authority to hire and fire employees. This criticism is without merit. Appellant
acknowledged that he “would hire clerks.” He also fired at least one employee, with his
father’s approval. Appellant’s partial firing authority is sufficient. Again, § 6672(a) does not
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require that a responsible individual “have the final word.” Id. at 472, 475 (noting that the
appellant had authority to hire and fire “with the approval of” his bosses).
Appellant next challenges, correctly, the factual finding that his father “worked
at Harold’s Market [only] a couple of days a week for a couple of hours each time.” This
statement is taken from the affidavit of Ms. Biltz. However, Appellant testified that his
father worked at Harold’s Market “daily” for a total of 25-30 hours per week, and that Ms.
Biltz was “incorrect.”
Although the magistrate did not construe this disputed fact in the light most
favorable to Appellant, the error is harmless. The magistrate recognized that Appellant’s
father may have also been a “responsible person” under § 6672(a). Review of the
magistrate’s opinion does not indicate that the number of hours worked by the father was a
materially determinative factor in that court’s ultimate conclusion.
Lastly, Appellant criticizes the magistrate’s findings that tax liens were in place
as to Harold’s Market in early 1996 and that Appellant “personally borrowed tens of
thousands of dollars to pay Harold’s Market’s delinquent payroll taxes and other debts.”
This information is found in Ms. West’s affidavit. However, Appellant submitted the
affidavit of a title professional who stated that the earliest tax lien placed on Harold’s Market
was dated June 20, 1997 - three months after the business closed. As for the use of his
personal funds, Appellant offered conflicting testimony. He testified that personal funds
were used only to satisfy the tax debts of Bob’s Market, and that he was “not aware of” any
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Harold’s Market tax debts at the time of his personal loan. However, he subsequently
admitted that he did use, inter alia, “personal accounts” and “personal assets” to satisfy the
delinquent 1996 tax debts of Harold’s Market. Again, Appellant may not create a genuine
issue of material fact merely by contradicting his own testimony. See Reid v. Sears, Roebuck
& Co., 790 F.2d 453, 460 (6th Cir. 1986).
Therefore, the magistrate erred only in finding that there were tax liens on
Harold’s Market in early 1996. This error is harmless. Taking that disputed fact in the light
most favorable to Appellant does not create a genuine issue of material fact as to
responsibility.
As cited by the magistrate, Appellant was the treasurer and store manager of
Harold’s Market. See Gephart, 818 F.2d at 473 (considering officer status and corporate
duties). As cited by the magistrate, Appellant had check writing authority and could hire and
fire employees. See id.
Most importantly, and again as cited by the magistrate, Appellant had
significant authority over the financial affairs of Harold’s Market. He paid creditors. He
applied funds of Harold’s Market to satisfy the debts of Bob’s Market. He directed Ms. West
and Ms. Biltz to deposit money into the payroll tax account. He applied personal funds to
satisfy the debts of Harold’s Market. He reduced inventory and labor costs in response to
decreasing revenue. He monitored expenses to be sure that they stayed below a certain
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percentage of total sales, because “that’s what the manager is, you got to keep these
guidelines.”
After his father’s death, Appellant participated in the decision to close Harold’s
Market. In his own words, “I closed the Harold’s Sparkle Market” and “I sent” up to
$80,000.00 of Harold’s Market’s inventory to the other family store. “I had to close the place
down.”
In light of the above, the magistrate did not err in finding an absence of genuine
issues of material fact as to Appellant’s §6672(a) responsibility. Although he may not have
always been the ultimate decision-maker, Appellant certainly exercised a sufficient degree
of influence and control over the financial affairs of Harold’s Market, specifically pertaining
to “disbursements of funds and the priority of payments to creditors.” See Gephart, 818 F.2d
at 473.
B. Willfulness
A responsible person’s failure to submit payroll taxes is willful if that person
“at least . . . recklessly disregarded facts and known risks that the taxes were not being paid.”
Calderone v. United States, 799 F.2d 254, 260 (6th Cir. 1986). It is not necessary that the
responsible person demonstrated fraudulent intent or evil motive. Id. at 259 (citation
omitted).
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Appellant again attacks various factual findings by the magistrate as to his
willfulness. Each argument is without merit.
Appellant criticizes the magistrate’s findings: (1) that he was involved in the
1997 transfer of inventory from Harold’s Market to Bob’s Market; and (2) that he had the
authority to ensure that the taxes were submitted after his father’s death. He argues that these
matters were within the exclusive control “of estate attorneys and the Executrix Kathleen
Harold.”
Appellant’s position is, however, inconsistent with his deposition testimony.
He testified that he participated in the “joint decision” to close Harold’s Market. He stated
that “I” closed the store and “I” transferred up to $80,000.00 in assets. Appellant’s vague
statement that he was at some subsequent point in time “blinded from the estate”
notwithstanding, there is no genuine issue of material fact as to his involvement in the
inventory transfer or his continuing authority to direct payment of the creditors of Harold’s
Market.
Appellant next argues that the magistrate erred in finding that he “received
liquidation funds subsequent to receiving notices from the IRS and did not use these funds
to pay trust fund taxes[.]” Appellant now states that he “did not receive funds from the
liquidation of the store.” His deposition testimony, however, indicates otherwise.
Q: So you liquidated Harold’s Sparkle Market . . . and you received
approximately 60 to $80,000?
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A: Right.
Further, Ms. West’s uncontroverted affidavit states that “[a]fter Harold’s Market closed, John
Harold told me that he liquidated the store and sold the inventory, fixtures, etc. and received
funds from the liquidation.” Whether or not Appellant personally retained any of that money
is irrelevant.
Lastly, Appellant argues that the magistrate erred in concluding that he “was
aware of Harold’s Market’s prior payroll tax problems” yet, at a minimum, “acted with
reckless disregard as to whether such taxes were being paid.” At his deposition, Appellant
at times denied such knowledge. At other times, however, he admitted such knowledge.
Again, a non-movant may not create a genuine issue of material fact merely by contradicting
himself. See Reid v. Sears, Roebuck & Co., 790 F.2d 453, 460 (6th Cir. 1986).
Appellant knew that Harold’s Market’s payroll tax deposits were sometimes
late. Because of prior problems at Bob’s Market, he understood the importance of submitting
payroll taxes. He knew that the IRS sends out notices when payroll taxes are not paid, and
he admitted receiving and paying such notices. He at times applied “[p]ersonal accounts,
general accounts, anything it took to get them paid[.]” He acknowledged that he was at times
“aware that federal tax deposits were not being made[.]”
Ms. West’s affidavit further confirms the magistrate’s finding that Appellant
was aware of Harold’s Market’s tax problems. Ms. West stated in material part:
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In 1995 and 1996, Robert, Sr. and on some occasions, John Harold, would tell
me about the notices they were receiving from the Internal Revenue Service
about unpaid payroll taxes for both Bob’s Market and Harold’s Market. I
informed both Robert, Sr. and John, that it was important to pay the payroll
taxes. From these conversations in 1995 and 1996, it was clear that both John
and Robert, Sr., were aware that their stores were having financial and tax
problems.
...
. . . After Robert Harold’s death and including the time period in which
Harold’s Market remained open for business, John Harold told me about
additional notices he received from the Internal Revenue Service.
When asked whether Ms. West was incorrect, Appellant answered “I don’t know” and that
he could not say that she was wrong.
Appellant has therefore not demonstrated a genuine issue of material fact as
to the “willfulness” of his failure to submit withholding taxes. He knew that tax deposits and
payments were a problem at Harold’s Market. Despite being a person responsible for the
submission of those payments, and despite personally making such payments in the past,
Appellant by his own admission “did nothing” to ensure that the IRS was in fact fully paid
for the last two quarters of 1996 and the first quarter of 1997 - even though he generated
more than enough liquidation proceeds to pay the bill. Instead, he “assumed” that others
would take care of it.
“[O]ne who possesses significant control over the company’s financial affairs
may not escape liability by delegating the task of paying over the taxes to someone else.”
Kinnie v. United States, 994 F.2d 279, 284 (6th Cir. 1993). The fact that an individual does
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not always exercise his powers does not absolve him of responsibility for his failure to act.
Id. Reckless disregard of facts and known risks - and thus “willfulness” - exists when a
responsible officer attempts to “immunize himself from the consequences of his actions by
wearing blinders which will shut out all knowledge of the liability for and the nonpayment
of [the] withholding taxes.” Calderone v. United States, 799 F.2d 254, 260 (6th Cir. 1986)
(citation omitted).
VI. Conclusion
There is no genuine issue of material fact as to whether Appellant was a
“responsible person” who acted “willfully.” He is thus personally liable under 26 U.S.C. §
6672(a) for the unpaid withholding taxes of Harold’s Sparkle Market. Although the
magistrate in some instances failed to resolve disputed issues of fact in Appellant’s favor,
those errors were immaterial and harmless. The judgment of the district court is
AFFIRMED.
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